abc

Global Research

Equity strategy: Vietnam has been the worst
performing market in Asia y-t-d. 2008 earnings fell by
30% as companies wrote off property losses. But some
quality companies produced decent results and now look
attractively valued.
Fixed income strategy: Government embarks
on subsidised lending programme substantially
draining excess liquidity and VGB appetite. Sell VGBs
on tight(ening) VND liquidity, policy uncertainty.
FX strategy: More stable conditions for USD-VND.
VND still looks expensive and capital inflows will continue
to shrink. Expect continued gradual depreciation.









Asia / Vietnam
Strategy

Vietnam Monitor
(Issue 22)
Loan programme drains liquidity, bond
appetite
4 March 2009
Pieter van der Schaft*
Asia Local Rates Strategist
The Hongkong and Shanghai Banking Corporation Limited
+852 2822 4277 pietervanderschaft@hsbc.com.hk
Garry Evans*
Equity Strategist
The Hongkong and Shanghai Banking Corporation Limited
+852 2996 6916 garryevans@hsbc.com.hk
Daniel Hui*
FX Strategist
The Hongkong and Shanghai Banking Corporation Limited
+852 2822 4340 danielpyhui@hsbc.com.hk
Virgil F Esguerra*
Asia Local Rates Strategist
The Hongkong and Shanghai Banking Corporation Limited
+852 2822 4665 virgilesguerra@hsbc.com.hk


View HSBC Global Research at: http://www.research.hsbc.com
*Employed by a non-US affiliate of HSBC Securities (USA) Inc,
and is not registered/qualified pursuant to NYSE and/or NASD
regulations
Issuer of report: The Hongkong and Shanghai Banking
Corporation Limited
Disclaimer & Disclosures
This report must be read with the
disclosures and the analyst certifications
in the Disclosure appendix, and with the
Disclaimer, which forms part of it



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Key indicators
USD/VND FX reserves
15,500
16,000
16,500
17,000
17,500
18,000
J
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-
0
6
M
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6
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7
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7
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7
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8
J
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-
0
9
-2. 5%
0.0%
2.5%
5.0%
7.5%
10. 0%
12. 5%
USD/VND (lhs) Y/ y change (rhs)


0
5
10
15
20
25
30
D
e
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2
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6
D
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7
D
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8
Foreign reserv es (USDbn)
Source: Bloomberg Source: CEIC, Fitch estimate for 4Q08

O/n call money, benchmark policy rates and 5yr bond yields Headline CPI and ex-food & energy
0
5
10
15
20
25
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9
O/n call money Base rate
Refinancing rate 5y r VGB


0
5
10
15
20
25
30
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CPI CPI ex -food & energy
Source: Reuters, HSBC Source: CEIC, HSBC

HCMS Index GDP growth
0
200
400
600
800
1000
1200
1400
J
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-100%
-50%
0%
50%
100%
150%
200%
HCMSI (lhs) Y/y change (rhs)


5
6
7
8
9
10
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1
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M
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8
GDP, y / y
Source: Bloomberg Source: CEIC



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The struggle continues
with EPS falling 30% in 2008
Vietnams stock market has continued its gloomy
performance this year. The Vietnam Index has fallen
22% y-t-d, making it the worst performer in Asia. By
contrast, MSCI Asia ex Japan is down only 12%.
Since its peak in March 2007, the Vietnam Index has
now fallen 81% in US dollar terms.
1. Vietnam stock index
0
200
400
600
800
1000
1200
J
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9
VN Index

Source: Bloomberg

Other indicators of activity look equally bad.
Turnover has dwindled to almost nothing: average
daily value of stocks traded in February for the Ho
Chi Minh and Hanoi exchanges combined was
only USD13m (see Chart 2). Total market cap has
shrunk to USD10bn, with no listed stocks having
a market cap of more than USD1bn, and only four
over USD500m (of which one has hit its foreign
ownership limit, and one has only USD12m of
foreign buying room left). Table 8 at the end of
this section gives details of all stocks with a
market cap of USD200m or more.
2. Daily trading value on HCM and Hanoi exchanges (20DMA)
0
20
40
60
80
100
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U
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HCM Hanoi

Source: Bloomberg

Foreign investor selling has eased a little: after
total net selling of USD127m in September-
December, foreigners have sold only USD2m
since the start of this year. Mainly, though, this is
because almost all foreign money, apart from
closed-end country funds, has now exited the
country. There is some risk that the country funds
are unwound or closed (the PXP Vietnam
Emerging Equity Fund, for example, recently
allowed fundholders to redeem their shares and
receive the underlying holdings, most of which
they could then sell). But, in general, the foreign
Equity strategy
Vietnam has been the worst performing market in Asia y-t-d
2008 earnings fell by 30% as companies wrote off property losses
But some quality companies produced decent results and now
look attractively valued


4
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Strategy
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selling pressure has probably ended. Meantime,
domestic investors remain very bearish, with
sentiment towards the stock market poor.
3. Foreign net buying of Vietnamese equities
-100
-50
0
50
100
150
200
250
300
350
J
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U
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m

Source: Bloomberg (to end-Feb)

Clarity on earnings
With all 2008 results announced by end-February,
we now have some much-awaited clarity on how
bad earnings were last year, and how the valuation
of the market now stands. Table 4 shows the
aggregate results for all listed companies (on both
exchanges) and Table 5 details for the 23 largest
(those with market cap over USD100m).
4. Aggregate earnings for all listed Vietnamese companies
2008 y-o-y growth
Sales 39.8%
OP 8.4%
NP -25.1%
EPS -29.5%
2008 2007
OPM 8.4% 11.9%
NPM 5.8% 11.8%
ROE 11.2% 18.0%
Source: HSBC, Bloomberg


