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vn +84 3 3814 5588 Raphael Wilhelm, Technical Strategies firstname.lastname@example.org +84 3 3814 5588 Table of content Predictions for 2012 ‐ Economy – 5.5% GDP growth ‐ Balance of payments – +USD2.9bn ‐ Banking sector – relaxed, but tight ‐ Stock market – +20% Risks ‐ Banking sector – Leverage & NPLs ‐ Electricity prices ‐ Fuel prices What Vietnam really has going on for ‐ Strong exports performance ‐ Stable foreign fund flows ‐ Stable currency (so far) ‐ Technicals on medium‐term positive How to play Vietnam – Ideas for 2012 ‐ Chasing value ‐ Consolidation through M&A ‐ The Dragon year boom ‐ Vietnam’s agricultural powerhouse
See important disclosure at the end of this document
Vietnam 2012 Outlook
Strategy Growth story intact on the back of financial sector stresses
We believe that although Vietnam is going through a deleveraging cycle that exposes serious issues in the banking sector amid a bursting real estate bubble, the back bone of the economy, that is agriculture, manufacturing and services has been and will remain strong in 2012. Pains will be inevitable, but we do not adhere to the Armageddon scenario that some people have become accustomed to believe in. We argue that Vietnam will fare better than most other Asian countries as western countries economic growth slows down. No Armageddon – While issues in the banking sector are serious and pain will be inevitable, we do not adhere to the Armageddon scenario. At this time last year, some international investment banks were calling for an imminent BOP crisis to hit Vietnam sometimes in 2011 and this never came, as we predicted about a year ago (see No BOP Crisis note of 25 January 2011). As a matter of fact, the country actually ran a BOP surplus of USD 2.5bn according to the State Bank of Vietnam (SBV). We think that main street is doing just fine all things considered and that the stresses are almost exclusively centered on the banking sector and inefficient SOEs. Slower, albeit decent growth – We expect GDP growth to slower to 5.5% as tight monetary policies and slower growth in Vietnam’s traditional export markets hit, but growth will remain decent thanks to growing exports and robust consumption. Construction will remain subdued however. With inflation and interest rates abating, companies should be able to find space to grow, although monetary conditions will remain subdued compared to previous years as credit growth will continue to be closely monitored and we don’t expect a relaxation of credit for “non‐productive sectors”. This will put a cap on stock market performance. The economy is more stable than neighbours – Albeit macroeconomic difficulties, we also believe that Vietnam’s economy will do better than most in the region thanks to competitive manufacturing costs and lower value added, inelastic, export goods. Also, the lack of hot foreign flows in and out of the country enables Vietnam to see less volatility in its currency. NPLs, an inflationary waiting game – With NPLs estimated close to 10% system wide, everyone wonders where Vietnam will find the money to recapitalise its banks. The large banks have ample liquidity, so we’re not overly concern about an imminent collapse. Also, as inflation and interest rates fall, so should NPLs, alleviating part of the problem. However, we believe the country will have to print money to pay for its banks and its SOEs past excesses and that would mean inflation could more difficult to bring down than most people think. Ideas to play Vietnam – We finish our report with a few ideas on how to play Vietnam in 2012. We have four compelling ideas; (1) while valuations are at historical lows, we think not all is warranted, (2) with asset prices depressed, cash rich companies could go on an M&A spree, (3) the year of the Dragon means a huge boost in babies and companies that cater to infants, (4) Vietnam’s has become one of Asia’s top agricultural goods exporter.
Viet Capital Securities | 1
www.vcsc.com.vn | VCSC<GO>
9 January 2011
Vietnam 2012 Outlook
Predictions for 2012
The table below summarises our predictions for 2012. Figure 1: VCSC’s predictions for 2012 Unit 2010 The economy
GDP growth CPI‐ Headline CPI‐ Core Trade Deficit Exports Imports FDI Disbursed Remittances Errors and Omissions Balance of Payments Foreign Reserves (est.) FX rate (interbank rate) % YOY % YOY % YOY USD USD USD USD USD USD USD USD VND / USD 6.8% 11.8% 9.3% 12.6bn 72.2bn 84.8bn 11.0bn 8.0bn 9.5bn (3.1bn) 10.0bn 20,780 13.5% 17.7% 29.8% 32.3%
5.9% 18.1% 13.6% 9.5bn 96.3bn 105.8bn 11.0bn 9.0bn 9.2bn 2.5bn 12.5bn 21,275 14.0% 19.0% 10.2% VND 18.7% USD 12.4% VND 21.9% USD 350
5.5% 12.0% 10.0%
‐6.8% ‐33.7% ‐26.5%
The balance of payments
8.8bn 115.5bn 124.3bn 11.0bn 9.0bn 7.0bn 2.9bn 15.4bn 22,130
‐7.4% 19.9% 17.5% 0.0% 0.0% ‐23.9% 16.0% 23.2% 4.0%
The banking sector
Deposit rates Lending rates Credit growth Deposit growth
% % % %
12.0% 16.0% 16.0% VND ‐ 17.5% VND ‐
‐14.3% ‐15.8% 56.9% ‐ 41.1% ‐
The stock market
In summary, we believe economic growth will slightly slowdown, albeit post a reasonable growth of 5.5%. However, the right set of policies is in place to improve Vietnam’s most critical macroeconomic imbalance: inflation. On the back drop, exports will continue to grow at a faster pace than the region, thanks to an export mix that is low on elastic goods and increasing competitiveness of its manufacturing sector. Economic growth will also continue to be supported by robust domestic consumption, although at a slightly slower pace than before as salaries will probably not keep pace with inflation. The BOP should also slightly improve thanks to ongoing strength in FDI and remittances, putting the BOP balance in positive territory for a second year in a row, which somewhat will alleviate pressure on the currency. As inflation abates, we should see interest rates gradually come down and help companies reduce interest expenses. All in all, we pencil earnings to grow 18% in 2011 and would see a modest 20% rise of the VNI by year end. We further explain the basis of our predictions below.
See important disclosure at the end of this document
www.vcsc.com.vn | VCSC<GO>
Viet Capital Securities | 2
However.9 January 2011 Vietnam 2012 Outlook Strategy The economy GDP to growth at 5.com. inelastic. is the construction sector which shrank in 2011 and remains under a lot of pressure as the country is currently going through a deleveraging of a real estate bubble.5% – Vietnam is likely to experience a mild slowdown in 2012 with GDP coming in at 5. Inflation to decline – Inflation has been on the decline since August on tighter money supply and weakening food prices. We think FDI inflows into industrials will support the long term prospects of GDP growth. See important disclosure at the end of this document www. Imports are highly correlated with exports while other types of imports are tightly controlled. we expect 11% in headline inflation. Manufacturing has become an increasingly important contributor to GDP growth and we expect this to continue thanks to a notable shift in FDI from real estate into productive industries in 2011. plans are in place for the government to adjust utility prices up. slightly higher than the government’s target of 9‐10%. However. as it has been the trend in the past 3 years. Though data is not available.9% in 2011. international soft commodity prices. We expect the agricultural sector to slow somewhat as international prices fall. and should therefore continue to grow at a slower pace than exports. at least in Q1. which likely will put a floor on how much inflation could fall. which peaked in February. though it remained near 18% at year end. Manufacturing is key – The three main pillars of support of the economy in 2011 were agriculture. and could impact growth as companies find it increasingly difficult to find financing. So far the domestic economy has been relatively resilient despite domestic and international concerns and we think this will continue forward. but the drop should be offset by resilient manufacturing and services. and that. which probably helped support domestic consumption again in 2011. goods. Also.vn | VCSC<GO> Viet Capital Securities | 3 . we believe that the large amounts of gold savings in the economy (estimated to 40% of GDP) means that households are generally able to protect their wealth.vcsc. Headline inflation YoY dropped thanks to lower food prices but core inflation has been sticky. Moving forward.5% against 5. We think the trend is likely to continue in 2012 thanks to stronger orders from traditional markets for Vietnam’s low value added. thanks to an export mix that is low on elastic goods and increasing competitiveness of its manufacturing sector. inflationary pressure is likely to ease in 2012 on the back of stable or lower commodity prices and continued monetary and fiscal austerity. Credit to remain tight – Stabilisation policies initiated in early 2011 will likely continue into 2012. have been on a declining trend (FAO Food Price Index is down more than 10%) that can very well continue into 2012. As exports Consumption unlikely to be a major source of growth in 2012 – Domestic consumption proved resilient since the Great Financial Crisis despite rampant inflation thanks to remittances and gold savings. and services. manufacturing. Downside risks may arise from reforms necessary to reduce the build‐up of debt. however. domestic consumption in 2012 may experience some headwinds as many companies have not been able to peg salaries to inflation and we expect buying power will further shrink in real terms. despite the economic slowdown anticipated in western economies. Exports to grow – at a faster pace than the region that is. As such. The wild card.
