Vietnam Strategy – Strong Earnings Will Drive Market Up 18 – 20%

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May 09, 2016

The VN-Index finished 2015 with a disappointing 1% increase for the second half and 6.4% for the year. The outlook for 2016 looks better, but with risk. We expect strong earnings growth, driven by an emerging consumer and strong manufacturing. Normally, you would expect that a strong earnings growth outlook would lead to rising P/E ratios but we actually do not foresee this. We forecast 20% EPS growth but with little to no multiple expansion.

Macro outlook:

  • FDI helped strengthen manufacturing, which will continue to drive GDP growth.
  • Consumption is increasing with retail sales rising due to low inflation and increasing employment. Record high consumer confidence suggests this will continue.
  • TPP and other FTAs, as well as regulatory reform – new business law, new foreign ownership laws – have spurred massive FDI.
  • The government debt continues to be a concern, although somewhat manageable. Low oil prices did hurt revenues but the shortfall was made up from tax collections. We continue to watch this area with caution in 2016.
  • Exports will grow in 2016 but so will imports, so the trade deficit will remain. The silver lining is that much of the imports are equipment for investment in manufacturing. The bad news is that most of the exports are from the FDI sector.
  • At less than 1%, inflation has nowhere to go but up. Still, we expect it to remain moderate in 2016 due to low commodity prices.
  • There will be pressure on the dong this year, especially since China will probably devalue the yuan, but we don’t expect devaluation to significant exceed 2015.
  • Due to high credit growth, continuing government deficits and somewhat higher inflation, we expect interest rates to rise both for lending and for bonds.
  • The biggest risk to the economy and the market performance comes from China. Of course, Vietnam is not unique in this regard but poor economic performance in China can affect us in many ways. It will put pressure on our currency to compete for export markets. China is not only our largest import market but also one of our largest export markets after the U.S., EU and ASEAN. China can impact us in everything from lower demand for our exported mobile phones to the threat of cheap steel being dumped into Vietnam.

Equity market outlook:

  • H2/2015’s lacklustre performance was driven by falling oil prices, yuan devaluations and the Fed rate increase offset by the TPP agreement and some help from Vinamilk. All of these will continue to affect the market in 2016.
  • The VN-Index may seem quite cheap at an 11.1x P/E ratio, especially compared to its regional peers. However, we believe that due to rising bond yields we are unlikely to see any expansion.
  • We are forecasting strong earnings growth especially from a few heavyweight large caps that should drive the market.
  • However, we will need to break through the psychological barrier of 640 in order to achieve our target for the VN-Index of 680 – 700.

Sectors and stocks we like:

Since economic growth will be fuelled by strong manufacturing and a strong consumer, we especially like stocks that can benefit most from these trends. Much of the export manufacturing will come from FDI companies but several domestic sectors will benefit from their growth.

  • Consumer: Strong retail sales and low inflation have resulted in record high consumer confidence.
    • Masan (MSN): Singha investment is a game changer. It not only provides a platform for MSN to take its fish sauce and other brands regional, it gives the company a war-chest for acquisitions.
    • Mobile World (MWG): While its core phone business remains strong, concerns of a cap on growth have been alleviated by the expansion into minimarts.
    • FPT Corporation (FPT): Retail revenue should still grow 20% while telecom and software outsourcing will each exceed 30%.
  • Banks: A stable property market and strong manufacturing have fuelled strong credit growth while a stable macro environment has helped banks clean up balance sheets.
    • Asia Commercial Bank (ACB): Hi non-interest income and high levels of capital boost our valuation.
  • Logistics: Expanding manufacturing and consumerism both require expanded logistics. Transportation and storage as well as ports will benefit.
    • Gemadept (GMD): While ports continue to operate at high capacity, new distribution centres will drive growth making the company well positioned to benefit from Vietnam’s growing trade.
  • Thermal power: Growing manufacturing is increasing demand for power while natural gas input prices are falling.
    • Nhon Trach 2 Thermal Power Plant (NT2): Samsung CE Complex will increase demand for power while NT2 plans to expand capacity with a second plant.
    • Pha Lai Thermal Power Plant (PPC): Utilization is rising due to droughts and the company pays a very attractive dividend.

Macro Scorecard


The Macro Picture: Poised for strong growth on the heels of robust FDI

Vietnam to buck the global downtrend by delivering higher GDP growth at 6.8% in 2016

The industry and construction sector continues to drive economic growth with the manufacturing subsector being the main catalyst on the heels of persistently strong capital influx from MNCs. Meanwhile, the firm recovery of domestic demand convinces us to pencil in high growth for the service sector in 2016.



Manufacturing sector retains its strength to drive growth thanks to the “FDI snowball”

The snowball of registered FDI in 2013 & 2014 has finally disbursed with implemented FDI in 2015 reaching a record-high and helping manufacturing industries to continue their healthy expansion and post double digit growth for the first time since 2008.



Consumption: Gathering more momentum with resilient consumer confidence on more job opportunities from growing FDI

We project growth acceleration for service sector as domestic demand recorded a decent pickup in 2015, reflected by a five-year high in real retail sales growth and buoyant auto and apartment sales (indicators of growing spending on discretionary goods). Looking at GDP growth on the expenditure front, private consumption was the stimuli for GDP growth to reach an eight-year high in 2015. Better wage payment from the increase in non-farm employment and abundant job opportunities due to more FIEs coming to Vietnam have been the key factors to sustain strong consumer confidence, nurturing the firm return of domestic consumption.




Investment: FTAs – including TPP, Vietnam-EU & AEC – will ensure that FDI remains strong

The conclusion of the Trans-Pacific Partnership negotiations, which cover 12 signatories across the Pacific region and the Vietnam-EU FTA act as a magnet for investment into Vietnam to in order for firms to gain tariff-free access to big markets like the US, the EU or Japan. Moreover, TPP is motivating Vietnam to develop a more transparent and foreigner-friendly business environment by calling for fair treatments among all market participations, improving protection of intellectual property, stimulating cross-border services and simplifying customs procedures. This in turn will not only attract but also ensure that FIEs will invest over a longer horizon.



Although sluggish global demand is posing challenges on the sector in 2H15, recent conclusions of Vietnam-EU FTA and the Trans-Pacific Partnership (TPP) draft or the inauguration of ASEAN Economic Community (AEC) are incentivizing another massive wave of oversea capital influx into manufacturing, countering off external headwinds in the coming year.

  • In 2015, at least USD1 billion was channelled into the textile and garment industry. Prominent projects include those from Far Eastern New Century (Taiwanese synthetic fibres producer), Hyosung (Korean yarn producer), Worldon (Chinese high-end fashion producer) and Texhong (Hong Kong yarn producer).
  • Trade liberalisation movements well encourage the persistent shift of production to Vietnam. Pouchen, a Taiwanese shoes maker, is shifting its production to Vietnam (circa 42% of Pouchen’s shoes were made in Vietnam in 2015, up from 34% in 2013) in anticipation of lower tariff barriers when entering the US and the EU.
  • Meanwhile, Cheng Loong, a Taiwanese industrial paper producer supplying packaging for Nike and Apple, decided to expand their production in Vietnam to take advantages from FTAs.
  • … and giant electronics MNCs such as Samsung continue pouring capital into Vietnam. In 2015, Samsung received licensed for another USD 3b investment in Samsung Bac Ninh and an additional USD 600m into Samsung Electronics Ho Chi Minh City (SEHC). SEHC is designed to become one of the group’s largest bases of producing electronic home appliances.

Meanwhile, in 2016 we will witness many big-ticket FDI projects commencing operation, with SEHC as a notable example. Henceforth, despite a global slowdown, we believe the industry could successfully carry forward its momentum in 2016 thanks to the firm FDI catapult.



Government Budget: The aggressive call for fiscal consolidation

Crude oil lingering at low levels and falling corporate income tax will continue to pose challenges on revenue collection in 2016. As such, we think that aggressive efforts to collect taxes in arears will remain in 2016 with possibilities of tax being raised elsewhere to compensate for the gap.

Meanwhile, funding the fiscal deficit remains a headache. Although the MOF has approved issuance of G-bonds with short tenors of less than five years again, robust credit growth will make it hard for the MOF to raise capital from domestic market. Accessing the international capital markets will become more expensive due to the US Fed’s rate hikes and higher fluctuation in the forex market.

Aside from difficulties in revenue collection and fiscal deficit funding, we also believe in a more stringent control on government spending in 2016 to ensure fiscal stability. Countercyclical fiscal policy with growing debt borrowing has been in place since 2011 to support economic recovery. This has resulted in Vietnam public debt reaching 61.3% GDP (nearing the statutory limit of 65% GDP set by the National Assembly). Meanwhile, debt service payment has significantly increased its burden on the budget as interest payment is estimated to have eaten up 9% of the state revenue in 2015 vs. 6% in 2013.

The need to ward off the budget woes, on the flip side, would lead to acceleration in structural reform or the speeding-up of privatization and divestment. In October 2015, the government announced it would divest all of its shares in 10 enterprises held by State Capital Investment Corporation (SCIC), which is estimated to bring approximately USD 4 billion for the state budget, though the precise timeframe is still ambiguous. Meanwhile, there are long-awaited IPOs to take place in 2016 from large state corporations such as Mobiphone, Vicem, Vinalines etc.



Trade: Export growth should improve in 2016 but the trade deficit will remain due to import growth

Vietnam export growth in 2015 slowed to 8.1% from last year’s 12%. However, amid lackluster global demand, this result is a commendable feat, especially when regional export-oriented economies incurred contraction in shipments (Figure 14). Notably, FIEs in Vietnam delivered healthy double digit growth despite oil’s slump, being the main contributor to Vietnam’s export growth (Figure 15 and 16). Meanwhile, domestic enterprises with agricultural commodities being the prime export products, actually recorded declines due to the plunge of most commodity prices in 2015.

Going forward into 2016, we believe that strong inflow of foreign investment ahead of massive FTAs should be sufficient to boost Vietnam export growth even if external demand remains stuck in a rut. Of note, as Vietnam is still taking a relatively small proportion of global trade while MNCs are constantly shifting their production into Vietnam, the country is in a sweet pot to enlarge its share from a low base (Figure 17). Furthermore, we expect commodity prices to see a lighter pace of contraction from the lows of 2015, adding more margin to growth. We forecast export growth to inch higher to 10% in 2016.

Imports continue to surge as FIEs are sourcing little from local enterprises while domestic demand will fuel the import of consumer-related goods. Given our expectation of increasing FDI, further acceleration in machinery import is undeniable (Figure 18) while higher consumer spending on discretionary goods means import auto sales will have another fruitful year ahead (Figure 19). As such, we forecast imports to outpace exports to deliver growth of 11% in 2016.

Therefore, we forecast the trade deficit to continue in 2016, reaching USD5 billion. Consequently, the country’s current account deficit will be contracted further in the year to come (Figure 20).

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Inflation: Price increase to accelerate albeit at a moderate pace

We believe inflation hit bottom in 2015. In 2015, inflation fell to a 14-year low of 0.63% largely due to the plunge of oil prices as the transportation category was the biggest dragger to the CPI reading. Yet, we reckon some signs of bottoming out as on-year inflation bounced to 0.6% in December from 0% in September and October.

As such, our view is that inflation will carry on its two-year subdued streak into the first few months of 2016 but then rolling into mid-year, price appreciation will speed up. Higher inflationary pressure is becoming more imminent as consumer demand and credit growth, which has been robust since 2015, will remain resilient in quarters ahead. Moreover, consecutive Dong devaluations in H2/15 with expected further weakening in Q1/16 would gradually impact prices of imports.

However, there are opposing forces to abate the pressure. We expect commodity prices to see contained recovery from the lows of 2015. Meanwhile, pricing of imported products will gain support from tax elimination stipulated by FTAs, offsetting the impacts of a weaker Dong to some extent.

As such, we forecast year-end inflation at 3.5%, with some upside risk. This further backs our anticipation of the SBV’s shift to a more tightened monetary stance. However, as the pickup remains under a manageable range (less than 5%), the SBV will not be in a rush for an abrupt switch.


Forex rate: It’s impossible to stay immune from external turbulence

Effective January 4, 2016, the SBV starts to adopt a more market-controlled exchange rate mechanism. Under the new regime, the reference rate shall be adjusted on daily basis as opposed to being kept for a long horizon like what had been implemented previously. Adjustments should be determined based on:

  • The weighted average of interbank rates on the previous day
  • The movement of the US dollar and other currencies of Vietnam’s important trading partners including the euro, Chinese yuan, Japanese yen, Taiwanese dollar, Singapore dollar, Korean won, and Thai baht
  • Macro indicators such as inflation and interest rates

Meanwhile, a defined trading band is still applied (which is standing at 3%) so as to prevent unexpected volatility.

