Vietnam’s markets got off to a solid start following the announcement that the Trump administration had finalised negotiations with Canada and that there would be a revised North American Free Trade Agreement.
Investors were positive on the news as it seemed to indicate that the US is willing to make deals, and therefore there may be a chance that the US-China trade tension could ease sooner than we think.
However, enthusiasm quickly faded as the more important U.S. – China trade worries appeared to intensify. Tensions with China appeared to escalate after a 24-hour-cycle which saw a Bloomberg report that Amazon and Apple network servers may have been compromised by Chinese spy microchips, a Reuters report warning of attacks by a Beijing-linked hacking group, a CNN story about the U.S. Navy proposing a show of force in the Pacific, and a speech by Mike Pence accusing China of trying to undermine President Trump.
Therefore, we should expect more companies to begin shifting their supply chains to other countries as a result, and Vietnam should continue to be a key beneficiary of this trend. From conversations with buyers of manufactured goods in Vietnam, we are hearing that Vietnamese vendor have been lengthening delivery schedules because they have been swamped with orders that used to be filled in China prior to Trump’s trade war.
The VNIndex closed the first week of the 4th quarter down 1.15% on heavy trading worth VND42,891.76bn (USD1.86bn). Total trading value increased 70% from the previous week, supported by two massive trades in Masan (HSX: MSN). The first trade was on Tuesday and was worth VND10,990bn (USD478mn), while the second, worth VND5,328bn (USD232mn), happened Friday. SK Group and GIC were the buyers of the blocs.
In other news, according to the amended Securities Law draft, FOL in a public company is 100%, excepting for special cases in which Vietnam signed an international pact regarding FOL lower than 51%. In June 2018, as MSCI’s Market Rank Report, the Vietnamese market needs to improve five issues, including FOL and equality rights for foreign investors. FOL expansion will allow many Vietnamese companies to meet the MSCI Emerging Markets Index of Emerging markets.
Also Vinfast, Vingroup’s subsidiary, and Vietnam’s first automaker, unveiled its new sedan and SUV earlier this week. Instead of engaging Vin Diesel for the debut, Vinfast chose Miss Vietnam and David Beckham to launch its first two cars at the Paris Motor Show. Most commentators seem quite impressed with the new models, which will be on sale in Vietnam in the fall of 2019.
Webinar Invitation
On the back of our October Strategy Report we are organizing our Monthly Strategy Webinar on Mon, Oct 8, 2018 4:00 PM – 5:00 PM WIB.
Mr. Bernard Lapointe, Head of Research at Rong Viet Securities, will present the Equity Research Team’s most up-to-date views on Vietnam’s stock market, present some of their favourite stocks and answer investors’ questions.
Join the event to receive our top investment ideas and to learn how our strategy will help your investment decisions.
Registration URL: https://attendee.gotowebinar.com/register/3673054226449671692
(if the link doesn’t work, copy & past it in your browser)
Monthly Strategy Report
October 2018 Strategy – Keep Defensive Status
- Factors that influence the flow of capital to emerging markets are still mixed. The Fed’s intention to raise interest rates three times in 2019 is quite unexpected. Meanwhile, US 10-year Treasury bond yields reached 3.2% this past week, breaking through a 37-year downward slopping trend line.
- Vietnam was added to the FTSE watch list is very positive news. In addition, liquidity gradually increased. Fears of ‘missing out’ may encourage investors to return to the market.
- Q3 business results will likely determine the trend for the market. We think that there will be more diversion between companies’ stock price movements. Positive results overall will support the market. However, the amplitude of share price movements will not be as big as what happened in the beginning of 2018.
- Stable macro factors continued to support investors’ sentiment. As a result, large cap stocks drove the market in recent weeks.
- We believe that stocks with high dividend yields should remain a safe place for risk-averse investors. Our list includes 23 stocks which have expected cash dividend for 2018 from 9% and ROE from 11%. Stocks which investors can consider are SJD, NNC, CIA, HAH, SFG, HTI, TVT, PLC, and AAA.
- Our model portfolio is up 11.7% since inception in late June 2018 while the VN Index is up 6.6%. We reduced by half our position in Vinh Hoan because the stock has gone up 67% since early July. As a result cash has risen to 20%.