The overall picture is straightforward. Sales
growth was extremely strong, up almost 40% y-o-
y, but decremental margins allowed only 8%
growth in operating profits. Large write-offs of
real estate and equity investment losses, however,
pushed down net profit by 25%. Capital-raising
made the EPS line even worse, with a 29.5% y-o-
y decline. ROE fell to 11%, from 18% in 2007.
Of the 329 listed companies for which data was
available, 23 made losses. These included some

5. Earnings data for Vietnams largest listed companies
2008 ___________Growth___________ 2008 2007 2008 2007
Code Company Exchange Sector Market
cap
(USDm)
Net
profit
(USDm)
Sales OP NP EPS OPM OPM ROE ROE
VNM VIET NAM DAIRY PRODUCTS JSC HCM Food 762 70 23.5% 115.6% 27.6% 27.6% 14.1% 8.1% 26.9% 22.1%
DPM PETROVIETNAM FERT & CHEMICAL HCM Chemicals 614 79 71.3% -0.8% 3.7% 3.8% 19.4% 33.5% 29.1% 30.4%
HAG HAGL JSC HCM Misc Manufactur 519 40 n/a n/a n/a n/a 36.7% n/a 16.7% n/a
PVF PETROVIETNAM FINANCE JSC HCM Div Finan Serv 452 3 n/a n/a n/a n/a 0.2% n/a 0.8% n/a
STB SAIGON THUONG TIN COMMERCIAL HCM Banks 429 61 83.5% -21.4% -23.5% -23.5% 14.2% 33.2% 13.6% 19.0%
PVD PETROVIETNAM DRILLING AND WE HCM Oil&Gas Services 420 53 35.8% 67.8% 62.1% 62.1% 25.8% 20.9% 35.3% 24.2%
FPT FPT CORP HCM Telecoms 352 48 150.5% 48.7% 13.7% 11.4% 4.2% 7.1% 28.3% 32.6%
PPC PHA LAI THERMAL POWER JSC HCM Electric 342 -12 2.0% -12.4% -125.2% -125.2% 21.1% 24.6% -6.0% 21.6%
HPG HOA PHAT GROUP JSC HCM Misc Manufactur 286 48 48.1% 33.9% 32.0% 24.2% 12.1% 13.4% 19.5% 19.9%
VIC VINCOM JSC HCM Real Estate 263 7 54.5% 15.2% -54.7% -53.1% 26.3% 35.2% 7.5% 13.9%
VPL VINPEARL JSC HCM Entertainment 224 2 18.3% 13.4% -51.0% -51.0% 12.6% 13.1% 3.4% 8.1%
VSH VINH SON - SONG HINH HYDROPO HCM Electric 207 21 30.7% 66.6% 44.4% 44.4% 61.2% 48.0% 17.3% 12.7%
SSI SAIGON SECURITIES INC HCM Div Finan Serv 165 14 -2.2% -67.5% -70.8% -74.0% 23.6% 70.9% 6.5% 21.3%
ITA TAN TAO INVESTMENT INDUSTRY HCM Real Estate 119 17 19.1% -21.5% -19.7% -26.1% 30.5% 46.3% 6.4% 11.0%
DHG DHG PHARMACEUTICAL JSC HCM Pharmaceuticals 118 8 19.2% 8.1% 6.9% 6.9% 9.9% 10.9% 18.0% 19.5%
SJS SONGDA URBAN & INDUSTRIAL ZO HCM Eng&Construction 110 10 -40.4% -29.8% -51.3% -51.0% 55.5% 47.2% 14.1% 28.3%
PVT PETROVIETNAM TRANSPORTATION HCM Transportation 107 4 254.2% 321.6% 279.9% 166.2% 13.1% 11.0% 4.4% 2.5%
ACB ASIA COMMERCIAL BANK Hanoi Banks 904 126 n/a n/a 25.4% n/a v 34.0% n/a 28.1%
KBC KINHBAC CITY DEVELOPMENT SHA Hanoi Home Builders 185 16 42.9% 64.9% -15.0% -17.2% 60.4% 52.4% 10.0% 14.3%
PVS PETROLEUM TECHNICAL SERVICES Hanoi Transportation 235 1 50.0% 122.4% -95.7% -96.3% 6.3% 4.3% 0.6% 27.1%
PVI PETROVIETNAM INSURANCE JSC Hanoi Insurance 133 11 45.2% -23.4% -24.6% -33.3% 18.5% 35.0% 8.2% 14.3%
VCG VIET NAM CONSTRUCTION & IMPO Hanoi Eng&Construction 167 18 n/a n/a n/a n/a -2.4% n/a 18.0% n/a
VNR VIETNAM NATIONAL REINSURANCE Hanoi Insurance 123 9 82.4% 175.7% 118.4% 56.0% 31.7% 21.0% 8.4% 11.9%
Source: HSBC, Bloomberg


5
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former foreign investor favourites such as REE,
Gemadept (GMD) and Sacom Cable (SAM).
But there were some impressive results too,
mainly from companies that stuck to their core
businesses and did not dabble in property
development and banking. Vietnam Dairy
Products (better known as Vinamilk), for
example, saw EPS growth of 28%, with improved
margins; it managed a return-on-equity of 27%.
Among large listed companies, PV Drilling
(PVD), Hoa Phat (HPG), Vinh Son (VSH), PV
Transport (PVT) and Vietnam National
Reinsurance (VNR) all saw EPS grow by more
than 20%.
What this means for valuation
The 2008 results were somewhat worse than we
had been expecting: our valuation analysis
previously was based on the assumption of a 10%
decline in EPS in 2008 (and 15% rise in 2009).
On the basis of the actual data, the VN Index is
trading on a PE of 9.6x historical earnings.
We are now assuming that EPS will be flat y-o-y
in 2009 and grow by 10% in 2010 (since
operating earnings grew by 8% last year, we think
those are fairly conservative assumptions, as long
as real estate losses were fully written off by
auditors in the latest results). That would put the
index on a 12-month forward PE of 9.5x (Chart
6). That is the cheapest level it has ever traded at
(with the actual 2008 EPS data, valuations in
retrospect were much higher in mid-2008 than
they seemed at the time). But it is not especially
cheap by regional standards. China is on a similar
multiple, Indonesia is on 8.2x and Thailand on
7.8x. These markets also have better earnings
visibility than Vietnam, where there are still no
consensus earnings estimates available.

