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Date: 13.02.2015 Institutional Research & Investment Advisory

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Table of Contents

MACRO ...................................................................................................................................................... 3

2014 IN REVIEW: A RECOVERY IN DOUBT ............................................................................................................... 4

2015 OUTLOOK: REACHING NEW HEIGHTS ........................................................................................................... 10

Foreseeable factors in 2015 ................................................................................................................................................................ 10

1. We believe domestic consumption (65% of total GDP) will recapture its past glory while constituting as the fuel that will

ignite growth. ...............................................................................................................................................................................10

2. Irrelevant inflation ...............................................................................................................................................................11

3. We believe that with a healthy current account surplus, prudent capital control, and rising foreign currency reserve, the

VND could well weather the impact of the USD rally, and a 2% depreciation target is achievable. .............................................12

4. 2015 is the deadline for IPOs and divestment by the SOEs ...............................................................................................13

5. 2015 is also the deadline for the 1st phase of banking restructuring ...................................................................................15

Variable factors in 2015 ........................................................................................................................................................................ 19

1. Oil and gas price will remain volatile despite a sharp decline in 4Q2014. ...........................................................................19

2. Vietnam will see its fair share of free trade agreements (FTA) this year, specifically ASEAN FTAs from 2015-2018) .......19

3. Fiscal discipline is the risk to our forecast ...........................................................................................................................20

2015 MARKET OUTLOOK ...................................................................................................................... 22

SECTOR IN FOCUS ................................................................................................................................ 27

CONSUMER DISCRETIONARY .......................................................................................................................................................... 28

TIRE: OVERWEIGHT ..................................................................................................................................................................28

JEWELRIES: OVERWEIGHT ......................................................................................................................................................32

TEXTILE & GARMENT: OVERWEIGHT .....................................................................................................................................36

ICT RETAIL: NEUTRAL ..............................................................................................................................................................40

CONSUMER STAPLES ............................................................................................................................................................................. 42

SUGAR: NEUTRAL .....................................................................................................................................................................42

ANIMAL FEED: OVERWEIGHT ..................................................................................................................................................47

FISHERY: NEUTRAL ..................................................................................................................................................................51

DAIRY: OVERWEIGHT ...............................................................................................................................................................57

CONFECTIONARY: NEUTRAL ...................................................................................................................................................62

OTHER F&B: OVERWEIGHT......................................................................................................................................................66

ENERGY.................................................................................................................................................................................................... 69

OIL & GAS: UNDERWEIGHT ......................................................................................................................................................69

FINANCIALS ............................................................................................................................................................................................. 74

PROPERTY (COMMERCIAL DEVELOPERS): OVERWEIGHT .................................................................................................74



PROPERTY (INDUSTRIAL PARK DEVELOPERS): OVERWEIGHT ..........................................................................................81

BANKING: UNDERWEIGHT .......................................................................................................................................................86

INSURANCE: UNDERWEIGHT ..................................................................................................................................................93

HEALTHCARE .......................................................................................................................................................................................... 99

PHAMARCEUTICALS: OVERWEIGHT .......................................................................................................................................99

INDUSTRIALS ......................................................................................................................................................................................... 103

PORTS: NEUTRAL ...................................................................................................................................................................103

SHIPPING: OVERWEIGHT .......................................................................................................................................................107

PLASTICS PIPE: OVERWEIGHT..............................................................................................................................................112

CONSTRUCTION: OVERWEIGHT ...........................................................................................................................................114

INFORMATION TECHNOLOGY .............................................................................................................................................................. 116

IT: OVERWEIGHT .....................................................................................................................................................................116

MATERIALS ............................................................................................................................................................................................ 119

STEEL AND CEMENT: OVERWEIGHT ....................................................................................................................................119

FERTILIZER: NEUTRAL ..........................................................................................................................................................128

NATURAL RUBBER: UNDERWEIGHT .....................................................................................................................................132

UTILITIES ................................................................................................................................................................................................ 135

ELECTRICITY: OVERWEIGHT .................................................................................................................................................135

RATING ................................................................................................................................................................................................... 138

DISCLAIMER ........................................................................................................................................................................................... 138

CONTACT ............................................................................................................................................................................................... 139



MACRO



2014 in review: A recovery in doubt

The macroeconomic climate in 2014 can be characterized in two words, ‘stability strengthening’. Macro stability was

exhibited by prolonged low interest rate and a stable currency which perpetuated the deleveraging process with less

pain. Deleveraging ushered in a period where banks sat on ample liquidity, however, banks failed to lend brazenly in

fear of risk. While macro stability was apparent and consistent, the same cannot be said for macro recovery which

was in doubt, and therefore restricted corporations and individuals from spending.

Growth was not exceptional in 2014 although Vietnam GDP growth did exceed the government’s target (5.98% vs

5.6%, YoY). Main growth stimulants remained the familiar factors, namely export and investment. Although

consumption (roughly 65% of GDP) was unquestionably the key stimulant behind growth, however, because

individuals remained restricted in spending, private consumption was reticent, as observed by FMCG sales and sales

of large listed consumer companies such as VNM and MSN.

Private consumption in GDP

Source: GSO, SSI Research

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

62.50%

63.00%

63.50%

64.00%

64.50%

65.00%

65.50%

66.00%

66.50%

67.00%

67.50%

68.00%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Weight

Growth



Vietnam FMCG Sales

Source: Kantar Worldpanel

Export (82% of GDP) and net export (2% of GDP): Net export reversed from negative to positive since 2012.

However, the weight of net export in total GDP remains insignificant. Net export improvement has a strong

correlation with rising FDI in Vietnam in recent time, as exhibited by key export drivers (handphone: USD 23.6

bn, 11.1% YoY growth, garment and textiles – USD 20.95 bn,16.8% YoY growth, footwear USD 10.34 bn,

23.1% YoY growth)



Net export in GDP


Investment (30-31% of GDP) and FDI: Apart from the gap in salary between the Vietnamese and Chinese

workers, Vietnam continued to be a relatively attractive destination for foreign investors given the country’s

strategic geographic position, political stability and labor supply. Total investment growth was unprecedented in

2014 (represented by gross fixed asset formation) with 8.9% YoY (vs 5.45% in 2013) and this was attributed to

foreign direct investment, which resulted in expedited growth for manufacturing and export. Most prominent

being Samsung which has been a bedrock for Vietnam, with total investment at USD 11.2 bn (and expected to

rise in 2015) and accounted for roughly 20% of Vietnam’s total export (approx. USD 30 bn). New significant

FDI projects in 2014 include the 3 biggest projects, all from Samsung, USD 3 bn for the expansion in SEVT –

Thai Nguyen, USD 1.4 bn for Samsung Consumer Electronics Complex in Ho Chi Minh City and USD 1 bn for

Samsung Display in Bac Ninh)

Most notably, in 2014, the private sector’s investment witnessed 13.6% YoY growth, which doubled 2013

growth of 6.6%. The rise in private investment is suggestive of a healthy economic recovery.

-12.00%

-10.00%

-8.00%

-6.00%

-4.00%

-2.00%

0.00%

2.00%

4.00%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Weight



Gross fixed asset formation in GDP


When looking at the supply side, industrial and construction spearheaded 2014 GDP growth, overtaking the

service sector (industrial and construction contributed 2.75% to total GDP growth vs 2.62% of the service sector

while 2013 data were 2.09% vs 2.85%). Within the industrial and construction sector, the manufacturing segment

(with 8.45% YoY growth) spearheaded growth. Additionally, construction posted a 7.07% annual growth (much

higher than 2003 of 5.87% YoY). All this corroborate our outlook in our 2014 Strategy Note when we anticipated

increase activities of infrastructure-related industries. Banks’ lending to the SOEs sector increased in 2014 in

order to finance infrastructure-related projects. Furthermore, increased liquidity in the property sector also helped

ignite construction activities. By end of November 2014, there were 9,950 successful transactions in Hanoi

(+100% YoY) and 8,850 in Ho Chi Minh City (+35%YoY) with a high focus on mid and low-end segments.

-10.00%

-5.00%

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

35.00%

40.00%

2006 2007 2008 2009 2010 2011 2012 2013 2014

Weight

Growth



Registered FDI to manufacturing sector (mil USD)

Source: GSO

All other macroeconomic indicators in 2014 acutely corresponded with our expectations, including: tamed CPI

(year-end at 1.84% YoY and 4.09% YoY on average), lower interest rate – about 150-200 bps lower from 2013

year-end (the State Bank of Vietnam curtailed policy rates twice, in March and October 2014), 1% depreciation of

the VND against the USD, and in fact the VND was one of the best performers amongst Asian currencies in 2014.

Notably, given the low deposit rate (5% for the less than 6-month terms) and a stable currency, property rent yield

increased to a reasonable level (6-7% at some favorable locations) which attracted more home buyers.

Economic restructuring which was inaugurated in late 2011 flaunted signs of growth and fortitude after coming out

of the corners stumbling. In the past, the government was fixated on equitizing only small and medium state owned

5,979

7,789

11,702

17,141

14,490

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

2010 2011 2012 2013 2014

4.00%

4.50%

5.00%

5.50%

6.00%

6.50%

7.00%

7.50%

1M Deposit rate (%)



enterprises (SOEs), and although the number of SOEs reduced from 1,406 by the end of 2009 to 857 in Sep,

2014, their contribution to GDP was inconsequential (from 34.7% in 2009 to 32.2% in 2013). Starting from 2014,

we saw sizeable SOEs’ IPO, namely Viglacera, Vinatex or Vietnam Airlines. Together with the request for non-core

divestment, and permitting the sales of state-assets under book value - under the newly issued 51/2014

government decree, we believe SOEs reform will continue to flourish in 2015 – the deadline for IPOs and non-core

divestment (with about 200 SOEs in the pipeline in 2015).

With an improved macroeconomic climate, Moody’s and Fitch upgraded Vietnam sovereign credit rating, which

was well deserved, coupled with the astounding success of the US dollar bond issuance by the government

(outstanding issuance of USD 1 bn of 10Y bond at par on a semi-annual coupon of 4.8%, bid to cover ratio at

10.8x, Nov 2014). All the evidences have solidified Vietnam economic dexterity.



2015 outlook: Reaching new heights

In 2014, although private consumption was sluggish, the macro indicators pointed to encouraging private

investment which is a good start for 2015. In 2015, the government targets higher GDP growth (at 6.2% YoY),

stable CPI (lower than 5% YoY) and a stable VND (VND depreciation within 2%, which has been partly achieved

as the State Bank of Vietnam officially adjusted VND 1% lower in Jan 2015). From our assumptions, we believe

the targets are quite conservative, whereas we estimate that GPD growth will deliver 6.5% and CPI at 2.28%

YoY. Our key assumptions for 2015 are summarized into 2 groups: Foreseeable factors and the Variables in 2015

Foreseeable factors in 2015

1. We believe domestic consumption (65% of total GDP) will recapture its past glory while constituting as

the fuel that will ignite growth.

Lower oil and gas prices will be strong supportive factor for growth, serving as an unofficial tax cut for both

consumers and enterprises. A simple calculation reveals that if petroleum product retail price drops 20% from

2014’s average, consumers and enterprises would save around USD 4 bn, and this will unquestionably trickle

down to consumption. 2013 and 2014 average gasoline prices were almost identical, and by the beginning of

February 2015, average gasoline price was 30% lower than 2014, implying that the significance of low oil and gas

prices will radiate its true colors in 2015 in terms of YoY comparison. Consumption will revitalize with

strengthened consumer confidence, which needs time to recover after a prolonged depression period. We would

like to note that in a low interest rate environment, banks and individuals are sitting on abundant cash, which was

partially disbursed to the property sector as mentioned above. However, room for further investment and spending

by the private sector remains ample in 2015.



Gap between Total deposit and Total credit (VND Billion)


Private consumption and GDP growth 2006-2015

Oil price and retail sale growth

Source: GSO, SSI Research Source: Bloomberg, GSO

2. Irrelevant inflation:

We expect that average CPI, the key indicator for the government, will continue to drift lower in 2015, thanks to the

built-in momentum from 2014 and could only rebound from 4Q2015. Our call on low inflation already take into

account the scenario where the government might consider slashing its subsidies on a number of utilities, including

raising the electricity price, possibly by 10% in 1Q2015. In essence, room for both fiscal and monetary policies is

(500,000)

(400,000)

(300,000)

(200,000)

(100,000)

-

100,000

200,000

300,000

400,000

500,000

Jan

-09

Ma

r-09

Ma

y-0

9

Jul-0

9

Se

p-0

9

Nov-0

9

Jan

-10

Ma

r-10

Ma

y-1

0

Jul-1

0

Se

p-1

0

Nov-1

0

Jan

-11

Ma

r-11

Ma

y-1

1

Jul-1

1

Se

p-1

1

Nov-1

1

Jan

-12

Ma

r-12

Ma

y-1

2

Jul-1

2

Se

p-1

2

Nov-1

2

Jan

-13

Ma

r-13

Ma

y-1

3

Jul-1

3

Se

p-1

3

Nov-1

3

Jan

-14

Ma

r-14

Ma

y-1

4

Jul-1

4

Se

p-1

4

Nov-1

40.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

Private consumptiongrowth

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

-

20

40

60

80

100

120

140

160

180

200

2005200620072008200920102011201220132014

Average Oil Price (LHS)

Real Growth in Retail Sales (RHS)



ample in 2015. The SBV might lower its policy rate at the start of 2015, and later remove the cap on short term

deposit rate (less than 6-month tenure) to reign in a market-based mechanism to nurture competition among banks.

Interest rate would bottom out in 1H2015 and is likely to stabilize afterwards, as room for further adjustments is

narrow, given that it’s in the SBV’s interest to protect the VND against the global USD rally. In short, we don’t view

inflation as a threat of any kind in 2015.

Consumer Price Index 2009-2015 (monthly)

RON 92 gasoline retail price 2013-2015

Source: GSO, SSI Research Source: Petrolimex

3. We believe that with a healthy current account surplus, prudent capital control, and rising foreign

currency reserve, the VND could well weather the impact of the USD rally, and a 2% depreciation target

is achievable.

For the current account surplus, we anticipate that the trade balance would slightly improve to USD 4.8 bn in 2015

vs. USD 2 bn of surplus in 2014, as Vietnam would pay a smaller bill for its oil-related imports (Vietnam recorded a

trade deficit of USD 14 bn for oil-related products in 2014). Couple with the increase of Samsung exports and the

expansion in supporting industries, all of these factors can more than compensate for the higher growth in

machinery and other imports as a result of stronger consumption and production. 2014 growth in FDI disbursement

and overseas remittances will be repeated in 2015.

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

Jan

-09

Jun

-09

Nov-0

9

Ap

r-10

Se

p-1

0

Fe

b-1

1

Jul-1

1

Dec-1

1

Ma

y-1

2

Oct-

12

Ma

r-13

Au

g-1

3

Jan

-14

Jun

-14

Nov-1

4

Ap

r-15

Se

p-1

5

CPI(average)

10000

12000

14000

16000

18000

20000

22000

24000

26000

28000

2015

2014

2013



Foreign Direct Investment

Foreign reserve

Source: CEIC Source: MOF

4. 2015 is the deadline for IPOs and divestment by the SOEs:

We believe SOEs restructuring will be in full throttle in 2015 and preference will go towards bigger-size SOEs. The

new Circular 01/2015 (effective from March 1, 2015) requiring SOEs, after IPO, to list on UpCom within 90 days

once they receive their registration certificates, and for those that IPO before Nov 1st, 2014, to list before Nov 1

st,

2015,will serve as an important catalyst for attracting investors. It is believed to be more direct impact on

administering SOEs to become listed, than what was stipulated in the government’s Decree 108/2013, which

simply levied small fines on SOEs that failed to list. Please find below a number of expected IPO in 2015, and

possible listings in 2015 for those that IPO-ed in the past.

Expected listing in 2015 (those with chartered capital higher than USD 50 mil)

IPO Date Company name (English) Chartered

capital (USD mil)

Average IPO price

(VND/share)

Market cap (USD mil)

27/03/2008 Hanoi Beer Alcohol And Beverage JSC (HABECO) 108.4 50,017 542.4

28/01/2008 Saigon Beer-Alcohol-Beverage JSC (SABECO) 300.0 70,003 2100.3

15/05/2009 Thai Nguyen Iron and Steel JSC 86.1 10,113 87.1

27/09/2010 Vietnam Electrical Equipment Corporation 65.5 10,502 68.8

29/12/2010 PETEC Trading & Investment Corporation 121.6 21,010 255.6

10/06/2011 Vietnam Steel Corporation 318.1 10101 321.3

28/07/2011 Vietnam National Petroleum Group 500.6 15032 752.5

20/07/2011 Mekong Housing Bank* 211.2 11,025 232.9

28/11/2013 Ha Tinh Minerals and Trading Joint Stock Corporation 61.8 10,000 61.8

0.000

200.000

400.000

600.000

800.000

1,000.000

1,200.000

1,400.000

1,600.000

1,800.000

0.000

10,000.000

20,000.000

30,000.000

40,000.000

50,000.000

60,000.000

70,000.000

80,000.000

FDI: Registered

FDI: Disbursed

FDI: No of Project Licensed

3 4 4 6 7

9

13

23 24

16

12 14

26 26

36

-

5

10

15

20

25

30

35

40

Billion USD



IPO Date Company name (English) Chartered

capital (USD mil)

Average IPO price

(VND/share)

Market cap (USD mil)

03/10/2014 Hanoi Construction Corporation 88.9 10,201 90.7

20/02/2014 Viglacera Corporation 143.6 10,301 147.9

05/08/2014 Hai Phong Port JSC 153.0 13,507 206.6

31/10/2014 DAP - VINACHEM JSC 68.4 10,034 68.6

27/07/2014 Vietnam Vegetable Oils Industry Corporation 57.0 13,428 76.5

18/09/2014 Southern Airport Services JSC 61.5 19,330 118.9

22/09/2014 Vietnam National Textile and Garment Group (VINATEX) 233.9 11,000 257.3

14/11/2014 Vietnam Airlines 659.7 22,307 1471.7

11/12/2014 PetroVietnam Camau Fertilizer JSC 247.7 12,251 303.4

12/12/2014 Seaprodex 58.5 10,100 59.1

*: Possible be acquired by BIDV (BID: HOSE)

Source: HNX, HOSE

Expected IPOs in 2015:

Ministry of Transportation: Airport Corporation of Vietnam (who owns all the key airports in Vietnam), Vinalines

(the troubled shipping giants), Saigon Port

Ministry of Construction: FICO (construction material), VICEM (cement), HUD, CC1, LILAMA, Song Da, IDICO,

COMA (all construction and real-estate related)

Ministry of Health: Vinapharm, some vaccine producers

Ministry of Industry and Trade: Vimico (Vinacomin mining), Vinacomin Power, VVMI (Viet Bac Mining

Industrial), Vinapaco (Vietnam paper corp), MIE, VEAM (equipment)

Ministry of Agriculture and Rural Development: Vigecam, Vinafor (forestry), VRG (Vietnam Rubber Group, but

only its subsidiaries in Phu Rieng, Binh Long, Loc Ninh), …

In order to facilitate faster SOEs restructuring and infrastructure development, the Ministry of

Transportation announced that it will scale back public investment, while adopting measures to induce

private investment. The Minister of Transportation announced that more priority should be given to the private

sector participation in infrastructure projects. Therefore, the mega Lach Huyen deep-water port should be the final

project funded by the government, and the government’s focus will be shifted to unappealing or national security –

related projects.