but we do think the situation has improved markedly.9 January 2011 Vietnam 2012 Outlook Strategy The balance of payments BOP surplus of 2. www. but remains the main risk to our scenario – The errors and omissions will continue to be the wild card. expect a 4% devaluation in 2012 as stubborn inflation (albeit declining) could lead to domestic capital flight towards alternative currencies such as gold and USD continues and we suspect the SBV to print money to cover the country’s NPLs. Throughout 2011. thanks to improvements in the country’s balance of payments and foreign reserves. The banking sector Interest rates to drop – The government’s message has been clear: it wants’ to see lower interest. The stock market We believe the Vietnam Index could end the year at 420. the SBV targets deposit rates at 10% and lending rates at 14% by the end of 2012. but would be cautious if they surpass them as above 15‐16% credit growth is probably inflationary. but not excessive – The SBV’s target to limit credit growth to 16‐17% in 2012 puts credit availability to a reasonable level that shouldn’t lead to inflationary expectations to haunt the country in 9‐12 months. That being said. We still. the SBV has made reference to lowering deposit rates and potentially reinstating a ceiling on lending rates in 2012. however. perhaps because it now sees how sticky core inflation is and that it will take more time to bring it in line with targets. albeit not at the speed we expected.1 billion in 2010 thanks to improvements in the trade deficit and robust FDI and remittances inflows.vcsc. Our forecast is based on the consensus within our sales team and takes into account several factors. but the talk has somewhat reduced of late. though they have been on a declining trend since 2008. The only way to reduce the errors and omissions is to put in place a credible plan to fight inflation.9bn in 2012 – The SBV estimates a BOP surplus of USD2. Currency pressures remains. Errors and omissions to decline. but whether it will deliver single digit inflation remains to be seen.5 billion in 2011 compared to deficit of USD3. These targets are optimistic as lending rates are currently set by market forces rather than administrative measures and as liquidity issues towards the end of 2011 have forced some banks to again contravene the 14% rate cap in order to mobilise funds. We are comfortable with these levels. That being said. the SBV’s efforts to focus on stability and administrative measures should help boost dong sentiment and prevent domestic residents from hoarding gold and foreign currencies too far. albeit less – The currency has remained relatively strong on the grey and interbank markets since the devaluation of February 2011.vn | VCSC<GO> Viet Capital Securities | 4 See important disclosure at the end of this document . Such a plan is in place. up 20%. The strength of the VND ultimately depends on the government’s ability to restore confidence in the currency and this will be put to the test in 2012 again. We do not expect the currency to depreciate as much in 2012. We are confident 2012 will see similar trends. Credit growth relaxed.com.
but overall. but without margin lending coming back and clarity about the banking sector. Risks The most crucial events of 2012 for investors will stem from the developments of the banking system. Liquidity is likely to remain throughout most of the year however. but we hope they don’t do so before June. As interest rates fall. Even if the cap is removed. This will pose the most risk to our predictions. we think the cap on lending growth system wide and the clear preference of the SBV that lending should be in “productive” sectors will seriously limit any margin lending activity in the stock market. which make the sustainability of such rallies rather shaky. retail investors will be quick to take profits in any rally. ‐ Greater visibility of the banking sector – As the SBV moves forward with its thorough assessment. possibly to the downside. electricity and fuel. which will have an impact on how low inflation will decline this year. ‐ Cap on loans for “non‐productive” sectors – Will not be lifted this year we think and that means securities companies won’t be offering margin lending anytime soon. so will interest expenses of companies and we can expect better earnings. Interest rates coming down will help the market. not only headline inflation. Risks: ‐ Inflation doesn’t come down as quickly as everyone thinks (high probability). we think markets will be positive. which in turn will stifle growth potentials (great time to be in private equity however).vn | VCSC<GO> Viet Capital Securities | 5 . ‐ NPLs are much higher than we think (roughly 10% system wide). we think the index can grow by roughly 20% if only because we started the year in depressed territory. especially water. Overall: ‐ Taking all these factors into consideration. but not sure how much or when). but considering global growth is slowing. transparency (we hope) and acceptance of the facts over time should gradually bring back confidence. we give think that probability is low. Also. ‐ Interest rates should fall along – We think the SBV will have room to decrease rates starting early March. ‐ Bad news on the health of the banking sector – News and rumours on the sector could depress market sentiment and put a cap on how high any rally will go. its deleveraging and its NPLs. which will further curtail the ability of banks to lend to companies. it would help borrowing for consumption to gradually come back. if volatile. ‐ The assessment into the banks fails to provide any light as to what’s really going on in the sector and no roadmap to address these issues is proposed and serious implemented.com. especially if EVN increases electricity prices by 20% in the year (we expect an increase of 10‐15%) and fuel prices are further increased (expected. We think retail investors will take in profit in the 5‐10% range. We think the SBV looks at core inflation so that’s what investors should watch.vcsc. Other items to watch stem from the need to strengthen Vietnam’s fiscal balance sheet which will come in the form of increased prices. Cons: ‐ Margin calls – Securities companies are currently still making margin calls and we expect that to continue for the first half of 1Q. Surprises in global commodity prices could also bring further downside to our scenario. making.9 January 2011 Vietnam 2012 Outlook Strategy Pros: ‐ Inflation continues its decline – Although we note core inflation is rather sticky. See important disclosure at the end of this document www.
as inflation and interest rates fall. Considering real NPLs are probably 3 times that of officially announced numbers. depositors’ confidence was buoyed largely in part by the SBV’s directive to have BIDV support liquidity in those banks which implicitly guaranteed deposits. However.9 January 2011 Vietnam 2012 Outlook Strategy NPLs and restructuring of the banking system Official NPLs in Vietnam have increased from 2. they will need to be recapitalized. as a consequence. The M&A route – The first consolidation between SCB. as inflation and. To be precise. they could turn to foreigners. With a lot of concerted effort. we believe real NPLs to be at least 10% system wide. but we really have no idea how much will be printed. NPLs. interest rates ease. Recapitalisation – We think M&A is good for small banks.7% at the end of 2011. in our opinion. The large banks (which account for roughly 80% of all bank lending) have ample liquidity. Detailed breakdowns of NPLs are unavailable. especially “strategic investors”. so we’re not overly concern about an imminent collapse. From what we know. alleviating part of the problem.vcsc. banks will need to strengthen their balance sheet through recapitalization or mergers. it might breathe some life back into companies. enabling them to payback their loans.9bn in NPLs.5% in 2010 to 3. but we’re not so confident this will work out for all banks. but for the large ones. Also. In a nutshell. Such a scenario could make inflation more stubborn than most people anticipate. Where it will find the money to maintain the liquidity? We think it will print it. we think our estimate is grounded. the system isn’t terminally ill. but in order to prevent a crisis.com. exorbitant lending rates and tight monetary policies has made it hard for SOEs to hide their losses and has exposed the chronically lax risk management and poor performance in such companies which. How NPLs are dealt with and the impeding restructuring of the banking system will likely headline 2012 and bring volatility to the market.vn | VCSC<GO> Viet Capital Securities | 6 . Tight policies exposes the ravages of past excesses – Rampant inflation. Of course. Also. there are five more banks categorized as weak that could soon get the same treatment. like Vietcombank did with Mizuho in 2011. an inflationary waiting game – With NPLs estimated close to 10% system wide. or USD13. everyone wonders where Vietnam will find the money to recapitalise its banks.1% in 1H2011 and 3. but with the country’s largest SOEs such as EVN. What we think will happen is that the SBV will maintain liquidity in the large banks while waiting for the economy to pick up and NPLs to fall naturally. we believe Vietnam will be See important disclosure at the end of this document www. but its condition should be taken seriously. is where the bulk of the NPLs lie. they should be able to deal with their NPLs over time. SOEs loans make up roughly a third of the country’s total outstanding credit of USD130bn. Tin Nghia and Ficombank has been completed and a run on those banks was averted right after the announcement of the consolidation. the whole banking system is now under‐provisioned and may only be able to cover half of the officially announced NPLs.3bn (12% of GDP). so should NPLs. To be sure. translating into USD4. By our estimates. and reducing NPLs altogether. things look bad. No run on the banks – Most large banks have ample liquidity and as long as a run on the banks is averted. Vinashin and Vinalines making losses year after year.