6. Estimated 12-month forward PE for VN Index
0
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25
30
35
40
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9

Source: HSBC

That said, there are some companies that now
trade on low valuations. As shown in Table 8,
Vinamilk is on a historic low PE of 10.8x, PV
Fertiliser on 7.8x, PV Drilling on 7.9x, FPT on
7.2x and Hoa Phat on 5.8x.
Adventurous investors might be willing to dip
their toes back into the water on a long-term basis
to buy some structurally sound companies on
reasonable valuations. Overall, however, our view
remains that the Vietnamese market is likely to
continue to struggle this year, and that there are
more attractive markets in Asia which investors
would be advised to enter first if they believe that
emerging markets in general will recover.
7. Key stock market data
HCM Hanoi Total
Market cap (USD m) 7,666 2,691 10,357
No. of stocks 174 176 350
Stocks with mkt cap >USD1bn 0 0 0
Stocks with mkt cap >USD500m 3 1 4
Stocks with mkt cap >USD200m 12 2 14
Stocks that hit foreign limit 3 3 6
Daily turnover (USDm, 1mth ave) 9 5 13
Foreign ownership 23.5% 16.7% 21.8%
PE (2008) x 9.6 9.4
ROE 22.9% 17.2% 22.8%
DY 7.8% 6.1%
Source: HSBC, Bloomberg, HOSE


Garry Evans


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8. Key valuation data for the largest listed Vietnamese stocks (market cap >USD200m)
Code Name Industry Subgroup Exchange Mkt cap
(USD mn)
Ave daily
t/over
(USDm)
Foreign
ownership
Foreign
limit
Room for
foreign
buying
(USDm)
PE Chg 3M
ACB ASIA COMMERCIAL BANK Commer Banks Non-US Hanoi 904 1.40 30% 30% 0 6.0 -16%
VNM VIET NAM DAIRY PRODUCTS JSC Food-Dairy Products HCM 762 0.48 44% 46% 12.3 10.8 3%
DPM PETROVIETNAM FERT & CHEMICAL Chemicals-Diversified HCM 614 0.64 18% 49% 191.6 7.8 -19%
HAG HAGL JSC Miscellaneous Manufactur HCM 519 n/a 17% 49% 165.1 13.0 n/a
PVF PETROVIETNAM FINANCE JSC Finance-Invest Bnkr/Brkr HCM 452 0.30 12% 30% 81.9 156.5 -1%
STB SAIGON THUONG TIN COMMERCIAL Commer Banks Non-US HCM 429 1.22 30% 30% 0.0 7.3 -23%
PVD PETROVIETNAM DRILLING AND WE Oil-Field Services HCM 420 0.57 29% 49% 84.5 7.9 -20%
FPT FPT CORP Telecommunication Equip HCM 352 0.79 27% 49% 76.1 7.2 -13%
PPC PHA LAI THERMAL POWER JSC Electric-Generation HCM 342 0.27 18% 49% 105.4 -28.8 2%
HPG HOA PHAT GROUP JSC Miscellaneous Manufactur HCM 286 0.47 24% 49% 71.9 5.8 -14%
VIC VINCOM JSC Real Estate Oper/Develop HCM 263 0.08 5% 49% 116.6 39.0 -50%
PVS PETROLEUM TECHNICAL SERVICES Transport-Services Hanoi 235 0.34 9% 49% 94 265.9 -22%
VPL VINPEARL JSC Resorts/Theme Parks HCM 224 0.12 17% 49% 72.4 96.6 -60%
VSH VINH SON - SONG HINH HYDROPO Electric-Generation HCM 207 0.13 28% 49% 43.3 9.8 0%
Source: HSBC, Bloomberg, HOSE (Data as of end-Feb)



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We last published on Vietnam on 7 January, when
we recommended rebuilding a position in
Vietnam government bonds (VGBs) due to a
positive near-term outlook predicated on at least
one more easing measure by the State Bank of
Vietnam (SBV) and a benign near-term supply
outlook. While the SBV proceeded with monetary
easing (150bp cut in the base rate and 200bp cut
in reserve ratio) and VGB primary issuance was
scarce (we calculate less than VND2tr in total
issuance year-to-date), the main factor
underlying our previously favourable outlook
flush domestic liquidity due to sluggish bank
lending growth has reversed due to the
governments introduction of a subsidised
loan programme.
Domestic liquidity has shown signs of significant
tightening with the O/N rate at 6.50% while VGB
yields have retraced 100bp in recent weeks. Tight
VND liquidity has even forced the SBV to inject
liquidity in large amounts via open market
operations (OMOs) for the first time since Q3 08
(see Fig. 1).
1. SBV has injected VND39tr since the start of the subsidised
loan programme
2. 5
7. 5
12. 5
17. 5
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%
(60)
(40)
(20)
-
20
40
60
V
N
D
t
r
n
Weekly net liquidity injections through OMOs (rhs)
O/n call money rate (lhs)

Source: HSBC

Subsidised loan programme
tightens domestic liquidity
Notwithstanding successive base rate and bank
reserve requirement cuts (see Fig. 2), domestic
liquidity has tightened significantly as a result of
the new government-subsidised loan programme.
The programme, announced on 11 February, aims
to stimulate the economy by increasing bank loans
by VND468tr (the government is targeting 2009
credit growth of 20% y-o-y, versus 21% in 2008
and 54% in 2007). Under the programmes terms,
banks have been mandated to provide subsidised
loans to borrowers at a spread of 400bp below the
maximum lending rate of 10.5%, or
Fixed income strategy
Government embarks on subsidised lending programme
substantially draining excess liquidity and VGB appetite
Sell VGBs on tight(ening) VND liquidity, policy uncertainty


8
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Strategy
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approximately 6.5%
1
. This compares with average
system-wide bank deposit funding costs of
approximately 8%.
The loan subsidy program will negatively affect
bank profitability (as the subsidies will be
provided up-front to borrowers, but reimbursed by
the government over an 8-10mth period
2
) and
possibly result in an increase in non-performing
bank loans (NPLs
3
) due to the subsidised nature
of the loans and as some loans may be used to
refinance existing NPLs with high interest rates).