The SBV’s switch is well-grounded given global currency market is entering an era of greater turbulence, from a strengthening US dollar on the Fed rate hike to a more volatile yuan, given its nomination as a new internal reserve currency by the IMF. As such, by adjusting the reference rate frequently in an anticipated manner, the SBV is showing their readiness to respond to any external changes without causing shocks to the local forex market.

and defending a prolonged fixed reference rate has become costly in the context that Vietnam is more integrated into the increasingly changing global landscape. The appreciation of the USD and the surprise yuan depreciations of late caused many currencies of Asian export-oriented economies to tumble. Therefore, pegging the dong to the USD for a long horizon would hurt the competitiveness of a country where export turnover is equivalent to c.80% of GDP. Meanwhile, efforts to steady the forex rate caused Vietnam’s forex reserves to fall significantly below the comfortable standard level of three months of imports. As of end Q3/15, the ratio stood at 2.1 months of imports with total reserves estimated at USD30.3 billion vs. USD37 billion as of end July.

The implementation of this flexible exchange rate system will introduce gradual and expected dong depreciation going forward. As such, we believe this would help to better the forex market activities by harnessing a wait-and-see sentiment on ‘one-off’ devaluations.

The Dong is under strong depreciation pressure in the coming year. Abroad, the USD is likely to carry forward its momentum on the heel of Fed’s rate hikes, hinted at an aggregate of 100 bps in 2016 (25 bps hike per quarter). Meanwhile, slowing growth of China economy is weighing on Yuan to depreciate. At home, the expected widening of trade deficit in 2016 will further narrow the current account surplus, burdening the balance of payment.

However, the Dong would not go that far. The SBV vowed to exert stringent policies, including the new exchange rate mechanism, to thwart US hoarding, alleviating speculating pressure on the dong. Meanwhile, a strong VND devaluation would increase the extent of Vietnam’s debt burden – the country has USD80 billion of external debt (41.5% of GDP) while public debt is approaching the ceiling of 65% of GDP.

As such, we forecast VND/USD rate would reach VND 23,700 at year-end, implying an effective depreciation of 5.4%.

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Interest rate: Time for some tightening

We expect interest rate (lending and deposit rates as well as bond yields) hikes of circa 100 bps in 2016

Interest rates have fallen by about 800 bps since 2011 and we believe rates are bottoming out:

  • Some rate hike will take place for the purpose of mobilizing capital to grow bank’s loan book. As the economy reenters into a firm recovery phase, credit growth has been overwhelming deposit growth in 2015. Furthermore, the SBV has shown their intention to keep a pro-growth policy by targeting 18%-20% credit growth in 2016, a slight acceleration above 2015’s pace.
  • We expect a moderate increase in government bond yields. The increasing budget deficit (up 12% vs. 2015) together with a considerable amount of bonds to expire will continue burdening the bond supply in 2016. As commercial banks are the main clientele of G-bonds (holding circa 80% of current G-bond outstanding), lending rate is all but moving in tandem with the movement of return on this risk-free asset.

However, as the SBV is still prodding an accommodative policy, we believe that the hike will be limited for the time being. As such, we forecast a moderate increase of 100 bps in 2016.

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Stock Market Performance

What happened in H2/2015: It was Vinamilk vs the global economy


Vietnam’s stock markets finished 2015 with unimpressive performances. The VN-Index gained a mere 6% for the year while the HNX-Index actually declined by 5%. Since our mid-year report, the performance in H2 was not better. The VN-Index fell 3% from 592 to 576 while the HNX-Index fell 8% from 85.3 to 78.6. Key drivers were:

  • Falling oil prices: Oil prices fell most strongly at the beginning and the end of the period, dragging oil & gas stocks down both times. The impact in July was offset by rising bank stocks fuelled by issuance of new shares from MBB.
  • China currency devaluation: China devalued its currency by 5% over three-days in mid-August and Vietnam followed suit by devaluing the dong and widening the trading band. The VN-Index reacted by falling 9%, but it quickly rebounded.
  • TPP agreement: Vietnam stocks reacted very well to the announcement of an agreement on the Trans-Pacific Partnership (TPP) agreement. Stocks in export and transportation sectors were particularly affected. But the effects were short lived, with TPP stocks correcting somewhat after a few days.
  • Fed rate increase: Markets have known for quite some time that the US Fed would eventually raise its benchmark interest rate and that this could lead to foreign outflows from Vietnam. However, the market did not seem to fully price this in until the first week of November when Fed Chair Yellen made the comment that a December hike was “a live possibility” and her comments were followed the next day by a very strong US jobs report. Over the next six
    weeks, the VN-Index fell 9% before rebounding slightly on the day of the rate increase announcement.
  • Vinamilk: If one company can ever move a whole market, it was Vinamilk (VNM) during this period. The shares rose from 91,700 (adj) on July 1 to a peak of 140,000 before correcting to finish the year at 128,000, a 40% increase over the six months. Because of its large market cap, the shares had a significant impact on the overall market, adding approximately 30 points to the VN-Index. VNM’s story was fuelled by (1) the announcement by the government SCIC would divest its shares; (2) rumors that following the divestiture VNM would increase its FOL; (3) the announcement that 9M earnings had increased 35% y-o-y; and (4) rumors that F&N would acquire a large share of the company.

It could have been worse. Just ask our neighbors.


Although Vietnam’s market performance was lacklustre, it was significantly better than our neighbors. Global economic factors, such as oil prices and the yuan devaluation clearly affected them similarly to Vietnam, but they did not have the benefit of VNM boosting their markets in October. Interestingly, the Fed rate rise seemed to affect Thailand and Vietnam in the same way, but not Indonesia nor the Philippines.

But is the VN-Index still cheap compared to our neighbors?


Even though the VN-Index outperformed our neighbors during 2015, it still trades at a much lower P/E ratio than any of them. This is true in spite of the fact that its ROE is the highest and its ROA is nearly the highest and we had the lowest foreign outflows. While this might suggest that we are due for a correction as foreign flows seek our undervalued stocks but there are a few reasons for the lower values. The first is market size. The HOSE market cap is a fraction of the other markets’. This difference is magnified by foreign ownership limits thereby reducing investible opportunities for foreign investors. Furthermore, Vietnam has a higher risk-free rate, especially on a real (inflation adjusted) basis. This is a function of our sovereign credit rating and reduces our equity valuations. Considering these factors, the difference in multiples begins to seem more justified.


The auto & parts sector had the strongest performance, due largely to expectations of increased automobile purchases as regulations change. Banks and F&B (led by VNM) also had very strong performances and had far more impact on the overall market due to their larger market capitalization. Oil & gas and utility stocks were among the worst performers and made a strong negative impact on the overall market with PVGas (GAS) estimated to have shaved more than 10 points off the VN-Index by itself.

Outlook for 2016: Earnings growth will drive market performance.


Past performance is, of course, not always and indicator of future performance but it is interesting to note that following the bubble of 2006-2007 and the crash of 2008-2009, the VN-Index returned to the exact same trend line it had been on previously. During 2015 the index dropped below this trend line, but was returning to it at the end of the year, indicating (although maybe not in the most scientific way) that share prices had not appreciated too quickly and that there is room for further recovery going into 2016.


The VN-Index has recorded a very strong negative correlation to the five-year G-bond yield since 2010. During H2/2015 both were relatively flat although the P/E ratio was more volatile. For 2016, we have forecast the bond yields would increase by up to 100 basis points. It is therefore unlikely that we will see significant multiple expansion for the market as a whole even though the current level may seem low. Furthermore, global geopolitical factors that hurt market performance in H2/2015 show every indication of continuing their trend in 2016. Oil prices should remain low (assuming the Middle East does not break out into full-scale war); weakness in the Chinese economy will likely lead to further devaluations and the Fed will likely continue to increase rates at a steady pace throughout the year at least two, possibly four times.

If P/E ratios will not expand then we will need earnings growth in order to see increased valuation. Fortunately, the outlook here is more positive. For the VCSC coverage universe, we are forecasting 28.9% EPS growth on a market-weighted basis, 17.2% on a simple average basis. This is due to three heavy-weights – VCB, MSN, and VIC – pulling up the weighted average. Our coverage universe represents approximately 75% of the total listed market-cap. If we conservatively assume the rest of the market does not do as well and forecast 20% EPS growth with no P/E multiple expansion, this would bring the VN-Index just shy of 700.


There are two elements of downside risk we should consider though: technical and geopolitical. From a technical perspective, the VN-Index has approached 640 two times during the past two years and both times failed to break through. There is definitely negative retail sentiment surrounding this level and we will need some strong catalyst in order to break through. It may take a few tries in order to do so. From a geopolitical perspective, we must consider the risk around China. Its manufacturing is declining, currency is devaluing and its equity markets have taken big hits. All of these weigh on global markets and affect Vietnam, not only as an emerging capital market but also as a trading partner of China. If China should experience a hard landing, this could create a completely different scenario for Vietnam (as well as for many other countries). With these two risks in mind, we temper our forecast back a bit to 680 and note the possibility of a darker scenario.

Banking sector: Controlling the commanding heights of the banking system

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2015 recap: SOE banks see healthy price surge, recapitalisation and M&A

Two significant recapitalisations but not public markets driven: BID and MBB completed major recapitalisations but they were mainly driven by the government and existing major shareholders, respectively. We don’t see these as repeatable going forward. Access to equity capital markets, driven by institutional investor participation, will be key for our favoured stocks going forward.

Market bids up healthy banks while side-stepping weaker banks: Bank investors bid up SOE banks in 1H15, at least two quarters before credit growth numbers clearly indicated robust demand for credit in the economy. Bank investors however showed discernment by side-stepping weaker SME/retail focused banks like EIB and STB.

M&A of big players with small banks: The industry saw mergers of some small banks with other big banks: BID and MHB, CTG and PG Bank, STB and Southern Bank. Acquisition of weak banks follows the direction set by SBV to restructure the current system, which will allow a narrowed number of efficient banks to operate. M&A benefits the whole system in the long-term as banking services and products will be provided big banks with strong financial position. For the banks after these mergers, a larger customer base and network is advantageous, especially for expanding into the retail sector. However, in the short-term, banks after these mergers have to resolve problems of NPLs and depressed NIMs.

Cross-holding has been gradually resolved: SBV has shown strong commitment to disentangle cross-holding issues in the banking system by the issuance of Circular 36/2014 and several enforcements in 2015. Weaker SME banks have received most of the SBV spotlight. EIB was inspected by the SBV and some individuals were requested to lower their stakes to below 5% cap. Cross-holding between EIB and associate companies, between STB and EIB are also in the midst of being resolved. In addition, with the merger of STB and Southern Bank in play, SBV has inspected STB and requested an individual in Southern Bank to transfer their entire voting rights to the SBV. Enforcements has started at SME banks, and we can see more to come in 2016, although extended timeline may be allowed in some cases.

Share price impact of these divesture overhangs has generally been negative. When news of broke of the sequestration of voting rights at STB and EIB on 23 Oct 2015 we saw a 9.8% drop in the share price of STB in the two weeks thereafter whereas EIB only dropped 1.7% over the same period. However, the liquidity of STB is more than three times larger than EIB and the scale of the overhang at STB is of a significant order of magnitude larger (possibly up to 50% of shares outstanding). MBB is a stock also subject to significant overhang and it has generally underperformed in 2015 however this overhang was clear when Circular 36/2014 was first released and its underperformance in 2015 may have more to do with its operational performance and a highly dilutive equity raising.

2015 credit growth exceeds initial target on robust economy and the freedom provided by a low inflation environment: system wide credit growth came in at 18% compared with initial 2015 SBV target of 13 to 15%.
Loan book weighted loan yields, funding cost and NPL ratios: Loan yields for 9M15 came in at 6.92% versus FY14 of 7.51%, but funding cost for 9M15 improved to 3.82% versus FY14 of 4.40%. The industry NPL ratio for 3Q15 continued to improve to 1.68% versus YE14 of 1.83% with much of the improvement being due to sales to the Vietnam Asset Management Company (VAMC).

2016 outlook – access to equity capital markets to anoint winners

Our refreshed view on listed banks is laid out in our recently published December 2015 sector report where we gradually build up our case on our favoured banks. As a house, we’ve always avoided making definitive conclusions simply on headline numbers, especially when those headlines numbers cannot even be compared across banks. In our first banking sector report published in November 2014, we devoted the piece to drilling down on each of the bank’s balance sheet. This focus on asset quality suited the times when there were still so many doubts in the market about systemic risk in the banking system. Fast forward 13 months and with GDP metrics pushing at five-year highs and SOE banks completing a remarkable share price run, we felt the new focus in the second sector report should be forward looking on topics set to focus the minds of boards of banks for the years ahead. For us these topics revolved around the looming introduction of Basel II in Vietnam, evolution of the interbank market in Vietnam, a reality check on real estate lending, bank’s handling of their IT development and finally putting this all together to present a VCSC view on normalized ROEs.