In Jan 2015, the list of marine infrastructure projects for private investors was announced (41 projects, with a price

tag of approximately USD 2 bn, in 2015-2020, with 19 seaport projects). 3 projects will be implemented for 2015-



2016 and several listed companies will participate, for example, MPC for the port in Hau Giang, and VIC for the

luxury cruise ship terminal in Duong Dong, Phu Quoc. Similarly, Vinalines will also sell a number of its ports to

private and foreign investors, and it has sought for the government’s approval to fully divest from Quang Ninh Port

(possibly to T&T group, which owns SHB: HNX). Recently, the government announced plans to sell expressway

toll fee collection rights to the private sector. Vietnam Expressway Corporation (VEC) is proposing to sell a portion

of its portfolios, including 5 expressways (Cau Gie – Ninh Binh, Noi Bai – Lao Cai, TPHCM – Long Thanh – Dau

Giay, Da Nang – Quang Ngai and Ben Luc – Long Thanh – total 570 km), with total investment of nearly USD 6 bn

(57% from the state budget). Back in October 2014, and the government sold 49% stake of Ha Noi – Hai Phong

expressway to IL & FS (India, with quite favorable conditions, i.e the 49% profit from toll fee collection in the next

31 years must be paid by 2018, or 29 years in advance). Judging by recent announcements, it’s safe to assume

that SOEs restructuring has caught a new wind, and the same can be said for public investment restructuring,

which indicates that the government has adopted a market mechanism and increase privatization will come to

fruition in 2015.

5. 2015 is also the deadline for the 1st

phase of banking restructuring:

With the assumption that 2015 will be the deadline for the 1st phase of banking restructuring, specifically cleaning

up bad debts, we believe that Vietnam banking sector will likely to bottom out in 2015.

Upside: Credit growth might be higher provided that consumer demand increases thanks to lower oil price

and interest rate remains low. Consumer lending is now the focal point of many banks and its growth rate

has been remarkable (banks such as VCB, BID, ACB, STB and MBB all enjoyed high retail loan growth in

2014, i.e. VCB’s retail loan growth was 38%, higher than the average loan growth of 17.8%; BID’s retail

growth was 36% compared with its average loan growth of 13.4% in 2014). Service fee will continue to

enjoy robust growth thanks to strong import and export activities. Other income from collecting bad debts

which were written off may contribute more to banks’ earnings when banks accelerate bad debt collection

and the property market gradually improves.

Downside: On the other hand, we are more convinced that banks’ NIM may continue to slightly decline in

2015 (banks’ NIM have continuously declined since its peak in 2011) in the context of low interest rate,

fiercer competition among banks to attract good customers and the SBV’s direction of lowering medium

and long-term loans’ lending interest rates. Deleverage might continue in 2015 but will dissipate as

interest rate remains shallow. In 2014, banks earned significant gains from bond trading which we think will

be hard to repeat in 2015.



Loan to Deposit ratio of Vietnam banking system

Source: SSI Research

Listed banks’ NIM and Fee growth, 9M2014

Source: Banks’ FS

However, the largest downside factor for the banking sector in 2015 remains the system’s NPLs and we

expect banks still need to book substantial provisions in 2015. Technically, the deadline for the 1st phase of

banking restructuring implies that the reported NPLs of the banking sector have to be lowered to less than 3%

which suggests higher provision and M&A among banks will accelerate, especially in 1H2015. As of 30 Sep 2014,

banks reported NPL ratio of 3.88%, however, it could be 5.43% as estimated by the SBV (the SBV added portion

of the restructured loans and re-classified loans with the information from the Credit Information Centre – an

agency of the SBV). In the first 3 quarters of 2014, listed banks on average wrote off only around 0.2% of total

80%

85%

90%

95%

100%

105%

110%

115%

120%



outstanding loans (except for MBB 1.25% and BID 0.82%) and the average provision coverage ratio as of 30 Sep

2014 was 78%. Circular 09 (originally Circular 02) taking effect in February 2015 is positive for the sector as it

demands that all banks report a more accurate picture of NPLs with the information from CIC. Therefore, apart

from selling bad debts to VAMC, in order to reduce reported NPL ratio to 3% by 2015 year-end, we believe that

banks still have to use a significant amount of their PPoP to book provision expense and write off bad debts in

2015.

Vietnam banks’ NPL

Source: SBV, SSI Research

The role of VAMC is more significant than ever: The Vietnam Asset Management Company (VAMC)

purchased bad debts worth ~ VND 96 trillion in 2014 (2013: VND 39,337 bn; 1H14: VND 11,414 billion), increasing

total bad debts purchased to VND 135 trillion from 38/38 credit institutions. This amount accounted for around

3.4% of total outstanding loans. It also plans to purchase an additional VND 100 trillion worth of bad debts in 2015

which represents around 2.5% of total outstanding loans. With the strong participation of VAMC, we believe that

reported NPLs of the banking system can decrease to 3% by 2015 year-end. However, banks still need to book

provision expense for bad debts that they sell to VAMC. Under existing regulations, the banking system will have

to book around VND 37.6 trillion worth of provision expense a year which accounts for nearly half of the banking

system’s PPoP in our estimate.

The sales of bad debt by VAMC will be the focus of the 2nd

phase of banking restructuring after 2015. One of the

deadlocks for resolving bad debt through the Vietnam Asset Management Company (VAMC) is the lack of

regulation framework, not only for foreign ownership, but also how to protect participants from being violated by the

existing laws. The National Assembly has raised a number of laws and ordinances on resolving bad debt, as the



current regulation, is unsatisfactory. We believe a secondary debt market needs to be created, with market

makers, allowing investment funds to purchase and sell bad debts (which is not available at the moment). It is

believed that the most important feature for such a regulation to be passed, is to refrain from tapping into the state

budget. In essence, the funding needs to come from government borrowings (i.e the government to buy the VAMC

bond), or in a more effective way, VAMC bond is guaranteed by the government, therefore instilling private

investors with more confidence in the bad debt resolution process. We’re still a long shot away from completing all

the regulations needed, as expectation is that 2016 might be the year that the VAMC divests its debt portfolio.

Listed banks’ NPL before and after VAMC

Source: Banks’ FS, SSI Research estimate

In short, we believe that banks’ earnings will not witness significant upside in 2015. However, if banks aggressively

resolve bad debts in 2015 as required under existing regulations, their earnings in 2016 will improve on a low base.

Apart from earnings, we are likely to see increase M&A activities in the banking sector, especially the marriage

between the strong and weak banks. Although M&A activities will benefit the overall banking sector in the long

term, the immediate effect could be detrimental to stronger banks that will acquire weaker banks as acquisitions

could result in additional expenses for the strong banks, couple with additional bad debts to resolve and dilution

risk when banks have to increase their charter capital to comply with international standards (i.e. Basel II). Most

of the transactions are expected to be non-cash (i.e. new shares issuances to swap with the weak banks’ shares)

which will increase the dilution risk for existing shareholders of strong banks.

However, the conventional idiom on the stock market advises that we can buy when a stock is bottoming out. The

full effectiveness of both Circular 09 on NPLs calculation and Circular 36 on cross-ownership in February 2015 will

be the most critical stress test for all the banks and require them to strictly conform to risk management practice

and enhance corporate governance. Fundamentally, we do believe the sector is bottoming out. Additionally, there

are technical factors that we need to monitor with banking stocks. In line with tumbling oil price, oil & gas stocks

have declined significantly and their weight in the VN Index has decreased. In contrast, the weight of banking

stocks has increased considerably as CTG lists its State’s shares (which will raise the weight of CTG in the VN

Index from 2% to 5.5%) and several large listed banks will increase their charter capital in order to acquire other



banks in 1H15. Rumors that certain banks may be acquired or sell their stake to their strategic investors at a price

higher than market price, have altogether boosted both institutional and retail investors’ sentiment on banking

stocks. Given the evidences, we are watching for the right timing to Upgrade our view to Neutral on the banking

sector in 2015.

Vietnam banks’ ROE & ROA

Variable factors in 2015

1. Oil and gas price will remain volatile despite a sharp decline in 4Q2014.

Contrary to popular belief, Vietnam could in fact be a beneficiary of weak oil and gas prices, because of weak

refinery capacity and reliance on oil-related inputs for production. However, the biggest concern is on the state

budget balance. From the government’s perspective, in a meeting on 22nd

of January, they expressed

determination at 2015 plan for both GDP growth and the state budget collection, with no target revision needed

(although in details, there should be revisions, i.e lower contribution from the oil and gas sector, higher collection

from domestic and foreign trade collections, rigid surveillance on price transfer, tax avoidance and overdue tax

collection).

2. Vietnam will see its fair share of free trade agreements (FTA) this year, specifically ASEAN FTAs from

2015-2018)

(including ATIGA – ASEAN Trade In Goods Agreement and the ASEAN FTAs with its partners, i.e China, South

Korea, Australia and New Zealand, India), but also FTAs between Vietnam and EU, Custom Union (Russia,

Belarus and Kazakhstan), South Korea in the begin of 2015, plus the highly-anticipated Trans Pacific Partnership



agreement. Consumers will become first hand beneficiaries of these upcoming FTAs but enterprises will definitely

face more competition as a result of lower import tax. The impact will vary among different sectors.

3. Fiscal discipline is the risk to our forecast:

Fiscal discipline is imperative in a year like 2015 as the structure of the state budget has been unprecedentedly

altered due to declining oil price coupled with public debt standing on the brink of reaching the Laws of Public Debt

management threshold. In essence, without a low budget deficit, lowering public debt is impossible.

It’s important to shed light on Vietnam state budget deficit number. Previously, in the Ministry of Finance’s report on

the state budget, two numbers were issued, one in Vietnamese standard (2013: 5.45% GDP, 2014: 5.3% GDP) and

one conformed with GFSM (Government Finance Statistics Manual, by the IMF), and this is normally lower than

its Vietnamese counterpart (2013: 3.9% GDP, reported in the MoF website, but might be revised up to 4.25%

GDP, and 2014: 4.1% GDP). In fact, even the GFS data calculated by the MoF still failed to satisfy the IMF

standard, as an IMF staff noted that GFS 2001 presentation is different from the authorities’ presentation, mainly

reflecting the inclusion of off-budget capital expenditure and the exclusion of principal repayments above the line.

Therefore, IMF-standard budget deficit should be higher than the Vietnamese-standard one, contrary to common

belief. The IMF-recalculated deficit would be 5.5% of GDP in 2013, and 6.6% of GDP in 2014. We do not believe

that the current high budget deficit is healthy, and the government needs to take stern action to mitigate this issue in

2015. The good news is the MoF is determined to maintain the budget deficit at 4.5% of GDP – Vietnamese

standard, although the National Assembly’s target is 5% of GDP. The Prime Minister has identified all the

underlining factors behind weak state budget structure, and all that is needed now is actual implementation for fiscal

discipline in 2015.

Conclusion: We anticipate that 2015 might start out as an ordinary stone, but as time elapses, and with

precise polishing, it will transform into a distinctive gem. We believe 2015 will see healthier GDP growth,

incited by improve private consumption, stable interest rate, tamed inflation, manageable local currency,

and increase participation of the private sector in public investment. The government (pressed by the

election in 2016) will throw all the available kitchen tools at baking restructuring in order to achieve 2015

deadline (rather than introducing new measures or targets), and in doing so, a radiant economic climate

would secure another sovereign credit rating upgrade, possibly launching Vietnam a notch closer to

investment grade.



VIETNAM MACROECONOMIC DATA IN SUMMARY

2007 2008 2009 2010 2011 2012 2013 2014 2015F

GDP growth (%- 2010p) 7.13 5.66 5.4 6.42 6.24 5.25 5.42 5.98 6.2

Agriculture (%) 3.96 4.69 1.91 3.29 4.02 2.68 2.67 3.49 3.5

Industry & Construction (%) 7.36 4.13 5.98 7.17 6.68 5.75 5.43 7.14 7.2

Construction (%) n/a n/a n/a 10.06 -0.62 3.25 5.4 7.07 6.6

Manufacturing (%) n/a n/a n/a 8.38 11 5.8 7.44 8.45 9.1

Service (%) 8.54 7.55 6.55 7.19 6.83 5.9 6.56 5.96 6.3

Retail Sale (%) 22.9 30.9 18.5 24.96 22 16 12.6 13 14

Industrial Production Index (%) n/a 7.4 7.1 10.7 6.8 4.8 5.9 6.5 7

CPI (%) 12.6 19.9 4.35 11.09 18.13 6.81 6.03 1.86 4

PPI (Agriculture) (%) 17.46 0 -4.56 13.81 31.8 6.2 0.57 4.3 4.3

PPI (Industrial) (%) 7.44 25.79 2.38 13.44 18.3 10.1 5.25 7 7

Exports (USD bn) 43.69 58.01 51.33 72.20 96.90 114.60 132.20 150.00 177.50

Imports (USD bn) 54.53 74.82 62.28 84.80 106.70 113.80 131.30 148.00 172.60

Trade Balance (USD bn) -10.84 -16.81 -10.95 -12.60 -9.80 0.80 0.90 2.00 4.80

% of Export 24.82% 28.98% 21.32% -17.45% 10.11% 0.70% 0.68% 1.33% 2.70%

Exchange rate (USD/VND) 15950 17483 18479 18932 21250 20900 21250 21250 21500

Current Account Balance (USD bn) -6.9 -10.8 -6.6 -4.3 -0.6 7 8.8 8.1 9

Foreign reserve (USD bn) 23.74 24.17 14.1 12.4 13.5 25.4 32 36 40

Foreign reserve/imports (weeks) 22.64 16.80 11.77 7.60 6.58 11.61 12.67 12.65 12.05

Credit growth (%) 52.42 25.43 37.73 29.81 14.41 8.91 12.5 14.16 13

Deposit rate (VND %)

14.71 8.61 11.89 16.66 8 8 6 6




2015 Market Outlook



VN Index 2014

Vietnam stock market in 2014 was on a wild roller coaster ride as the foundation for a solid recovery

wasn’t cemented. The VN Index began the year riding the momentum in the first 2 months of 2014 (+20.3%),

driven by excitement over evidences of macro stability and the expectation of FOL extension until the East Sea

dispute abruptly sparked fear among retailed investors in May and contagion ensued (the VN Index forfeited

12.4% within May). 2014 can be defined by a chain of seismic events: it began when the East Sea dispute

discouraged investors for a solid month in May, and just when the market was beginning to heal its wound, the

collapse of oil and gas stocks in 3Q14, coupled with the introduction of Circular 36 which caps commercial

banks’ lending to the brokerage industry at 5% of their chartered capital, and the news of the arrest of a

prominent banker completely exhausted retailed investors. By end of 2014, the VN Index was up by only 8.15%.

Foreign investors’ were still in a net buy position of USD 135 mil during the year, with a clear pattern, net buying

in 1H and net selling in 2H, however, returned to net buy in December. In fact, foreign investors trading value

accounted for roughly 12.5% of total trading volume in the market.

Interestingly, the leading mover of the market was actually Joint Stock Commercial Bank for Foreign Trade of

Vietnam (VCB: HOSE), while the lagging mover was also another state owned bank, Bank for Investment and

Development of Vietnam (BID: HOSE). As discussed above, the banking sector was faced and had to overcome

many obstacles. However, when shopping for a prominent stock in the banking sector, VCB was the apparent

choice for many investors. This explains why VCB’s stock performance exceeded its fundamentals. In terms of

sector, consumer discretionary was the best performer in 2014 thanks to MWG and DRC. Many would consider

MWG as a growth stock and its plan to list at a relatively low price coupled with poor liquidity helped enhance the

stock performance significantly. On the other hand, DRC was the beneficiary of low oil price and the limit on

maximum weight in truck transportation. Despite the strong performance of VCB, the banking sector still



underperformed the VN Index with 5.8% upside, only higher than the worst performing sector being consumer staple

with 0.56% upside due to the weak performance of VNM.