1
The subsidised loan programme mandates each bank
to commit a certain amount of funds to new loans to
SMEs and exporters especially those in sensitive,
labour-intensive sectors. Many of the loans will be used
to refinance existing high-interest loans as well as
convert foreign currency debt (approximately 20% of
outstanding loans).
2
Banks will be reimbursed the 4ppt-interest rate
subsidy by the government with 80% of the subsidy
amount paid on a monthly basis over a period of eight
months, with the final 20% of the subsidy to be
reimbursed by year-end (the tentative termination date
of the programme).
3
The official system NPL ratio is 3.5% by Vietnamese
accounting standards, but could be more than 3x higher
by international standards, according to Fitch
Despite this, local state-owned banks have already
responded by pledging an increased quantum of
lending. Already, local banks have lent out
VND80tr under the programme in February,
which has fully absorbed virtually all available
surplus money market liquidity. In response, the
SBV on 24 February reduced bank reserve
requirements by 100bp to 3% to free up VND10-
15tr in money market liquidity.
However, the governments objective to spur
VND300tr (a further VND220tr) in subsidised
lending by the end of 1Q09 raises major
questions as to how these additional subsidised
loans will be funded and also how the
government intends to fund its borrowing
requirement for 2009 (est. VND55tr).
In this respect, the overarching issue is how the
authorities will be able to maintain their 6.5%
GDP growth target through fiscal stimulus
measures and directed bank lending at a time
when Vietnam may suffer again from a sizable
current account deficit (HSBC house-view:
USD8.6bn or 9.6% of GDP) and a possible BoP
deficit due to a reduced rollover of short-term
foreign liabilities
4
.

4
According to the BIS, Vietnam external liabilities as
of 3Q08 stood at USD14.5bn, of which USD6.5bn
matures by 3Q09.
2. Aggressive policy easing has failed to spur credit growth
Cumulative
change (bp)
1 Mar-09 22 Dec-08 5 Dec-08 21 Nov-08 3 Nov-08 20 Oct-08 1 Oct-08
Base rate 700 7.0% 8.5% 10.0% 11.0% 12.0% 13.0% 14.0%
Discount rate 700 6.0% 7.5% 9.0% 10.0% 11.0% 12.0% 13.0%
Refinancing rate 700 8.0% 9.5% 11.0% 12.0% 13.0% 14.0% 15.0%
Lending rate ceiling 1050 10.5% 12.8% 15.0% 16.5% 18.0% 19.5% 21.0%
Reserve requirement
- VND, non-term 800 3%* 5.0%* 6.0% 8.0% 10.0% 11.0% 11.0%
- VND, >12mths 400 1.0% 1.0% 2.0% 2.0% 4.0% 5.0% 5.0%
- FC, non-term 400 7.0% 7.0% 7.0% 9.0% 11.0% 11.0% 11.0%
- FC, >12mths 200 3.0% 3.0% 3.0% 3.0% 3.0% 5.0% 5.0%
Interest on VND reserve
deposits
-350 3.6% 8.5% 9.0% 10.0% 10.0% 10.0% 5.0%
Source: HSBC. *Agribank, rural banks and state-run credit funds benefit from preferential minimum reserve requirements of 1% (1 Mar-09), 2% (22 Dec-08)



9
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Strategy
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abc
Given tight domestic and external liquidity, the
authorities are faced with limited policy
options. Further reserve requirement cuts (e.g.
from 3% to 1% as recently in Malaysia) may free
up only another VND30tr of liquidity in the
system clearly insufficient to fund either the
VND468tr subsidised loan programme or
VND55tr in net government funding needs
planned for 2009. An alternative option is for the
SBV to resort to quantitative easing or a
monetisation of government borrowings, which
could however introduce upward pressure on the
USD/VND exchange rate.
Instead, as an alternative approach towards
funding the fiscal deficit, the authorities have
signalled that they are considering issuance of
onshore USD-denominated government bonds
through compulsory sales to domestic banks.
The main motivation for the issuance of these
USD bonds is to lower government borrowing
costs by offering competitive yields relative to
local USD bank deposit rates (currently offered
around 2%). By comparison, VGB yields
currently range from 9.10-9.70% (1-15yr, bid),
while the Vietnam 2016 sovereign yields
approximately 9-10%. Moreover, the issuance of
dollar-denominated government bonds would also
help beef up SBVs FX reserves (which stood at
USD22bn in early February according to SBV
Governor Giau) through the transfer of FX
liquidity from the banking system to SBV. USD
bond issuance might also help reduce dollarisation
in the economy. Given the governments
VND55tr in funding requirements, at least USD2-
3bn of USD bond issuance would be required to
make a serious contribution to the governments
funding needs and to SBVs FX reserves position,
in our opinion.
However, the major drawback of the USD bond
issuance plan is that it could contribute to a
further drying up of domestic USD liquidity,
unless this FX liquidity is channelled back by
SBV through FX interventions. According to BIS
data as of Sep-2008, private short-term foreign
liabilities totalled USD6.5bn versus USD5.9bn in
private sector foreign assets. As these short-term
foreign liabilities are to BIS-reporting banks, they
may not include private sector foreign currency
deposits held locally.
Implications for the VND
money market and VGBs
Tightening domestic liquidity has already been
reflected in a rise in the O/N rate to 6.50%
while VGB yields have retraced 100bp trough-
to-current (see Fig. 3) with the 2yr and 5yr
VGBs at 9.20% and 9.40% (bid), respectively.
3. O/N rate and VGB yields have retraced
0
4
8
12
16
20
J
a
n
-
0
8
M
a
r
-
0
8
M
a
y
-
0
8
J
u
l
-
0
8
S
e
p
-
0
8
N
o
v
-
0
8
J
a
n
-
0
9
M
a
r
-
0
9
O/n call money 5y r VGB y ields
2y r VGB y ields