By taking this approach in the second report we argue that a pure focus on numbers fails to give a true picture of how banks, typically the most complex organisations operating in any economy, will prosper in the long-run. The strategies at play behind the numbers should be as important to investors, especially for a buy and hold market like Vietnam.

Traversing these five topics there is one name that consistently rises above all others and that is VCB. Comparing VCB to a technology titan would be a stretch but there is definitely a vein of strategic aplomb at VCB and hence the title we hatched for the report – “controlling the commanding heights of the banking system”. Our approach to valuation of all banks under our coverage has also undergone more of a straight laced approach, discarding some of the “leap of faith” approaches of the past and instead presenting a uniform argument and the main drivers of valuation. Under this standardized valuation approach three names that surface are ACB, VCB and CTG. Built into the valuation of these three banks is an assumption that these banks have superior access to equity capital market and an ability to sustain credit growth in the long term. ACB is a valuation call and also a vouch of approval for its management’s handling of post-crisis ACB (i.e. last two years). As a member of the troubled SME/retail focused banks it was the first to take on the task of reforming itself and even at its nadir its problems were much more manageable than present day STB and to a lesser extent EIB. The VCB call may strike some as lacking originality however our sector report goes to great ends to find valuation support. With Vietnam’s stock market what it is, subject to the vicissitudes of ETF rebalancing, a firm valuation call on VCB is useful in highlighting trading opportunities. Finally, CTG is a non-consensus call based on our work looking at its IT systems, relatively admirable approach to credit extension and the other typical attractive elements of SOE banks being CIR and relatively low credit cost.


Though we refer readers to the sector report we repeat below the essence of valuation drivers for our banks under coverage:

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Stock recommendations

BUY – Asia Commercial Joint Stock Bank (HNX: ACB) – We upgrade to a BUY on ACB as this bank benefits most from our application of standardised valuation techniques across banks, in particular our assertion that CIR at ACB can hold between baselines set for SOCBs and JSCBs and that the bank can hold a circa 17% non-interest income business relative to operating income in the years ahead. ACB is at the high end of our seven banks under coverage in terms of capital under Cir36 and an adequate level under Basel II means ACB has the least dilution risk behind EIB. We apply conservatism to the ACB valuation and despite the bank’s claim that accumulated provisions and revised collateral value fully cover total outstanding principal of the “six companies” we apply a 1/3 write-off of the outstanding principal which equates to VND1,865 per share and still see upside of circa 26.7%. Other positives include relatively low exposure to real estate developers and good IT infrastructure.

OUTPERFORM – Vietcombank (HSX: VCB) – We maintain an OUTPERFORM on VCB by focusing on the bigger picture at VCB where we see leadership in important segments of the banking system: establishing a hegemonic position in accumulating USD deposits and interbank settlements, exhibiting more prudent lending in real estate, ranking second in the IT stakes and exhibiting sector leading characteristics in our path to calculating normalised ROEs. VCB has the lowest credit cost and CIR was able to hold at 38%. This is the only bank with a shot at achieving non-interest income of 25% relative to total operating income. 10% issuance of primary shares for strategic investors is planned for completion in 1Q16. Additionally, in the past 12 months we see more of a willingness at the board level to engage with investors. We recommend investors build positions in VCB on price weakness (where prudence can be discarded after the completion of 1Q16 equity raising).

OUTPERFORM – Vietinbank (HSX: CTG) – We upgrade to an OUTPERFORM on CTG as it slides into third place based on old fashion banking qualities of good management of credit cost and without observable bad debt baggage. CTG is well positioned to benefit as Vietnam’s economy accelerates in the years ahead. Having MUFJ as a major shareholder is a major plus when it comes to tapping equity capital markets. CTG’s level of exposure to tier 1 property developers, which is ahead of most of its peers, is another positive. On IT platforms, CTG is the best bank in our coverage universe for user-friendly, fast processing system and the lowest fees charged. The bank also took an axe to on balance sheet problem loans, writing off VND2,628 billion (USD116 million) for 9M15 (equivalent to 0.5% of gross customer loan book) vs VND887 billion (USD39 million) for same period last year. In addition, we’re seeing both healthy VAMC provisioning for the 3Q15 plus specific provision account being topped up on par with 9M14 with a number of VND2,394 billion (USD106 million) vs VND2,626 billion (USD116 million). Asset quality metrics are improving with three months past due falling from 1.5% of customer loan book in 2Q15 to 1.0% in 3Q15.

Consumers sector: Undemanding valuation for retail stocks

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What happened in 2015: Domestic consumption picked up

Consumer confidence has been on a steady rise against the backdrop of macro stability, driving a bounce-back in FMCG growth since Q4/14-Q1/15, which progressed as the year went on. Growth in rural areas continued to outpace urban areas on the back of a lower base and a more active penetration strategy by FMCG players as growth in urban areas slows down.

Uneven stock performance. Consumer staple stocks (VNM & TLG) performed exceptionally well in 2015 while consumer retail stocks did not live up to their operating performance, as in earnings growth, for different reasons. MWG suffered from weak buying by investors due to lack of foreign room while retail investors found little excitement in its trading illiquidity. Meanwhile, the incident of Dong A Bank overshadowed PNJ’s core business excellence during Q3-Q4/15.


Food & Beverage – Divergent trends

Beverages including dairy remained the fastest growing category within FMCG with accelerating growth especially in dairy. In contrast, consumption of packaged foods slightly dipped. This divergence has translated into listed companies’ performance, with VNM reporting strong top line growth while MSN’s consumer business stagnated.

According to Nielsen Vietnam, the fact that beverages are outgrowing foods is attributed to 1) producers putting a greater emphasis on health in their products (i.e. adding nutrients) with health being ranked as the top concern of Vietnamese consumers nowadays, 2) consumers’ increasing preference for convenience as beverages typically come in small packages and 3) sustainable innovations that expanded category. To demonstrate the last point, Pepsi Suntory expanded its tea category away from Green Tea Lemon to Olong and expanded category from refreshing to healthy with its TEA+ Olong product, which achieved 56% growth in its second year while Meadow Fresh expanded milk from fruit flavour to real fruit juice with its Nutriboost products, posting an 84% growth in its second year.


Retailing – Inevitable elevation, but it is just the beginning

2015 witnessed an explosive expansion by retailers, incumbents or new entrants alike. Leveraging on their established platforms, leading players like PNJ and MWG posted impressive core earnings growth driven by aggressively opening new stores. MWG has also announced its minimarket chain, which together with Vinmart+ of Vingroup (HSX: VIC) will propel the shift in Vietnamese’ grocery shopping behaviour towards modern retail formats going forward. While MWG will go through an experimental period of 12-18 months before deciding whether to scale up the new chain (which could reach 6,000-8,000 stores by YE2018-2020), Vingroup already revealed its ambitious plan of reaching an accumulated 60 supermarkets and 2,000-3,000 minimarkets by YE2016. Foreign retailers also played their part in pushing the development of modern retail, with the expansion of Aeon Mall (hypermarket), Lotte Mart (hypermarket) and convenience store chains (Circle K, Family Mart, Ministop etc.), as well as the entrance of E-mart (hypermarket) and Simply Mart (supermarket, belonged to Auchan).


As we discussed in last year’s strategy report, Vietnam’s modern retail is at its inflection point of development and so we always look at retail plays as attractive investments. PNJ and MWG remain our favourites but low free-float remains a roadblock to their investability.

Technical goods market

2015 continued on 2014’s path, as mobile and consumer electronics (CE) spearheaded Vietnam’s technical goods market growth. Fundamental drivers remained the same, including the shift from feature phones to smartphones and increasing affordability in mobile phones, and growing penetration in CE.


Jewellery retailing

Vietnam gold jewellery demand grew 22% in 9M15 vs 9M14 as Vietnam’s economic growth sped up, weak gold prices offered good buying opportunities for gold jewellery and the surprising VND devaluation in Q3/15 ignited a rush to gold as safe heaven.


2016 outlook – BUY retail stocks when you can

We expect domestic consumption to keep its rally momentum in 2016, driven by:
– Rising income and consumer confidence. Discretionary goods should outgrow staple goods again on the back of its higher income elasticity and Vietnam’s young middle-income class.
– More jobs created by FDI inflows and a healthy real estate market (many Vietnamese’s wealth is tied to property) to spur consumption
– Rapid development of modern retail especially small-format stores, which widens access to consumer goods and encourages consumption of packaged foods and beverages
– Possibility (admittedly a remote one) of a recovery in commodity prices, which will boost rural population’s income and bolster even higher growth in the rural areas

BUY retail stocks on growth potential and attractive valuation. Although we are also bullish on staple goods plays, the undeserving relative underperformance of retail stocks in 2015 has made them among those with highest upside in our coverage. Earnings growth should remain elevated in 2016 primarily driven by store expansion.

Stock recommendations

BUY – Mobile World (HSX: MWG) – MWG remains one of our top picks as it presents a compelling growth stock play which is capitalizing on Vietnam’s underdeveloped but fast-growing retail sector. We expect MWG to deliver another good year in 2016 driven by its footprint expansion especially in the DienmayXANH (CE) chain, as we pencil in a 29% EPS growth in FY16 vs FY15. Whether MWG can continue to grow at this pace afterwards depends on the outcome of the new minimarket chain BachhoaXANH’s experimental period, which has a high likelihood of success according to our analysis discussed in the report dated 26 Oct 2015. Regardless, MWG remains very cheap at FY16 PER of 7.9x.

BUY – FPT Corporation (HSX: FPT) – One of those stocks that will keep investors away from sleepless nights, boasting a durable growth trajectory thanks to Telecom and Software Outsourcing while presenting market-leading corporate governance and transparency. FY16 bottom line growth will better reflect FPT’s true performance, as we estimate margins of the telecom segment to stabilize after heavy investments in fiber optics in 2015. As such, Telecom’s profit will grow more in line with its revenue at nearly 30%. Meanwhile, we believe Software Outsourcing will maintain its growth rate at 35-40% in 2016 as FPT continues to ride on its cost competitiveness and aggressive staff recruitments. On the ICT Trading & Retail front, we expect Retail to rise 20% owing to store expansion to offset the stagnation of Trading caused by the fact that MWG now can deal directly with Apple instead of having to go through FPT Trading as before.

BUY – Vinamilk (HSX: VNM) – Given the high visibility of a robust FY16 on the back of improving domestic consumption and subdued input milk powder prices, any surprising share price movement relative to our 22x forward PER-based price target is likely to emanate from market reactions to new developments on the issue of FOL and state divestment. In our viewpoint, chances are surprises will come on the upside given that the recent M&As related to other large listed F&B companies, namely KDC (confectionery unit) in 2014 and MSN (with its F&B subsidiary) in 2015, ended up with buyers paying significant valuation premium. We currently project EPS growth of 13% in FY16 vs FY15 based on the conservative assumption that VNM’s input milk powder cost base will average USD2,400 per ton in 2016 (similar to 2015), against spot prices of USD2,400 for whole milk powder and USD1,700 for skim milk powder as at end of 2015.

BUY – Masan Group (HSX: MSN) – MSN took another big stride towards re-transforming itself into a consumption-focused business by partnering up with Thai beer giant, Singha Asia (Singha) through its consumer subsidiary. Apart from the valuation premium that Singha paid for MSN’s consumer platform (roughly 30x FY16 PER on a post-money basis under our estimates), the deal brings about substantial growth opportunities for MSN’s consumer business by 1) enabling MSN to bring its seasonings and coffee products to Thailand via Singha’s distribution network, 2) allowing MSN to tap into other Indochina countries (Myanmar, Laos and Cambodia) when the time is right, and 3) enriching MSN’s war chest to roughly USD1.8 billion post-deal, which can be used to expand and deepen its consumer platform via either operational investments or M&As. Given that we are modelling this free capital at its face value and have not factored in any future contributions from the new geographical markets, our current valuation certainly carries further upside especially from potential value-added M&A that MSN has proven that it can pull off evidenced by the recent acquisition of Masan Nutri-Science. Earnings multiple for MSN still looks pricey in 2016 due to its mining business, which is suffering from depressed metal prices. Nonetheless, if we strip out Masan Resources which is EBITDA-positive and the investment in Techcombank, we estimate that the market is attributing an FY16 PER of around 15x to MSN’s consumption-driven businesses (branded F&B and animal protein), which is undemanding in our opinion given the opportunities derived from the Singha partnership that we mentioned above.