We concur with the overall consensus that the market is moving towards the right direction and we

remain our bullish stance on the market given the recent macro development. We understand that

volatility is a prerequisite during a transformation period. Our positive stance is supported by earnings estimate

and market valuation. According to our estimates of 67 companies under coverage, sales and net profit are

projected to grow by 11.68% and 10.5% % respectively in 2015. Notably, median EPS growth in 2015 is

estimated at 8.55% as compared with -0.01% in 2014 and 4.66% in 2013, which legitimize the assumption that

turn-around stocks will be more conspicuous in 2015.

All stocks

Revenue Growth (%) Net Profit Growth (%) Median EPS Growth (%) Dividend Yield (%)

2013 2014 2015 2013 2014 2015 2013 2014 2015 2013 2014 2015

9.87% 12.60% 11.68% 19% -2.13% 10.49% 4.66% -0.01% 8.55% 4.86% 4.90% 5.01%

Exclude Oil & Gas

Revenue Growth (%) Net Profit Growth (%) Median EPS Growth (%) Dividend Yield (%)

2013 2014 2015 2013 2014 2015 2013 2014 2015 2013 2014 2015

13.44% 18.34% 14.66% 18% 0.00% 14.95% 2.59% -0.01% 9.80% 4.88% 4.96% 5.08%



Our bullish view on the stock market in 2015 is predicated on the bet that GDP growth in 2015 will

exceed expectation while macro stability remains unblemished. As discussed above, we believe that

consumption, the engine for growth, will have added horsepower in 2015 at least on the low base of 2014 couple

with the support of low commodity prices. We maintain our bullish view on the consumer and industrial sectors.

The consumer sector will benefit from macro improvement and margin expansion while the industrial sector will

continue to benefit from increase infrastructure investments.

Source: SSI Research, Bloomberg

The property sector will remain on its uphill climb, but with increasing liquidity and more turn around

companies, the property sector will attract well-deserved attention. It should be noted that within the sector,

VIC accounts for 58% of the sector’s weight while the remaining stocks are mid and small caps.

The banking sector will undergo critical transformations in 2015 and will most likely bottom out soon.

This could serve as an opportunity to consider investing in banking stocks. However, we believe that investors

should adopt a long-time approach when looking at banks. Otherwise, short-term speculation will only add

volatility to the bullish trend. Technically, as the weight of the banking sector increases, the sector will attract

more investors. The momentum for banking stocks will reach its peak in 1H15 as many catalysts such as banks’

M&A activities are expected to transpire during this stretch.

One of the biggest impediments for Vietnam stock market is its relatively low “investibility”

characteristic in terms of market cap, liquidity and foreign ownership limit. Foreign investors are limited in

choices when it comes to big caps and blue chips because of foreign ownership limit. However, the deadline for

IPO and divestment of SOEs and new listing requirements will flood the market with more supply in the next 2

years.



Our Top Picks for 2015 include VNM, NT2 and REE. Additionally, we also like VCB, FPT, MBB, ACB, DHG,

DRC, BMP, PNJ, HDG, DBC, VSC, BCC, KDH, PET, FCN, TDH, LCG, BCI. Mid and small caps with turn-

around stories will bring a distinct style back to the market in 2015.



SECTOR IN FOCUS



CONSUMER DISCRETIONARY

TIRE: OVERWEIGHT (Last year call: Neutral)

Key call: DRC

Kien Tran Nguyen, +84 4 3936 6321 ext. 679, [email protected]

Tires industry performance in 2014

Source: Bloomberg

Source: Bloomberg

What transpired in 2014?

Industry performance

Strongly outperformed the VN Index: The tire industry gained

44%, in comparison with 8.15% of the VN Index. Best-performing

stocks were SRC (+ 91%), DRC (+51%) and CSM (+23%).

Key highlight on sector/key companies

Average natural rubber price declined approx. 30% YoY in 2014

which was provoked by global oversupply.

Positive implication of load limit regulation for the tire industry:

Circular 6/2014 issued by the Ministry of Transportation regulates

load limit and other conditions of road transport vehicles took

effective in April 2014. A common fact is that road transport vehicles

are illegally 1.5 or 2 times overloaded compare with their official

limits in order to maximize profits. The Circular aims to eliminate

this pandemic issue, and its subsequent consequences on road

transportation companies. Concerned companies will require

additional transport vehicles to ensure sufficient volume of

transported goods and profits, and safety the requirements listed in

the Circular.

In 2014, DRC and CSM both benefited from significant declines in

natural rubber prices. However, the two companies incurred high

depreciation and uncapitalized interest expense from radial tire

plants while production and sales volume of radial tires were still

under their respective breakeven points.

DRC and CSM’s 2014 revenue are estimated at approx. VND

50%

70%

90%

110%

130%

150%

170%

190%

Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14

Vn Index

Consumer Discretionary

Tires

0

500

1,000

1,500

2,000

2,500

3,000

3,500

SVR10 SVR20

mailto:[email protected]



3,168bn (+13% YoY), and VND 3,352bn (+7% YoY). Pretax profits

are expected at VND 425bn (- 15% YoY), and VND 420bn (- 13%

YoY) respectively in 2014, translating to an EPS of VND 3,989 and

VND 4,874. in July 2014 which created an advantage for DRC as it

benefited from being the first mover.

2015 Expectation

Possible change in fundamentals

Natural rubber and crude oil prices are expected to remain

weak in 2015 given increasing supply and sluggish demand.

New planted area during 2005 – 2012 has gradually come into

tapping since 2012 and will increase supply of NR from 2013 to

2020. On the other hand, demand for natural rubber (NR) in tandem

with global economic growth (refer to figure 2). Slow global

economic growth was forecasted by the IMF in Oct 2014, especially

in China, and EU zone, which consume over 50% of world natural

rubber consumption. World economic growth was revised down

0.1% compared with the forecast in July 2014 by IMF, reaching

3.3% for 2014, and global economic growth was revised down 0.2%

compared with the forecast in July 2014 to 3.8% for 2015.

Aggressive actions from the government in terms of load limit

control will boost the demand for commercial vehicles – on Jan

1st 2015, the government raised financial penalty for transport

vehicles (loading capacity over 5 tons) which are illegally 2x

overloaded compared with official limit.

Increasing demand for radial tires – rapid replacement progress

of radial heavy truck tires to bias heavy truck tires – in regards

to the heavy truck tires segment, structure of radial and bias heavy

truck tires has changed rapidly in which proportion of radial tire in

the total number of heavy truck tires has increased significantly

during the last 5 years.

Currently, radial and bias heavy truck tires account for 65% and

35% of total heavy truck tires used in Vietnam

From 2009 – 2013: radial and bias heavy truck tires accounted

-1

0

1

2

3

4

5

6

8000

8500

9000

9500

10000

10500

11000

11500

NR Demand World economic growth



for 50% and 50% of total heavy truck tires

Before 2009: radial and bias heavy truck tires accounted for 30%

and 70% of total heavy truck tires

Issues and risks

Unfair competition field affecting pricing power of tires

producers. It is worth noting that trade fraud relating to imported

radial tires from China has recently adversely affected pricing power

and generated an unfair competition in the radial tire segment.

Prices used for custom procedures of imported tires from China are

typically recorded at 30% - 50% lower than actual prices, therefore,

traders can evade approx. 50% of import tax and VAT.

Nevertheless, the General Department of Custom has requested the

Custom Department in provinces and cities to inspect imported

automobile tires (code 4011) in order to prevent trade fraud relating

to those items. In addition, the General Department of Custom also

requested the Custom Department in provinces and cities to gather

information and analyze them to determine taxable value; and

establish reference prices for automobile tires.

Our Investment stance: Overweight

DRC and CSM are highly likely to benefit from (1) weak natural

rubber and crude oil prices, (2) increasing demand for radial tires,

and (3) load limit regulation. In addition, average selling prices are

expected to remain stable as the two companies had just reduced

prices by 2% on average in 2H14.

In 2015, DRC plans to produce approx. 220,000 radial tires (+43%

YoY) while sales volume is expected at approx. 240,000 units

(+105% YoY) which will reduce cost per unit produced in radial

segment, and will begin to generate profit starting in 2015 given that

average selling prices will remain stable. DRC’s 2015 revenue and

pretax profit are forecasted at approx. VND 3,543bn (+ 12% YoY),

and VND 506bn (+ 19% YoY) respectively, translating to an EPS of

VND 4,750.

In 2015, CSM’s radial sales volume is expected at 150,000 units

compared with roughly 30,000 units in 2014 which is still below



breakeven point. CSM’s 2015 revenue and pretax profit are

expected at VND 3,841 bn (+14% YoY), and VND 401 bn (-5%

YoY), translating to an EPS of VND 4,652. It should be noted that

CSM’s 2015 pretax profit includes approx. VND 60bn from property

divestment which was delayed from 2014. If subtracting earnings

from property, CSM’s PBT would decline by 19% YoY.

At the price of VND 56,000/share and VND 43,000/share for DRC

and CSM respectively, the stocks are being traded at 2015PE of

11.8x and 9.2x respectively. DRC and CSM’s 1-year target prices

are derived at VND 69,000/share, and VND 39,900/share, an upside

of + 23.6% and – 7% compared with the current prices.

DRC and CSM (31/12/2014)

Stock

Price (VND)

Market cap (mil USD)

PER PBR EV/EBITDA Dividend yield EPS (VND) EPS Growth Sales growth Net profit growth

2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E

DRC 56,000 219 14.04 11.79 2.98 2.65 709,470 806,811 3% 4% 3,989 4,750 -12% 19% 13% 12% -12% 19%

CSM 43,000 136 8.82 9.24 2.02 1.78 642,231 634,808 3% 3% 4,874 4,652 -9% -5% 7% 15% -9% -5%




JEWELRIES: OVERWEIGHT (Last year call: N/A)

Key call: PNJ

Thu Le, +84 838242897 ext. 2137, [email protected]

Jewelries industry performance in 2014

Source: Bloomberg



Outperformed the VN Index: The jewelries industry gained 45.04%

in 2014, compared with 8.15% of the VN Index. The best performing

and the only stock in the sector was PNJ which finished 2014 at

45.04% higher than 2013.


Circular 22 benefits large reputable jewelers: Circular 22 was

announced in September 2013 and came into effect in June 2014. It

requires gold jewelers to follow a set of strict rules regarding the

quality (gold content, purity, etc.) and the labeling of their gold

products. According to Vietnam Gold Business Association, 70% of

the 3,000 gold jewelry enterprises in Ho Chi Minh City have closed

in 2014. Circular 22 benefits both consumers (because most gold

jewelers previously misled consumers about the gold content of their

products to stay competitive in the market) and reputable companies

such as PNJ. Despite a 7% YoY decline in Vietnam gold jewelry

demand, the company posted a 20% YoY increase in gold jewelry

sales in 9M14. Retail sales increased 34% YoY while wholesales

increased 12% YoY thanks to growing selling volumes.

2014 witnessed PNJ’s aggressive expansion in the retail

segment which led to higher gross margin. Gold jewelry sales

reached VND 5,100 bn (22% YoY), in which retail sales increased

42% YoY. This figure is much higher than the growth of Vietnam’s

gold jewelry market, which according to the World Gold Council,

rose by only 4% YoY in 2014. According to PNJ, same store sales

grew 35% YoY. The remaining sales growth derived from new gold

stores. In 2014, PNJ opened 20 new gold stores and closed 2 old

ones, thereby the number of gold stores reached 81 as at 31

50%

70%

90%

110%

130%

150%

170%


Vn Index

Consumer Staples

Jelweries




December 2014. In addition to growing selling volume, the company

sold more high value products (e.g. products with both gold and

gemstones) which accelerated sales. According to PNJ, the average

price of a piece of gold jewelry sold in 2014 was 13-15% higher than

in 2013. This also explains for a healthier gross margin of gold

jewelry segment which reached 13.2% in 2014 compared to 11.7%

in 2013. Store expansion will continue in 2015 with a focus on

smaller cities and provinces. PNJ aims to double its retail space and

market share in 2017.

2015 Expectation


The introduction of Circular 22 not only eliminated mendacious

businesses but also raised consumer awareness. Its effects, in our

opinion, will be long lasting rather than temporary. We believe PNJ’s

retail expansion arrives at a ripe time when consumers are inclined

to purchase from trusted brands. As the company penetrates the

market further in both large and small cities, it will be able to seize

market share from smaller competitors. As retail sales and its share

in total sales increase, we expect sales and gross margin to

continue growing in 2015.

Issues and risks

Policy risk: The gold jewelry market is strictly regulated by the State

Bank of Vietnam hence any changes in policy can affect PNJ’s

business.


Given encouraging sales growth in 2014, we believe gold jewelry

sales will advance by 18.5% YoY in 2015, in which retail sales will

grow 30%, attributed by a 25% increase from same store sales and

5% from new openings. In 2016, we forecast gold jewelry sales will

increase 15% YoY. Gross margin of gold jewelry will likely to

improve compared to 2014 thanks to i) the rising proportion of retail

sales and ii) PNJ’s emphasis on selling high value products.

We expect the silver jewelry segment will continue to benefit from



brand innovation. Silver sales will grow 20% YoY in both 2015 and

2016 and gross margin will remain stable at around 62.5%.

In 2015, we forecast sales to reach VND 8,270 bn (15% YoY) and

sales exc. gold bar to reach VND 6,251 bn (18.5% YoY). Net income

is anticipated to reach VND 298 bn (16% YoY – ignoring the income

from the divestment of SFC and Que Huong Liberty Hotel, net

income will increase 33% YoY) translating into an EPS of VND

3,945.

In 2016, we forecast sales to reach VND 9,136 bn (10.5% YoY) and

sales exc. gold bar to reach VND 7,118 bn (14% YoY). Net income

is anticipated to reach VND 366 bn (23% YoY) translating into an

EPS of VND 4,841.

PNJ is trading at 2015 PER of 10.1x and 2016 PER of 8.2x. Our 1Y

target price for PNJ is VND 47,100/share, indicating a 26% upside

from the current market price. We recommend to BUY PNJ based

on the following reasons:

As a reputable brand, PNJ will continue to benefit from Circular

22.

PNJ has an extensive retail network: PNJ has 77 gold stores in

43 out of 54 cities and provinces in Vietnam. Its main

competitors Doji and SJC have 40 and 60 exclusive stores

respectively.

PNJ has the facilities, workforce and design expertise to expand

production. The Company has 800 goldsmiths and trains 150-

200 new goldsmiths each year.

Low valuation compared to region peers: Based on stock price

on 31 December 2014, 2015 PER is expected at 10.1 (vs. China

average of 40x, Indonesia average of 20x, Malaysia average of

14x and India average of 13x).

The stock, however, is very illiquid as foreign room is full at 49% and

management and staff hold 45%.



PNJ (31/12/2014)

Stock

Price (VND)



2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E

PNJ 39,900 143.6 11.9 10.1 2.4 2.2 9.6 6.0 5.8% 5.0% 3,349 3,945 39% 18% -5% 15% 41% 16%




TEXTILE & GARMENT: OVERWEIGHT (Last year call: Overweight)

Key call: TCM

Thu Le, +84 8 3824 2897 ext. 2137, [email protected]

Textile and garment industry performance in 2014

Source: Bloomberg

Source: Customs Statistics



Outperformed the VN Index: The textile & garment industry

gained 33.62% in 2014 in comparison to 8.15% of the VN Index.

Except for EVE (-6%), most major textile and garment stocks

outperformed the VN Index: TNG (178%), TCM (66%), GIL (43%),

GMC (42%) and KMR (12%).


Textile & garment export achieved better-than-expected result:

According to Customs Statistics, textile & garment export reached

USD 18.97 bn in 11M14 (+17% YoY). The Vietnam Textile &

Apparel Association (Vitas) forecasts that for FY 2014, Vietnam will

achieve USD 24.5 bn in textile & garment export, an increase of

16% YoY which is higher than the initial forecast of 12% YoY.

Exports to all major destinations increased: the United States

(12.6% YoY), the European Union (16.9% YoY), Japan (8.8% YoY)

and Korea (26.6% YoY). In the US, which represented 47% of

export value in 11M14, Vietnam has gained market share from

competitors who achieved lower growth such as China (<1%),

India (6%) and others (negative growth).

50%

70%

90%

110%

130%

150%

170%

190%


Vn Index

Consumer Discretionary

Texttile & garment

47%

16%

12%

10%

15%

Textile and garment export in 11M14

US EU Japan Korea Others




FDI capital flow: In 2014, there are approx. 20 new FDI projects in

textile & garment sector. These projects cover all stages in the

textile supply chain including spinning (e.g. Huafa Hong Kong in

Long An province, Bros Eastern in Tay Ninh province, etc.),

weaving and knitting (e.g. Thien Nam – Sunrise joint venture in

Nam Dinh province, Yulun Taiwan in Ha Nam province, etc.),

dyeing (e.g. Global Dyeing Korea in Tay Ninh province, etc.) and

sewing (e.g. Hannes-Brands in Hung Yen province, etc.).

The remarkable growth and upbeat FDI movement can be linked to:

i) The expectation that important Free Trade Agreements (FTAs),

including the Trans-Pacific Partnership Agreement (TPP) and the

Vietnam-EU FTA, will conclude soon and ii) A diversion of orders

from China, where labor cost is higher, and Bangladesh and

Cambodia, where worker safety and living conditions are subpar to

Vietnam.

Most textile & garment companies posted encouraging

financial results in 9M14 and are expected to either reach (e.g.