Source: Bloomberg, Reuters, HSBC

Insofar as the subsidised loan programme
proceeds as planned (i.e. without relaxation of the
VND468tr lending target), there are few signs
that domestic liquidity will be sufficient to
absorb VND55tr in VGB net issuance.
Importantly, banks pledged commitments under
the subsidised loan programme may require some
offloading of VGB holdings in order to raise
funds to lend to borrowers. Our data on maturing
bond redemptions and coupon payments also
show little in the way of reinvestment flows
through the remainder of H1 09 (see Fig. 4) to
help absorb upcoming VGB issuance.


10
Asia / Vietnam
Strategy
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abc
4. Under VND4tr in reinvestment flows during Q2 09
0
1,000
2,000
3,000
4,000
5,000
6,000
J
a
n
-
0
9
F
e
b
-
0
9
M
a
r
-
0
9
A
p
r
-
0
9
M
a
y
-
0
9
J
u
n
-
0
9
J
u
l
-
0
9
A
u
g
-
0
9
S
e
p
-
0
9
O
c
t
-
0
9
N
o
v
-
0
9
D
e
c
-
0
9
V
N
D
b
n
VGB principal VGB coupon VDB principal
VDB coupon HIFU

Source: Bloomberg, HSBC

In addition to onshore banks limited capacity to
absorb VGBs, government supply projections
are also subject to upward revision. For
instance, recent official statements point to
revenue shortfalls (as much as VND90tr due to
optimistic growth and export assumptions
5
) and
the risk of higher budget deficits will continue to
place pressure on 2009 funding requirements,
which are likely to exceed the original budget
plan (see Fig. 5). Already, on 3 March, the
National Assembly approved an increase in net
issuance from VND43tr to VND55tr, which could
raise outstanding local government bond supply
by about 25%. Although the compulsory sale of
dollar bonds being considered by the government
would invariably decrease the proportion that
would be financed through VGBs, this amount
still excludes planned issuance by Vietnam
Development Bank (VDB) and Ho Chi Minh City
Investment Fund (HIFU) to the tune of VND30tr
and VND20tr, respectively.

5
The government targeted 2009 real GDP growth of
6.5% (compared to HSBC 5.4% and Consensus
Economics 4.8%).
5. MOF financing, VNDtr
2008 (first
estimate)
2009 (plan) Notes
GDP 1,490 1,813
Total revenues and grants 399 390 Revenues
may be
VND90tr
lower
Total exp. (exclude
principal payment)
439 457
Primary deficit (31) (53)
- Deficit/GDP (%) -2.1% -2.9%
Principal payment 35 35
Total financing (net) 31 53
Of which: - -
Domestic (net) 23 43 National
Assembly
approved
VND55tr
issuance
- Issued 51 71
- Repayed 28 28
External (net) 8 10
- Issued 15 16
- Repayed 7 6
Overall deficit (gross
issuance)
(66) (87)
- Deficit/GDP (%) 5.0% 4.8%
Source: MOF

Bottom line: Sell VGBs, target
10-11% yields near term
Given this backdrop, the outlook for VGBs has
deteriorated markedly in recent weeks. Policy
uncertainties emanate from whether the
government will allow the subsidised lending
programme to proceed as planned in the process
reducing demand for VGBs or whether credit
growth targets and lending requirements will be
relaxed in light of a higher government bond
issuance schedule.
It is possible that the government may scale back
its ambitious loan programme, but the initial
impact (VND80tr in new loans just since mid-
February) has already withdrawn liquidity from
the banking system. Rising NPL ratios as well as
lower scope and flexibility for further SBV easing
is unlikely to breathe life into the market in the
same way as flush liquidity conditions did in
4Q08.


11
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Strategy
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Aside from tightening domestic liquidity, SBVs
subsidised loan program will put upward pressure
on VGB yields and may also lead to upward
pressure on USD-VND if accompanied by large
scale issuance of USD-denominated bonds or
major liquidity injections by SBV.
Against this uncertain backdrop, we recommend
reducing exposure to VGBs until there is more
clarity about the authorities policy direction. In
the meantime, we revise our VGB yield
forecasts upwards to 10.00-11.00% within the
next 2-3 months to take into account the outlook
for tighter money market liquidity and increased
VGB issuance, with the caveat that the rise in
VGB yields may be tempered in the event of
major liquidity injections by SBV in order to cap
any further rises in the O/N rate and/or to
monetise government borrowings.