- Our target range for the main Vietnamese Index is still 960-1040.
- As we get into November we will reduce the cash position to benefit for, what we expect, a December end of the year ‘exhaustion’ move.
Company Reports
Vietjet Aviation (HoSE: VJC) – Growth Speed to Watch Closely (Initiation, ACCUMULATE, VND170,000, UPSIDE 19%)
1H18 performance: maintains impressive growth
- Core revenue and net profit grow by 53% and 23%, respectively.
- High efficiency and improved ancillary revenue are key elements to counter rising fuel price.
- Increasingly dependent on international flights is something to monitor closely.
2018-2019: golden time for the fleet
- The number of passengers will likely grow well in 2018 and 2019, ensuring high frequency for VJC flights
- Operating A321 aircrafts (220-230 seats) in place of the A320s (180 seats only) will improve VJC’s efficiency.
Valuation
- 2018-2019 is the time when VJC’s fleet can operate at its highest efficiency.
- The stock is trading at 14x current EPS of VND11,356. Furthermore, at its current price, it is trading at ~6.5x P/B. Cash dividend is expected at VND3,000.
Mobile World Investment Corporation (HoSE: MWG) – Bach Hoa Xanh Improvements on the Way (Update, BUY, VND160,000, UPSIDE 25%)
- Bach Hoa Xanh is expected to show a lot of positive developments, especially since MWG adjusted its expansion strategy in 2Q18.
- Although more adjustments still need to be done, we believe that with the experience as a leading retailer and a responsive management, MWG can successfully expand this model beyond HCMC in the next two to three years.
- By 2022, in the base scenario, we believe that Bach Hoa Xanh could reach 4,500 stores and VND93tn sales, contributing to 50% of MWG’s total sales.
- Presently, The Gioi Di Dong is contributing steady revenue, while Dien May Xanh is remaining a pillar of short-term growth due to the organic strength of the consumer electronics market.
Valuation
- The stock is trading at 12x current EPS of VND7,162. Furthermore, at its current price, it is trading at ~5.5x P/B. Cash dividend is expected at VND1,500.
Analyst Pinboard
Viet Nam Dairy Products JSC (HoSE: VNM) – Seeking Opportunities in New Export Markets
- In VNM Result Update that Rong Viet Securities published recently, VNM is looking for opportunities to expand sales in markets such as Myanmar and Indonesia through the establishment of Joint venture with local companies.
Myanmar – Early stage of dairy market development with low consumption per capita
- The dairy industry in Myanmar is still in its early stage of development, with nearly 85% of its milk consumption coming from dairy farms with small processing facilities.
- The major dairy products include fresh milk, condensed milk, yogurt and ice-cream, in which fresh milk and condensed milk are more commonly consumed.
- The challenge for VNM is to raise public awareness, especially to move from home-made products to the ones that have been certified for quality.
Indonesia – A potential market under the domination of foreign corporations
- Revenue of dairy products has increased 12.5% in the past 5 years. The growth rate will continue and the yogurt sector will lead its growth rate in the following years with CAGR of around 10.3%.
- Indonesia is considered as a potential market with high growth but it is undergoing a major difficult to access.
- Although VNM has experience in competing with large multinational companies, the company will not have many advantages facing with others in foreign markets as on its “own turf”.
Shrimp Sector: the SIMP Program May Affect Exports from Vietnam in Early 2019
- The final anti-dumping (AD) tax on Vietnamese shrimps in POR 12 (1st Feb 2016 to 31st Jan 2017) has been announced on the 10 of Sep 2018: all companies are taxed at 4.58%.
- As we mentioned in a note posted recently, shrimp exported to the US must comply with a set of new rules on an origin traceability basis.
- At first, the program looks simple to abide by while the fee charged by the NOAA is small at USD 30 per application.
- Nevertheless, looking more closely, we see that the following requirements may be a large hindrance for applicants:
o First, the NOAA requires the US importer to act on behalf of the Vietnamese exporter to provide the information.
o The second and largest obstacle is the requirement that the exporter has evidence of the origin of the raw shrimps purchased from the farmer/fisherman if the amount of the purchase is larger than 1,000 kg per day.