we could see prices drop further as property companies try to accelerate the sale of their assets. Electricity prices Set to increase between 10‐16% – What we get from the messages sent by the Ministry of Finance is that electricity prices will increase between 10‐16% in 2012. Nevertheless. to moderate the potential impact of electricity price hikes on inflation. since September. the real estate market is likely to remain depressed. Prices have fallen somewhat this year. This is why we think inflation won’t come down as quickly as some say. one time jump. domestic gasoline prices will remain dependent on global prices. Needless to say. but unaffordable for a large part of that population. We believe the SBV is hands on and will continue to actively manage liquidity and consolidation of the sector. This will again put a cap on how much inflation will fall this year. However. without the approval of the Ministry of Industry and Trade. cost increases to EVN will most likely be passed through to consumers. by a maximum of 5% per quarter depending on increases of its input costs. we believe that electricity prices will be increase at a gradual pace rather than a large. See important disclosure at the end of this document www. 2012 looks like another tough year for the real estate sector. we our think there is a risk that electricity price increase exceed the 16% threshold set by the MoF. Considering that the government recently increases import tariffs on petroleum products by 5%. until the SBV relaxes limits on lending to non‐production sectors and excess supply is absorbed. as banks put pressure on developers to settle their debts.vn | VCSC<GO> Viet Capital Securities | 7 . which led to the stock market’s previous spectacular rises. Fuel prices With Vietnam’s refining capacity unchanged. to return anytime soon. With a large portion of its population at family formation age and considering the quality of accommodation throughout the country. Given EVN’s severely poor financial situation and the entitlement to adjusting electricity price. Eventually. but don’t expect free flow of capital. we believe that even with slower global demand and price softness for the barrel. 2012 will be tougher – Given the liquidity crunch and the fact that loans for the real estate sector will continue to be frown upon.com. Real estate 2011 was tough. we believe demand for real estate is real. We will obviously maintain a close watch of the banking sector in 2012 as developments in this area could dictate much of the market’s movements in the coming months.vcsc. EVN has been given the authority to increase its selling price. Vinacomin recently announced it may have to raise the selling price of coal for electricity generation in 2012 possibly by up to 30% to reduce its own financial burden. the probability of a downward revision on gasoline prices is rather small. as in 2011. but we are still away from a clearing prices which would enable demand to return.9 January 2011 Vietnam 2012 Outlook Strategy able to weather the storm. especially as mortgages are hard to come by. Many developers suspended new projects and local banks ended up with mounting NPLs on their books. As a matter of fact.
despite its other problems. and exports as a consequence. but unlike last year. you’ve probably started to have concerns about hot money flows reversing out of Asia. Reasons to be bullish on Vietnam’s export growth for the future. While probably true for many countries in the region. The slowdown in IT‐ related exports. The country is increasingly becoming the “+1” in the “China+1” expression. aren’t a concern for Vietnam yet. even thought the world economy has already slowed. Anecdotal. will continue to move to Vietnam. Asian countries will feel the pinch and will see exports decline substantially. We think strong FDI in the manufacturing sector will continue to provide a reason to be bullish on Vietnam’s future export growth. 2‐ Demand is concentrated in low elasticity goods: Most of Vietnam’s exports are low value added.vcsc. one of the country’s leading readymade steel building manufacturers was telling us how most of his clients in 2011 were repeat customers. eroding their balance of payment and possibly the value of their currency. etc) for Vietnam’s top trading partners have 2 years of advance orders. 4‐ More FDI in manufacturing: FDI disbursements in 2011 were the same as in 2010 at USD 11bn. garments. with Japan catching up fast since the BTA was signed. 3‐ Cost advantage over China: As the cost of manufacturing in China is increasingly more expensive relative to Vietnam. currencies being under pressure and exports suffering as the world’s largest consumer markets are facing mounting economic difficulties. mainly multinationals. more and more production. Here’s why: 1‐ Resilient exports: Vietnamese exports in 2011 were one of the fastest growing in the region (see figure 2). One of the strongest export performances in Asia Some people have argued that as the global economy slows in 2012. We argue that Vietnam’s biggest issue right now is its banking system. inelastic. even though they are becoming more important of late. Most large size export producing factories (who produce shoes. Turns out all these problems come to naught in Vietnam. goods for which demand dies last (see figure 3). and even though US and EU are still the country’s largest export destinations. we think Vietnam will be one of the least affected by such global slowdown. Sourcing agents now have to go further to find smaller factories to source goods for their clients. not its main street. we see more and more US and EU companies shifting part of their sourcing to Vietnam. as expected by many. the manufacturing sector received 50% of that FDI this year against 37% in the previous year. We hear orders for 2012 are a lot stronger than for 2011. despite high inflation and accompanying wage pressures.com. who expanded their facilities despite inflation. especially with Samsung and Intel opening their mega factories. but it gives colours to the numbers. which hurt many of the other countries in the region. As a result of higher costs in China. belts.vn | VCSC<GO> Viet Capital Securities | 8 . See important disclosure at the end of this document www.9 January 2011 Vietnam 2012 Outlook Strategy What Vietnam really has going for If you’re a financial investor in Asia.
Laos) or classified as an Emerging market.661 2.489 1.671 1.618) Strategy Thailand Philippines Malaysia Vietnam 2 3 4 5 6 Dec‐11 9.099) (11.053) (1.630) (11.744 2. hot money flows into Vietnam in 2009 and 2010 were quasi absent.261) (2.785) (12. which means they do not rotate their investment into other countries.540 (445) (4.412) (3.274 (5.com.vcsc. footwear Net exports wood Net exports agriculture Net exports oil and energy Net exports steel and metal Net exports Machinery Net exports Chemical Net exports plastic Net exports Electronics and Pc Dec‐07 5. in our opinion.703) (2.728 7.863 1. Although more and more are converting to open ended and do face some redemptions as a See important disclosure at the end of this document www.854 1.692 6.284 8.006) (1.588 11.380 5. Indeed. As a consequence.105) (10.512) (1.466) (1. the Southeast Asia region is seeing massive outflows from foreigners as inflation is starting to creep up and growth is softening. While they might increase cash positions at certain times. the money will come back into Vietnam’s stock market (unless they close entirely that is).9 January 2011 Vietnam 2012 Outlook Figure 2 – Exports (% 3m/3m sa) Indonesia 15 10 5 0 1 ‐5 ‐10 Figure 3 – Vietnam’s export composition Net exports textile garment.192) Dec‐10 7.2bn respectively).082) (1. which means hot money flows out are also negligible. This is why: 1‐ Fund flow data are positive: Probably the most important argument is that according to Bloomberg.481) (2. 2‐ Frontier market: Vietnam is the only country in Southeast Asia classified as a frontier market. the volume is relatively small and such a massive exodus has a low probability of happening.727) (1. All the others are either not classified at all (Cambodia.104) (1.796) (802) Dec‐08 6. 3‐ Vietnam dedicated: Most of the foreign investment funds in Vietnam are country focused funds.078) (3.681 1. This is not happening in Vietnam as inflation is moderating and as growth for 2012 will probably be subdued.622) (1.351 615 (6. but relatively better than the region. Vietnam is one of the only three countries in Asia with positive fund flows for 2011 (see figure 4.050) %Δ 10/11 27% 13% 33% ‐180% ‐9% 5% 22% 25% 89% Stable foreign fund flows There’s a common fear in the market that there’s a high risk that foreign indirect investors will leave Vietnam equity markets in masses.893 (5.653 558 (5.056) (10.085) (2.069) Dec‐09 6. leading to a collapse of the stock market and of the currency We think that while some foreign funds are indeed closing and exiting Vietnam. 4‐ Close ended: Most of the foreign investment funds in Vietnam are close ended. were we took out South Korea and Taiwan for ease of comparison as they saw outflows of USD 8.5bn and 9.vn | VCSC<GO> Viet Capital Securities | 9 .