OUTPERFORM – Phu Nhuan Jewellery (HSX: PNJ) – 2015 would have been an excellent year all around for PNJ without the big provision related to the investment in DongA Bank. Without the fresh provision of VND181 billion (USD8 million) in 2015 that propelled us to forecast a 14% NPAT drop in FY15 vs FY14, NPAT would have grown by 48% under our estimates. However, we believe now is time to put the DongA Bank incident aside and re-focus on PNJ’s success story as a jewellery retailer well positioned to capitalize on Vietnam’s growing middle-income class. PNJ’s aggressive retail footprint expansion is being supported by its effective marketing campaigns and product innovations. On the other hand, GPM expansion resulting from better product mix and a greater contribution from high-margin retail business is also boosting bottom line growth. With the remaining VND204 billion (USD9 million) of the provision related to DongA Bank anticipated to be booked in 2016, attention should be re-directed to PNJ’s core business in which we expect core NPAT to jump by 36% in FY16 vs FY15.

MAKET PERFORM – Thien Long Group (HSX: TLG) – A typical consumer staple play with stable and durable growth potential while a simple business model means things can hardly go wrong. However, given a demanding valuation of 14.1x FY16 PER and unresolved trading illiquidity, patience is needed for investors to build up a position. Healthy sales growth of 16% together with a substantial margin expansion thanks to low plastic prices led to a 30% EPS growth in FY15 vs FY14. Looking forward to FY16, given expected flattish margins based on our house view that oil prices have limited downside, sales growth will command the story. We forecast EPS to increase by 12% in FY16 vs FY15 against a top line growth of 14%.

Property sector: Ride on market leaders as liquidity stabilizes




What happened in 2015: record liquidity, high-end took spotlight

Transaction volume reached record high level. The number of condominium transactions in HCMC and Hanoi totalled 37,940 in 9M15, which is already 35% higher than the whole 2014 and the highest mark ever. Although the majority of activity happened in new projects, the elevation in market liquidity has helped overall inventory drop 24% YTD through October 2015.


High-end segment led the way. This segment accounted for roughly one-third of the market transaction volume, much higher than previous years. Among the factors lifting the whole property market that we list below, we want to highlight: 1) improving infrastructure in the areas surrounding CBD, most notably in the East of HCMC and 2) the inevitable return of investors as ones that have catapulted high-end to be the fastest growing segment in 2015 (9M15 transaction volume edged up by 134% vs 9M14).


Multiple factors played in favour of the property market in 2015, including:

  • Macro stability in general and low inflation in particular improved homebuyers’ confidence.
  • Interest rates fell to rarely seen levels with borrowing rates of 7-8% for the first year of mortgages.
  • Banks were more accommodative, with the first ever appearance of 25-year mortgages and loan-to-value ratios of 70-90%. Such lending was encouraged by Circular 36, which reduced the risk weighting of mortgage loans from 250% to 150%.
  • Highly capable players, most notably Vingroup and Novaland supplied quality product to the high-end segment and are consolidating the market coming out of the previous crisis. In the low- and mid-end segments, we also saw leading player, NLG gain market share. Projects launched in 2015 are well located with designs and sizes suited for buyers with real living purpose.
  • We see accelerating progress of infrastructure development including the construction of the Metro Lines as well as Thu Thiem Urban Area (up-and-coming area close to CBD). More projects are being strategically located near these developments to capture the value premium.
  • Investors are returning, mostly in the high-end segment.

New laws loosen up foreign ownership of properties in Vietnam but its impact has been insignificant so far. Leading developers stated that foreigners have remained a minimal part of their buyer profile due to:

Lack of detailed guidance on the implementation of the Real Estate Business Law 2014;

Lengthy procedures;

Inflexible financing, in which 1) foreigners cannot buy properties in Vietnam with money borrowed from Vietnam-based banks and 2) it is complicated for foreigners to transfer money back to their countries after selling properties.

2016 outlook: market to stabilize from 2015’s high base.

We believe the property market will remain healthy in 2016 but do not foresee another liquidity surge in the primary market owing to 1) pent-up demand during the 2011-2013 downturn having been partly realized in 2014-2015 and 2) secondary supply poised to increase in 2016. On the other hand, we expect banks to remain accommodative thanks to healthier balance sheets and comfortable headroom for mortgage lending, while quality projects coupled with prices kept under control will sustain demand. An interest rate hike, though likely, will not be of significant magnitude in our viewpoint.

Prices will be kept in check due to three main reasons. Firstly, a large primary supply is coming in 2016. According to Savills, HCMC will welcome new primary supply of 57,500 condos between Q4/15-17 while that of Hanoi will reach 27,900 units between Q4/15-16. This level of new stock runs at a similar rate compared to 2014’s. Secondly, secondary supply should pick up following 2015’s record primary transactions, especially those coming from investors as higher interest rates will urge profit-taking on their leveraged position. Finally, a greater number of projects are slated for delivery/move-in, weighing on rental yield and ultimately property prices.

On the other hand, we may see more luxury projects introduced to the market as developers seek to capture niche demand from this high-margin segment, which has been less active compared to the other segments over the last few years. Nassim Thao Dien by Son Kim Land or Madison by Novaland have jumpstarted this segment towards end of 2015 while Novaland and Vingroup’s pipelines suggest more luxury projects to come in 2016.

A different market dynamic this time around gives us less worry over the secondary supply overhang. We believe that the secondary market going forward will be more liquid and fundamentally driven compared to the previous cycle thanks to a drastic improvement in product quality. During the last cycle, residential properties were mostly meant for investment/speculation purpose and so would have a hard time finding buyers once the market turned cold. In contrast, this time around, investors are holding products that will be welcomed by real demand-driven homebuyers and hence, bring about lower liquidity risk.


Over the medium and long term, mid-end should be the fastest and most durably growing segment. Mid-end fits well with Vietnam’s rising middle-income class and urbanization. It is less cyclical than the high-end segment and it should receive a stronger push from developers on the back of its better profitability in relation to the low-end segment.

Our top picks should do well in this environment. The expected stabilization should do more good than harm to property developers in our opinion as long as liquidity maintains at healthy level since it will prolong the upcycle. We recommend investors to again ride on established names whose execution capabilities will ensure that they will be able to capitalize on market demand.

Stock recommendations

BUY – Dat Xanh Group (HSX: DXG) – Leading real estate broker and emerging low/mid-end developer. Leveraging on its market expertise and a robust project pipeline built in 2015, we believe DXG is becoming a prominent player in the low/mid-end segment. The greater fragmentation in the low/mid-end segment compared to high-end means there are ample opportunities for DXG to consolidate the market. DXG’s pipeline includes 12 projects. Most of them are poised to be launched in 2016, boasting a GDV of VND17 trillion (USD752 million) and 10,000 total units. These aggressive launches will be supported by DXG’s sales capabilities, in which its brokerage platform consists of 30 transaction floors, 1,500 permanent salesmen and 2,000 collaborators. The key risk is DXG’s unproven capabilities in executing various developments at the same time.

BUY – Khang Dien House (HSX: KDH) – Leading mid-end landed property developer. In the short term, KDH will continue to realize its land bank in District 9 (East of HCMC) on the back of its unique product offering and brand name. Based on a total land bank of 82ha currently, we estimate KDH to launch 2,600 townhouses and 3,000 apartments from 2016 to 2019. In long term, the recent takeover of BCI, which provides an additional 700ha of land bank in the West of HCMC, assures KDH of unimpeded development. Key risk is the company’s ongoing move-up to villa development which yields higher margin vs townhouses but also poses greater liquidity risk.

OUTPERFORM – Vingroup (HSX: VIC) – leading high-end brand. On the back of a superior project pipeline, VIC is set to reinforce its strong foothold in its traditional Hanoi market, which appears less heated than HCMC at the moment (see figure 48). In the HCMC market, we also expect VIC to launch new landmark projects to extend its success following the Vinhomes Central Park (VCP) project. Since commencing VCP in November 2014, VIC has sold 6,543 units out of 8,325 units launched as at end of September 2015 (79% take-up rate). Speaking of other businesses, VIC is rolling out its strategy of shoring up the contribution from recurring income streams by aggressively expanding its retail property and hotel/resort portfolio. VIC aims at reaching one million sqm of retail space by YE2016 from about 700,000 currently, while we believe one or two new hotel/resort projects will be put into operations each year. Key risk is a cooler-than-expected property market as high-end segment is highly cyclical. On the other hand, VIC’s across-the-board penetration into the consumer retail segment, while appearing potential and enticing owing to Vietnam’s underdeveloped modern retail sector, remains a drag on earnings in short term. VIC’s target of reaching 50 supermarkets and 2,000-3,000 minimarkets by YE2016 from about 20 and 150 currently has drawn close attention to its execution capabilities, which remain unproven at this point.

OUTPERFORM – Nam Long Group (HSX: NLG) – Leading affordable-housing developer. NLG boasts a positive outlook and solid earnings growth momentum as it continues to ride on its reputed Ehome project series. Thanks to its cheap land bank, superior economies of scale and a strong brand, NLG is able to compete profitably in the tough affordable segment and gain market share in the process. The company looks to cement its position by commencing its Camellia Garden project (6ha) and East Gate Residences project (17ha) in 2016, both located in the outskirt areas of HCMC suited for affordable housing development. Key risk remains its 355ha Waterpoint project in Long An province (45-60 mins from HCMC) that accounts for 43% of NLG’s inventory and has been standing idle for several years despite substantial investments already made for land clearance and land use rights.

Cement sector: Industrial construction to drive sales volume

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What happened in 2015: record-high sales volume fuelled by busy construction activities

Cement consumption is on resilient recovery, in tandem with the boom of construction activities. Domestic cement sales volume increased 11% vs. 2014 to 55 million tonnes in 2015, posting the highest growth since 2010. Growth was spurred by robust construction activities (the construction components in GDP breakdown posted double digit growth for the first time since 2009) as the recovery of the real estate market boosted residential construction while record-high FDI disbursement stirred up demand from industrial construction.


Growth skewed to the South, as this region is poised to massive infrastructure projects such as the metro line while residential projects are heating up in Ho Chi Minh City. Meanwhile, supply-demand dynamics in the South remained far better than in the oversupplied northern market.


Outlook for 2016: Hefty industrial construction will ensure the growth momentum

The strong influx of overseas capital into Vietnam manufacturing will drive demand for factory construction. As such, we believe 2016 will be another fruitful year for cement producers, especially leading players with strong brand equity in the Southern market such as HT1.

The IPO of Vietnam Cement Industry Corporation (VICEM) is most likely to take place in 2016, after several delays. VICEM has significant control over Vietnam’s cement industry as this state-owned enterprise is the parent of eight subsidiaries (including HT1), whose aggregate market share are standing at 35% nationwide. Furthermore, VICEM has stakes in joint ventures with well-known foreign players operating in Vietnam such as Holcim Vietnam, Nghi Son or Chinfon. VICEM planned to reduce their stake in subsidiaries listed on stock exchanges (including HT1) after their privatization.

Stock recommendation

OUTPERFORM – Ha Tien 1 (HSX:HT1) – Leading cement producer in the South of Vietnam, commanding more than one-third of the market share. We maintain our positive view on the stock as HT1 is showing its capability to utilize its leading position in the fastest-growing market and ride well the coattails of booming construction projects. In 2015, HT1 posted record-high sales volume growth, up 18% vs. 2014. Given the momentum of the cement industry in the year to come, we believe HT1 could continue to deliver decent sales growth in 2016. Moreover, for a heavy-capital investment business, continuous increase in volume sold implies persistent improvement in EBITDA margin – this pattern was proven in their FY15 financial performance. HT1 is trading at FY16 PER of 10.4x and EV/EBITDA, vs. peers’ 22x and 12x respectively.

Steel sector: The fight against Chinese steel has not ended

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What happened in 2015

Demand for construction steel reached a five-year peak

Over the past eleven months of 2015, thanks to a robust real estate sector recovery as well as swelling spending on infrastructure projects, demand for construction steel skyrocketed by 26.5% vs. the same period last year. Such growth has surprised all industry’s players as it is nearly twice the expected 12%-14% growth for 2015. In addition, this has made Vietnam the largest steel consuming country in the SEA region, surpassing Thailand.


A good year for all producers despite a flood of Chinese imports & pricing pressure

The NPAT of all the top four steel producers improved over the first nine months of this year compared to the same period last year. POM turned a profit after realizing a loss of VND20 billion (USD885 million) last year. Meanwhile, TIS and VNS saw their NPAT grow by 26% and 72% respectively. This growth was driven mainly by good sales volume growth as well as a 40 to 80 bps improvement in EBITDA margins. The fact that HPG’s competitors delivered slightly higher margin improvement than HPG is due to their aggressive restructuring efforts in recent years, embarked upon after they all suffered losses in the past three years. HPG fared much better over the period than its competitors.