Virgil Esguerra / Pieter van der Schaft
Addendum
6. Recent VGB and VDB auction results
Date Plan.
size
Tenor Type Target
yield
Result (issue size,
VNDbn)
1-Dec-08 1,000 12mth VGB T-
notes
8.98% Size issued: 1000
1-Dec-08 500 2Y VGB 9.50% Size issued: 20
300 5Y 9.50% Failed
2-Dec-08 200 3Y VDB 9.50% Failed
300 5Y 9.80% Size issued: 28
10-Dec-08 700 2Y VGB 9.00% Size issued: 100
300 3Y 8.80% Size issued: 100
15-Dec-08 500 2Y VGB 9.00% Failed
23-Dec-08 200 3Y VDB 8.98% Size issued: 200
300 5Y 8.70% Failed
30-Dec-08 200 3Y VDB 8.50% Failed
300 5Y 8.50% Failed
14-Jan-09 850 2Y VGB 8.00% Size issued: 250
500 3Y 8.05% Size issued: 100
150 5Y 8.15% Size issued: 100
15-Jan-09 1000 12mth VGB T-
notes
7.49% Size issued: 1000
11-Feb-09 1000 2Y VGB 6.70% Size issued: 100
1000 3Y 6.75% Failed
13-Feb-09 500 5Y VDB n/a Failed
500 10Y n/a Failed
16-Feb-09 700 2Y VGB 6.70% Size issued: 100
800 3Y 6.70% Failed
20-Feb-09 500 5Y VDB n/a Failed
500 10Y n/a Failed
23-Feb-09 500 2Y VGB 6.70% Failed
500 5Y 7.20% Failed
26-Feb-09 500 2Y VGB 6.95% Failed
500 3Y 7.00% Failed
27-Feb-09 500 5Y VDB 7.00% Failed
500 10Y 7.00% Failed
Source: HSBC Vietnam, Bloomberg





12
Asia / Vietnam
Strategy
4 March 2009
abc

Since we last published in these pages, the USD-
VND market has seen some of the least eventful
weeks in recent years. The official midpoint has
remained stable around 16,975, official USD-
VND spot has remained steady at the ceiling
around 17,484, while the NDF fixings have
remained in slight premium on average about 100
VND above the band (Chart 1).
Indeed, the fundamentals have become less hostile
to VND in the last few weeks. Notably, Vietnam
posted a monthly trade surplus of USD390m in
January, the first such monthly trade surplus in
three years. Given the lunar new year-related
volatility, as well as uncertainty between falling
imported intermediate goods and the potential
similarly sized though lagged fall in exports, it
would be very premature to draw conclusions that
Vietnam has shifted into structural surpluses.
However, it is still safe to assume that the large
falls in the consumption and investment related
imported goods categories (e.g. automobiles,
steel, cement) driven by a sharp slowdown in
domestic demand, will help reduce USD demand
in the coming months.
The other improvement in the backdrop for VND
is that the foreign portfolio liquidation process
appears to be coming to an end. Foreign equity
flows have been minimal for several months now,
and while aggregate data is unavailable, anecdotal
evidence suggests that foreign bond liquidation is
basically completed. Together with a sharp
slowdown in FDI flows, FX regime management
FX strategy
More stable conditions for USD-VND
VND still looks expensive and capital inflows will continue to
shrink
Expect continued gradual depreciation

Chart 1: USD-VND, trading band, and NDF fixing Chart 2: Real exchange rate
15900
16400
16900
17400
17900
Sep-08 Oct-08 Nov-08 Dec-08 Jan-09 Feb-09 Mar-09
Official Mid USD/VND
Ceiling NDF Fix
Fl

55
70
85
100
115
130
Jan-90 Jan-94 Jan-98 Jan-02 Jan-06
REER LR Avg Avg since 1998

Source: Bloomberg; ASIA denotes simple average of the region Source: HSBC


13
Asia / Vietnam
Strategy
4 March 2009
abc
by the SBV should become more familiar, as
conditions have reverted closer to pre-WTO
accession conditions where trade flows, rather
than investment flows, are the predominant source
of FX activity.
However, in the near term, we are somewhat
concerned about the as-yet unclear plans to offer
USD-denominated treasury bonds to the onshore
market. This is discussed in more detail in the
preceding fixed income section. For the FX
market, the impact appears pretty clear this will
absorb USD from the private sector and from the
financial system. The impact on net USD-VND
demand will be mitigated to the extent that the
USD proceeds are recycled into the market, either
through SOE on-lending (to fund SOE imports, or
to roll over USD debt), or sold by the government
back into the market to fund local spending. Still,
the risk is that such a move creates unexpected
volatility in USD supply that feeds into the FX.
More broadly, we continue to expect, going
forward, that the SBV should manage a gradual
depreciation. Despite some improvement on the
trade balance, we still believe fundamentals
support a weaker currency. For one, especially
with the considerable weakening of peer
currencies in Asia, as well as inflation which
remains in the double-digits, the VND is now very
expensive. Despite the recent nominal
depreciation against the USD, in real effective
terms (Chart 2) the VND remains about 23%
above its long-run REER average and close to its
historical extremes.
We also expect capital inflows, both on direct and
portfolio flows, to remain feeble through the next
several quarters, at least until global financial
markets recover and the global economy troughs.
Finally, the SBV would likely take the opportunity
to rebuild its FX reserves, if it can manage to
weaken the VND in line with the region while
maintaining overall FX market stability.