TCM) or exceed 2014 target (e.g. TNG and GMC)

9M14 GIL TNG TCM GMC KMR EVE

Sales growth 28% 9% 1% 24% 14% -3%

Net profit growth 143% 120% 37% 21% 18% -33%

Source: Company data

Vinatex posted VND 14,983 bn in consolidated sales (31% YoY)

and VND 432 bn in consolidated net profit (32% YoY). For 2015,

Vinatex targets VND 19,575 bn in consolidated sales (31% YoY)

and VND 572 bn in consolidated net profit (32% YoY).

TCM announced that the company achieves VND 2,543 bn in sales

(similar to 2013) and VND 164 bn in net profit (+33% YoY) in 2014.

Although the yarn segment underperformed TCM’s expectation in

terms of profit, the fabric and garment segment performed well

thanks to improved operational efficiency and additional

fashionable orders. For 2015, TCM targets VND 2,781 bn in sales

(9% YoY) and VND 170 bn in net profit (4% YoY).

TNG: 2014 was a good year for TNG when sales increased 48%

YoY and 17% YoY in 4Q14 and FY 2014 respectively thanks to



increasing orders. Coupled with a 16% decrease in interest

expense attributed to lower interest rate amid low demand for bank

lending, net income arrived at VND 53 in 2014 (279% YoY).

Accordingly, the company has surpassed its sales target by 10%

and its net income target by 6.5% in 2014.

2015 Expectation


Several FTAs are expected to finalize in 2015 including the

Vietnam-Korea FTA, Vietnam-EU FTA and TPP (the US, the EU,

Japan and Korea are Vietnam’s 4 largest export markets). The

textile & garment industry is expected to benefit from the

elimination of import duty to these markets. Vietnam aims to

achieve USD 28-28.5 bn in textile & garment export in 2015 (14%-

16% YoY), in which export to the US and the EU are forecasted at

USD 11 bn (12% YoY) and USD 4 bn (18% YoY) respectively.

Issues and risks

Vietnam imports raw materials from non-TPP countries:

According to the Ministry of Industry and Trade (MoIT), Vietnam

has to import 88% of textile & garment material. Import value of

cotton, yarn, fabric and textile component increased 28% YoY, 3%

YoY, 14% YoY and 25% YoY respectively in 2014. Vietnam’s

largest partner is China who accounted for 36% of Vietnam’s yarn

import, 49% of fabric import and 33% of textile component import in

11M14. Since China is not a participating TPP member, Vietnam’s

textile & garment companies will find it difficult to satisfy the ‘yarn

forward’ requirement.

Increasing competition from FDI companies: In 11M14, two

thirds of the textile & garment export value derived from FDI

enterprises. This proportion will likely to increase as more

international corporations invest in Vietnam to take advantage of

coming FTAs.




We are positive of the long-term outlook of Vietnam’s textile &

garment industry thanks to its competitiveness against rivals and

the assumption that the mentioned FTAs will soon be settled.

Among textile & garment stocks, we favor TCM because the

company has a vertically integrated supply chain which qualifies for

the ‘yarn forward’ requirement. Despite an unfavorable outlook on

its yarn business as a consequence of pessimistic cotton price, we

remain positive of TCM’s fabric and garment businesses which are

projected to expand by 20% and 17% respectively in terms of sales

in 2015. As sewing capacity increases, the percentage of yarn used

internally will increase and the percentage of yarn sold externally

will decrease. Consequently, the contribution of yarn in total sales

will decrease and overall GPM will likely to improve (yarn has the

lowest GPM out of the 3 business segments). For 2015, we expect

TCM to earn VND 190 bn (16% YoY) in net profit translating to an

EPS of VND 3,874 and a PER of 8.3x. We recommend to BUY

TCM at VND 38,700/share.

TCM (31/12/2014)

Stock

Price (VND)



2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E

TCM 32,000 74.8 9.6 8.3 1.96 1.77 7.3 6.2 4.7% 4.7% 3,332 3,874 32% 16% 0% 11% 32% 16%




ICT RETAIL: NEUTRAL (Last year call: Overweight)

Key call: PET, MWG

Kien Nguyen, +84 4 3936 6321 ext. 510, [email protected]

Industry performance in 2014

Source: Bloomberg


Industry performance: MWG as a new star

Strongly outperformed the VN Index: The sector increased

82.51%, strongly outperforming the VN Index. MWG, a new listed

stock, advanced 113% since its listing in July 2014. Low listing price

and high earnings growth are key stimulants behind the excellent

performance.

Mobile market boom: In 2014, according to GFK, value of the

mobile market advance by 35% to VND 45,000bn. Although the

volume increase only 1-2%, value increased significantly as users

switch from low price featured phones to high value smart ones.

Revenue of MWG increased by 62% YoY in 2014 thanks to market

growth and aggressive expansion. In 2014, MWG opened 120 news

shops increasing total number of shops to more than 330 shops by

the end of 2014, covering 27% of the mobile phone market in

Vietnam.

2015 Expectation

Unwavering high growth: As Vietnamese mobile phone users

continue to switch from featured phones to smart phones, the

market is expected to expand by more than 20% YoY in 2015.

Issues and risks

Increasing competition: FPT Retail and FTG are direct

competitors of MWG and PET in terms of retail and distribution of

mobile handsets and ICT products. As FRT expanded its chain to

150 shops in 2014 and targets to open new 50 shops in 2015, which

is a half of MWG’s number of shops, we expect that competition

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Vn Index




landscape will become fiercer. Both MWG and FRT are quite

aggressive in expanding their market shares while the growth of the

market is declining. The increasing coverage might help gain market

share and sales in short and mid-term but efficiency of each shop

will decline and in long term, when the market becomes saturated,

certain shops will fail to generate profit. In the distribution segment,

Digiworld, the third largest distributor, whose revenue is

approximately VND 5,000bn, will be listed in 1Q15.

Our Investment stance: Neutral

Except for PSD, and PET, which we anticipate slight increases in

sales and PBT in 2015 as their market share can no longer increase

due to a switch from distribution channel to retail chain by providers,

MWG is expected to experience high growth in 2015. Sales and net

profit of MWG are expected to grow by 47% and 29% YoY

respectively in 2015. MWG is trading at 2015 PER of 14.3x, which is

quite high. We recommend HOLD for MWG at 1Y target price of

VND 107,000/share and maintain a neutral view for the sector

mostly due to their fair value rather than their earnings outlook.

MWG, PET (31/12/2014)

Stock

Price

(VND)

Market cap

(mil USD)


2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E

MWG 107,000 529 17.36 14.15 7.85 5.28 6.81 5.25 0.0% 0.0% 6,164 7,563 154.8% 28.8% 62.8% 46.9% 154.8% 28.8%

PET 20,700 67 7.42 6.56 1.10 1.02 3.46 3.99 8.2% 8.2% 2,792 3,153 22.1% 13.0% 6.5% 11.4% 22.1% 13.0%




CONSUMER STAPLES

SUGAR: NEUTRAL (Last year call: Underweight)

Key call: None


Sugar industry performance in 2014

Source: Bloomberg



Underperformed the VN Index: The sugar industry gained 1.27%,

in comparison with 8.2% of the VN Index. Best-performing stocks

were SBT (+ 9%), BHS (- 1%), and LSS (- 6.3%)


Oversupply and smuggled sugar wreaked havoc on the

industry:

In 2013 – 2014 season, total domestic sales volume of the

industry reached approx. 1.45mn tons of sugar (+ 12% YoY)

while total supply during this period reached approx. 1.98mn

tons which included: (1) beginning stock of 315,000 tons, (2)

imported of 72,308 tons (WTO’s import quota), and (3)

production of 1.59mn tons. It is worth noting that the upstream

figure did not include smuggled sugar which is estimated at

approx. 0.4mn tons of sugar in 2014

Smuggled sugar which is mainly smuggled from Thailand

through Cambodia continues to be the biggest impediment

facing the Vietnamese sugar industry. In 2013 – 2014 season,

global sugar industry saw a surplus in sugar supply and

Thailand’s sugar production volume reached a record of approx.

11.6mn tons (+ 12.6% YoY) while domestic consumption is

forecasted at roughly 2.6mn tons per year. As a result, we saw

increases in smuggled sugar to Vietnam in 2014 given the

surplus in the global markets.

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Vn Index Consumer Staples Sugar




Average selling prices of RE and RS sugar declined approx.

10% YoY and 15% YoY respectively by the end of 2014 -

Although sales volume of the industry indicated a significant

increase of 12% YoY, the gap between supply and demand reached

0.53mn tons of sugar in 2013 – 2014 season (not including

smuggled sugar), an increase of 11% YoY which affected sugar

price performances during this period.

Grow through M&A: in 2014, Ninh Hoa Sugar JSC (NHS: HOSE)

was merged into Bien Hoa Sugar (BHS: HOSE). In 2015, SEC will

be merged into SBT. The M&A entities in the industry typically are

Thanh Thanh Cong Group’s associates. Given the difficulties in the

industry, M&A would help players to operate more efficient.

SBT was a victim of oversupply - in FY2014 SBT achieved VND

2,311bn (+ 36% YoY), and VND 245bn (- 17% YoY) in revenue and

pretax profit respectively.

Nevertheless, SBT’s stock price recently improved by 10% which

was supported by the expectation on significant growth through

M&A, and reversion of a provision in FY2015.

2015 Expectation


Oversupply persists in 2014 – 2015. According to Vietnam

Sugarcane and Sugar Association, sugar production volume is

estimated to reach 1.6mn tons of sugar (+ 1.2% YoY) which is

based on the estimate of crashed sugarcane volume of 16.8mn tons

(+ 5% YoY), and average CCS of 9.8 (- 1.3% YoY). Total plating

area is expected at 300,000 ha (- 3% YoY) in which contracted

planting area is estimated at 271,683 ha (+ 2% YoY) Total domestic

sugar supply will also include: (1) 2014’s sugar import quota of

approx. 77,300 tons; and (2) ending stock by 15th Aug 2014 was

0.37mn tons which will result in a total supply volume of approx.

2.05mn tons of sugar, compared with expected total demand of

1.6mn tons.

Smuggled sugar remains an impediment for the Vietnamese

sugar industry - As stated above, smuggled sugar which is mainly



smuggled from Thailand through Cambodia continues to be the

biggest impediment wreaking havoc on the Vietnamese sugar

industry. Sugar smuggled into Vietnam evades two types of

Vietnamese taxes including 5% VAT, and 5% import tax from

AFTA’s members which creates an unfair playing field for local sugar

producers.

Oversupply and difficulties in controlling smuggled sugar will

continue to inhibit average selling prices in 2015.

Issues and risks

High sugar production cost: In terms of sugarcane production, the

most significant factor for the sugar industry is fragmented and

dispersed sugarcane planting area. On average, a sugarcane farmer

owns approximately 0.5 to 1 ha. Therefore, in order to maintain

10,000 ha of sugar cane cultivation area, a company has to contract

with approximately 13,000 farmers. This feature has prompted

difficulties for sugar enterprises in maintaining and developing sugar

cane cultivation areas. More importantly, due to the fragmented and

dispersed cultivation area, sugar producers have not been able to

industrialize and mechanize the planting and harvesting processes

resulting in high production cost of sugar cane for farmers and

consequently high sugarcane purchasing price for sugar producers.

ASEAN Trade in Goods Agreement (ATIGA) – According to the

trade agreement (ATIGA), Member States will eliminate tariffs on all

products in trade relations between the Member States in 2010 for

the ASEAN 6 (Brunei Darussalam, Indonesia, Malaysia, Philippines,

Singapore and Thailand) and 2015 with flexibility to 2018 for the

CLMV members (Cambodia, Laos, Myanmar, and Vietnam). In

regards to rice and sugar products, on 29th Oct 2010 Vietnam and

other 9 members of AFTA signed a protocol to provide special

consideration for rice and sugar. Accordingly, Member States are

allowed to maintain tariff barrier of 5% for imported sugar from other

members after 2018, and create or intensify quantitative restrictions

or other measures limiting imports of rice and sugar products when

imports of rice and sugar products cause or threaten to cause

serious injury to sectors producing like or directly competitive

products in the importing Member States, the importing Member

States may, to the extent and for such time as may be necessary to



prevent or to remedy such injury. This can be seen as a protective

factor for Vietnamese sugar industry in the coming years given the

weaknesses of the industry compared with other members.

As an agriculture-based company, sugarcane diseases, and

unfavorable weather conditions will negatively affect SBT’s

sugarcane plantations areas, sugarcane yield and CCS which will

affect SBT’s profit margins.


Thanh Thanh Cong Tay Ninh JSC (SBT: HOSE): Negatively

affected by the difficulties in the industry. SBT’s FY2015

earnings growth will derive from M&A activities.

In FY2015, SBT’s planting area is expected to decline to approx.

13,440ha (- 12% YoY) due to competition from other plants in Tay

Ninh Province while average sugarcane yield and CCS of sugarcane

are expected to increase approx. 12% and 1% respectively. In

regards to sugar ASP, ASP is expected to decline approx. 6.5% YoY

given the bitter outlook of the sugar industry in FY2015, and average

purchasing price of sugarcane is expected to remain unchanged

compared with 2013 – 2014 season. We forecast that SBT’s

revenue and pretax profit would reach VND 1,993bn (-14% YoY),

and VND 202bn (-18% YoY) respectively in 2015 which is mainly

contributed by a decline of 9% YoY in sales volume and 6.5% YoY

in ASP, translating to a diluted EPS of VND 1,238.

In FY2015, Gia Lai Cane Sugar – Thermoelectricity JSC (SEC:

HOSE) will merge with SBT through swapping stocks with the ratio

of 1:1.05 (01 SBT share for 1.05 SEC shares). Accordingly, SBT will

need to issue approx. 37mn shares to swap 39mn outstanding

shares of SEC. Total outstanding shares of SBT after the merger is

estimated at 180mn shares. The merger will benefit SBT and SEC

through sales volume increase and margin gains.

Sales volume increase: after the merge, SBT and SEC will be able

to access to the customers base of each other. Currently, part of

SBT’s industrial customers demand for RS sugar which SEC will be

able to fill this blank. On the other hands, SEC has considered to

upgrade its sugar plant to produce RE sugar. In such case, SEC



located in middle of the country will supply RE sugar to SBT’s

customers located in central and northern Vietnam which will save

transportation cost to SBT.

Margin gains: SEC has benefit from favorable soil and weather

conditions in Central Vietnam. SEC’s average yield and CCS of

sugarcane are higher than that of SBT generating cost competitive

advantage for SEC. According to SEC, average cost of goods sold

of its RS sugar reaches VND 10,000/kg compare to industry average

of VND 12,000/kg. If SBT uses SEC’s RS sugar to refine and

convert into RE sugar, this RE sugar product will have approx. 4%

lower in CoGS per kg compared with RE sugar originally refined

from sugarcane.

After the merger, SBT’s FY2015 revenue and net profit are expected

approx. VND 3,000bn (+30% YoY), and VND 360bn (+69.5% YoY)

respectively, translating to an EPS of VND 1,956 (+58% YoY). In

FY2015, SEC’s revenue and pretax profit are planned at VND 987bn

(+ % 47YoY), and VND 40bn (identical to the previous year)

respectively.

At the price of VND 12,900/share, the stock is being traded at

2015PE of 6.5x which is higher than its 5-year average of 5.7x.

SBT’s 1-year target price is derived at VND 13,500/share, equivalent

to a target PE of 6.9x.



ANIMAL FEED: OVERWEIGHT (Last year call: Overweight)

Key call: DBC


Animal feed industry performance in 2013

Source: Bloomberg

Source: Bloomberg


Industry performance (benchmark with VNIndex)

Strongly outperformed the VN Index: The feed industry gained

67.5%, compared with 8.2% of the VN Index. Best-performing

stocks were VTF (+ 96.6%) and DBC (+ 51.3%).


Declines in major feed ingredients prices in 2014: Average corn

price in 2014 declined approx. 18% YoY while average soybean

meal price increased roughly 1% YoY. Corn and soybean meal

typically accounts for approx. 40% and 20% in 1kg of industrial feed.

Declining input costs have significant effects on profit margins of

animal feed producers in the industry.

Demand for industrial feed increased by 10% YoY – Total

production volume of animal feed reached approx. 14.7mn tons

(+10% YoY) which was supported by the improvement in the

livestock industry. In 2014, pig and poultry herds increased by 1.5%

YoY, and 3.1% YoY respectively, causing total pork meat (living

weight) and poultry meat to increase by 2.1% YoY and 4.9%

respectively.

DBC - unexpected low 3Q14’s earnings results: Gross margin

declined YoY despite favorable movement of input price: DBC’s

3Q14 gross profit margin settled at 10.8% compared with 9.7% in

2Q14, and 12.5% in 3Q13. According to the company, changes in

animal feed product structure led to a decline in gross margin of

animal feed business and a decline of 22% in 3Q14 net profit.

However, given significant declines in major feed ingredients in

9M14, and stable average selling price of animal feed, we believe




DBC’s 3Q14 bottom line would be 60% higher than the actual result,

and therefore, it is likely that 3Q14’s earnings have not been fully

recorded.

9M14’s earnings results remained flat: Accumulated 9M14’s

revenue and net profit totaled VND 3,684bn (+ 8.6% YoY), and VND

92bn (- 3% YoY). Animal feed and husbandry segments contributed

59% and 20% to total revenue respectively. 9M14’s gross margin

settled at 12% compared with 13% in 9M13. However, as stated

above, it is likely that 3Q14’s earnings have not been fully recorded.

With 9M14’s earnings results, DBC has completed 64% and 50% of

yearly revenue and net profit plans.

2015 Expectation


Major feed ingredients prices are expected to remain weak in

2015 – According to USDA’s Dec report, in 2014 – 2015 season,

global corn and soybean meal ending stocks are projected to

increase 11% YoY and 7.5% YoY which will be driven by:

Total production of corn in America, accounting for 37% of

global production is forecasted to reach approx. 366 mn tons

(+3.4% YoY). However as the corn output outside US also

increases, the US’s corn export volume is projected to decline

by 8.7% YoY.