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Imports from China were significant but we lack the data needed to assess its impact specifically on the construction steel segment. Over the past 10 months, Vietnam imported 7.7m tons of all types of steel from China, up 62% vs. the same period last year. According to Southeast Asia Iron & Steel Institution, most of these imports are flat steel and other types of steel rather than long steel. Their statistics over 1H15A show that Vietnam’s long steel imports rose by 24% while imports of flat steel soared by 43% compared to 1H14A. According to VSA, steel billet imports leapt by 290% over 9M15A to reach 1.1m tons (of which 75% was from China).

Over the first 11 months of 2015, local steel prices fell by 24%, more or less in line with global trends but a milder decline than that witnessed for Chinese steel due to a sharp slowdown in China’s economic growth and vast overcapacity there. In the meantime, iron ore and steel scrap prices plunged by 40% and 44%, respectively and coking coal price dropped by 25%. Hence, in addition to the benefits of recent restructuring efforts finally kicking-in, domestic steel producers saw an improvement in profitability this year as the fall in raw material costs more than offset the decline in steel prices; TIS was the only player that experienced a significant contraction in gross margin.

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Market consolidation happened outside the Vietnam Steel Association group

As of October 2015, we see that consolidation in Vietnam’s construction steel sector has taken place mainly outside the Vietnam’s Steel Association group as market share of the five biggest players only inched up by 300 bps to 60.1%. HPG has taken away market share from other big players rather than from small players. According to estimate of VSA, Chinese’s steel market share is ~20% up from having no presence in the market last year.


2016 outlook

Demand for construction materials to remain buoyant

Even though the interest rate is expected to rise in 2016, it will still stay low enough to continue to support the property market. We believe that demand for construction steel will continue to be resilient into next year given continue strong construction activity within the real estate sector as well as many road/bridge infrastructure projects and new factory construction especially for Foreign Invested Enterprises.

The Vietnamese Government will try to protect local steel producers…

  • On 28 December 2015, the Minister of MOIT just signed a directive to apply safeguard investigations against Chinese steel.
  • This followed a proposal from the four biggest steel players including HPG, POM, TIS and Vietnam-Japan Steel JSC.
  • These players requested the review of material injury that imported products are causing to the domestic industry. In particular, the steel billet market share of domestic players dropped from 100% in 2014 to 86% in 2015, and from 100% in 2014 to 98% in 2015 in the case of steel bars.
  • An import tariff of 33-45% was proposed for steel billet and finished long steel. Such tariffs should be immediately imposed for 200 days while waiting for MOIT’s final conclusion.
  • We think these tariffs are high enough to start curbing Chinese steel imports.

…but competition from Chinese steel could get harsher still

Firstly, China recently announced that it will cut the 25% export tariff on billet and pig iron to 20% and 10% respectively from Jan 2016. In January-October, China exported 141,659 tonnes of pig iron and 5,367 tonnes of steel billet. Chinese steel exports continued to grow by 22% over 11 months of this year after surging by 50% last year.
Chinese steel production is forecasted to decrease by 3.1% in 2016 while domestic consumption is anticipated to reduce by 3%. However, a sharper slowdown in Chinese GDP growth and a souring of the local property market there could intensify the supply glut in China and boost the flood of Chinese steel into Vietnam despite the new domestic policies to protect local producers.


Secondly, a further devaluation of the yuan this year against the USD cannot be ruled out. The general view is that the yuan is currently overvalued and the inclusion of the currency in the IMF’s list of reserve currencies will only increase the pressure on the Chinese central bank to allow the yuan to trade more freely, thereby increasing the risk of another devaluation. If this happens and Vietnam does not follow suit with its own devaluation, then competition from Chinese steel will get much stiffer. Even if the dong is devalued to retain competitiveness versus the yuan, this will make imports of iron ore and coking coal more expensive thereby causing some gross margin erosion for local producers.

According to industry players, steel prices might continue to be under pressure on the back of depressed input material prices including iron ore, steel scrap and hard coking coal and intensifying competition from Chinese imports. The ability of local players to maintain their gross margins into 2016 will therefore depend on how global prices of iron ore and coking coal fare in relation to local steel prices in Vietnam.

Iron ore prices are expected to stay flattish in 2016

According to Bloomberg consensus, iron ore price is anticipated to stay flat in 2016 vs. 2015’s average level but will reduce slightly after that. Iron ore price plunged by 44% this year on surging output from three biggest players amid China’s GDP growth slowing to its lowest level since 1990. This resulted in a significant supply-side correction and therefore less pricing pressure but the capacity overhang will continue to pressure prices for a while.

Overall, local steel producers might see flat gross margins in 2016 — or even a slight contraction – as competition from Chinese imported steel weighs on local steel prices while prices of major raw materials stay flattish.


Recommendation for 2016

OUTPERFORM – Hoa Phat Group (HSX:HPG) – For 2016, we are forecasting a 300 bps decline in the steel segment’s EBITDA margin due to stiffer competition from imported Chinese steel. On the demand side, the buoyant real estate market should continue to support HPG’s top line into next year. In addition, the fact that market consolidation has just happened outside VSA proves that HPG has room to grow its market share further by taking share from smaller players. Furthermore, the fact that small players in VSA were still able to deliver volume growth in 2015 and given that HPG has much greater scale than the smaller competitors proves that HPG still has a significant competitive edge over imported Chinese steel. Finally, even though the depressed iron ore prices make it difficult for vertically integrated steel producers (since the incremental margin in the iron ore part of the steel value chain is now too low to justify the depreciation and other operational overheads associated with iron-ore production), HPG will not feel the pressure as much since it still sources 70-80% of its iron ore from third parties.
The only major risk we see is an intensifying of competition from imported Chinese steel in the event of a sharper slowdown in China and further devaluation of the yuan. However, were this to happen, HPG would be better positioned than any other domestic player to withstand the pressure. Finally, we do not see this as posing a downside risk to the stock as it appears that the market has already priced this in.

NON RATED – Hoa Sen Group (HSX:HSG) – HSG is the biggest player in Vietnam’s galvanized steel sector (steel for roofing and walling, usually used in rural areas) with dominant market share of 40%. The company has evolved from a distributor in 2002 to become the largest galvanized steel producer in Southeast Asia at the moment. HSG’s nationwide retail distribution network makes it distinctive versus other competitors who are pure producers. HSG has surpassed reputable foreign players such as BlueScope and Maruichi Sun Steel to increase its market share from 21% in 2008 to 39% in 2015. The company started to export to other SEA countries since 2009 and export revenue now accounts for 40% of the company’s total revenue.

In its last fiscal year (starting from 1 October 2014 to 30 September 2015), HSG delivered top-line growth of 16% and bottom-line growth of 59%. This was a big surprise given that China accelerated its dumping into other markets and also given the anti-dumping tax on HSG’s exports into other South East Asian countries.

HSG’s current strategy is to expand its business in the domestic market (especially to the North where its presence is still humble) by doubling its distribution network by 2020. It is in the preliminary stages of building a new factory in Central Vietnam to double its capacity to 2MTPA by 2020 as its current facilities are operating at ~100% utilization rate.

HSG’s main competitor is Chinese steel but so far, its high-quality product, good brand-name as well as its distribution network have helped protect its market share as well as margins in spite of difficult industry conditions for a few years now. However, its high gearing ratio (partly due to combined producer & distributor status) and USD-denominated borrowings make it vulnerable to interest rates and dong devaluation. HSG is trading at a PER of 6.3x on 2015 EPS.

Power sector: Surging demand, drought and weakness in gas prices to benefit gas thermal players.

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What happened in 2015

Huge capacity added but drought dented output

Electricity consumption grew by 11.9% in the first eleven months of 2015 vs. the same period last year to 131.3 billion kWh, the highest level in the past five years. An estimated 5,900 MW of total system-wide capacity was added in 2015, an impressive growth of 17% in total capacity from the beginning of the year.

Due to El Niño which led to a unusually low rainfall, hydroelectricity could only contribute approximately 20% to Vietnam’s electricity supply through 10 months this year in contrast to the estimated 37% contribution in National Load & Despatch Centre’s 2015 plan. Historically, hydropower plants have contributed 40% of the total power supply in Vietnam.


Revised power development plan (PDP) VII is currently under formulation

  • Proposed lower forecast for electricity consumption versus earlier is based on the assumption of higher electricity savings, a better efficiency ratio (elasticity ratio between GDP & electricity consumption growth rate will reduce from current 1.8x to 1.0x as economic growth become less energy-intensive). According to Green Innovation & Development Centre, demand for electricity is estimated to be 464.7 billion kWh by 2030, 76% of PDP VII’s base case.
  • Proposed lower capacity accordingly to ~117,000 MW by 2030, 79% of PDP VII’s base case. In particular, it is estimated that there is now no need to build ~30,000 MW of coal power plants as Vietnam’s ports and related infrastructure are not equipped to handle such huge coal import volumes and there are also concerns on pollution.
  • CO2 fee imposed on coal thermal (2020 onwards) will bring production cost of this power source to USD6.7-9.1cent/kWh compared to the current unit production costs of USD5.7 cent/kWh and USD3.6cent/kWh unit costs for coal thermal and hydropower, respectively.
  • Developing renewables such as wind, power and biomass are emphasized in the revised plan.

Flat electricity price due to lower gas price

The average selling price of power plants nationwide through 10 months of 2015 was VND1,183/kWh (~USD 5.3 cents/kWh), nearly flat vs. the same period last year. This is mainly owing to lower gas prices, as we can see below: the input gas price for power plants above take-or-pay volume has declined ~15% in 2015 vs. 2014.


Outlook for 2016

Spurt of FDI into the manufacturing sector following a slew of recently concluded FTAs will drive strong growth in electricity demand

We expect electricity consumption in Vietnam will grow at least 12% in 2016 on robust economic growth of 6.8%, a surge in registered FDI into the manufacturing sector on the back of recently-signed FTAs such as Vietnam-Russia, Vietnam-EU and Vietnam-Korea. TPP is expected to be signed in 2018 and the manufacturing investment in anticipation of this will be another driver for electricity consumption starting in 2016.

Registered FDI into the manufacturing sector – which typically accounts for 50% of electricity consumption in Vietnam – has totalled USD45 billion over the last two years and eleven months, nearly double the amount registered for the previous three-year period. In particular, Samsung’s CE Complex (investment of USD1.4 billion in District 9, Ho Chi Minh City, just increasing to USD2.0 billion) which will produce high-tech white goods is expected to come online in Q2/16 and will materially boost electricity demand in the HCMC urban area.


Drought will severely hamper hydropower production in 2016…

According to EVN, year-to-date water flow into hydropower reservoirs is just 52% of the level realized in the same period last year. In addition, the water level of reservoirs in the Central & Southern regions are just at 20-30% of their designed capacity. Similarly, water levels of reservoirs in the North are at just 40-50% of their designed capacity. Therefore, going forward to Q1 & Q2 next year (which is dry season), the contribution of hydropower plants will be modest and the scenario played out in 2015 might repeat next year.

….and as a result, new supply will fail to match to incremental demand in 2016

Based on our assumed consumption growth rate of 12%, demand will grow by 17 billion kWh in 2016. In the meanwhile, as observed, new electricity supply in 2016 is expected to reach 14.3 billion kWh, mainly from Duyen Hai 1 (in the South) and Mong Duong 1 (in the North). Large-scale hydropower plants such as Huoi Quang & Lai Chau, which are expected to come online later this year, will not yet contribute significantly to 2016 supply as test runs will take time and the drought will also limit their production. Finally, Duyen Hai 3 will not be connected to the national grid until late 2016, implying that its contribution will also be very minimal.


For 2015, Vietnam’s electricity system had an extremely low reserve margin – except for January and February, the reserve margin ratio for the rest of the year ranged from -11% to 6% versus a standard reserve margin ranging from 25% to 40%. This situation might continue into 2016 due to supply constraints and surging demand.


Slow progress on new power plants will exacerbate the power shortage in the next two years.

Over the next two years, we see capacity growth being limited at 3% – 14% per annum after 2015’s ample growth of 17%. In 2016, Duyen Hai 3 will come on-stream.

We revise our estimates for the national theoretical reserve down for the 2016-2017 period and up after 2018 as updated information shows that there will be delays on the Thai Binh, Nam Dinh, Vinh Tan 3 and Duyen Hai 3 expansion power plant projects.


We expect retail electricity prices to rise in 2016.