com.000 ‐4.000 500 0 ‐500 Indonesia Philippines Vietnam Pakistan Thailand India Japan Source: Bloomberg as of 30 December 2011. Figure 4 – Net foreign institutional investment in equities.000 ‐ Jan‐2008 ‐2.500 1.000 4. VCSC Phillipines Thailand Vietnam Pakistan Jul‐2008 Jan‐2009 Jul‐2009 Jan‐2010 Jul‐2010 Jan‐2011 Jul‐2011 See important disclosure at the end of this document www. VCSC Figure 5 – Cumulative net foreign institutional investment in equities Vietnam is far less volatile in terms of foreign portfolio flows and no one is running to the door Indonesia 8. selected countries Vietnam is one of the few countries in Asia who have received net foreign inflows in 2011 (we omitted Taiwan and South Korea as the outflows were staggering and skewing the graph) 3. YTD.vcsc.000 USD mn 1.9 January 2011 Vietnam 2012 Outlook Strategy consequence.500 2. quarterly.000 ‐6.000 2.vn | VCSC<GO> Viet Capital Securities | 10 .000 Source: Bloomberg as of 30 December 2011.000 USD mn 2. we see that the redemptions vary between 10‐20% of NAV as the funds have been good at convincing their shareholders that selling near the bottom of a cycle isn’t the wisest thing to do. We believe that argument is valid as well.000 6.
com. As a matter of fact. Vietnam has been the 3rd best performing currency in Asia in the past 6 months. Stability depend on confidence in the SBV’s policies – We long argued the main culprit for the VND devaluation has been the lack of confidence of the Vietnamese populace in the government’s ability to keep inflation under control in an economy where USD and gold is a quasi standard currency. Now that hot money flows have reversed and exports softened. Thanks to quasi‐inexistent hot money flows.vn | VCSC<GO> . at this time of the year. Nobody is laughing about the VND anymore. it’s impossible to get USD in the market. Figure 6 – YTD and 6 month currency performance versus the USD in Asia Year‐to‐date. We believe that the new found stability has a lot to do with the SBV’s policies introduced this year to curb excessive speculative activities on the currency by its own population. we’re positive the currency will remain one the less volatile and best performing currency in Asia in 2012 and pencil a 4% depreciation in total. but we’re positive as this is also the first time the currency has been stable for that long without showing signs of stresses.9 January 2011 Vietnam 2012 Outlook Strategy A currency that held its mettle in recent times No hot money flows – The VND has been quite out of sync with the rest of Asian currencies as it depreciated year after year while the currency of many of its neighbours was actually appreciating. many Asian currencies have come under pressure.vcsc. the VND has been weak due to a Over the past 6mo. strong enforcement of monetary policies. Local pressures remain. but not Vietnam. falling inflation and declining trade deficit. The other good reason that the currency is now stable is that Vietnam’s trade deficit has shrunk a fair bit and as capital inflows from FDI and remittances more than covers the trade deficit. but optimistic – We remain cautious on the currency as this is the first time the SBV is able to enforce such regulations. This time is different and the economy is flush with USD. especially as large amounts of QE money found its way into these countries. VND: cautious. the VND has been quite 8% devaluation in February stable as exports perform and there’s no hot money outflows CNY HKD PHP IDR SGD MYR KRW TWD THB VND INR CNY HKD PHP VND THB SGD MYR TWD IDR KRW INR 5% 0% ‐5% ‐10% ‐15% Viet Capital Securities | 11 5% 0% ‐5% ‐10% ‐15% See important disclosure at the end of this document www. Normally.
Conclusion: Even if Q1 doesn’t turn out to produce decent gains. The expected reversal will lift the VNI back to the multiple support/resistance mark at 425. We give this scenario a probability of 70%.com. the VNI has underperformed by about 7% (both indices in local currencies) in 2011.vcsc. we don’t expect the market to fall below 330. We discuss each factor in our analysis below. On a relative basis. versus the MSCI APAC ex Japan Index. Conclusion: Medium‐term oriented investors should BUY now as we expect a move back to 425. Investors can also expect the Vietnamese market to outperform the majority of its regional peers. outperformance expected In this scenario. Together with positive technicals as described in the first scenario and the tendency of the market to perform well in 1Q. From a relative perspective. we can expect the market to at least trade in a range of 330 to 360. we don’t expect the VNI to close below 330. we believe the performance of the VNI to be neutral vis‐à‐vis the MSCI APAC ex Japan Index. equal performance expected In this scenario. However. Our forecast is based on absolute price patterns and relative strength analysis into consideration. Beyond that point. as the relative pattern is about to stabilize. the VNI turns around in January as we think that the 330 mark is a cyclical medium‐ term low based on the fact that price targets of three popular technical patterns are coincidentally pointing towards the 330 mark. which equals a +20% return in 1H2012. the medium‐term bull cycle fails to materialize in 1H2012 and is postponed to 2H2012. especially in January. we feel using technical analysis for forecasting isn’t appropriate. the medium‐term momentum on the ratio spread chart (see figure 7) is about to bottom and the VNI should outperform relative to the MSCI APAC ex Japan Index. this with a 30% probability we believe. This could materialize in the advent that the overall macro picture doesn’t improve as expected.9 January 2011 Vietnam 2012 Outlook Strategy Technicals showing medium‐term buying opportunity Our technical view gives a 70% probability for positive return and a 30% for roughly flat returns for 1H2012. See important disclosure at the end of this document www. At least allocating a portion of an investor’s portfolio to the Vietnamese market should be taken into consideration given that we believe the 330 mark (5% below today’s level) is strong resistance level. Scenario #2: Worst case Target price 1H: 330 ‐ 360 (‐5% to +3%) Probability: 30% Relative strength versus APAC markets: Neutral. In any case. which equals to an upside of 20% (same results as under the fundamental and event driven prediction).vn | VCSC<GO> Viet Capital Securities | 12 . Scenario #1: Best case Target price 1H: 425 (+ 20%) Probability: 70% Relative strength versus APAC markets: Positive.
The spread marked its high in September at 1.vcsc. This was followed by a distinctive period of relative outperformance of the VNI from the beginning of August until the end of September. but at least a decent positive return can be expected. shows that the latest significant downtrend period was from the February 2011 high to the May 2011 low. which begun on September 2011 and is about to end now.480.com. 3.4% support.1400) 1300 3 0.550.0% 1100 1000 900 800 700 600 500 1x 76. based on the last significant uptrend phase from the February 2009 low to the August 2009 high.vn | VCSC<GO> Viet Capital Securities | 13 .290. We therefore deducted 160 points from the September top at 475. We can therefore assume that the current downtrend phase. should have the same length (160 points) as the previous bear phase. The VNI is underperforming when the spread is in a downtrend and outperforming when the spread is moving higher. as highlighted by the dashed green trend line in figure 7. -29. This results in a target of 315. Figure 7 – Monthly chart of VN Index from 2000 to 2012 VNINDEX (380. is still intact. coincides with the long‐term uptrend line from 2003.9 January 2011 Vietnam 2012 Outlook Strategy Price Pattern #1 – Absolute price analysis for the Vietnam Index – Supporting the 330 mark 1. as highlighted by the orange horizontal line. A measured move analysis to guess the magnitude of an existing trend. 2. The simple Fibonacci retracement 76. 396. slightly lower than 330 but another argument that the market is well supported around the 330 area and downside risk is limited. The index is now just 5% above the 2003 uptrend line at 330. See important disclosure at the end of this document www. We therefore expect a rebound to happen from around this mark. The rally will not have the same magnitude like the previous uptrends as today’s world is quite different from back then. The long‐term uptrend.470.0% 2 1 200 100 2000 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Price Pattern #2 – Vietnam’s technical relative strength versus other regional markets Figure 8 shows the ratio spread chart of the Vietnam Index versus the MSCI APAC ex Japan Index (Ratio spread = VNI Index price / MSCI APAC Index price). underlining the importance of the 330 level. 351. This ratio spread built out a double bottom at 0.05.7 in May and July 2011 (highlighted by the two half circles in figure 8). 346.4% 1x 400 300 100.