Total production in major corn imported countries is forecasted

to increase 8.5% YoY while total domestic demand in those

countries is projected to increase only 2.7% YoY, leading to a

decline in the need for corn import from the US.

Global SBM supply is projected to increase at a higher pace

than the growth in demand for SBM. SBM production major

producers is expected at approx. 66mn tons (+4.6%) while total

demand for SBM in major importing countries is expected at

approx. 49mn tons (+ 4.3% YoY).

Increase in demand for livestock products: – According to



MARD, in 2015, demand for pork and poultry meats are expected to

increase by 2.6% and 6.7% YoY respectively which will support the

demand for animal feed. Animal feed production is expected to

reach 15.6 mn tons (+ 6.2% YoY) in 2015.

Issues and risks:

Low input costs might give rise to increase competition relating

to trade discount rates, and/or decline in average selling price in

2105.

As an agriculture-based company, local animal diseases, and

weather conditions in major feed grains producing countries will

affect DBC’s business performance. Animal diseases would

impede demand for livestock products and adversely affect

demand for industrial feed as a consequence.

In addition, unfavorable weather conditions in major feed grains

producing countries would affect total supply of feed grains and

generate a long-term upward trend in feed grain prices. This

feature would adversely affect DBC’s feed business margin.


Dabaco Group JSC (DBC: HNX) – a beneficiary of brighter

outlook in the animal feed industry given (1) expected weak

prices of major feed ingredients, and (2) increase demand for

animal feed in 2015.

DBC’s 2015 revenue and pretax profit are expected at VND

5,489bn (+6.5% YoY), and VND 292bn (+ 15% YoY)

respectively, translating to an EPS of VND 3,778. The estimates

are based on the assumptions that (1) animal feed sales volume

growth is expected to reach 6.2% YoY, and (2) average selling

price of animal feed will decline by 1.5% YoY.

At the price of VND 29,000/share, the stock is being traded at

2015PE of 7.68x which is quite attractive compared with the

overall market and given the positive outlook for animal feed

industry in 2015. DBC’s 1-year target price is derived from PE



multiple at VND 32,500/share, equivalent to a target PE of 8.5x.

DBC (31/12/2014)

Stock

Price (VND)



2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E

DBC 27500 81 8.92 7.07 0.96 0.89 434,699 501,827 5% 5% 3,085 3,892 -2% 26% 10% 7% 1% 26%




FISHERY: NEUTRAL (Last year call: Neutral)

Key call: HVG

Minh Dinh, +84 8 3824 2897 ext. 2148, [email protected]

Fishery industry performance in 2014

Source: Bloomberg



The fishery industry gained 153.28%, compared with 8.15% of the

VN Index. The outperformance was driven by all three stocks in the

industry: MPC (+386.69%), VHC (+148.52%), and HVG (+29.52%).

MPC (+386.69%): Share repurchase and high earnings growth

In Jan 2014, shareholders approved the delisting plan of MPC.

During that time, market share price was around VND

25,000/share. MPC announced that it would purchase treasury

shares from minority shareholders at up to VND 30,000/share.

Then the repurchase price was raised to VND 40,000/share in

April, and VND 100,000/share in September. In 31 Dec 2014,

MPC closed at VND 105,000/share.

Thanks to increases in both shrimp export volume and price,

MPC attained high earnings growth in 2014. 9M2014 revenue

reached VND 10,798 bn, a 47.3% YoY increase. Net profit

reached VND 698 bn, a 336% YoY increase.

VHC (+148.52%): Sales of Vinh Hoan Feed and zero anti-

dumping duty in the US

VHC’s 9M14 revenue reached VND 4,304 bn, a 16% YoY

increase. Pretax profit reached VND 500 bn, a 149% YoY

increase, of which VND 183 bn was the gain in sales of Vinh

Hoan Feed to Pilmico International Pte. Ltd. Excluding that

extraordinary income, pretax profit would have only reach VND

317 bn, a 57% YoY increase.

VHC is one of four companies that were not levied with anti-

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Vn Index

Consumer Staples

Fisheries




dumping duty in the US. Most companies, including major

exporters such as HVG, Agifish (AGF: HOSE), Anvifish (AVF:

HOSE)..., have to pay anti-dumping duty of USD 0.58-2.39/kg

(preliminary results, POR10, from 1 Aug 2012 to 31 Jul 2013),

and USD 0.42-2.11/kg (POR9).

In Nov 2014, VHC offered investors a 2:1 bonus share.

HVG (+29.52%): Expectation about export to Russian market

At present, only HVG and three other companies in Vietnam are

permitted to sell pangasius to Russia. The country does not

allow import from other companies due to hygienic standards.

Due to disputes between Russian and Western countries

regarding the conflict in Ukraine, Russia has banned food

imports from the US, EU, Norway, Australia and Canada.

According to Reuters, in 2013, the countries under sanction

exported USD 1.4 bn of fish products to Russia. As a result,

Russia has to find a substitute supply of fish products. With

export price of approximately USD 2.5/kg, pangasius is among

the cheapest variety of fishes and will be preferred by Russian

consumers.

Source: VASEP

Key highlights on the sector

According to Vietnam Association of Seafood Exporters and

Producers (VASEP), Vietnam’s fishery export is estimated to reach

USD 7.85 bn in 2014, a 16.7% YoY increase. Two major products

are shrimp and pangasius.

Shrimp export attained high growth, however, the pangasius

industry has not recovered

Vietnam shrimp export attained high growth in 2014 because of

global supply shortage, prompted by the shrimp early mortality

syndrome (EMS) in Thailand, the largest shrimp exporting country.

Vietnam shrimp export was estimated to reach USD 3.95 bn in 2014,

a 29.2% YoY increase, prompted by an approximately 17.6% YoY

increase in volume and 9.8% YoY increase in average export price.

Contrary to shrimp export, pangasius export did not improve in 2014

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Vietnam's fishery export (USD mil)



due to fierce competition and low export price. Export was estimated

to reach USD 1.75 bn in 2014, a 0.6% YoY increase, prompted by

1.1% increase in average export price and 0.5% decline in volume.

High anti-dumping duty in the US imposed on both pangasius

and shrimp

Regarding pangasius export, as we mentioned above, most

companies, except VHC and three other minor exporters, have to

pay anti-dumping duty of USD 0.58-2.39/kg (preliminary results,

POR10), and USD 0.42-2.11/kg (POR9) when selling pangasius

fillets to the US.

For anti-dumping duty on shrimp in POR8 (from 1 Feb 2012 to 31

Jan 2013), MPC, the largest shrimp exporter in Vietnam is subject to

a duty of 4.98%, which is the lowest rate. Sao Ta Foods JSC (FMC:

HOSE) and most other shrimp exporters are subject to a duty of

6.37%. There was no duty on POR7.

Decree 36/2014/ND-CP regarding pangasius farming,

processing and exporting

Decree 36/2014/ND-CP was promulgated by the Government on 29

Apr 2014 and took effect from 20 June 2014. Three months after

that, on 29 July 2014, the Ministry of Agriculture and Rural

Development (MARD) issued Circular No. 23/2014/TT-BNNPTNT,

which provided guidelines for Decree No. 36/2014/ND-CP. The

Circular took effect from 12 Sep 2014. Decree 36 and Circular 23

require more stringent quality control, registration of farming area

and export.

In general, we expect that the regulation over pangasius export

quality (water content ≤ 83%, glazing ratio ≤ 10%, restrictions on

usage of chemicals and additives) will create positive impacts on the

industry. Vietnamese exporters can improve the product quality and

sell at higher prices.

Nevertheless, several pangasius exporters argue that some

regulations are unreasonable. For example, customers usually order

pangasius fillets with higher water content and glazing ratio than

stipulated in the Decree. In addition, export registration with Vietnam



Pangasius Association may delay shipments.

Source: Bloomberg

2015 Expectation

Possible changes in fundamentals

Pangasius farming cost will decline

Soybean meal is the main material for producing pangasius feed. It

accounts for 50% of feed production cost and 30% of pangasius fillet

cost. Soybean meal price has declined by 17% since the beginning

of 2014. Average price of soybean meal in 2H14 was 16% lower

than in 1H14.

A decline in soybean meal price will lower pangasius farming cost.

Assuming soybean meal price declines by 15%, we estimate that

cost of pangasius fillet will decline by 5%. It takes 8-9 months for a

pangasius harvest, so we expect to see a positive impact of soybean

meal price decline on business results of pangasius companies from

2Q15.

VAT exemption on feeds

According to the Amended Tax Law No. 71/2014/QH13, effective

from 1 Jan 2015, the VAT imposed on feed will be reduced from 5%

to zero.

VAT exemption will not directly impact profit of fishery exporters as

exports are entitled to VAT refund. Nevertheless, VAT exemption will

reduce cost of pangasius and shrimps raised by farmers.

Consequently, fishery companies can choose between purchasing

fish/shrimp from farmers or raising fish/shrimp on its own farms,

whichever is cheaper.

Decree 36/2014/ND-CP may alleviate competition within the

pangasius industry

Pangasius export price has declined since early 2012 due to

competition among pangasius exporters.

As we have mentioned above, Decree 36 and Circular 23, which

took effect from June and Sep 2014, require more stringent quality

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Soybean meal price (USD/ton)



Source: Ministry of Industry and Trade

control and registration of farming area and export. The supervision

of quality, farming area, number of processing plants can improve

product quality and prevent supply surplus and unhealthy

competition. As a result, we expect that the number of pangasius

exporters will be reduced and export price can increase.

Source: Ministry of Industry and Trade

Issues and risks

Earnings of shrimp companies may decline

Earnings of shrimp companies peaked in 2014 thanks to increasing

price, prompted by global supply shortage. It is estimated that global

supply has declined by 15% due to the EMS, which occurred most

severely in Thailand, the largest shrimp exporter in the world.

It is likely that Thailand can remedy the shrimp EMS in 2015. If

Thailand’s shrimp industry recovers and shrimp export price

subsides, profits of shrimp companies will decline.

High-anti dumping duty in the US

According to preliminary results of POR10, Vietnam pangasius

companies, except VHC and three other smaller exporters, have to

pay anti-dumping duty of USD 0.58-2.39/kg. With such high duty, it

will be impossible for those companies to export to the US.

Although anti-dumping duty on shrimp is lower (from 4.98% to

6.37% in POR8), when it is combined with decline in export price,

we are concerned that earnings of shrimp exporters will be

negatively impacted.


Taking all factors into consideration, we expect that pangasius

companies can attain decent earnings growth in 2015, while shrimp

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11

Ju

l-11

Oct-

11

Ja

n-1

2

Apr-

12

Ju

l-12

Oct-

12

Ja

n-1

3

Apr-

13

Ju

l-13

Oct-

13

Ja

n-1

4

Apr-

14

Ju

l-14

Oct-

14

Average pangasius export price (USD/kg)

7.0

8.0

9.0

10.0

11.0

12.0

13.0

14.0

Ja

n-1

1

Apr-

11

Ju

l-11

Oct-

11

Ja

n-1

2

Apr-

12

Ju

l-12

Oct-

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n-1

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Oct-

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n-1

4

Apr-

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Ju

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14

Average shrimp export price (USD/kg)



companies may face certain difficulties. We think that the decline in

soybean meal price will be the most critical factor in driving earnings

growth.

Stocks that we expect to outperform in 2015

HVG

The largest Vietnamese pangasius exporter, one of the few fully

integrated fisheries company covering the entire value chain

from hatchery, farming, manufacturing of fish feed, processing,

production of frozen fish and cold storage warehousing.

With vertically integrated production, HVG will benefit the most

from soybean meal price decline.

The company is expanding to shrimp business by increasing

stake in Sao Ta Foods Processing from 39.3% to over 51% and

cooperating with Faquimex in raising shrimp in Ben Tre

province. In 2014, HVG earned VND 30 bn in profit from

cooperated business with Faquimex.

Net income attributable to shareholders will increase: By the end

of 2013, HVG held a 55.6% and 51.4% in Viet Thang Feeds

(VTF: HOSE), Agifish (AGF: HOSE). At present, stake in VTF

and AGF has been increased to 80.74% and 74.9%.

We expect 2015 revenue to reach VND 18,375 bn, a 28.7% YoY

increase, and net income attributable to shareholders to reach

VND 535 bn, a 12.1% YoY increase, translating to an EPS of

VND 4,052. HVG is trading at 6.7x 2015 EPS, which is rather

attractive.

Risks of investment: Receivables from Russian customers

may increase following the Ruble depreciation.

HVG (31/12/2014)

Stock

Price (VND)



2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E

HVG 27,200 167.8 7.5 6.7 1.4 1.1 7.6 6.8 3.7% 5.5% 3,614 4,052 73.9% 12.1% 29.3% 28.7% 100.4% 4.8%




DAIRY: OVERWEIGHT (Last year call: Neutral)

Key call: VNM

Trang Pham, +84 439366321 ext. 537, [email protected]

Dairy industry performance in 2014

Source: Bloomberg


The dairy sector decreased by 12.44% in 2014, underperforming the

VN Index (+8.15%). Underperformance of the sector was driven by

negative earnings growth of VNM in 2014.

Key highlight on sector/companies

International dairy market: From March 2014, impaired demand

from China, the world’s largest milk consumption country and from

Russia-the world’s third largest dairy consumption market since

August when it banned milk import from Western countries sent

global dairy prices in a whirlwind. International dairy price at 2014-

end retreated 54% YTD, and average milk powder price was 25%

lower YoY.

Weak demand: In the domestic market, consumers continued to be

frugal on FMCG consumption, especially dairy products. According

to Kantarworld Pannel, milk consumption growth was very weak in

9M14, to an extent where it did not increase in 3Q14. Due to

tightened disposal income, consumers either considered cheaper

products or reduced dairy consumption.




Policy: On May 23, the Ministry of Finance issued Decision

1079/QĐ-BTC that regulates price caps on powder milk products for

children under age of 6. Accordingly, all powder milk brands

wholesale prices were slashed by 10-30%, causing margin

contraction for dairy producers. In a different manner, this Decision

encouraged milk consumption in the context that formula products

became more affordable, especially for rural consumers.

Rising competition: 2014 witnessed saw fierecer competition

amongst dairy brands than ever before across all product segments.

Almost all industry players placed heavy emphasis on cow farm

development. TH Milk currently has 45k cows and targets 137k cows

by 2017. Vinamilk has designated farm development as a top

priority, in which it plans to increase its cow herd to 130k cows by

2017 from the current 9k cows. Nutifood co-operated with HAGL to

raise a cow farm of 120k cows by 2017. Meanwhile, Friesland

Campina also invested in a new farm in Northern Vietnam in July

2014. Judging by two M&A transactions, the industry remains

attractive. 70% stake of IDP was acquired by a group of financial

institutions including Vinacapital and Daiwa Partners; TH Milk

purchased 51% stake in Dalat Milk.

Company: VNM is the longstanding leader in the sector, holding an

overall market share of more than 50%. 2014 was a difficult year for

the company in which many external influences adversely affected

earnings: weak domestic demand, uncertain export market,

unfavorable policy and rising competition. 2014 marks the first time

in history that the company experienced negative profit growth which

is estimated at -9% YoY. During 3Q13 to 1Q14, VNM even forfeited

market share. However, despite of fragile demand, VNM’s domestic

sales improved in 2Q14, outpacing the overall industry. Its market

shares also improved in key segments: drinking milk (from 48.7% by

2013-end to 51% by July 2014), and powder milk (from 25.6% in Jan

2014 to ~30% by 2014-end (source: Nielsen Vietnam). We are

convinced that VNM has initially achieved some success in

weathering both weak consumption and rising competition.

Contribution from a new subsidiary (Driftwood Dairy) has offset

reduction in export sales (mostly from Iraq). Negative earnings

growth and concerns over challenging outlook in the coming time

corroded investors’ sentiment. Thus, as a typical defensive stock,



VNM underperformed the VN Index in 2014.

Quarterly domestic sales growth by value and volume (YoY)

Source: VNM, SSI estimates

Dairy consumption growth (volume) YoY

Source: Kantar World Panel

2015 Expectation: Back to winning ways


VNM will undergo key fundamental changes in 2015 that would

foster encouraging results:

Margin improvement on lower material price: In the global

dairy market, milk powder price prolonged its downtrend, closing

at USD 2,270/ton on December 16, 2014, a decrease of 54%

YTD. Accordingly, we assume that average milk powder price for

VNM’s production at USD 2,750/ton (down 35% YoY), elevating

16.2%

22.9% 23.5%

21.3%

28.2%

15.2%

7.2%

16.7%

4.0%

13.8%

19.4%

9.6%

16.0% 16.5%

14.4%

18.7%

6.7%

-0.7%

8.0%

-1.9%

7.3%

12.6%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14

YoY Quarterly sales growth

YoY quarterly sales volume growth

-5%

0%

5%

10%

15%

20%

1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14

Urban Rural VNM



estimated gross margin for VNM in 2015 to 38.5% (vs. ~36% in

2014), which is supposedly the peak since 2006. Thanks to its

leading market position, we believe that VNM are not obligated

to cut selling price despite of lower input cost. However, we

forecast that the company will maintain promotion activities in

order to safeguard sales. Hence, we have conservatively

increased estimated selling expense to sales ratio to 15%. Net

margin, hence, will edge to 18.8% from ~17% in 2014.

Healthier demand: We expect that FMCG consumption will

improve next year on 2014’s low base. Looking at a bigger

picture, lower fuel price is a big support to consumers’ wallets,

and with increasing disposal income, dairy products will find their

way back to households’ dinner tables.