Even though electricity price hikes could have a profound impact on GDP growth, we think there are several reasons that EVN will continue to raise tariffs in spite of continued weakness in oil & gas prices:

  • EVN released its 2014 financial statements in which we see NPAT of VND3.3 trillion (USD146 million), down 61% vs. 2013. Accumulated FX translation loss as of 31 December 2014 is VND4.8 trillion (USD212 million).
  • The dong’s 5% depreciation against the USD in 2015 has resulted in an incremental VND2.0 trillion (USD88 million) input gas cost burden for producers (as gas prices are fixed in USD). In addition, EVN also suffered FX translation losses of VND20.0 trillion (USD884 million) for 2015, bringing total accumulated FX losses to VND24.8 trillion (USD1.1 billion).
  • 2015 saw the lowest inflation in the past ten years (less than 1% inflation vs. target of 5%) allowing EVN ample room to raise electricity prices without fear of stoking inflation.
  • EVN’s gearing ratio as of 31 December 2014 is still very high at 2.3x
  • Previously, the Government approved the price range for 2013-2015 period at VND1,437–VND1,835. At the moment, the price is only VN1,622/kWh, leaving room for further hikes.
  • Since Vietnam still lacks power capacity, the selling price should be high enough to attract investment in generation as well as to trim demand by boosting electricity savings initiatives and lift the efficiency ratio.

Low oil price makes gas thermal the best power source.

Based on the assumption that the oil price stays at USD40/bbl in 2016, we estimate the upstream price of electricity produced by gas thermal power plants will fall further and narrow its gap with price of hydropower to 3% in 2016 from the previous gap of 26% over H2/2012-2014 period when oil prices averaged USD104/bbl. At the same time, this will also widen the upstream price gap between gas thermal and coal thermal with the gas thermal price potentially ending up 31% lower than coal thermal price vs. just 17% cheaper, previously.

The Competitive Generation Market (CGM) wholesale price is estimated to remain flat in 2016 vs. 2015 as the drought will lift hydropower prices while coal thermal prices remain unchanged and low oil prices bring down the gas thermal power price. Of note, low gas prices will widen the gap between gas thermal’s CGM price and the price fixed in the PPA, thereby benefiting margins of gas thermal power producers


Wholesale competitive market officially goes into pilot mode in 2016.

  • MOIT released the pilot operation plan of the Wholesale Competitive Market (WCM) for 2016.
  • EVN will gradually transfer current PPA contracts that they signed with power plants to the five Electric Power Trading Companies (EPTCs) on the principle that average electricity cost of each wholesale buyer will be the same.
  • In addition, each power plant’s contract volume (~60%-80% of total output) will be decided by these EPTCs every year instead of by EVN.
  • This handover process will retain the contract price but the Competitive Generation Market (CMG) price will increasingly be determined by supply & demand.
  • For 2016, each EPTC will be transferred three contracts, one hydro, one gas thermal and one coal thermal.
  • We believe this will further enhance the transparency and competitiveness of Vietnam’s power sector with at least five wholesale buyers instead of only one buyer at present. While this movement may only have a nominal impact on power plants in the short term, this shows that Government is on the right track to fully liberalize the sector by 2022 (which will then benefit all power plants). It should also attract much needed FDI to help increase Vietnam’s power production to keep pace with rapid demand growth.

Recommendation for 2015

BUY – Nhon Trach 2 thermal power plant (HSX:NT2) – We maintain a BUY rating on NT2 for several reasons: Firstly, we expect the same record utilization rate of 85% for 2016 on robust growth in manufacturing activity and drought which is impeding hydropower output. The operation of the Samsung CE Complex will exacerbate the electricity shortage in the South of Vietnam. In case the drought is more severe than expected, NT2’s utilization rate could rise by another five percentage points to help cover up the shortfall. Secondly, as mentioned above, gas thermal is the best choice for next year due to its growing competitiveness vis-à-vis other power sources We estimate that NT2’s input gas price will drop by another 20% in 2015, making its gas price match the Take or Pay price secured by Phu My 10 years ago. Thirdly, we expect that NT2 will get approval for their second plant as PetroVietnam wants to diversify their business further given the continuing weak outlook for oil prices. NT2 just hired one more vice general director who will responsible for the development of the second plant. We expect that Government’s decision on licensing for this second plant will be announced in H1/16. Fourthly, we believe NT2 will raise its divided in the coming AGM.

BUY – Pha Lai thermal power plant (HSX:PPC) – We upgrade PPC from M-PF to BUY as we believe PPC is another beneficiary of the drought and revise its 2016 utilization rate from 62% to 70%. In addition, we expect that in 2016 PPC will be able to pay out a cash dividend of VND2,000 (11.0% yield at current price) if both the JPY/VND and USD/VND exchange rates do not appreciate more than 5% (the company and its associates have JPY and USD denominated debt). The tapering-off of depreciation expenses will lift EPS growth by 40.3% and result in a sharp contraction of PPC’s PER to 6.0x at current prices. Meanwhile, signals from the company suggest that the upcoming PPA renegotiation for Pha Lai 1 will work in its favour. Moreover, the pressure on PPC to divest its 26% stake in Hai Phong Thermal Power Plant under the new Investment Law appears to be a non-issue as it might only apply to future stake purchases rather than being retrospectively applied to legacy holdings – this means that any potential hit to earnings from a fire-sale of this stake is now unlikely.

MARKET PERFORM – Vinh Son Song Hinh Hydropower plant (HSX:VSH) – We downgrade VSH as retail investor speculation in Q3 results pushed the price up at the same time that a worsening drought and the uncertainty around the construction of a key part of the Upper Kontum project (tunnel from 5th Km – 15th Km) clouds the medium-term outlook.

Oil & Gas sector: Vietnam’s oil & gas production activities could stall if oil price slides further to USD30/bbl

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What happened in 2015

Global Brent oil price keeps searching for a bottom due to supply glut. The oil price has plunged 67% from its peak of USD115 in June last year and 32% since the beginning of FY15. The global oil market remained oversupplied by 1.5 to 2.3 million bpd in FY15. After OPEC’s December meeting, Brent crude tumbled towards its eleven-year low of less than USD40 in response to the following:

  • OPEC decided to impose no ceiling on its production in order to maximize low-cost OPEC supply and shake out higher-cost non-OPEC producers.
  • OPEC’s three largest members, Saudi Arabia, Irag and Kuwait keep pumping more oil to the market at near record highs amid anticipation of new crude from Iran. OPEC’s output touched a three-year high of 31.7m bpd in November.
  • Russia’s oil output continued to hover over post-Soviet record levels, i.e. 10.8m bpd in November.
  • A 40-year ban on U.S. crude exports was lifted on 18 December 2015.
  • Surplus oil inventories have been approaching the highest levels in at least a decade. As extra Iranian and U.S. export oil come onto the market, the supply glut is expected to grow, raising concern around hitting storage capacity limits.
  • China, the world’s largest commodities consumer, released third quarter macro data showing its slowest growth rate in six years; demand is likely to remain weak.



PetroVietnam boosted oil & gas production to make up for price declines.

In 2015, PetroVietnam’s oil and gas production touched a five-year high. Crude oil production is estimated to have grown by 9% to 18.7m tons while natural gas production also is estimated to have climbed to 10.7bcm (+5% vs. 2014).

PetroVietnam tried to boost production in low-production cost fields while it has brought production in high-production cost fields as well as most exploration and development activities to a halt.


Oil & gas share prices collapsed in line with declining prices, despite production hikes.

As oil prices tumbled by 30% in 2015, oil & gas stocks (GAS, PVS, PVD and PVC) that were exposed to low oil prices also plunged by 30-50%. In the meanwhile, beneficiaries of low oil prices (PLC and DPM) saw share price increases of 35% and 9%, respectively.


In terms of earnings, we estimate that PVC was hit hardest by the oil price plunge, followed by PVD. GAS seems to be the most oversold with a share price decline of 47.5% vs. an earnings decline of just 17.8% while DPM’s impressive EPS growth failed to draw investors’ interest.


Outlook for 2016

While we do not want to take a punt on oil prices, we assume that Brent oil price of USD40/bbl forms a good base case scenario for next year…

Analysts forecast a recovery of oil price to USD50/bbl, up 35% from current levels (5 January) based on several reasons:

  • Production cuts will turn the market around in the coming year, especially U.S. shale oil production will fall as drillers succumb to mounting debt service obligations. US. Shale oil production break-even point is estimated at USD50-60/bbl.
  • In 11M15, China’s crude oil imports increased 8.6% vs. TSPLY to 6.6 million bpd. For 2016, China is forecasted to purchase 8% oil more from overseas as they target a stockpiling of 100 days’ worth of import by 2020, tripling the number as of the middle of 2015.
  • OPEC squeezing budget. Plunging oil price eats into many OPEC’s national budget. Saudi Arabia needs to sell oil at around USD106 a barrel in order to balance the Government budget. Similarly, other OPEC countries needs oil price of USD49-100/bbl.

Additionally, several of the world’s major producers, such as Russia, Saudi Arabia and Iran, are involved in military conflicts that could escalate anytime and drive up oil prices.


We set a base case assumption for oil price of USD40/bbl for 2016 based on consensus of experts’ estimates of USD50/bbl but adjust this further down to factor in the increasing speculation by traders on a continued slide in price.

…but if oil were to slide below our base-case level, the outlook for local producers and service providers would be disproportionately bleaker.

Vietnam’s production activity would be at risk with crude oil production cost of USD30-37/bbl. Even though oil production cost in Vietnam is lower than some countries, it is much higher than in OPEC countries such as Saudi Arabia and Iraq. We assume that if oil price were at USD30/bbl, Vietnam’s oil & gas operators could cut down production activities. Under this scenario, the outlook for mid-stream players such as PVD, PVS and PVC would be very bleak.


Block B O Mon Project to spur E&P activities, however capex plan still unclear. In mid-June 2015, PetroVietnam announced that it had fully acquired Chevron’s stake in two offshore production sharing contracts (PSCs) in Vietnam including Block B 48/95 and Block 52/97. The drilling campaign is scheduled to start in FY17, with a plan to drill up to 1,000 wells over the next 10 to 15 years, and gas production expected to commence in FY19 with annual output of 7bcm. Total capex for the project is USD10 billion. The Block B project was officially kicked off in June 2015 with the ground breaking of a new supply base in Phu Quoc to support initial exploratory drilling campaigns. Nonetheless, while we acknowledge its prospects, we will not factor Block B into the valuations of companies within our coverage universe until the contracts have been awarded. But we believe that while this massive project will not yet contribute revenue and earnings for our covered companies in 2016, the announcement of contract awards will be a big share price catalyst for all the service providers.



Stock recommendations for 2016


BUY – Phu My Fertilizer (HSX: DPM) – DPM traversed 2015 successfully when it benefited from low input gas costs thanks to low oil prices. Our base case oil price assumption of USD 40 / bbl represents a 26% decline from the average oil price in 2015 and this should therefore boost DPM’s performance greatly in 2016 based on the current oil-linked input pricing theme.
Low oil prices have a positive impact on DPM: Dry gas input accounted for 79% of urea input cost. Lower fuel oil prices translate to lower costs. However, a further weakening in oil prices will also lead to a slight fall in urea selling prices, even though DPM has enough pricing power to command a 5% premium to the local average selling price of urea. We conservatively assume that every 25% change in oil prices will result in an 18% change in input gas price but only a 5% change in urea prices.
Loss-making PVTex associate, is now a complete write-off as DPM booked a final provision in Q3/15. Nonetheless, concerns remain over debt guarantees for PVTex, which are estimated roughly at VND1,313 billion (USD58 million) or VND3,500/share and we deduct this from our TP. It is likely that DPM will be forced to make good on this commitment but not until it is due in June 2017.


BUY – Petrolimex Petrochemical Corp. (HNX: PLC) – 2016 looks promising for PLC as it is not only a good play on economic growth and capital investment but also a beneficiary of the oil price slump. Top line growth will be driven by asphalt demand for which will be boosted by rising investment in infrastructure projects. Meanwhile, margin expansion from low input cost for both asphalt and lubricant will further boost PLC’s earnings growth.
Low oil price has positive impact on PLC: 70% of input materials comprise of base oil and imported asphalt. Asphalt is made from crude oil and base oil (input for lubricant), both of which are linked to crude oil prices. Hence, lower oil prices convert to lower input costs.
Our main concerns for PLC are payment realization risk (as its clients are largely SOEs) and forex loss as 90% of its raw materials are imported. The former, in our view, is presently managed well by PLC while the latter has not yet been hedged. We assume VND will devalue by 5% in 2016 and our target price already factors in the forex losses resulting from this.