0. 2012 could be a turnaround year for equity market. both indexes are trading at or near their all time lows in terms of price‐to‐book value and 80% of all listed equities are currently trading below their book value.75329.3 1. 0.9 0. thanks to falling inflation. but we also have some new and interesting ideas we believe. while the medium‐term momentum oscillator also about to bottom.76482. MSCI APAC ex Japan (0. Some old.7.8 0. but we contend that not all stocks warrant so. How to play Vietnam – Ideas for 2012 As inflation falters and the macro economy further stabilises under the helm of the more hands on SBV. Idea #1: Chasing value Cheap valuation.vcsc.1 1. the current price pattern looks promising as we are again close to the double bottom support at 0. Exports continue to improve.4263. Improving Fundamentals – The macro picture improved markedly towards the end of the year. natural growth in domestic and export markets and.1 1.7 50 40 30 20 10 0 -10 -20 -30 Momentum Viet Cap(M) (-18. Net margins shrank due to higher material and financial costs. Inflation peaked and MoM trend has been under 1% for the last five months and remained below monthly ten‐year average for two consecutive months.76482.9 0.0 0.2 1.2 1. lower interest expense.7 50 40 30 20 10 0 -10 -20 -30 J A S O N D 2010 A M J J A S O N D 2011 A M J J A S O N D 2012 The Vietnamese market has since then underperformed its regional peers.0 0.76027. but still very actual ideas appear. Vietnam’s agricultural powerhouse We’ve put our heads together and came up with what we believe could be good ways to play Vietnam in 2012. domestic See important disclosure at the end of this document www. However. Corporate earnings of listed companies managed to grow by 4% in 2011.8 0.00244) 1. We estimate corporate earnings will grow by on par with consensus of 18%. but managed to stay above record low levels of 2008. which will result in an outperformance of the Vietnamese market compared to the MSCI APAC ex Japan Index.000) Strategy Figure 8 – Weekly ratio spread chart of the VNI versus MSCI APAC ex Japan (local currencies) 1.com.vn | VCSC<GO> Viet Capital Securities | 14 . not the least. Ideas to play Vietnam in 2012 1. Consolidation through M&A 3. many stocks deserve to be cheap. 0. As a result. The Dragon year boom 4. We therefore expect the spread to rebound from this mark. 0. growth via M&A for some companies.9 January 2011 Vietnam 2012 Outlook VNI vs. Chasing value 2. not all warranted – Thanks to over pessimism on speculation over government policies. -0.3 1.
1x 12.vcsc. Figure 10 – BV at discount to Asian peers Figure 9 – PE at discount to Asian peers 16x 14x 12x 10x 8x 6x 4x 2x x MA IN PH ID SG TW TH CH HK KR VN Average: 11.0% 3.vn | VCSC<GO> Viet Capital Securities | 15 . FY2012 We feel that current valuations provide an opportunity for a turnaround in Vietnam’s unloved.0% 3.0x 7.6% 4.4% 8.9% 1.2x 1.7% 7. Though buying stocks at these levels would not guarantee a return. At the same time.9x 1.1% 4.8% 3. We believe that inflows of See important disclosure at the end of this document www.20x during the GFC). On aggregate.3x 1.9% 7. We believe critical factors that will enable corporate earnings to improve in 2012 are in place.5% 4. we estimate GDP growth at 5.5% 5.7x 12.4x 2. FY2012 Source: Bloomberg.8x 12.3% 3.8x 2x 1x x ID IN PH MA TH CH TW HK SG KR VN Source: Bloomberg.5x PB 2.7% 3.2% 3.9% 5.5% FY12F GDP Growth FY12F CPI 4.0% Source: Bloomberg. Our FY12 earnings growth estimate for listed equities is essentially in line with the consensus of 18%.3% 3.8x 13.8x 1.4% 5.5% 4.8x 1.1% 4.0% 1.2% 11.5x 13. deep discounted equities.4x 1. we feel current valuations should provide a good margin of safety for investors.5% 3. which represents an undemanding discount of 44% to their Asian peers.7x 3x Average: 1.9 January 2011 Vietnam 2012 Outlook Strategy demand remains resilient and the SBV is willing to provide more credit to productive sectors.5% 4.4% 3.0x book (it was 1.6% 3.5x 2.6x 1.com. estimated to remain the highest in Asia in 2012.0x Dividend Yield 5.5x FY11F consensus EPS estimates and FY12F 7.7% 6.5x 12.9% 2. Vietnamese equities are currently trading at 8.3x 10.5% 2.5x consensus.5% 3.5% in FY 2012 which would place it as the 4th fastest growing country in the region.2x 9.5% 2.8% 5. Figure 11 – Comparative valuation table in South‐East Asia Country Malaysia India Philippine Indonesia Singapore Taiwan Thailand China Hong Kong Korea Vietnam Consensus FY12 PE 14. Vietnam’s Achille’s Heel remains inflation. Consensus Economics We believe that there is a potential for a more sustainable rally in the latter part of 2012 as domestic investors return to equities prompted by falling interest rates.3x 2.6x 10. Vietnamese equities are trading at historical lows of 1. which is 36% below their Asian peers.
the stock trades at a 14% discount to its regional peers and below our replacement cost estimate of VND38. we the expect core businesses to further strengthen with sales and NPAT reaching USD464.5 .82). Van Eck’s Vietnam ETF reduced its position in DIG by nearly 3 million shares in December.2% YoY). The stock is trading at 6. The ETF selling pressure was aggravated by domestic and foreign investor’s front running the trade. the company’s financial fundamentals. PVD – Historical PE and PB DIG – Historical PE and PB PER 30x 25x 20x 15x 10x 5x x P/E P/B PER 10x 9x 8x 7x 6x 5x 4x 3x 2x 1x x P / 1.2mn and USD55. Third. the stock is trading at its lowest PER since listing. Our 2012 estimates are only based on backlog contract values.7mn respectively on the back of its new drilling rig and well technical services shifting into higher value services.9 January 2011 Vietnam 2012 Outlook Strategy funds into the equity market combined with historically low valuations will be the catalyst for a rally.930 and 5.x 3. See important disclosure at the end of this document www. Consequently we think the company is relatively well positioned to weather any financial distress risks that are threatening most other listed real estate players.6mn of revenues (+8. especially its liquidity position remain decent enough. we estimate PVD will generate USD439. 1. we believe some stocks with good fundamentals have bottomed out from a market overcorrection and could provide positive returns once the technical reasons that drove down the stock price have been eliminated. We like DIG for three reasons. which should be both liquidity‐driven and fundamentally‐driven. 2. PetroVietnam Drilling Services (HSX: PVD) may be one of the companies less affected by the two current threats to Vietnamese enterprises: high interest rates and VND devaluation. Source: Bloomberg Source: Bloomberg DIC Corp (HSX: DIG): While we’re still bearish on the property sector.vn | VCSC<GO> Viet Capital Securities | 16 . .361sqm and a MLA of 121. Companies we like: PVD and DIG Below are some of our favourite companies currently trading at historically low valuations despite robust earnings growth. We believe we could see upside from (i) earnings growth assuming investors pay the same multiple for HSX earnings and/or (ii) higher valuation multiple as investor confidence return and rush to undervalued stocks. offering a large margin of safety for the price to bounce back. considering the current state of the property sector. Looking into 2012.576.200/share (USD1. 3.4mn of NPAT (+10. Second. First.vcsc. we feel that DIG’s stock price has been overly punished by ETFs rebalancing their portfolio lately. For 2011.1% YoY growth in USD term) and USD52.7x our FY12F EPS estimates of VND5. Its land bank is located in concentrated areas that are suitable for township development and could significantly increase its value. Based on its FY12F PER.6 ha in satellite cities in both northern and southern Vietnam. it owns one of the largest land banks with a SFA of 260. 2.com. thus leaving the door open for upward revisions should the company secure new leasing contracts. On a PB basis. DIG now trades at a 61% discount to its 9M2011 balance sheet book value and 66% discount to our NAV estimate.5x our FY11F EPS estimates of VND4.
we expect to see continued growth in M&A deal volumes and values in 2012. As is generally the case in a developing economy given the nature and scale of the banking system compared to the rest of the economy. Clearly the biggest deal in 2011 was Mizhuo’s 15% stake in Vietcombank for USD550mn. total M&A transaction value in the first ten months of 2011 exceeded full year 2010 levels despite global and local uncertainties.vcsc.vn | VCSC<GO> Viet Capital Securities | 17 . We also saw strong deal flow in the consumer space as buyers want to tap into the strong consumption growth of the 13th largest country in the world by population and growing.com.9 January 2011 Vietnam 2012 Outlook Strategy Idea #2: Consolidation through M&A Rising M&A activities in a developing economy – Substantiating that Vietnam’s medium and long term growth prospects remains intact. See important disclosure at the end of this document www. Driven by high cost of debt and challenges to source capital. financials led deal flow in size and volume.