Issues and risks

Policy risk: As dairy products are under a price stabilization

program, companies will face policy risk as they did in 2014 from

price capping regulation.

Fresh milk would be more favored by consumers, especially in

urban areas. Thus, there is a possibility that consumers will

switch from liquid milk (produced from milk powder) to fresh milk.

If so, VNM’s drinking milk segment would be adversely affected,

as 70% of its liquid milk volume is produced from milk powder.

Concern over food safety in the industry has been heightened

on increasing awareness of consumers.

Rising competition: The dairy industry is still attractive, as

evident by increased investments by dairy companies, via M&A

transactions or upstream developments. In 2015, we believe the

competitive nature between industry players will intensify, and

it’s still too early to predict a winner. Companies will have to

discover new innovative strategies to grow while providing

consumers with better products at more reasonable prices.


VNM’s top line and bottom line are estimated to obtain YoY growth



rates of 10% and 23.3% respectively in 2015. In 2014-2018, we

estimate VNM’s top line and bottom line CAGR at 10.3% and 14.3%.

At the current market price of VND 94,000/share, the stock is bring

traded at 2015 PER of 13.3x, which is fairly cheap in our view.

We recommend to BUY VNM.

VNM (31/12/2014)

Stock

Price (VND)



2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E

VNM 95,500 4,466 16.2 13.3 4.7 4.2 9.3 7.7 3% 4% 5,881 7,192 -10% 22% 12% 10% -10% 22%




CONFECTIONARY: NEUTRAL (Last year call: Neutral)

Key call: NONE

Trang Pham, +84 4 3936 6321 ext. 537, [email protected]

Confectionary industry performance in 2014

Source: Bloomberg

FMCG consumption growth by volume

Source: Kantar


The confectionary sector gained 22.7%, outperforming the VN Index

(up 8.15%). Although KDC’s earnings growth is expected at only 6%

YoY in 2014, the comprehensive restructuring of the confectionery

giant, including acquiring Vocarimex, expanding to instant noodle

and transferring confectionery business fostered positive sentiment

for investors.


Declining key material prices: According to the Food and

Agriculture Organization’s (FAO), sugar, vegetable oil and cereal

average price indexes decreased by 3%, 5.2% and 12.2% YoY

respectively. Despite of lower key ingredients costs, confectionery

consumption was very weak in 2014 as consumers reduced

consumption of confectionery- which they viewed as a discretionary

good - when tightening their spending budget. According to the

General Statistics Organization (GSO), retail sales growth totaled

10.5% in 2014, vs. 12.6% in 2013. Additionally, a report from Kantar

World Panel stated that FMCG consumption growth continued to be

dormant in 9M14, even negative in urban areas in 3Q14.

Company: KDC had an eventful year brimming with M&A activities.

Its ultimate goal is to become a holding company in the consumer

sector, via M&A transactions thanks to plentiful cash accumulation.

At first, it raised charter capital via a private placement to local

investors to: (1) fund upcoming M&A activities and (2) create

available room for foreign investors. After successfully raising

charter capital, KDC purchased 24% stake of Vocarimex in its IPO

(and will increase ownership to 51% in 2015). Subsequently, KDC

entered the instant noodle business by co-operating with Saigon

Vewong. In December 2014, KDC announced that it has sold 80%

stake of its confectionery business to Mondelez in exchanged for

0%

20%

40%

60%

80%

100%

120%

140%

160%

180%

KDC Vn Index

-2%

0%

2%

4%

6%

8%

10%

12%

1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14

Urban Rural




USD 372 mn. KDC will continue to pursue M&A activities as the

company plans to purchase a beverage company and a wheat flour

company. In terms of business performance, KDC’s top line and

bottom line are expected to achieve growth rates of 8.7% and 6.8%

YoY respectively in 2014, which are moderate, however, still

encouraging albeit weak demand as we have outlined above.

BBC gained 88.6% in 2014 thanks to both fundamental and

technical reasons. In terms of earnings, BBC posted strong earnings

growth in 2014 (9M14: 135% YoY) thanks to largely improved

margin (from 29.2% in 9M13 to 33.45% in 9M14) on lower material

prices and improved sales of products with higher margins (layer

cakes, Chocolate Pie). In addition, due to low liquidity, the stock

price effortlessly increased on purchasing power, especially from

large shareholders.

2015 Expectation: Consumption to pick up


In terms of the industry, there are elements that suggest healthier

growth in 2015:

Commodities including cereal, milk, vegetable oil, sugar are

expected to remain at favorable prices in 2015. Hence,

confectionery companies would be able to further increase gross

margin.

We expect that FMCG consumption will improve next year on

2014’s low base. Looking at a bigger picture, lower fuel price is a

big support to consumers’ wallets, and with increasing disposal

income, consumers will not think twice when purchasing

confectionary goods. Confectionery consumption stands to

benefit from increasing FMCG consumption trend.

For KDC, the largest player in the industry, 2015 will be a transitional

year. It will only book earnings from confectionery business in the

first half as the transaction with Mondelez is expected to be

completed by 2Q15-end. While earnings from edible oil and instant

noodle could not offset the lack of confectionery earnings in the

short-term, it is expected that KDC will record significant



extraordinary income from the deal with Monelez.

Issues and risks

Confectionery products in Vietnam are viewed as

discretionary goods rather than staple ones. Thus, if

economic conditions do not improve, consumers spending

habit on discretionary products will remain frugal.

Increase commodity prices should commodities supply

become tightened on adverse weather.


We maintain our NEUTRAL investment view over this sector. In our

opinion, in 2015, although demand might improve, valuations of

confectionery stocks such as KDC and BBC are already high in

terms of PER.

2015 would be a transitional year, in which net profit would

significantly increase. According to our estimates, net profit from

selling 80% of BKD could reach ~VND 5,100 bn, which will be

recognized in 2015. KDC’s estimated 2015 net profit would reach

VND 5,527bn, in which core profit would be VND 334bn, down 18%

YoY.

KDC’s long-term strategy is to engage in the F&B sector, increasing

its addressable markets via adding more FMCG products into its

platform. Specifically, in addition to instant noodles and edible oil, it

is seeking for more M&A opportunities in the F&B segment. After

instant noodle, edible oil, there have been rumors that KDC will

enter wheat flour, fast food and beer businesses. The company is

confident that it could leverage its operation capabilities, industry

expertise to obtain future growth on the back of rich cash position,

especially once the deal with Mondelez finalizes. KDC’s growth

picture seems to be unclear to investors at the moment, and surely it

would take a long time (i.e 2-3 years) for those who are waiting for

the transformation story to achieve success.

At the current market price of VND 49,800/share, 2015 PER of

KDC’s core business is 29.6x, which is significantly higher compared



to its historical PER and the overall market. However, as KDC’s

book value will increase sharply this year (by 66% in our estimate),

2015 PBR will decrease to 1.12x, much lower than other consumer

companies in Vietnam (VNM: 5x, MSN: 3.5x). Once the deal with

Mondelez finalizes, KDC’s cash per share would reach ~VND

41,500/share, which is very high.

As we have discussed previously, in the short term, with high

retained earnings and a rich cash balance, KDC could either opt for

a cash dividend payment to investors or attain high interest income.

In the longer term, KDC management is keen on transforming itself

into a consumer conglomerate. The acquisition of Vocarimex only

marks the beginning. Vocarimex is the largest player in the edible oil

in Vietnam (over 70% market share) and chances are high that it will

achieve much better operational efficiency.

KDC (31/12/2014)

Stock

Price (VND)



2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E

KDC 49,900 555.76 17.9 2.3 1.9 1.1 9.9 12.8 3.73% 2.99% 2,794 21,340 12% 76% -20% 664% 9% 909%




OTHER F&B: OVERWEIGHT (Last year call: Neutral)

Key call: VCF


Confectionary industry performance in 2014

Source: Bloomberg

Source: Bloomberg


MSN gained only 1.22%, underperforming the VN Index on negative

earnings growth in 9M14 (-69% YoY). VCF advanced 25.5%,

outperforming the VN Index thanks to strong growth in 2014

(expected ~54% YoY).


Corresponding with weak FMCG consumption in 2014, growth of

packaged foods was shallow in 1H14 (5-6% by volume, according to

Kantar World Pannel). In 3Q14, growth diverged, with negative

growth in urban area (-1% YoY) while urban area saw an increase of

8% YoY in terms of volume.

In our estimates, Masan Foods sales (including sales of instant

noodles and seasonings) decreased by 9% in 3Q14, but still added

15% YoY in 9M14. Due to saturated demand for existing

products/brands, MSN as well as its competitors such as Vina

Acecook, Asia Foods, Hung Thinh Co, and Trung Thanh Co, all

continued to administer product developments, with new initiatives

both in terms of packaging and ingredients in order to expand their

addressable markets. KDC’s recent penetration into the instant

noodles business continues to cluster an already congested

industry.

In the coffee segment, VCF increased its market share from ~38%

last year-end to ~41-42% in 2014 according to our estimates. This

can be linked to capacity expansion and aggressive product

developments and marketing activities by MSN which have yielded

dividends.

Company: MSN underperformed the VN Index as the consolidation

of mining business (with significantly high depreciation and interest

0%

20%

40%

60%

80%

100%

120%

140%

MSN Vn Index

0%

20%

40%

60%

80%

100%

120%

140%

160%

180%

VCF Vn Index




expense) from March 2014 generated losses in 1H14.In 3Q14, net

profit totaled VND 233 bn and this has led us to assume that much

higher profit can be attained in the coming quarters. Net income

contributed to the parent shareholder totaled VND 28 bn in 3Q14

(accumulated loss at VND 305 bn in 9M14). For 2014, we estimate

MSN’s revenue and net earnings (attributed to shareholders) will

grow at 43.9% and 53.5% YoY.

2015 Expectation: Positive


We see encouraging elements that may foster better growth for the

industry in 2015:

Commodities including cereal, milk, vegetable oil, sugar are

expected to remain at favorable prices in 2015. As such, MSN

and VCF are able to further increase gross margin.

We expect that FMCG consumption will improve next year on

2014’s low base. Looking at a bigger picture, lower fuel price is a

big support to consumers’ wallers, and with increasing disposal

income, consumption will inevitably increase.

In 2015, we anticipate MSN will achieve growth rates of 38.5% YoY

for sales growth and 120.4% YoY for net income. Strong growth in

bottom line will derive from fully booking revenue for the whole year

of Nui Phao Mine with higher profitability. Estimated net income

attributed to the parent shareholder is VND 2,057 bn, up 205% YoY,

translating to 2015EPS of VND 2766. 2015PER would be

significantly lower, coming at 29.3x (pro-forma: 25.7x) at market

price on December 31, 2014 of VND 83,000/share, a high premium

compared with the overall market.

Issues and risks

Weak demand: If economic conditions do not improve,

consumers spending habits on discretionary products will remain

frugal.

Increase commodity prices should commodities supply become



tightened on adverse weather


Investment view:

MSN (Overweight): Fair value of a MSN share arrives at VND

89,456/share, an upside of 7.8% compared to the market price on

December 31. As the mine has started to generate profit and

shareholders stopped incurring losses in 3Q14, we believe that MSN

has withstood adversities. In the long term, while the consumer

business is expected to remain stable, the mining business will

require additional time to achieve the desire potential. We suggest

investors to consider the stock at price weakness on expected

strong growth in 2015.

VCF (BUY): We expect the company will continue to enjoy high

growths in topline (27.2% YoY) and bottom line (22.2% YoY) as new

capacity has only started to be fully utilized since May 2014. At the

market price as of December 31, 2014, VCF is traded at 2015PER

of only 10.7x, which is attractive in our view. However, please note

that low liquidity remains a perennial issue for the stock.

MSN, VCF (31/12/2014)

Stock

Price (VND)



2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E

MSN 83,000 3,009 88.77 29.29 4.04 3.55 14.68 10.58 0% 0% 912 2,766 47.7% 203.1% 45.8% 38.5% 8.6% 120.4%

VCF 173,000 218 13.12 10.74 3.10 2.40 10.77 8.83 0% 0% 13,184 16,110 34.6% 22.2% 33.3% 27.2% 34.6% 22.2%




ENERGY

OIL & GAS: UNDERWEIGHT (Last year call: Overweight)

Key call: None


Oil & gas industry performance in 2014

Source: Bloomberg

Source: Bloomberg


Oil & Gas stocks recorded most of their gains in 9M14, jumping 94%

(GAS), 97% (PVD), and 131% (PVS) YTD, before painfully

correcting following oil price movements. They ended 2014 with

meager returns: 13% (GAS), 19% (PVD) and 37% (PVS). Judging

by the year end collapse, it is safe to assume that the oil & gas

sector was the most volatile in 2014.


Declining oil prices heightened anxieties:

At the beginning of 2014, Brent oil price was approx. USD

108/barrel, following three years of prices higher than USD

100/barrel. However, in addition to rising political tension, weary

demand from China and excess supply, mostly from the US, exerted

heavy downward pressure on oil prices, starting from June. Beside a

decrease of 40% in oil price, the tripling in implied volatility in oil

prices is a worth paying attention to as it signals more uncertainty

about future prices.

PetroVietnam’s key business performances:

In 2014, PVN total exploited crude oil reached 17.39 mn tons, up

4.1% YoY and natural gas volume totaled 10.2 bn m3, adding 4.6%

YoY. The Group’s revenue totaled VND 745.5 trillion and

contribution to the State Budget was more than VND 178 trillion,

accounting for 21% of total State Budget in 2014. Total capex

reached VND 81 trillion. The Group has exploited 8 new oil & gas

fields.

60%

80%

100%

120%

140%

160%

180%

200%


Vn Index Energy

0

10

20

30

40

50

60

70

0

20

40

60

80

100

120

140

May-1

2

Ju

l-12

Sep

-12

No

v-1

2

Ja

n-1

3

Mar-

13

May-1

3

Ju

l-13

Sep

-13

No

v-1

3

Ja

n-1

4

Mar-

14

May-1

4

Ju

l-14

Sep

-14

No

v-1

4

Brent crude oil price (USD/barrel

CBOE crude oil price volatility




2014 high earnings growth across the sectors:

GAS: Net profit of parent company increased by 16.8 %YoY, mainly

thanks to one-off earnings on EVN’s payment (VND 3,898 bn) for

previous AToP contract. Excluding one-off earnings, sales added

6.8% YoY while core profit was flat YoY. Sales growth was driven by

4.6% advancement in dry gas volume and slight margin

improvement on higher selling price.

PVD: Strong growths of 29% in topline and 22% in bottom line

thanks to (1) increased day rate of PVD’s owned rigs since 3Q13

with an average rate of 15%; (2) growth in revenue from leased rigs

(57% YoY), well services and other services (~25-30%), and (3)

higher profit contribution from JV (mainly from Baker Huges).

PVS: Although earnings is flat YoY, the stock was re-rated during

2014, after an extended period being undervalued.

Apart from strong fundamentals, frequent rumors of stock bonuses,

PVN’s divestment from GAS, etc., created short-term catalysts for

these stocks.

Stock prices plunged in the last two months

Often time declining oil prices will spark an immediate domino effect

which initially begins with oil producers then ultimately equipment

and services providers that work with them. In the stock market,

institutional money which had continously flowed into oil &gas stocks

for most of the year, started to flow out in the last quarter as oil

stocks tumbled, and in the process created a massive sell-off.

In alignment with global oil & gas stocks, from their peaks in August

and September 2014, Vietnam oil & gas stocks painfully stumbled,

siphoning off most of their accumulated gains from the beginning of

the year.

2015 Expectation: Possible negative growth


Theoretically, if oil price continues to drop or remains at the current

level, the effects of an oil price change on oil & gas companies are



indisputable, but it extends beyond the ramifications on revenues

and earnings in the near term as equity values of oil and gas

companies would be hindered.

According to PVN, Vietnam’s average break-even cost per barrel is

from USD 30-35, implying that the group could still enjoy profitability

at current oil price level. In 2015, PVN targets at production volume

of 16.8 million tons crude oil, a slight decrease of 500k tons

compared to 2014. This volume cut would be from oil fields with

break-even cost higher than USD 60/bbl.

The Group views the current weak oil price as a short-term anomaly,

and it will not terminate but may slow down Capex disbursement for

under-going E&P projects. PVEP might cut USD 500 mn out of

planned investment of USD 1.6 bn in 2015 if oil price falls to USD

50/bbl. In addition, in order to save cost, PVN targets at 20-30%

spending for outside services in 2015.

On the positive side, the current predicament presents PVN with

opportunities to acquire oil fields at discounted prices as well as re-

assess overseas ventures.

Due to different characteristics of each company, we see that their

performances will diverge in 2015:

GAS: Will bear the most adversities from declining oil price, in

the context that low FO price will eliminate benefit from market

price mechanism for Above Take or Pay gas volume sold to

electricity plants while low LPG price will erode most of the profit

of LPG segment.

PVD: 2015 outlook is ensured thanks to mostly fixed contracts

for its owned rigs and growth driver from 1 new JU rig

commencing in 3Q15, given the stable E&P activities as we

have mentioned above. However, looking forward to 2016,

PVD’s top line and bottom line will decrease if oil price maintains

at USD 60/barrel or lower.

PVS: Most business segments will be more or less impacted by

lower oil price and the investment cut, especically

marine/specialized ship services, O&M and ROV segments. A

plan to move M&C business from offshore market to onshore



market will help to ensure revenue, but profit may be lower.

Basically, FSO/FPSO segment is sheltered from declining oil

price thanks to 10-yr contracts and would still enjoy growth YoY

as FPSO Lam Son just fully commenced operation from May

2014.