OUTPERFORM – PetroVietnam Gas (HSX: GAS) – We recently reduced our TP for GAS by 13% to VND38,500 mainly due to a rise in the cost of capital (due to a rise in the cost of equity and a 13% reduction in estimated 2016 earnings on a lower oil price assumption of USD40/bbl (-26% vs. 2015). GAS is asking the government to modify the market pricing mechanism for gas sales to power plants to ensure that the output price should at least equal the input price. Therefore, we expect the average selling price (ASP) for above Take or Pay (AToP) to remain at USD3.8/MMBTU so long as the oil price is below USD40/bbl. We believe that GAS is trading at a pretty fair PER of 9.0x on FY16E’s EPS forecast with an 8.3% dividend yield.


BUY – Petroleum Technical Service Corp. (HNX: PVS) – The situation will be less severe for PVS as compared with PVD thanks to its diversified portfolio ranging from upstream to downstream activities. We forecast that PVS’s main pillars including OSV, M&C, Supply Base and Seismic Survey/ROV will all see revenue declines of 30%-60% for 2016 following prolonged low oil prices resulting in weakening E&P activities. In addition, gross margins across all its six business segments will contract by 100-450 bps due to fiercer competition amidst declining job volumes. We are assuming income from FSO/FPSO joint venture (which contributed 46% to PVS profit in 2015) will only fall slightly as all JVs are locked into 10-year contracts with fixed day rates (despite possible pricing pressure in the long term as production activities are hurt by weak oil prices).

Low oil price has negative impact on PVS: Aside from FSO/FPSO segment which has secured fixed long-term contracts, the other five core businesses have high exposure to E&P activities and oil price. A weakening of oil prices will result in lower OSV and supply base day rates as well as job flow cuts in the M&C, O&M and Seismic Survey segments.

We think the gloomy earnings outlook is already priced-in as (1) the stock is trading at 1YF PER of 6.9x compared to its regional peers’ average adjusted 1YF PER of 12.7x and (2) it has a juicy dividend yield of 8.2%. We therefore keep BUY rating on the stock.


MARKET PERFORM – PV Drilling (HSX: PVD) – We cut down our TP for PVD by 28% to VND21,800 as recent day-rate negotiations between PVD and clients suggest substantial price declines are imminent. We slash our 2016 day-rate assumption from USD120,000 to USD100,000 given observed day-rate in Southeast Asia (Rig-zone). As a consequence, 2016’ NPAT was revised down by 34%.


Low oil price has negative impact on PVD: Even though PVN will maintain oil and gas production to support oil export activities and meet gas demand from upcoming power plants, we believe that they would still need to cut cost to maintain their margins if the oil price weakness is prolonged. As a result, PVD will suffer from day-rate cuts, less well-related services demand as well as reduce leased rigs. We ran an analysis for lower day-rates vs. current contracted rates and modelled for a potential drop in well-related revenue.

Even though PVD still has a healthy balance sheet and we see no liquidity risk, we put a M-PF rating on the stock given a steep 2016 PER of 10.0x as well as poor and declining ROE.


UNDER PERFORM – Drilling Mud Corp. (HNX: PVC) – Similar to PVD’s main services, PVC’s core drilling fluids services are entirely exposed to E&P activities plus O&G operators’ drilling plans. Therefore, under oil price pressure, capital expenditure cuts threaten PVC’s earnings and squeezes its margins. The average number of jack-up rigs in operation has dropped to about nine rigs in 9M15 vs.14 rigs in 9M14 (exclusive of VietSovpetro’s fleet). We estimate that each rig can drill from four to six wells annually. Hence, numbers of wells being drilled will drop by 50% to around 30 in 2016 based on the assumption that there will be seven JU rigs operating in Vietnam.

Given negative ROE and EPS growth outlook as well as unjustified 1YF PER of 19.0x, we keep a U-PF rating for this stock.


Textile sector: Gearing-up for growth

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What happened in 2015: Conclusion of TPP negotiations strengthened Vietnam’s standing as a global textile export hub.

Vietnam’s textile industry is getting a major boost from the Tran-Pacific Partnership (TPP) and other important FTAs that have been recently inked and expected to take effect in the near future. While these new trade agreements will not have an earnings impact on local textile players for a while, their conclusion served as a major price catalyst for listed players across the textile value chain.

However, now that the “TPP premium” is already priced-in, we believe that price movements in the upcoming period will be driven more by earnings and fundamental developments rather than broad sentiment on the sector.


2016 Outlook: The Good…

Our view is that the textile sectors is poised for strong growth over the medium-to-long-term based on the following factors:

  • The existing cost advantages of Vietnam-based exporters, including: cheap labour, lower corporate tax rate in conjunction with tax incentives for capex expansion.
  • Which, in turn, will attract further FDI investment boosting the country’s output as well as Vietnam shares in the global textile market.
  • The new found tariff advantages from upcoming FTAs will dramatically reduce selling price, thus, boosting demand for “Made in Vietnam” textiles.


Capacity expansion and the thirst for locally-produced intermediates are the main performance catalysts in medium-term given the material origin requirements of the said FTAs and the limited current capacity of industry incumbents. While the recently concluded FTAs and TPP are unlikely to start boosting export volumes of garments from Vietnam immediately (and by consequence, sales of intermediates domestically), most players already started expanding capacity 1-2 years ago in anticipation of these trade agreements and as this incremental capacity comes online in 2016 and 2017, it will start benefiting the top-line of companies like TCM, TNG and STK. Given the capacity bottleneck in the mid-stream part of the value chain in Vietnam (fabric production) and the strict rule of origin requirements of TPP, upstream producers should see their growth outpace that of downstream producers. More fabric production capacity is being added domestically to address the existing bottleneck and this will translate into greater demand for locally-produced yarn.


The largest players in the sector are expected to be listed in 2016, broadening access to this sector. Vinatex and its subsidiaries are well positioned to ride on the coattails of the free trade bonanza. With two notable subsidiaries preparing to IPO and list in 2016 — Viettien and May10 — and the granddaddy Vinatex expected to follow suit in 2017, we expect investor interest to gravitate towards these new additions to the listed universe.

Viettien is currently the largest exporting member of the Vietnam Textile and Apparel Association (VITAS) with an average monthly export turnover of roughly USD30 million, well over that of our listed top pick TCM. May10 also has an impressive USD20 million worth of monthly export turnover, currently. With a large customer base already in the US, EU and Japan, both firms are well situated to benefit from the FTAs and TPP over the medium-to-long term.

…and the Ugly

New FDIs are a double-edged sword as they also attract fierce competition. Going beyond 2016, FDI firms will gain a larger foothold in Vietnam’s textile industry; some of these players will set-up fully vertically integrated operations while others – who are purely downstream players – will be followed into Vietnam by their existing upstream supplies. This will create competition for local incumbents across the textile value chain. Only leading local players with a large existing customer base will be able to withstand this competition over the medium-term.

In the long run, we tone down our view on the current upstream manufacturers amid the intensifying competition from foreign entrants. As mentioned above, the shifting of textile plants to Vietnam will also mean the shifting of upstream production to Vietnam. FTAs will attract international midstream players into Vietnam, filling in the gap between low upstream capacity and growing downstream demand. Many fabric and garment producers, especially from mainland China, Hong Kong and Taiwan (non-TPP countries) have already set up yarn and fabric factories in Vietnam. Therefore, a major part of growth will be absorbed by new comers rather than local incumbents such as STK. Nonetheless – given the lead time required to build these new facilities – we believe that local players will not really feel the heat for another couple of years.


Recommendation for 2016

MARKET PERFORM – Century Synthetic Fiber (HSX: STK)

Being the only midstream player listed on HOSE, STK made a strong debut this September with stock price rallying 15.5% in the first 2 days of trading thanks to the anticipated finalization of TPP. The company is one of the top listed premium synthetic yarn producers exporting to international garment houses that in turn make shoes and shirts for blue-chip brands like Nike and Adidas. With the current bottleneck in domestic yarn supply and the strict yarn-forward rules of origin coming into force under TPP, STK’s positioning as a high-quality yarn producer gives it lots of room for expansion. However, as pointed out earlier, the growing entry of foreign yarn makers as well as the entry of vertically-integrated garment producers (that can spin their own yarn) pose downside risks to STK’s long-term prospects.

The year 2016 will see the most pronounced effect of new capacity addition for STK as the company’s third factory Trang Bang 3 started to operate with 50% capacity commissioned starting September 2015 and will see 100% capacity commissioned in 2016. The fourth factory Trang Bang 4 will also be completed in 2016 and expected to commence operations in 2017. These capacity expansions will bolster STK’s growth for the next two years. The company is currently able to meet only 20% of its existing clients’ total demand for PES FY. Also, as these customers grow – especially those who increase their buying from Vietnam in order to benefit from FTAs – STK should have an increasing captive pool of demand to support sustained growth over the medium term.
Looking further, STK will pursue a forward integration strategy into fabric production, aiming to eventually become an integrated textile producer. We forecast EPS to increase by 44% in FY16 vs FY15 against a top line growth of 31% but, despite this robust growth outlook, the stock looks a bit expensive at 10.4x FY16 PER and a TTM PER of 12.6x, versus a TTM PER of 9.8x for peers.


NON RATED – Thanh Cong Textile and Garment (HSX: TCM)

The firm is currently the largest and the most fundamentally sound listed textile and garment exporter. Operating with a fully integrated value chain, the firm derives 50% of its revenues from exporting finish products while a smaller portion of revenues come from from sale of yarn (40%) and fabrics (7%) to third parties. It’s vertically integrated model is a natural fit with TPP’s yarn-forward rules of origin. Moreover, TCM’s geographically diversified customer base will allow it to benefit from several FTAs at them same time, especially the Korea-Vietnam FTA which is now officially in effect.

With the first phrase of its 3-years expansion scheme completed in 2015, the second phrase will look to add another garment factory by 2016 and a dying and weaving factory in the third phase by 2018. The total expansion plan will aim to significantly boost capacity across the value chain with end-product capacity rising by 90% and weaving capacity and dyeing capacity rising by 70% and 130% respectively.


Moreover, thanks to its largest strategic partner E-land Asian Holding – a well know Korea-based textile corporation – TCM has better access to internationally experienced management as well as cutting-edge manufacturing technology. In 2014, the revenues from E-land-related contracts accounted for more than 15% of TCM’s top line. With the new FTA with Korea, this partnership will become ever more important.

Being the only fully integrated listed textile player, TCM enjoys a premium over other exporters, trading at a TTM PER of 7.9x, but still much cheaper than its mid-stream counterpart, STK.

NON RATED – TNG investment and Trading (HNX: TNG)

Unlike its larger counterparts, TNG’s advantages lie in its deep roots in the US market. Only focusing on Cut-Make-Trim activities, this textile manufacturer will not immediately benefit from FTAs. However, the growing capacity in downstream production on the back of the recent FTA’s and TPP will eventually granted TNG the ability to source their material locally. TNG real attraction are its impressive growth. Top line growth accelerated from 16% in 2014 to 35% in 2015 on the back of aggressive capacity expansion. Having just completed a new garment factory and a cotton sheet factory in 2015, TNG’s pipeline stretches as far as 2020 with four additional factories expansions programs currently in the works.

Being the smallest player among the 3 on our list, TNG is trading at a TTM PER of only 6.0x which is rather impressive in view of its recent earnings growth track record.

Logistic sector: Bright outlook for part operations with expansion plans



What happened in 2015: Port operations in Vietnam have grown robustly this year despite a moribund global maritime shipping landscape

The total cargo volumes through Vietnam’s ports recorded an increase of 10.4% YoY in the first half of 2015 to reach approximately 203m tonnes, of which container cargo clearance volume touched 6.2 million TEUs, up 26% on YoY basis. This growth was largely driven by Vietnam’s rapid emergence as a regional manufacturing hub which is driving imports of both capital equipment and components as well as exports of finished products.

Domestic freight transportation volumes – comprising of road freight, air freight, inland waterway freight, maritime freight and rail freight – grew at a more subdued but still respectable rate of 5.7% YoY to touch 546 million tonnes in the first half of this year. With the continued growth in imports and exports as well as the acceleration in GDP growth, we can expect domestic freight volumes to pick-up slightly in 2016 although the sharp recent slowdown in global trade poses some downside risks.


The strong performance of the port sector in Vietnam is particularly impressive when you consider the sharp downturn in the global maritime shipping industry. Container freight rates have nosedived prompted by a fall in the volume of seaborne trade. This fall in demand has not been accompanied by a reduction in supply largely because the slump in steel prices has dissuaded shipping lines from scrapping their old vessels; 60% fewer container ships have been scrapped this year compared with the same period last year. At the same time, orders for new ships have boomed, rising 60% YoY in the first five months of 2015. These factors have combined to create huge oversupply, thereby pressuring freight rates. The cost of sending a container from Shanghai to Europe, for instance, has almost halved since March of this year (The Economist, October 29th, 2015).