Daniel Hui



14
Asia / Vietnam
Strategy
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abc
Disclosure appendix
Analyst certification
The following analyst(s), who is(are) primarily responsible for this report, certifies(y) that the opinion(s) on the subject
security(ies) or issuer(s) and any other views or forecasts expressed herein accurately reflect their personal view(s) and that no
part of their compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained
in this research report: Pieter Van Der Schaft, Garry Evans, Virgil Esguerra and Daniel Hui
Important disclosures
Stock ratings and basis for financial analysis
HSBC believes that investors utilise various disciplines and investment horizons when making investment decisions, which
depend largely on individual circumstances such as the investor's existing holdings, risk tolerance and other considerations.
Given these differences, HSBC has two principal aims in its equity research: 1) to identify long-term investment opportunities
based on particular themes or ideas that may affect the future earnings or cash flows of companies on a 12 month time horizon;
and 2) from time to time to identify short-term investment opportunities that are derived from fundamental, quantitative,
technical or event-driven techniques on a 0-3 month time horizon and which may differ from our long-term investment rating.
HSBC has assigned ratings for its long-term investment opportunities as described below.
This report addresses only the long-term investment opportunities of the companies referred to in the report. As and when
HSBC publishes a short-term trading idea the stocks to which these relate are identified on the website at
www.hsbcnet.com/research. Details of these short-term investment opportunities can be found under the Reports section of this
website.
HSBC believes an investor's decision to buy or sell a stock should depend on individual circumstances such as the investor's
existing holdings and other considerations. Different securities firms use a variety of ratings terms as well as different rating
systems to describe their recommendations. Investors should carefully read the definitions of the ratings used in each research
report. In addition, because research reports contain more complete information concerning the analysts' views, investors
should carefully read the entire research report and should not infer its contents from the rating. In any case, ratings should not
be used or relied on in isolation as investment advice.
Rating definitions for long-term investment opportunities
Stock ratings
HSBC assigns ratings to its stocks in this sector on the following basis:
For each stock we set a required rate of return calculated from the risk free rate for that stock's domestic, or as appropriate,
regional market and the relevant equity risk premium established by our strategy team. The price target for a stock represents
the value the analyst expects the stock to reach over our performance horizon. The performance horizon is 12 months. For a
stock to be classified as Overweight, the implied return must exceed the required return by at least 5 percentage points over the
next 12 months (or 10 percentage points for a stock classified as Volatile*). For a stock to be classified as Underweight, the
stock must be expected to underperform its required return by at least 5 percentage points over the next 12 months (or 10
percentage points for a stock classified as Volatile*). Stocks between these bands are classified as Neutral.
Our ratings are re-calibrated against these bands at the time of any 'material change' (initiation of coverage, change of volatility
status or change in price target). Notwithstanding this, and although ratings are subject to ongoing management review,
expected returns will be permitted to move outside the bands as a result of normal share price fluctuations without necessarily
triggering a rating change.
*A stock will be classified as volatile if its historical volatility has exceeded 40%, if the stock has been listed for less than 12
months (unless it is in an industry or sector where volatility is low) or if the analyst expects significant volatility. However,


15
Asia / Vietnam
Strategy
4 March 2009
abc
stocks which we do not consider volatile may in fact also behave in such a way. Historical volatility is defined as the past
month's average of the daily 365-day moving average volatilities. In order to avoid misleadingly frequent changes in rating,
however, volatility has to move 2.5 percentage points past the 40% benchmark in either direction for a stock's status to change.
Prior to this, from 7 June 2005 HSBC applied a ratings structure which ranked the stocks according to their notional target
price vs current market price and then categorised (approximately) the top 40% as Overweight, the next 40% as Neutral and
the last 20% as Underweight. The performance horizon is 2 years. The notional target price was defined as the mid-point of the
analysts' valuation for a stock.
From 15 November 2004 to 7 June 2005, HSBC carried no ratings and concentrated on long-term thematic reports which
identified themes and trends in industries, but did not make a conclusion as to the investment action that potential investors
should take.
Prior to 15 November 2004, HSBC's ratings system was based upon a two-stage recommendation structure: a combination of
the analysts' view on the stock relative to its sector and the sector call relative to the market, together giving a view on the
stock relative to the market. The sector call was the responsibility of the strategy team, set in co-operation with the analysts.
For other companies, HSBC showed a recommendation relative to the market. The performance horizon was 6-12 months. The
target price was the level the stock should have traded at if the market accepted the analysts' view of the stock.
Rating distribution for long-term investment opportunities
As of 04 March 2009, the distribution of all ratings published is as follows:
Overweight (Buy) 39% (30% of these provided with Investment Banking Services)
Neutral (Hold) 38% (31% of these provided with Investment Banking Services)
Underweight (Sell) 23% (24% of these provided with Investment Banking Services)

Analysts are paid in part by reference to the profitability of HSBC which includes investment banking revenues.
For disclosures in respect of any company, please see the most recently published report on that company available at
www.hsbcnet.com/research.
* HSBC Legal Entities are listed in the Disclaimer below.
Additional disclosures
1 This report is dated as at 04 March 2009.
2 All market data included in this report are dated as at close 03 March 2009, unless otherwise indicated in the report.
3 HSBC has procedures in place to identify and manage any potential conflicts of interest that arise in connection with its
Research business. HSBC's analysts and its other staff who are involved in the preparation and dissemination of Research
operate and have a management reporting line independent of HSBC's Investment Banking business. Chinese Wall
procedures are in place between the Investment Banking and Research businesses to ensure that any confidential and/or
price sensitive information is handled in an appropriate manner.


16
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Strategy
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Multi-asset
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+852 2822 4340 danielpyhui@hsbc.com.hk
Perry Kojodjojo
+852 2996 6568 perrykojodjojo@hsbc.com.hk
Marjorie Hernandez
+1 212 525 4109 marjorie.hernandez@us.hsbc.com
Fixed Income
Pieter Van Der Schaft
+852 2822 4277 pietervanderschaft@hsbc.com.hk
Virgil Esguerra
+852 2822 4665 virgilesguerra@hsbc.com.hk
Pablo Goldberg
Head of Latin America Fixed Income Strategy
+1 212 525 8729 pablo.a.goldberg@us.hsbc.com
Alejandro Mrtinez-Cruz
Debt Markets
+52 55 5721 2380 alejandro.martinezcr@hsbc.com.mx
Hernan M Yellati
Debt Markets
+1 212 525 6787 hernan.m.yellati@us.hsbc.com
Equity
CEMEA
Europe
Will Manuel
Head of CEMEA Company Research
+44 20 7992 3602 will.manuel@hsbcib.com
John Lomax
Head of Equity Strategy, GEMs
+44 20 7992 3712 john.lomax@hsbcib.com
Wietse Nijenhuis
+44 20 7992 3680 wietse.nijenhuis@hsbcib.com
Maciej Baranski
+44 20 7991 6782 maciej.baranski@hsbcib.com
Anisa Redman
+44 20 7991 6822 anisa.redman@hsbcib.com
Herve Drouet
+44 20 7991 6827 herve.drouet@hsbcib.com
Sergey Fedoseev
+44 20 7991 6831 sergey.fedoseev@hsbcib.com
Veronika Lyssogorskaya
+44 20 7992 3684 veronika.lyssogorskaya@hsbcib.com
Turkey
Cenk Orcan
Co-Head of Turkey Equity Research
+90 212 376 4614 cenkorcan@hsbc.com.tr
Bulent Yurdagul
Co-Head of Turkey Equity Research
+90 212 376 4612 bulentyurdagul@hsbc.com.tr
Levent Bayar
+90 212 376 4617 leventbayar@hsbc.com.tr
Tamer Sengun
+90 212 376 4615 tamersengun@hsbc.com.tr
Erol Hullu
+90 212 376 4616 erolhullu@hsbc.com.tr
Israel
Avshalom Shimei
+972 3 710 1197 avshalomshimei@hsbc.com
Yonah Weisz
+972 3 710 1198 yonahweisz@hsbc.com
United Arab Emirates
Kunal Bajaj
+971 4 507 7458 kunalbajaj@hsbc.com
Majed Azzam
+971 4 507 7380 majed.a.azzam@hsbc.com
Egypt
Alia El Mehelmy
+202 2529 8438 aliaelmehelmy@hsbc.com
Wael Orban
+202 2529 8437 waelorban@hsbc.com
Ahmed Hafez Saad
+202 2529 8436 ahmedhafezsaad@hsbc.com
GEMs Research Team