PGD, PGS: Because they predominantly engage in gas/LPG

distribution and trading, the impact of low oil price is less severe

than upstream companies. We learn that instead of fixed ( but

increasing) input price mechanism decided by GAS and PVN,in

2015 PGD and PGS (CNG) will apply a floating input gas price

formula which links to domestic FO/LPG prices. This new pricing

schedule will help to proportionally ensure profits for those

midstream companies. In any events, we expect that distribution

and trading margins might become thinner if natural gas/LPG

price continuous to decline.

Issues and risks

It should be noted that the sustainability of earnings of gas

companies in the future is solely dependent on the pricing schedule,

which is proposed by GAS but the final decision is contingent to the

Government’s decision. In our current forecast for GAS and other

related companies (DPM, PGD, PGS, CNG), we assume that the

market price mechanism with the announced formula would be

applied by GAS starting from 2015. This implies that our forecasts

and views on GAS and related companies may change accordingly

if there is any deviation in the pricing schedule.

Risk of E&P activities shutdown/delay/investment strong cut in the

long-term if oil price remains weak or further drops. As we have

outlined above, lower oil price hinders equity value of oil & gas

stocks.

Our Investment stance: Underweight

Although we are not oil watchers, we still hold our own viewpoints on

oil prices and apply different investment strategies:

If oil price continues to fall, we definitely suggest investors to



reduce or eliminate exposure to oil-related stocks

If oil price stabilizes at USD 60/barrel (i.e our base case), we

suggest investors to avoid negative earnings growth companies

(GAS, PGD)

GAS, PVD, PVS, PGS, PGD (31/12/2014)

Stock

Price (VND)



2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E

GAS 70,500 6,951 9.74 14.30 3.33 3.15 5.62 7.08 3.2% 3.2% 7,326 5,860 13.5% -20% 13.6% -10.8% 16.8% -20%

PVD 64,500 842.5 11.54 11.96 5.09 1.95 6.98 5.97 1.6% 1.6% 7,972 7,689 0.0% 0.0% 25.9% 1.7% 27.4% -1.1%

PVS 26,900 570 10.21 11.77 1.79 1.67 4.06 4.32 3.3% 3.3% 3,565 3,091 3.0% -13.3% 15.1% -5.3% 3.0% -13.3%

PGS 26,900 48 7.09 8.12 1.05 0.98 1.26 1.30 4.5% 4.5% 3,795 3,313 -19.4% -12.7% 3.5% -24.3% -10.9% -3.2%

PGD 30,700 82.7 10.01 12.36 1.41 1.39 3.09 3.54 6.5% 6.5% 3,068 2,484 -14.8% -19.0% 2.2% 9.5% -12.0% -19.0%




FINANCIALS

PROPERTY (COMMERCIAL DEVELOPERS): OVERWEIGHT

(Last year call: Neutral)

Key call: KDH, BCI, LCG

Anh Dinh, +84 4 3936 6321 ext. 670, [email protected]


Sector performance in 2014

Source: Bloomberg

Sub-sector performance in 2014

Source: Bloomberg


Industry performance: OUTPERFORMED

The commercial real estate developer sector advanced 9.79%,

slightly outperforming 8.15% of the VN Index in 2014.

In 2014, several large and mid-caps including FLC, SJS, KDH, BCI,

NBB, DIG, HDG, etc.... strongly outperformed the whole market.

However, VIC, the largest market cap in the sector with 63.6%,

underperformed the VN Index with a gain of only 4.24%; as a result,

depleting the sector’s performance.

HDG was the best performer in the commercial real estate

developer sector with a gain of 161.3% in 2014. HDG was mainly

favored by foreign investors thanks to its stable business

performance with relatively healthy financial status and attractive

sizable land bank with promising long term prospects. However,

poor trading liquidity remains an issue for HDG.

Key highlight on sector: The worst is over

Recovered liquidity vs. lowered inventories

According to a report published by the Ministry of Construction

(MoC), in 2014, 11,450 successful transactions transpired in

Hanoi, doubled that of 2013 and 10,350 in Ho Chi Minh City

(+35%YoY) in which the majority was in the affordable housing

segment, especially small-sized apartments. Completed or

close-to-completed projects with average construction density





Outstanding stock performance in 2014

Source: Bloomberg

and good construction progress, located in established location

with adequate infrastructure and developed by reputable

developers, had more competitive advantages and saw better

sales performances.

Improved liquidity helped reduce market inventories by 21.8%

compared to that in December 2013 and totaled approximately

VND 73.9 trillion in which apartments accounted for 32% and the

remaining were in landed properties.

While it is still untimely to assert that the market has fully

recovered, it appears that the property market has exhibited

positive indicators.

Stabilized selling prices

After a long-hauled correction to become more affordable than

the 2010 and 2011 peak, returning to 2006’s level, selling prices

in 2014 have stabilized in both primary and secondary markets,

especially in projects with convenient location and good

amenities. Downward selling prices across all segments ceased

and there were even slight increases in certain projects which

were completed or nearly completed with proven quality and

convenient access.

Meanwhile, we also witnessed that rental yield has increased

from approximately 4%-5% to 7%-8% in projects with convenient

access and established amenities; this might also be an

additional driver that helped enhance the market liquidity in

2014.

Higher credit growth in the property sector

By September 2014, according to the SBV, credit growth rate by

the end of September, 2014 was 7.26% compared with 2013-

end. Total real estate industry loan growth reached 12% by

September-end, therefore, confirming increasing real estate

demand in the low interest rate context. In fact, banks

proactively cooperated with developers to offer interest subsidy

programs with preferential interest rates fixed for up to one year

to purchasers taking mortgages. Higher loan-to-value ratio and



longer loan tenures were also offered to attract customers.

In regards to the VND 30 tn preferential package, up to 30% of

the total amount was disbursed by September-end. In order to

accelerate the disbursement progress, a joint resolution was

issued in August 2014 which loosened lending rules of the

package. Specifically, the loan terms was extended from 10 to

15 years, loan objects were expanded, price/sqm limit of VND 15

million was also replaced by price/unit limit of VND 1.05 billion

and more commercial banks were added.

2015 Expectation


Property Ownership Rights for foreigners allowed

In an attempt to attract foreign capital flows into the property market,

the Revised Housing Law which offers relaxed conditions for

foreigners to own properties in Vietnam was passed by the National

Assembly in November 2014 and will become effective in July, 2015.

In summary, it allows all foreigners who are granted a valid visa and

all foreign investment funds, banks, Vietnamese branches and

representative offices of overseas companies to lease or own a

maximum of 30% of an apartment building or up to a maximum of

250 villas or townhouses in one particular administrative (or the

equivalent of) ward. This also effectively provides a registered 50

year leasehold title with renewal possibility upon expiration.

With this new regulation, foreigners now have an enforceable title, at

the same time ushering in a more profound purchasing pace. Once it

becomes effective, we expect that it may add more liquidity to the

residential market that is currently exhibiting signs of a modest

recovery mostly in the low to mid-end segment whereas a majority of

high-end residences remain empty. More importantly, it may also

help Vietnam property market which has been historically dominated

by local players partly due to the foreign ownership limit issue,

become more competitive within the region; thus, in turn will help

support economic growth. Nevertheless, home mortgage for

foreigners which has yet to be comprehensively addressed and the



50 years ownership limitation remains an issue.

Small sized properties spearhead the recovery

Since affordable housing is the segment that is considered to meet

the real demand and suits the financial capability of most buyers in

the market, it will continue to spearhead the property market. We

expect that supply in this segment would increase in 2015 in order to

capture growing demand.

Cheaper funding drives players’ confidence

Source: SBV

Given the downward trend of interest rates over the past periods and

low inflation, we expect that banks might continue reducing their

lending interest rates thanks to low funding cost, thus, may rivive

confidence of both developers and buyers when making decisions to

invest in properties.

Issues and risks

High future supply

Although it is anticipated that market demand will increase, we

believe that future supply would also increment and this trend may

prevent the market from reaching its maximum potential.

Inventory sale progress may decelerate

Although inventory level has reduced over the last periods with

increasing successful transactions, we believe that the progress of

inventory sale may decelerate in the coming time since the majority

of unsold stocks are large-sized properties or located in distant local



with underdeveloped infrastructure.

Delay in guideline issuance for Revised Laws

Though the Revised Housing Law will take effect from July 1, 2015,

we do not exclude the possibility that there may be delay in issuing

detailed guidelines to instruct the application for property ownership

for foreigners. Thus, it might take time for this Revised Laws to really

make impact to the physical property market.

Our Investment stance: OVERWEIGHT

Investment view:

After a prolonged correction with deep adjustments in pricing and

product allocation so as to enhance market liquidity, 2015 is

expected to be a brighter year for real estate developers with greater

confidence of market players including buyers and banks, especially

for those with sound reputation and potential land bank targeting

niche product ranges. Stronger supportive policies from the

Government coupled with low interest rate are also expected to

enhance business performances in 2015. Thus, we upgrade our

Neutral investment view to Overweight on the whole sector for 2015.

Among listed companies, we believe that KDH, BCI, HDG, DXG,

and TDH may experience promising results in 2015 given their

current attractive project pipelines and business strategies.

Therefore, we recommend investors to monitor these stocks’ price

movement to capture investment opportunities.


KDH

A turnaround stock: In 2012 and 2013, KDH experienced a loss

of VND 57 bn and VND 137 bn because its products were not

suitable for market demand

9M14 net profit reached VND 61 bn as KDC launched Mega

Residence, which are townhouses with reasonable prices. KDH

expects to earn VND 100 bn in net profit in 2014.



All of KDC projects are situated in District 9, along the Ring

Road 2. The road connecting the surrounding area to HCMC

center will be completed this January. Upon completing, it will

only take 20 minutes to travel from KDH’s projects to HCMC

center.

KDH's land bank currently reaches 65 ha, sufficient for building

3,000 house in 3 years. The company will acquire more land in

the coming months.

Risks of investment: Once the Ring Road 2 is completed, it

may be congested with container trucks, which may discourage

home buyers.

BCI

Over 500 ha of land bank in the Southwest of HCMC, suitable

for long-term investment.

2015 earnings will be generated by Phong Phu 4 project in Binh

Chanh District, HCMC, with approximately 450 land plots. In

addition, unearned revenue of VND 378 bn remains on the

balance sheet.

BCI has stable earnings sources from Le Minh Xuan IP and Big

C Joint Venture, which generate approximately VND 80 bn in

gross profit annually.

Significant catalysts can be expected in 2016 as large projects

such as An Lac Plaza (463 apartments), Nhat Lan 5 Apartments

(312 apartments), and Expanded Le Minh Xuan Industrial Park

(109 ha) will be completed and revenue will be recorded.

The progress of Tan Tao Residential Area (300 ha) and Green

Villa (133 ha) project will generate positive catalysts in the long

term.

Risks of investments: Progress of projects may be slower than

expected.



LCG

A turn-around stock: LCG experienced a loss of VND 308 bn in

2013 due to declining revenue and provision for investments. In

9M14, net profit reached VND 18.5 bn thanks to revenue from

Formosa project and other smaller construction contracts.

Revenue from Formosa project is expected to reach VND 1,060

bn in 2014-2015. LCG may win more contracts from phase 2 of

Formosa project in 2015-2016.

National Road 38 Project may generate revenue of over VND

500 bn in 2015-2016.

Over 200 ha of land bank in Nhon Trach District. The road

connecting Nhon Trach and HCMC and the Ben Luc – Long

Thanh – Dau Giay expressway will be built in 2015, which will

increase the value of LCG's land.

Possible reversal of provision for the investment in Phuong Dong

Biofuel Company: The company produces ethanol, which is the

material for E5 gasoline. LCG holds 22% stake in Phuong Dong.

In 2013, LCG had to book a loss provision of VND 98 bn

because there was no market for E5 gasoline and ethanol.

Nevertheless, the government requested that E5 gasoline must

be sold from 1 Dec 2014 in 7 big cities and from Dec 2015

nationwide. As a result, Phuong Dong Biofuel Company can

generate earnings in 2015.

Investment risks: Future earnings subsequent to Formosa

project and National Road 38 are uncertain. Construction

progress of the roads connecting Nhon Trach District may be

delayed.

KDH, BCI, LCG (31/12/2014)

Stock

Price (VND)



2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E

KDH 20,200 70.5 15.0 13.0 1.0 0.9 15.0 13.5 0% 0% 1,333 1,468 - 10.1% 158% 57% - 85%

BCI 21,900 74.0 15.4 12.2 0.9 0.9 15.2 10.2 4.6% 4.6% 1,425 1,795 7.2% 26% 1.7% 30.7% 8.7% 26%

LCG 8,500 30.7 20 - 0.7 - 15.2 10.2 - - 430 - - - 348% - - -




PROPERTY (INDUSTRIAL PARK DEVELOPERS): OVERWEIGHT

(Last year call: Neutral)

Key call: KBC

Anh Dinh, +84 4 936 6321 ext. 670, [email protected]

Sector performance in 2014

Source: Bloomberg

Industrial park developers performance in 2014

Source: Bloomberg


Industry performance: STRONGLY OUTPERFORMED

Industrial Park Developers (IPDs) stocks saw strong performances

with a gain of 39.71% compared with 8.15% of the VN Index. It also

outperformed the real estate sector (+13.03%). As IPD business is

greatly influenced by FDI, IPD stock performances have also

parallel with growth in FDI trend during 2014.

Among IPD stocks, KBC was the best – performing stock with a

gain of 62% thanks to resilient improvement in its business

performance, especially in Trang Due Industrial Park after the

presence of LGE.

Key highlight on sector

FDI cemented its influence on IPDs’ business performance

According to the Ministry of Planning and Investment’s Foreign

Investment Agency (MPI’s FIA), total FDI registered in Vietnam

topped USD 20.2 billion in 2014 (-6.3% YoY) but exceeded the

annual target of USD 17 billion by 19%. However, FDI

disbursement saw encouraging growth of 7.4% YoY to reach USD

12.4 billion thanks to a number of big projects from multinational

giants.

Processing and manufacturing sector absorbed the lion’s share of

FDI with 774 newly registered projects and total amount of newly

registered and expanded capital reached USD 14.5 billion,

accounting for 71.6% of total FDI in 2014 to Vietnam. The sector

was significantly influential to IPDs since it normally requires large

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140%

150%

160%


Real Estate Vn Index

60%

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140%

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180%


Vn IndexReal EstateReal Estate (IP Developer)




Outstanding stock performance in 2014

Source: Bloomberg

FDI commitment and disbursement (2004-2014)

Source: GSO

land areas or factories located in well-developed and managed IPs.

Among the 60 countries and territories investing in Vietnam, Korea

led with total newly registered and expanded capital of USD 7.3

billion, accounting for 36.2% of total FDI in Vietnam in 2014 with

684 projects in which major projects included Samsung Electronics

Thai Nguyen (USD 3 billion), Samsung CE Complex (HCMC, USD

1.4 billion), and Samsung Display Bac Ninh (USD 1 billion).

According to the the MPI, by 9M14 – end, IPs attracted USD 79.4

bn of registered FDI capital with 5,325 projects or 80% of total FDI

investment in the industrial field. Annually, IPs are also said to

attract approximately 40% - 45% of newly registered FDI

nationwide. Currently, throughout the country, there are 461

industrial parks (IP) registered but only 208 IPs are functioning with

an average occupancy of approximately 67%. However, IPs with

adequate infrastructure and professional operation management

maintain their competitive advantages, thus, attracting more

investors and achieving higher occupancy rate.

Collective efforts to attract foreign investment

With a strong determination to foster a friendly investment

environment for foreign investors, Vietnam has implemented

several supporting measures including reforming and streamlining

administrative procedures for investors, offering a preferential

corporate income tax, especially for the hi-tech sector. As a result,

more and more big manufacturers have relocated their production

bases from China to Vietnam, several massive production projects

are being invested by world leading firms like Samsung, LG, Nokia,

Intel and Canon, etc…

Additionally, in order to lessen the required period for investors to

establish their manufacturing bases, the Government and provincial

agencies also proactively supported investors in procedural

process, employment and environment solutions; helped IPDs in

land clearance, planning and building infrastructure. Ensuring

synchronous development of transportation, power, water supply,

telecommunication systems and worker accommodation is also

another priority of provincial agencies to attract FDI.



2015 Expectation


Promising FDI acceleration with deeper international

integration

In addition commitments to the WTO and existing FTAs, Vietnam is

simultaneously negotiating several other FTAs with leading

economies and pursuing the Trans – Pacific Partnership (TPP)

Agreement, the Regional Comprehensive Economic Partnership

(RCEP) Agreement and the Vietnam – EU FTA. The combination of

synergized effects of these agreements and gradual global

economic recovery will engender practical benefits to businesses

and the economy, especially with respect to expanding export

markets, attracting foreign investment, enhancing transparency and

improving the investment climate which we believe would

dramatically influence FDI attraction into Vietnam; thus, also

generating promising opportunities for IPDs’ business.

Concentrated regulation reform continues in focus:

It is expected that public administration reforms will also be

expedited to capture more foreign investment capital with

improvement in regulatory system and investment policies aiming

to achieve higher consistency, transparency and investor

friendliness. Besides, Law on Investment and Law on Enterprises

which is considered to be the legal basis for several changes in

process, procedures and State administration will also be adopted

soon. Moreover, central and local authorities will actively involve

further in compensating damages, preparing clean land bank with

synchronized and modernized infrastructure. With these constant

efforts by the Government, we expect that the FDI to Vietnam will

be further improved thanks to more favorable and transparent

environment for foreign investors.