Meanwhile, the bulk shipping industry has been hit even harder given the sharp slowdown in Chinese commodity imports. The Baltic Dry Index, a measure of shipping rates for commodities such as coal, iron ore, steel and grain, recently touched a 30-year low, having fallen 96% since touching its all-time high in May 2008.

Vietnam’s ports have, however, managed to shrug-off these headwinds in the container and bulk shipping sectors owing to the country’s rapid emergence as a manufacturing hub as well as the strong recovery in the country’s domestic economy. However, the country is not immune to this and a deepening slump in global trade could impact Vietnam’s trade volumes and, consequently, lead to a slowdown in container traffic through Vietnam’s seaports in 2016 and beyond.


…and this is reflected in the strong performance of port operators this year relative to that of shipping lines

Vietnamese port operators in the Hai Phong port zone such as DVP, VSC, HAH or GMD, saw a dramatic expansion in gross margin, mainly stemming from higher cargo volumes (leading to higher utilization) as well as due to a spike in demand for reefer-related services. In 9M2015, there was a backlog of more than 2,000 cold containers in the Hai Phong port zone consisting mainly of frozen foods that were temporarily imported into Vietnam via sea for re-export to China via land. Recent tightening of controls by the Chinese along the Sino-Vietnamese border in recent months have prolonged custom clearance time, thereby lengthening the storage period for these reefer containers. Reefer container services carry substantially higher gross margins (~50%) than other regular container-handling services owing to their specialized nature. Such spikes could repeat in the future as border conditions between Vietnam and China remain tense owing to disputes over the East sea.

Local pure-play logistics companies that do not have any seaport operations saw a modest improvement in GPM, with the notable exception of TMS. Only TMS which owns a strong system of DCs (distribution centres) was able to improve gross margins substantially by providing more value-added services within its DCs. Nevertheless, revenue growth of pure-play logistics service providers increased rapidly driven by the recovery in the domestic economy as well as trade between Vietnam and the rest of the world.

Despite benefiting from lower oil prices (fuel cost accounts for 40-45% COGS), Gross margin of domestic maritime transportation or shipping companies were still pummelled by the prolonged weakness in global shipping freight rates. In fact, global freight rates have remained low with the Baltic Dry Index (BDI) plunging from 12,000 in 2008 to bottom at 509 points in Feb 2015 and then falling again to hit a fresh 30-year low of 498 points in November. The index is likely to stay depressed as the maritime transportation industry continues to suffer from chronic overcapacity and China’s demand for commodities continues to weaken. Meanwhile, container shipping rates have also seen sharp falls owing to the sharp slowdown in global trade activity in recent months.

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How the market perceived 2015 developments

The stock price performance of port operators and logistics service providers outperformed the VN-INDEX on the back of TPP finalization


Among the port operators, valuations became increasingly polarized based on capacity to grow and the impact of the new Bach Dang bridge on operations

By December 2015, the divergence among trailing-twelve-month P/Es of listed port players became wider. On the one hand, the market strongly rewarded those players with spare existing capacity or pipeline capacity. In the other camp were those with limited spare capacity, inability to add further capacity or proximity to the upcoming Bach Dang bridge. It is noteworthy that operators with port facilities upstream along the Cam River primarily fell into the “discounted” camp because of the following two reasons:

  • Many of the upstream ports are close to the Bach Dang bridge which is currently under construction; the market has factored in the risk of this construction work disrupting cargo traffic through to 2018; interestingly, there is a clear positive correlation between proximity to the bridge and the discount applied by the market.
  • Upstream ports also lack capacity expansion plans primarily because of their inability to match ongoing trends in the shipping industry; shipping lines are increasingly favoring larger vessels to boost economies of scale and the upstream ports would not be able to accommodate such vessels – even with expanded capacity – due to to limitations imposed by their geographical location; the upstream portion of the Cam River is not broad or deep enough to host ships greater than 10,000 DWT.

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Outlook for 2016

Port operators with new capacity expansions in the downstream portion of the Cam have a bright outlook in 2016
In 2016, only port operators located in the downstream area of the Cam river can absorb the expected incremental cargo volume handled in Hai Phong: By the end of December 2015, it is expected that cargo throughput in Hai Phong will touch 3.75 million TEUs, up 12.1% on 2014 levels. In 2016, we assume that the growth rate in cargo throughput in the area will be sustained implying that an incremental 400,000 – 450,000 TEUs of cargo volume will be handled through Hai Phong next year, over and above 2015 levels. However, this incremental cargo volume will not be equally allocated to all operators due to following reasons:

(1) The construction of Bach Dang bridge is disrupting cargo traffic along the upstream part of the Cam River. As a result of this all seven ports in this area including Greenport, Nam Hai, Doan Xa, Transvina, Chua Ve, SNP 128 and Hai An are likely to see flat or a modest growth in cargo throughput in 2016. It is worth noting that all upstream ports are only able to accommodate 10,000 DWT vessels, while the commencement of bigger ports in the downstream such as NHDV, Vip-green recently have started attracting many bigger vessels from new customers with vessel capacity ranging from 20,000 to 30,000 DWT. New shipping fleet capacity is increasingly going to be in the >10,000 DWT category as shipping lines switch to larger ships to reap scale economies.

(2) There are only four ports in the downstream part of the Cam river that still have spare capacity or new capacity in the pipeline to absorb the new cargo throughput in the area: Tan Vu (PHP), SNP 189, Nam Hai Dinh Vu (GMD) and VIP- Green (VSC) (Figure 8)

(3) The downstream ports are located right next to the Dinh Vu industrial park. As a result, these ports will be the preferred choices for exporting intermediate and finished products of FDI manufacturers. Overall, the surge in cargo throughput will help the port operators such as VSC and GMD increase their market share in the area. On the other hand, the market shares of small players located upstream are likely to shrink substantially.

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Tariffs in the Hai Phong port zone are not projected to rise in 2016 due to the ample spare capacity in the downstream area (see Figure 13 below) and the low utilization of the upstream state-owned ports such as Chua Ve and Hoang Dieu. We believe that the cargo handling tariff in Hai Phong will stabilize between USD34-38 per TEU during 2016. Therefore, in the absence of tariff rises, the average GPM of port operators should decline slightly if the volume of reefer containers falls in 2016 from the high base value realised this year (reefer container tariffs carry higher margins than conventional container cargo and, consequently, the spike in reefer container volumes in 2015 lifted the margins of port operators).


Logistics: Demand for inbound logistics services will grow fast next year on the back of robust FDI inflows.

Vietnam is witnessing a surge in manufacturing-led Foreign Direct Investment in anticipation of the prospects created by the expected conclusion of a number of free trade agreements as well as TPP, negotiations on which were finalized earlier this year. In 9M2015, total newly registered FDI capital reached USD17.15 billion, up 53.4% y-o-y while disbursed FDI touched USD9.65 billion, up 8.4% YoY. While TPP is not expected to start benefiting exports any time before 2018, given the long lead times for creating new manufacturing capacity, companies are already investing heavily and the resulting construction of factories and imports of plant and machinery are providing a strong filip to the demand for logistics services. This is particularly visible in the textile sector which is seeing a string of new projects from Chinese and Taiwanese manufacturers.

Growing labor costs in China, the dimming of growth prospects in its domestic market and its conspicuous exclusion from TPP are also spurring a shift of manufacturing capacity from China to Vietnam and a few other countries in SEA as witnessed by the recent doubling down of investments in Vietnam by Samsung, LG as well as Nokia. Capacity additions in more sophisticated industries like consumer electronics tend to boost imports of complex capital equipment and machinery in the near term, thereby driving greater cargo volumes through ports, greater demand for industrial parks as well as higher demand for transportation and warehousing services. This view is corroborated by the strong demand that KBC – the leading listed industrial park operator in Vietnam – is seeing from large blue chip manufacturers especially from Japan and Korea. KBC’s existing and prospective client list includes blue-chip multinationals such as Microsoft, Hee-Sung, Canon, LG, Foxccon, Wintek, Mitac, DK UIL, Woojeon & Handan, Bujeon, Starwood, Siflex, Hosiden, Nichirin, UMEC and Crystal. The robust demand for industrial park space is a lead indicator of demand for warehouse and inbound logistics services.

In the medium-to-long term, this will also create sustained demand for in-bound logistics services such as distribution centers and warehouses offered by local logistics companies since FDI production facilities in Vietnam are typically involved in assembly work and rely on imported components from overseas. Outbound shipments of finished and intermediate products will also drive strong demand for outbound logistics once these new factories start producing, however, this segment of the logistics market will be largely captured by foreign players because international shipping is a weakness in the domestic logistics value chain. However, large, integrated domestic players like GMD will still benefit greatly from this export trend for 2 main reasons: 1) international 3PL companies tend to outsource the various services to domestic producers with logistics assets, 2) regardless of who handles the outbound logistics, port cargo handling volumes will rise thereby benefiting port operators like GMD.


A strong network of Distribution Centres will be a key asset in capturing the increasing demand for logistics services in 2016. Currently, there are 3 players that have been investing aggressively in DC systems are Gemadept (GMD), Transimex (TMS) and Sotrans (STG).

Distribution Centers (DC) have just appeared in Vietnam in recent years to meet the growing demand for supply chain management services for large-scale production. Unlike traditional warehouses which simply provide goods storage and security services, DCs provide inventory management and tracking services. A strong DC network including bonded warehouses, CFS, cold stores and traditional warehouses will help companies provide a wide range of services across the 3PL chain including traditional services such as forwarding, custom clearance, transportation, cargo handling, distribution, delivery and value-added services such as inventory management, packaging and labelling. Overall, DCs are considered a vital transit point for cargo flow along the logistics value chain both in-bound and out-bound journeys.


Recommendation for 2016

OUTPERFORM – Gemadept (HSX: GMD) – We see three main potential growth catalysts within the core business of the company in 2016, including: (1) The new depot (total area of 21 ha) that is expected to commence operations from the beginning of 2016 will help to lift the handling capacity of Nam Hai Dinh Vu port from 500,000 to 650,000 TEUs per annum; (2) Distribution Center 3 is projected to reach 80-90% of its designed capacity in 2016, only one year from its commissioning in October 2015 and (3) The income from associates is expected to grow more than 20% YoY in 2016 with the strong anticipated growth in cargo handling volumes at the SCSC air cargo terminal.

NON RATED – Viconship (HNX:VSC): Given that the Green port is operating at 100% capacity, the new VIP-Green port is going to be the growth engine for VSC in 2016. Phase 1 of the project has already been completed and the first berth was put into operation in November 2015. Currently, because VIP-Green is undergoing commissioning, it can only accommodate three to four vessels a week, equivalent to around total 100,000 TEUs cargo throughput in the first four months of operation. We assume two scenarios for the commissioning of the second berth: (1) If the second berth starts operating from Q2/2016, the total throughput of VIP-Green in 2016 can touch 323,200 TEUs and total throughput of VSC’s port system can increase by 90% YoY (2) If the second berth is put into operation from Q3, the total throughput of VIP-Green in 2016 can reach 280,000 TEUs and, as a result, total throughput of VSC’s port system can increase by 78% YoY. Under both scenarios, VSC should receive a significant revenue boost in 2016.

NON RATED – Transimex (HSX:TMS): The key growth catalyst for TMS in 2016 is the logistics cluster project in Saigon high-tech park, serving the home appliances manufacturing operation of Samsung. The VND300 billion (USD13 million) logistics cluster of TMS includes bonded warehouses, CFS, cold stores, traditional warehouses as well as an ICD for container storage. Samsung has guaranteed enough cargo to match about 60% of storage and logistics capacity of TMS logistics cluster and the contract was finalised in November 2015. We are bullish about the growth prospects for this logistics cluster for the following reasons: (1) There are about 67 domestic and FDI projects that have registered for licenses to invest in Saigon high-tech park. This will allow TMS logistics cluster to diversify its customer base and reduce dependence on Samsung, (2)There are currently only two logistics providers in and around this high-tech park, including TMS and Ryobi Holding (Japan) meaning that competition is quite low (3) Finally, Samsung will in all probabilities continue to use TMS as its logistics provider in the high-tech park because the switching cost is very high. Therefore, the cash flow from serving Samsung in coming years is quite certain especially given that the construction of both the logistics cluster of TMS and the factory of Samsung are likely to be completed concurrently in February 2016. According to TMS management, once the logistics cluster is fully utilized, it will add 30-40% to the current run-rate revenue.

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