abc
Equity CEMEA (continued)
Asia
Sanjeev Kaushik
India Head of Research
+91 22 2268 1271 sanjeevkaushik@hsbc.co.in
Real Estate
Herald van der Linde
+852 2996 6575 heraldvanderlinde@hsbc.com.hk
Ashutosh Narkar
+91 22 3023 1474 ashutoshnarkar@hsbc.co.in
Louisa Fok
+852 2996 6629 louisawmfok@hsbc.com.hk
Michelle Kwok
+852 2996 6918 michellekwok@hsbc.com.hk
Alvin Wong
+852 2996 6621 alvincmwong@hsbc.com.hk
Banks
Todd Dunivant
Head of Banks, Asia-Pacific
+852 2996 6599 tdunivant@hsbc.com.hk
York Pun
+852 2822 4396 yorkkypun@hsbc.com.hk
Saumya Agarwal
+91 22 2268 1235 saumyaagarwal@hsbc.co.in
Kathy Park
+82 2 3706 8755 kathypark@kr.hsbc.com
Shary Wu
+852 2996 6585 sharywu@hsbc.com.hk
Katherine Lei
+852 2996 6926 katherinelllei@hsbc.com.hk
Insurance
John Russell
+852 2822 4321 john.russell@hsbc.com.hk
Patricia Cheng
+852 2996 6584 patriciacheng@hsbc.com.hk
Industrials
Sumeet Agrawal
+91 22 2268 1243 sumeetagrawal@hsbcib.in
Steve Man
+852 2822 4395 steveyfman@hsbc.com.hk
Sandeep Somani
+91 22 2268 1245 sandeepsomani@hsbc.co.in
Sachin Gupta
+91 22 2268 1079 sachin1gupta@hsbc.co.in
Mark Webb
+852 2996 6574 markwebb@hsbc.com.hk
Azura Shahrim
+852 2996 6976 azurashahrim@hsbc.com.hk
Eric Lin
+852 2996 6570 ericpklin@hsbc.com.hk
Natural Resources
Daniel Kang
+852 2996 6669 danielkang@hsbc.com.hk
Sarah Mak
+852 2822 4551 sarahmak@hsbc.com.hk
Steven Hong Xing Li
+852 2996 6941 stevenhongxingli@hsbc.com.hk
Gary Chiu
+852 2822 4297 garychiu@hsbc.com.hk
Scully Tsoi
+852 2996 6620 scullytsoi@hsbc.com.hk
Chris Chan
+852 2996 6619 chris.chan@hsbc.com.hk

Equity Strategy
Garry Evans
+852 2996 6916 garryevans@hsbc.com.hk
Steven Sun
+852 2822 4298 stevensun@hsbc.com.hk
Leo Li
+852 2996 6919 leofli@hsbc.com.hk
Jacqueline Tse
+852 2996 6602 jacquelinetse@hsbc.com.hk
Consumer Brands
Sean Yang
+852 2822 4342 seanyang@hsbc.com.hk
Percy Panthaki
+91 22 2268 1240 percypanthaki@hsbc.co.in
Jessie Guo
+852 2996 6572 jessieytguo@hsbc.com.hk
Summer Wang
+852 2822 4337 summerwywang@hsbc.com.hk
TMT
Steven C Pelayo
+852 2822 4391 stevenpelayo@hsbc.com.hk
Tse-yong Yao
+852 2822 4397 tse-yongyao@hsbc.com.hk
Tucker Grinnan
+852 2822 4686 tuckergrinnan@hsbc.com.hk
Walden Shing
+852 2996 6751 waldenshing@hsbc.com.hk
Shishir Singh
+852 2822 4292 shishirkumarsingh@hsbc.com.hk
Rajiv Sharma
+91 22 2268 1239 rajivsharma@hsbc.co.in
Wanli Wang
+8862 8725 6020 wanliwang@hsbc.com.tw
Frank Su
+8862 8725 6025 frankkssu@hsbc.com.tw
Christine Wang
+8862 8725 6024 christineccwang@hsbc.com.tw
Leo Tsai
+8862 8725 6022 leocytsai@hsbc.com.tw
Small & Mid-cap
Herald van der Linde
+852 2996 6575 heraldvanderlinde@hsbc.com.hk
Ken Ho
+852 2996 6593 kenho@hsbc.com.hk
Elaine Lam
+852 2822 4398 elainehlam@hsbc.com.hk
Parash Jain
+852 2996 6717 parashjain@hsbc.com.hk
Sandeep Somani
+91 22 2268 1245 sandeepsomani@hsbc.co.in


GEMs Research Team (continued)