See important disclosure at the end of this document www. especially in times of depressed valuations. inefficiencies.2 3.vcsc. through their M&A plan. Issues such as mismanagement. could present opportunities for companies with strong balance sheets to strengthen long‐term competitiveness through M&A. This in turn could create new investment opportunities not only for private equity investors but for listed equity investors as well. 250 Figure 12 – M&A deals in Vietnam 2008 to October 2011 Source: KPMG Figure 13 – Top 10 deals to October 2011 Target Vietcombank GTEL Mobile Masan Consumer Diana Dai Tin Bank Masan Resources PVI Holdings Hoan My Tate & Lyle Hanoi Liquor Source: KPMG Industry Financials Telecom Consumers Consumers Financials Materials Financials Healthcare Consumers Consumers Buyer Mizuho VimpelCom KKR Uni‐Charm First Gulf Bank Mount Kellet Capital HDI‐Gerling Industries Fortis Healthcare TH Milk Food Diageo Buyer country Japan Netherlands US Japan UAE US Germany Singapore Vietnam UK Value (USD mn) 546 196 159 128 96 94 92 64 54 48 Cash rich companies will lead the way – The Vietnamese stock market has generally been derided for having too few investment options with many listed companies lacking three important investment criteria: growth prospects. and real estate. two listed companies. lack of inputs and shortage of capital experienced by private companies can impede their ability to grow. fisheries. could provide listed equities investors with access to interesting growth stories. build economies of scale and boost liquidity to be deemed investable. logistics. pharmaceuticals. Companies we like: FPT and MSN Among all the potentials.com.9 0 2008 2009 Value (USD Bn) 2010 2011 Number 1.35 236 194 200 150 100 50 0 Strategy No. and liquidity.9 January 2011 Vietnam 2012 Outlook USD Bn 4 3 2 1 0. fragmentation.vn | VCSC<GO> Viet Capital Securities | 18 . But these short‐comings. consumer goods. We expect activities will be concentrated in financial services (driven by the SBV’s plan to consolidate the banking sector). scale.15 112 93 3. retail.
The company has been actively seeking value enhancing deals given its hefty war chest. The company has already expressed its intention to buy back 100% of FPT Telecom of which it owned 44%.1x forward earnings. We note that easing macroeconomic pressure and the launches of new products it could leverage its already extensive distribution channel could form catalysts to deliver upside to our estimates. 2. We note that no other private sector company in Vietnam has had such unparalleled access to capital. We remain bullish that MSN’s market leadership and extensive distribution channel will continue to bring favourable winds to the business. The stock is trading at 16.930. The company is looking at building scale through acquisitions within its three key verticals: Financials.9 January 2011 Vietnam 2012 Outlook Masan – Historical PE and PB PER 10 45x 9. We expect to see M&A activity in 2012 as the company takes advantage of the market’s favorable valuations and tight liquidity that afflicts many businesses.9x FY12F EPS estimates of VND5.vn | VCSC<GO> Viet Capital Securities | 19 . A war chest of USD150mn should facilitate FPT’s acquisition strategy. we believe MSN’s growth story will continue at least over the next five years driven by its organic and inorganic growth. MSN has already made notable acquisitions and a proven track record with the Nui Phao mine and Vinacafe. Also.240 and 14. The company’s new CEO Mr Truong Dinh Anh has his sights on building critical mass and entering new segments through M&A. FPT’s growth prospects has been questioned of late as the company experienced significant growth over the past few years.USD600mn. we expect that the restructuring of Masan Food into Masan Consumer would create a scalable platform for entries into other consumer categories. Consumers. positioning MSN for potentially aggressive M&A plans. the stock is trading at its lowest PE in its history at just 5.x 15. 5. We estimate that by the end of 2011.x .x 4. See important disclosure at the end of this document www. the company’s cash balance stood at c.x Strategy FPT – Historical PE and PB Source: Bloomberg Source: Bloomberg FPT (HSX:FPT): Although not lacking scale nor liquidity. We believe this is an unjustified discount for a blue‐chip that remains profitable and is relatively liquid with USD 638.800 per share. . 10.x 5. 3.x 35x 30x 25x 20x 15x 10x 5x x P/E P/B PER 25.9x our FY11F EPS estimates of VND5. Our forecasts only take into account organic growth from MSN’s current business portfolios.826 worth of shares traded per day on average over the past 3 months. We expect that MSN will reach VND2. 7. 1. and Mining. 40x P/E P/B 8.700bn in net income in 2011.x 20. Despite the company’s EPS 20% growth prospect and consensus FY12F estimate of VND9.vcsc.com. We heard of several other acquisition opportunities that management has hinted about such as the purchase of a Cambodia telecommunications firm and the possible partnership or acquisition of retail stores. which brought the company immediate leadership in its respective sectors. 6. Masan (HSX: MSN): M&A is MSN’s mantra.
The stock is trading at 11.286 and 9. Source: Bloomberg Source: Bloomberg Companies we like: VNM and GDT Vinamilk’s (HSX: VNM) infant powdered milk has gradually gained market share as consumers have acknowledged its quality and price point cf. Considering that today an even greater portion of the population is at family formation age compared to twelve years ago.vcsc. VNM has raised market share from 22% in 2010 to 27% in 2011.5 1. Tradition dictates that a child born in the year of the dragon will be a natural leader who will be successful. We expect to a 40% jump in revenue from infant formula in 2012. thus the rush to have dragon babies. competitive pricing and extensive distribution presence. Some of the O&G doctors we spoke to confirmed that they have already begun to see increases of up to 2. More than just a belief – The last time we had a dragon year in Vietnam. We are positive that VNM will continue to gain market share thanks to its established branding.com.9 January 2011 Vietnam 2012 Outlook Strategy Idea #3: The Dragon year boom 2012 baby boom – While high inflation might have had its take on declining consumption growth. In 2012. we are positive that 2012 could be a good year for infant‐related products. “Buy Vietnam” is a campaign that has started to pick up steam among consumers willing to do their part in helping the country prosper. the number of births jumped by 8. an opportunity that comes only every 12 years. wise. we think the zodiac effect will be even more significant this time around.218. Investors should look at Vinamilk (HSX: VNM) and Duc Thanh Wood Processing (HSX: GDT). We believe 2012 is going to be an exceptional year for births in Vietnam. First. See important disclosure at the end of this document www. Infant formula accounts for 27% of the company’s total revenues. confident.6x FY11F EPS consensus estimates of VND7. consumers have been switching from higher priced imported premium products to slightly more economical brands such as Vinamilk’s products.3% compared to the previous year. Second. Such fluctuations are more than trivial as they can bear significant economic consequences and provide a lucrative opportunity for infant‐related product makers in the near term. as a consequence of rampant inflation.vn | VCSC<GO> Viet Capital Securities | 20 . two listed companies we feel are better positioned to benefit from the dragon year theme. brave and beautiful.0 .2x FY12F EPS consensus estimates of VND9. other foreign products. P 1. we expect infant formula to benefit from two key trends we have observed of late.5x the numbers of patients compared to the same time last year. According to management. According to the Chinese and Vietnamese zodiac the year of the dragon is associated with wealth and power and is believed to be very favourable to children born during the year. VNM – Historical PE and PB GDT – Historical PE and PB PER 30x 25x 20x 15x 10x 5x P/E x P/B x P PER 6x 5x 4x 3x 2x 1x P/E P/B .