- What the NOAA request is “unusual” for Vietnamese companies because they usually only care about anti‑biotic residual, sizes, types, etc. and do not ask growers for farming permits.
- However, after communicating with MPC, we think that their exports to the US will not be affected. MPC’s subsidiary, Mseafood in the US, will help with the paper work with the NOAA.
Vietnam Joint Stock Commercial Bank for Industry and Trade (HoSE:CTG): High Provision Charges Likely to Undermine Earnings
- CTG’s 1H18 PBT and NPAT were VND5.3tn (+9.4% YoY) and VND4.2tn (+8.5% YoY) respectively.
- Fast growth of retail loan but NIM slightly contracted.
- Contribution from service income keeps increasing.
- Process to clear on-balance sheet bad debt still ahead but making asset quality to be healthier.
- New hope for capital is raising
- Following the phase of reorganizing its operating model as well as launching new modern core-banking, CTG’s services income is starting to show positive results.
- At the trading multiple of 1.7x 2018f BV, our unchanged target price of VND31,900, plus VND 700 per share in cash dividend offers an ETR of 20%.
Dry Cell And Storage Battery JSC (HoSE: PAC) – Short Term Outlook Remains Stable
- Over the first eight months of 2018, revenue was up 15% YoY to VND2.324tn, but profits went down 30% YoY to VND85bn.
- Prices of input materials such as lead and zinc are expected to continue falling in 4Q 2018.
- PAC’s products are facing strong competition with those of FDI companies and imported products. GS, a Japanese company, is a direct competitor.
- Bien Hoa factory will be moved to the An Phuoc industrial park, Dong Nai before 2022 due to environmental requirements. Even if it was on schedule, total capacity could temporarily down.
- No agreement has yet been reached with Furukawa Battery (FB)
- We forecast that the 2018 performance will improve slightly despite the challenges that we mentioned above. However, in the long term, we have yet to see any clear signs of a significant improvement in the outlook for PAC.
PetroViet Nam Coating JSC (HNX: PVB) – Remove the Obstacles
Rely on other income
- The main business mainly relies on the oil & gas projects, leading to a negative impact if most of these projects are delayed.
Positive profit for core business from 2018
- From 2018, PVB began to record revenue from the Ca Tam project after two difficult years.
- Moreover, PVB has also delivered pipeline coating services for underground gas piping O2/N2/H2 – a project of Viet Nhat Gas as well as anti corrosion coating service for Nippon Steel.
Remove the obstacle
- It can be said that 2018 is a turning point in PVB’s activities in the context of restarting the main oil & gas projects while oil prices are reaching a high level.
- However, there are still some “bottlenecks”, making the potential of PVB unclear.
- With the approval from the government, PVB ‘s “problems” have been removed.
Positive information for downstream ports in Hai Phong
- The Ministry of Transport (MoT) is drafting a circular regulating prices for a range of services at seaports in Vietnam to replace old decisions, expected to come into effect in January 2019.
- The notable changes are the price of container handling services at seaports in Zone I, including Quang Ninh, Haiphong, Thai Binh and Nam Dinh, as follow:
o Changing the price range for domestic container handling services: The ceiling and floor price for popular container size, 20ft and 40ft will fall sharply.
o The service charges for loading and unloading international containers will be adjusted in two options:
– Option 1: service prices increase 10% for seaports not located in Lach Huyen. For ones in Lach Huyen, the charges remain the same.
– Option 2: service prices are adjusted gradually every year, up to 2021.
- In addition, the tariff for container handling services at Cai Mep – Thi Vai area’s seaports will also be increased by 10%.
Analyst’s opinion
- The adjustment will raise the price of container handling services in Vietnam, gradually approaching the common price in the region and the world.
- In the short term, ports in Dinh Vu, with listed companies such as DVP, PHP, VSC, GMD will benefit. However, if we look more closely, in the long term, the circular will help to improve Lach Huyen’s competitive position by narrowing the handling charges gap between Lach Huyen and other ports in Dinh Vu area.