5bn of hard currency into the country. Listed equities do not necessarily provide access to the full gamut of agricultural investment opportunities as private equity could. Agriculture accounts for over 22% of the country's combined GDP. In 2011. and declining arable land and water supplies are impacting a wide range of agricultural commodities and food prices. Children’s toys count for 17% of total revenue in 2011 compared to 4% in 2009. This payment risk is more critical to small See important disclosure at the end of this document www. GDT’s products have important price advantages over Western‐branded toys. Figure 14 – Major agricultural exports and imports Exports (USD mn) Fisheries Rice Rubber Coffee Dairy Fruits & Veggies Cashew Pepper Tea 0 Source: GSO 2. and employs over 70% of its workforce. Recently.000 Imports (USD mn) Farm inputs Fertilisers Edible oils For investors. plus tightening credit to fisheries sector. particularly EU.000 6. We think there are substantial opportunities in the children’s toys market.000 4.338 and a PER of 3. but we have only begun to see the potential of Vietnam’s agribusiness sector. coffee and cashew nuts. wealth and food demand in conjunction with limited natural resources. erratic weather patterns. and farm inputs. bringing in USD11. Many small companies are facing with a barrage of difficulties due to challenging exports to foreign markets. rubber. there are opportunities all along the value chain.9 January 2011 Vietnam 2012 Outlook Strategy Duc Thanh Wood Processing (HSX: GDT) is the only listed wooden houseware and children’s toys manufacturer. Idea #4: Vietnam’s agricultural powerhouse Major shifts in global demographics. Vietnam ranks first in exports of pepper worldwide. The company’s 2011 earnings is estimated at VND45bn.7bn. and the segment that generates the largest trade surplus. GDT has gained reputation for providing high‐quality products with better designs.vcsc.9x.000 Source: GSO Wheat Fisheries Vegetable 0 1. second in rice. thus delaying their payments to Vietnamese partners. Aquaculture – look at VHC and HVG There are now over 120 companies operating in Vietnam fisheries sector is set to undergo some sort of consolidation in 2012. In addition.000 3. which is still dominated by imported Chinese products. and top‐ five of natural rubber and seafood.000 2. proving management’s long‐term strategy to focus on growing this segment. as safety issues have been raised against imported Chinese toys.vn | VCSC<GO> Viet Capital Securities | 21 . agricultural export earnings reached USD19. sugar.com. Vietnam has progressed from a nation of chronic food shortages to one of the world’s leading exporters of soft commodities and food. agricultural is very significant to the economy on account of the workforce it hires and the export revenue it generates. but stock market investors can get access to aquaculture. The on‐going EU public debt crisis make banks in the zone hesitate to give loans to importers. making up 20% of the country’s total export value. translating to EPS of VND4. Clearly.
7x our FY11F EPS estimates of VND7. VHC – Historical PE and PB HVG – Historical PE and PB PER 14x 12x P/E 10x P/B 8x 6x 4x 2x x PB PER 4 8x 3 7x 3 6x 2 5x 2 4x 1 3x 1 2x .6 bn. predicting there would be a raw material shortage in 2011. The stock is currently trading at 3. up 105. from fish farms to processing. but if we take into account its 51% stake of AGF ‐ the third largest exporter. slightly above its all time lows of 1. fish farms (now supplying 70% of its raw material needs) and processing factory.9 bn. To expand into new export markets.3%YoY jump in revenue to VND5. management decided to expand farming areas in order to supply 60% of its material needs. The company will continue to improve its production system and expand its farming area to supply all of its material needs.com. enabling the company to better control its material costs in the context of rising live fish prices in 2011.066 billion and VND350 billion respectively. At the same time.430 and 3.990. Moreover.3% of net sales compared to 7. up 39. in 2010. exporting a total value of USD122. Gross margins improved 135bps thanks to investments made to vertically integrate. to diversify into shrimp culture and processing. HVG would take the first position. Vinh Hoan Corporation is currently trading at a PB of 1.9 January 2011 Vietnam 2012 Outlook Strategy exporters since most of their importing partners have more limited access to bank credits.3% YoY.3bn. up 70. We forecast FY2011 net revenue and net income at VND4. HVG enjoyed a 91. it ranks number two pangasius exporter. HVG bought a 24.6% from 7. The stock is currently trading at PB 0.3x our FY12F EPS estimates of VND8. We also believe management is quite knowledgeable about industry dynamics. VHC saw a significant increase in its net sales of VND2. We think that consolidation in the local seafood sector is likely to continue.4x. Alone.9%YoY increase in EBT to VND349bn. In 3Q2011. Hung Vuong Corporation (HSX: HVG) is actively growing its capacity and revenue through acquisitions.3% YoY. VHC also enjoys relatively higher average selling price (USD 3.5 per kilo of fillet) compared to other Vietnamese exporters thanks to its strict quality management and fully‐integrated value chain from fish feed. The depreciation of the VND by 9% early in 2011 also gave VHC a large amount of realized foreign exchange gain (VND63.vcsc. which will place the sector in a better condition for sustainable development.1x in November 2008.9% thanks to efficient management which reduced selling expense which were equal to only 4.23% of total exports of the fish.4 mn and accounting for 8. and a much larger increase of its bottom lines to VND288. NPAT margin rose to 9.vn | VCSC<GO> Viet Capital Securities | 22 . collagen products and rice factory.5 1x .385.856bn and a 68.x x P/E P/B Source: Bloomberg Source: Bloomberg Vinh Hoan (HSX: VHC) was ranked number one pangasius exporter in the first 10 months of 2011. close to its all time See important disclosure at the end of this document www. HVG acquired 51% of Agifish (HSX:AGF) which has been selling to the US market for years and already has some brand recognition there. We feel the stock price could benefit from a strong catalyst in new projects such as raising area and processing capacity expansion.18% stake of Ben Tre Forestry And Aquaproduct Import Export (HSX:FBT). hence we expect gross margin improvements to come.65x. In 3Q2011.3% YoY) as the company had lots of USD stashed away. VHC’s main market is the US and EU which account for 44% and 27% of its sales respectively.3% YoY.
the sector is quite small and scattered.000 ha of cultivation areas. However.0x FY11F EPS consensus estimates of VND6.5x 1. Using the ownership ratios in the listed companies.x P / PB 2. and Angimex (OTC. LSS – Historical PE and PB PER 14x 12x 10x 8x 6x 4x 2x x . and the SCIC together own about 80% of each company.045. we calculate that TTC group currently owns about 20% of national sugar production.49x it hit last August. We think a sector consolidation is necessary to increase productivity and sustainability especially once the sector will no longer be protected as Vietnam has to remove the current tariffs on imported sugar from Thailand and Brazil under WTO agreements. The rice trade – look at VLF. the investment arm of the electronic store chain. Vinh Long Food (HSX: VLF). There are three listed stocks.5x FY12F EPS consensus estimates of VND8.com.3mn ha in Brazil. Docimexco (HSX: FDG). The stock is trading at an undemanding 3. We believe the number is larger as TTC also owns stakes in some other private sugar companies.vcsc. these three rice stocks have very low liquidity since the two largest shareholders. a private trading and investment firm and its related companies have been acquiring stakes in sugar companies.9 January 2011 Vietnam 2012 Outlook Strategy low of 0. We think the consolidation will continue in 2012 and should focus on eliminating operational inefficiencies. In addition. Within the sector we continue to like LSS’s fundamentals which include high productivity. Sugar sector – look at LSS Though not an export oriented play. sugarcane production yields and sugar conversion ratios among Vietnamese sugar companies vary significantly depending on the companies’ machinery quality and investments in plantation. 1. We estimate that LSS can make VND351bn in net See important disclosure at the end of this document www. We like the company’s fundamentals and are positive about its earnings growth in 2012.5x 2.3mn ha in China and 5. Nguyen Kim.vn | VCSC<GO> Viet Capital Securities | 23 . We also think SBT will benefit from the sector consolidation as the company now has more access to materials. capacity. compared to a total of 1mn ha in Thailand. There are currently 39 sugar companies operating on approximately 248. FDG and Angimex Investors wanting to get access to Vietnam’s second largest agricultural export have limited options. However.x 1. and heavy investments to secure sugarcane supplies.x Source: Bloomberg Lam Son Sugar (HSX: LSS) is a stock that we feel has been unfairly punished along with the rest of the Vietnam Index despite its resilient growth potentials. Thanh Thanh Cong JSC (TTC). we are positive about the long‐term prospect of Vietnam’s sugar sector as demand continues to outpace supply at a relentless pace. Some consolidation is already ongoing however. planning to list early 2012).5x .908 and 2.
etc. we expect DPM to record revenue of VND14.x 10x 1. 61% owned by the state‐run group PetroVietnam.221 billion. The new factory is strategically located between the Tien and Hau Rivers.5x 3. The corporation. The stock is now trading at a record low PER of 3. We forecast VND2. DPM is also trading at historically low PB of 1.x 2. FY12 selling price of urea would hardly increase as much as last year to offset the hike in input costs. For 2012.025 and a PER FY11F 2.8x. Meanwhile. most of which is imported via crossing‐border trading.4x against FY12F EPS VND5. Furthermore. We are confident that the company can maintain its leading position in the sugar market and believe the stock should not be trading at its current 18% discount to domestic peers.5x 1. things should improve thanks to its new capacity.x 3.5x x . Moreover.212. APC accounts for 60% of total market share for irradiation services in Vietnam. The company focuses on the irradiation of aquatic products (fish. An Phu Irradiation JSC (HSX: APC) is a leading provider of irradiation services for aquatic and fruits products. Therefore.597 and 4. directly on the major trade route between the economic centers of Can Tho and Ho Chi Minh City.9% but expect net profit to drop 31% to VND1.x . translating to FY12F EPS of VND9. translating to FY11F EPS of VND7. up 53.vn | VCSC<GO> Viet Capital Securities | 24 .5% as a result of the company acting as the sole distributor for the Ca Mau fertilizer plant.x 15x 5x Source: Bloomberg We recognize these headwinds against DPM in FY12.5x 2. and of gas prices increasing 40% YoY materially driving up input costs. still we believe at its current stock price which implies valuations fairly cheaper than the market. This is also the major route used by customers in the Southwest to deliver products to the Saigon Harbour to See important disclosure at the end of this document www. shrimp. DPM – Historical PE and PB PER 25x P/E 20x P/B PB 4. DPM is an attractive investment opportunity. We expect gross margins to shrink to c. is the leading urea producer and distributor in Vietnam with over 50% market share.992 billion. also fuels greater competition. In 2012.09x.447bn in revenue (+41% YoY) and VND463bn in net profit (+27% YoY) in 2012. Agriculture related opportunities – look at DPM and APC Petrol Vietnam Fertilizer and Chemicals Corporation (HSX:DPM) – An upstream agriculture opportunity exists in DPM which has been one of the flagships of Vietnamese equities.1x ‐ the lowest level since it listed. We expect APC to continue to grow earnings on the back of increased demand and margin expansion from a new plant in Vinh Long.258 a PER FY12F 2. Chinese urea. in addition to which there is very little visibility on the possible purchase of the Ca Mau plant.vcsc.26% from 43.9 January 2011 Vietnam 2012 Outlook Strategy profit (+19% YoY) in 2011.04x FY11F EPS of VND7.) and fruits.com. the country may start to see an oversupply of urea in 2012 when the Ca Mau and the Ninh Binh plants come online. We like the company’s fundamentals and are positive about its earnings growth in 2012.
4x .6x .vcsc.2x . The stock is trading at 4. we forecast this segment to grow 25% in volume in 2012. We believe that irradiated aquatic products will become a key revenue driver in 2012. However.com.2 FY12F EPS estimates of VND3.vn | VCSC<GO> Viet Capital Securities | 25 . See important disclosure at the end of this document www.x PB 1. APC – Historical PE and PB PER 6x 5x 4x 3x 2x 1x x P/E P/B .8x our FY11F EPS estimates of VND3.x . as more importing countries require Vietnamese products to be irradiated.000 and 4. irradiated aquatic products account for only 3% of total aquatic product exports.8x Source: Bloomberg Despite the country’s economic difficulties.439.4x 1.2x 1. 2011 was a fantastic year for APC which saw a 37%YoY jump in net income to VND34 bn. Currently.9 January 2011 Vietnam 2012 Outlook Strategy export.
EV/EBITA. clients should contact their local sales representative. market sentiment may affect the valuation of companies. competitive factors. Small Cap Research: VCSC Research covers companies with a market capitalisation of up to USD50mn. client feedback. Target price: In most cases. as well as risks inherent to the company under review. peer‐group comparisons. including. our recommendation is an assessment of the mismatch between current market price and our assessment of current fair value. the analyst may use different valuation methods. then the target price may differ from fair value. EV/EBITDA). the nature of the stock and other circumstances.vcsc. thus these performance parameters should be interpreted flexibly. are no longer in effect for this stock. among other business units and Institutional Equities. EVA). Michel Tosto. such as GDP growth. Foreign currency rates of exchange may adversely affect the value. or will be. related to the specific recommendations or views expressed in this report. For investment advice. Equity rating key BUY ADD HOLD REDUCE SELL NOT RATED Definition If the target price is 20% higher than the market price If the target price is 10‐20% higher than the market price If the target price is 10% below or 10% above the market price If the target price is 10‐20% lower than the market price If the target price is 20% lower than the market price The company is or may be covered by the Research Department but no rating or target price is assigned either voluntarily or to comply with applicable regulation and/or firm policies in certain circumstances. these performance parameters only reflect capital appreciation and are set with a 12‐month horizon. The target price is the level the stock should currently trade at if the market were to accept the analyst's view of the stock. The previous investment rating and target price. and overall firm revenues. 2) Discount models (DCF.com. and 4) Economic profit approaches (Residual Income. DVMA. VCSC’s Rating System and Valuation Methodology Absolute performance. on other assumptions about the economy. the company. directly or indirectly. and historical valuation approaches. Risks: Past performance is not necessarily indicative of future results. provided the necessary catalysts were in place to effect this change in perception within the performance horizon. if the analyst doesn't think the market will reassess the stock over the specified time horizon due to a lack of events or catalysts. discounted free cash‐flow and comparative analysis. DDM). and is not related to market performance. We also certify that no part of my compensation was. Company valuations are based on a single or a combination of one of the following valuation methods: 1) Multiple‐based models (P/E. This structure applies from 1 November 2010. Clients should note that coverage may not be consistent and that VCSC may drop coverage of small caps at any time without notice. including the quality and accuracy of research. which include revenues from. the target price will equal the analyst's assessment of the current fair value of the stock. depending on developments specific to individual industries. EV/sales. defined as (target price – current price)/current price. hereby certify that the views expressed in this report accurately reflect our personal views about the subject securities or issuers. However. but not limited to. In most cases. inclusively. RATING SUSPENDED Unless otherwise specified. long term (fundamental) rating key: The recommendation is based on implied absolute upside/downside for the stock from the target price. 3) Break‐ up value approaches or asset‐based evaluation methods. The selection of methods depends on the industry. Marc Djandji and Raphael Wilhelm.vn | VCSC<GO> Viet Capital Securities | 26 . therefore. EV/EBIT. Valuation Methodology: To derive the target price. Valuations are also based on expectations that might change rapidly and without notice. Future price volatility may cause temporary mismatch between upside/downside for a stock based on market price and the formal recommendation. P/cash flow. price or income of any security or related instrument mentioned in this report. Valuation models are dependent on macroeconomic factors. if any. interest rates. The authors responsible for the preparation of this report receive compensation based upon various factors. exchange rates.9 January 2011 Vietnam 2012 Outlook Strategy Analyst Certification We. including when VCSC is acting in an advisory capacity in a merger or strategic transaction involving the company. raw materials. is. The investment rating and target price for this stock have been suspended as there is not a sufficient fundamental basis for determining an investment rating or target. Furthermore. trade execution or other enquiries. See important disclosure at the end of this document www.
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