However, with the Government’s strategy of focusing on high

technology and eco-friendly projects or higher quality investors, it

will also be more challenging for investors to apply for adequate

investment licenses. Therefore, IPDs that provide sufficient and

well-managed infrastructure and have extensive experiences in



investment application process would stand to attract FDI inflow. As

FDI is expected to increase, so will the requirements from

investors, and it can only be satisfied by reputable IPDs. Thus, we

expect that IPDs with professional operation and management

would benefit from increasing FDI trend in the coming time.

Issues and risks

Delay in land clearance and complicated administrative procedures

remain hindrances the disbursement process, thus, impeding IPD’s

ability to handover sites, recognize earnings and manage cash

flow.


Earnings outlook & sector valuation

Taking all factors into consideration, we expect that high-profile

IPDs with established IP with cleared land and well-built

warehouses will reap great benefits from this promising FDI trend

and take charge in attracting multinational giants. Additionally, once

an IPD is able to secure FDI investors to a particular IP, it can also

benefit from auxiliary companies. Therefore, we maintain our

enthusiasm in KBC, who has succeeded in attracting LG to their

Trang Due IP in Hai Phong.

Kinh Bac City Group (KBC: HOSE)

KBC was established in 2002 specializing in industrial park

development. In the past 12 years, KBC has been very successful

in both acquiring land bank and attracting foreign direct investment.

Currently, KBC is managing several IPs with vast land bank of

approximately 15,000 ha across the country including its

associates. This ensures enough land bank for the firm to maintain

development in the next 10-20 years. 80% of KBC’s customers are

foreign investors; therefore, FDI has a direct impact on the firm’s

business performance.

Following the first deal with LGE in Trang Due IP in 2013, in 2014.

KBC exhibited further improvement in attracting investments into

their IPs by securing deals with LGE’s auxiliary partners; thus,



enhancing their performance in core business of industrial park

development. In FY2014, we expect that KBC will see resilient

earnings growth compared with previous years and would probably

double yearly profit target by completing the 2nd

deal with LGE to

expand their site in Trang Due IP – Phase 2.

Following the impressive results in 2014, we expect that KBC would

experience a promising growth in 2015 as well. We believe that

KBC will further reap benefit from the upward trend of FDI and

Phase 2 – Trang Due IP would remain a key earnings driver for

KBC thanks to the presence of LG, followed by Expanded Que Vo

IP (Bac Ninh), Tan Phu Trung IP (HCMC), etc…

KBC (31/12/2014)

Stock

Price (VND)



2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E

KBC 15,900 295.1 18.8 14.2 1.05 0.96 13.4 11.2 - - 846 1120 255% 32% 48% 46% 311% 32%




BANKING: UNDERWEIGHT (Last year call: Underweight)

Key call: MBB

Phat Cao, +84 8 3824 2897 ext. 2154, [email protected]

Banking industry performance in 2014

Source: Bloomberg

Banking industry LDR

Source: SBV



Underperformed the VN Index: The banking sector delivered an

increase of 6.14% in comparison to 8.15% of the VN Index. The best

performing stock was VCB with a sharp increase of 43.12%. This

advancement might be predicated on the bank’s sound financial

position, such as (i) the bank’s robust loan growth of 10.2% YTD vs.

industry’s average of 7.3% in 9M14, (ii) diversified sources of

income, (iii) efficiency in terms of cost-to-income ratio, profit per

number of staffs and branches, and ROA, and (iv) conservative in

classifying impaired assets and aggressive provision booking policy.

On the other hand, the slump in oil & gas stocks and the expectation

on the banking sector to turn-around also encouraged investors to

allocate their capital to other stocks having good fundamental,

including VCB.


Banking industry experienced further stable liquidity: The

overall loan-to-deposit ratio (LDR) of the banking sector decelerated

further to approximately 83% in September 2014 compared to 85%

in 2013 and 89% in 2012. Meanwhile, the overnight interbank

interest rate stood at low of around 2.0 – 2.5% pa on average

against 3.0 – 3.5% pa in the previous year.

This improvement was primarily thanks to deposit growth outpacing

loan growth (15.76% YTD vs. 12.62% YTD as of Dec 22). In fact, the

Dong maintained its strength against the greenback, and nationwide

inflation finished at a record low of 1.84% YoY. As such, real VND

deposit rates stood at high of around 2% pa in 2014 against 1.6% in

2013, thus continually attracting depositors.

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Vn Index

Financials (Excluding Real Estate)

Banking

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Banks’ net interest margin (NIM) contracted moderately: As

noted above, banks’ growth in deposits outpaced loan growth;

consequently, they had to allocate more capital to G-bonds and CB-

Bills, which offered lower yields. Besides, banks cut their lending

rates at a higher pace than deposit rates in an attempt to stimulate

credit growth. As such, the combination of these factors dragged

down listed banks’ NIM slightly to 2.94% on average in 9M14 in

comparison to 3.0% in 2013.

Profitability of the banking industry remains weak: Banking

sector’ ROE and ROA touched 5.49% and 0.51% respectively in

3Q14 in comparison to 5.56% and 0.50% in 2013 and 3.97% and

0.48% in 2012. The modest reduction in banks’ 3Q14 profitability

might stem from partial implementation of Circular 02, thus

augmenting banks’ provision expenses following higher

nonperforming loan (NPL) ratio recognition. For instance, we

calculated that listed banks’ 9M14 pre-provision operating profit

(PPOP) decreased 0.3% YoY, but their profit before tax (PBT)

retreated at higher pace of 6.2% YoY.

Banking industry’s asset quality improves, but remains under

pressure: We estimated listed banks’ provision charges ticked up

~4% YoY in 9M14, and their provision coverage ratio expanded to

78.2% in Sep 2014 against 67.3% at the end of 2013. Besides,

banks geared up their impaired asset selling to the Vietnam Asset

Management Company (VAMC).

The VAMC Chairman addressed that VAMC bought more than VND

135 tn worth of bad debts at price of VND 107 tn, and issued

approximately VND 98 tn worth of VAMC special bonds by the end

of 2014. Consequently, reported NPL ratio of the banking sector

decelerated to ~ 3.9% in Oct 2014 from the high of 4.2% in Jun

2014.

2015 Expectation


Credit growth will likely accelerate in 2015: The country’s

economic growth trended higher on the back of stronger

consumption and manufacturing. In particular, final consumption



List banks’ NIM vs. lending rate

Source: Banks’ FS, & SBV

increased 6.20% YoY in 2014 compared with 5.36% YoY in 2013;

meanwhile, growth in manufacturing expanded to 7.15% YoY in

2014 against 5.35% YoY in 2013. As such, this improvement will

likely invigorate demand for capital in 2015, thus propelling credit

growth. Moreover, given record low inflation, we learnt that some

banks cut their deposit rates further; consequently, banks might also

reduce their lending rates thanks to lower funding cost, encouraging

household and enterprises’ borrowing.

On the other hand, the SBV provided assistance to the banking

sector as the Circular 36, which is set to come into effect in Feb 1st,

2015, supports (i) higher medium and long-term loans, and (ii)

increased capital for securities and real estate sectors thanks to

lower risk ratio for loans to these two sectors (from 250% to 150%).

Indeed, we predict that credit growth will increase further with most

focus centering on (i) consumer lending, (ii) loans to infrastructure

sector, and (iii) loans to encouraged sectors.

Banks’ NIM might decrease further, but the magnitude will be

modest: Banks’ NIM might continue to be constrained in 2015 as

we believe that banks’ lending rate will likely decelerate further on

the back of lower funding cost. Additionally, we understand that

competition among banks have intensified as they attempt to expand

their loan books and market share. As such, contraction of lending

rates is essential for them to attract creditworthy borrowers in order

to increase their market share, but not threaten their asset quality.

Moreover, yields on G-bonds already stand at low levels, and

available room for further decrease will be limited in 2015 following

increased bond supply, thus scaling down banks’ profit from G-bond

investment.

The VAMC might provide more assistance to banking system’s

clean-up process: The VAMC purchased more than VND 95 tn

worth of illiquid assets in 2014, thus surpassing its 2014 target of

VND 70 tn worth of bad debts. In 2015, this company targeted to buy

around VND 70 – 100 tn worth of bad debts, which is equivalent to

approximately 1.5 – 2.2% of projected outstanding loans. In fact, the

VAMC will probably accomplish its target given that Circular 02 will

be fully implemented in 2015, thus sending banks’ reported NPL

ratio toward its actual figure and encouraging banks to sell their bad

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6%

7%

Average NIM of listed banks (LHS)

Lending rate (RHS)



debts.

Issues and risks

Earnings of banks might decline further on full implementation

of Circular 02: We expect that expansion of loan book will offset

moderate decrease in banks’ NIM; accordingly, growth in banks’

interest income might remain in positive territory in 2015.

Additionally, their non-interest income is expected to maintain

resilient growth rate thanks to better credit growth. The combination

of these earning streams leads to our belief that banks’ PPOP will

trend higher; however, the growth in PPOP might not be enough to

offset the acceleration of provision charge, threatening earnings

outlook of banking system. For instance, we anticipate that provision

charge of listed banks will increase 10 – 20% YoY on average in

2015, but the picture might be worse for unlisted banks, which

understated their NPL ratio. At the end of 2015, total bad debts that

VAMC will purchase is estimated at VND 235 trillion. With the strong

participation of VAMC, we believe that reported NPLs of the banking

system can decrease to 3% by 2015 year-end. However, banks still

need to book provision expense for bad debts that they sell to

VAMC. Under existing regulations, banking system will have to book

around VND 37.6 trillion worth of provision expense a year which

accounts for nearly half of the banking system’s PPoP.

As of 30 Sep 2014, listed banks wrote off only around 0.2% of total

outstanding shares on average (except for MBB 1.25% and BID

0.82%). Therefore, besides selling bad debts to VAMC, in order to

reduce reported NPL ratio to 3% by 2015 year-end, we believe that

banks still have to use a significant amount of their PPoP to book

provision expense including writing off bad debts in 2015.

Dilution risk is imminent: It is apparent that Vietnam’s banking

system is not well capitalized, especially for State-owned

Commercial Banks (SOCBs). According to the SBV’s latest data, the

capital adequacy ratio (CAR) of the whole system approached

13.22% in Oct 2014; meanwhile, this figure for SOCBs stood at only

9.89%, which is near the threshold of 9%. As such, they will need to

raise more capital in the coming time if they want to increase loan

book as well as partially satisfy Basel II requirements. On the other

hand, shareholders of banks also have to lower their stake in banks



in order to meet cross-holding limit stipulated by the Circular 36.


Taking into consideration the above mentioned factors, we anticipate

that Vietnam’s banking sector will continue to face challenging in

2015 in order to completely resolve its obstacles. Even though

liquidity at banks strengthened, worries on their profitability and

asset quality still linger, thus constraining our enthusiasm in the

outlook of this industry. In fact, the current valuation of banks seems

to be fair as their P/B kept hovering around 1.1x at end-2014. On the

other hand, there are some technical oriented catalysts might

increase the weight of banking sector. For instance, foreign

investors put more emphasis on banking stocks after sharp

divestments from oil & gas shares, thus invigorating banking stocks

further. Besides, Vietinbank (CTG: HOSE) will list its State’s shares,

and increase its weight in the VN-Index to 5.5% from 2% and

several large listed banks will increase their charter capital in order

to acquire other banks in 1H15


ACB: The outlook of ACB became brighter, and we gained more

confidence in the bank as:

The bank’s pace of clean-up process was faster than

anticipated with exposure to Group 6 companies declining to

around VND 5.5tn by the end of Sep 14.

The bank has a leading position in retail banking, strong risk

management, and high efficiency.

On the other hand, uncertainty about the future of relationship

between ACB and its valuable strategic partner, namely StanChart,

will likely affect the prospect of ACB. Indeed, we recommend HOLD

ACB with 1Y target price of VND 15,600/share, 1.3% upside from

market price of VND 15,400/share on 31 Dec 2014.

MBB: We favor MBB given the following reasons:

More precise picture of asset quality stems from its qualitative



credit rating system.

The bank delivered high profitability among listed banks (2013

ROE: 16.32%) thanks to low funding cost.

The bank possesses high efficiency (i.e. profit per staff and

branch), but has reasonable valuation (2014 P/B: ~0.9x against

sector average of 1.1x).

However, limited available room for foreign investors and uncertain

capital raising plan have somewhat curbed our enthusiasm for this

stock. As such, we recommend to HOLD MBB with 1Y target price of

VND 14,046/share, 7.2% upside from market price of VND

13,100/share on 31 Dec 2014.

VCB: We favor VCB among other banking stocks given the following

reasons:

Diversified sources of income. Its non-interest income accounted

for 30.5% of total operating profit in 2013, much higher than the

average figure of 21% among the top 12 banks. More

importantly, 34% and 30% of its non-interest income is recurring

and stable fees from offering banking services such as

payments and foreign currency trading;

One of the most efficient bank in terms of cost-to-income ratio,

profit/number of staffs/branches and ROA;

Conservative in classifying bad debts and aggressive provision

booking policy of VCB in the past has prompted us to believe

that VCB will be the first bank to turn-around. In the last three

years, VCB has commonly used 22-23% of its operating profit

before operating expense and provision expense to book

provision expense. The Bank also used 1.3% on average of its

outstanding loans to write-off bad debts from 2011 to 2013. This

suggests that the Bank has restituted for the past actions. Along

with aggressive provision booking policy, its internal qualitative

credit rating system paints a more accurate picture of its asset

quality than other commercial joint stock banks. We believe that

the difference between VCB’s current NPL ratio and NPL ratio

under full application of Circular No.2 will be of the smallest gap.

Its provision coverage ratio at present is quite high, at 106% in



3Q14. Therefore, provision expense required for additional

booking will be minimal.

However, because of these advantages mentioned above along with

VCB’s heavyweight in the VNIndex and ETFs’ indexes, VCB has

always been trading at a premium compared with the market and the

banking sector. At the market price of VND 31,900/share on 31 Dec

2014, VCB was trading at current PB of 2.0x, compared with the

industry average of around 1.1x.

Stock pick (31/12/2014)

Stock

Price (VND)



2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E

VCB 31,900 4,048 23.2x 21.8x 1.94x 1.86x N.a N.a 3.1% 3.8% 1,376 1,460 0 % 6.1% N.a N.a 4.9% 4.9%

MBB 13,100 723 6.3x 7.9x 0.94x 0.97x N.a N.a 7.6% 7.6% 2,089 1,656 -2.6% -20.7% N.a N.a 2.1% 6.0%

ACB 15,400 667 15.6x 13.3x 1.10x 1.08x N.a N.a 5.2% 5.2% 985 1,162 13% 18% N.a N.a 15% 18%




INSURANCE: UNDERWEIGHT (Last year call: Neutral)

Key call: BVH

Tran Huong Ly, +84 4 3936 6321 ext. 545, [email protected]

Insurance industry performance in 2014

Source: Bloomberg

Source: Bloomberg



Strongly underperformed the VN Index: The insurance sector

gained 3.8%, compared with 8.15% of the VN Index.

The best performer was VNR (+40%) despite the low growth in

9M14. We think this can be traced to (1) Price of VNR has a sharp

increase of 32.2% in 1Q14 thanks to the positive 2013 released

earnings results and (2) positive reaction to investment increasing of

BVH in VNR (from 9.08% to 9.18%) and maintained long-term

investment of SCIC at VNR, and (3) positive reaction to 30% bonus

stocks and 10% cash dividend.

The worst performer was BVH (-12%) against the positive net

income growth of 14.7% YoY in 9M14. The main reason is negative

reaction to the key personnel changes of BVH. On 23rd

April 14,

three former senior officials at BVH were prosecuted for

"irresponsible actions resulting in serious consequences”, and on

24th Dec 14, BVH announced sudden BOD member changes, of

which, four key positions of BOD (chairman, deputy chairman, CIO

and CFO) were changed.


Improved growth in direct premium: According to Insurance

Supervisory Authority (Ministry of Finance), in 2014, the insurance

sector direct premium is estimated to reach VND 52,680 bn (+14.2%

YoY, compared to 14% YoY in 2013 and 12.8% YoY in 2012),

thanks to (1) more active economy, (2) strong growth of life

insurance sector, especial the investment insurance product in the

context of low deposit rate, and (3) further development of

80%

90%

100%

110%

120%

130%

140%


Vn Index Financials Insurance

0%

20%

40%

60%

80%

100%

120%

140%

160%


BVH

BVH Vn Index




Source: Bloomberg

Source: Association of VN Insurers of the MoF

bancassurance channel.

Non – Life segment: Higher premium growth than 2013

Premium Growth: In 9M14, premium growth rate of Non-life segment

(+10.8% YoY, higher than the growth of 7% YoY in 2013, but lower

than growth of 10.5% YoY in 2012 and 17.5% YoY in 2011) was

mainly driven by Motor Vehicle insurance with the largest proportion

in terms of premium (+10.8% YoY, ~27.4% of total premium),

followed by Health and Personal insurance (+18.4% YoY, ~20.6%),

since insurance companies focused on the retail segment (because

although the economy became healthier, demand of enterprises for

insurance products still decreased) as well as enhancing customer

services.

Market positions: PVI reached No. 1 position, followed by Bao Viet

Non-Life, BMI, PJICO and PTI.

Claim loss ratio & gross insurance profit: The total direct claim loss

ratio in 9M14 was 38% (a slight decrease compared to 41% in

9M13), partially thanks to efforts of insurance companies in risk

control right from the application level. However, this ratio still

remained high compared to the ratio of 37.3% in 9M12 due to

sudden insured events of great losses in value such as accidents in

Dong Nai, Binh Duong and Ha Tinh provinces, of which, 27/29 non –

life insurance companies participated in the compensation with an

estimated damage of VND 2,500 bn (accounting for ~24% of total

direct non-life insurance claims in 2014) (according to ISA of the

MoF). PVI was the hardest hit because it had the largest market

share in terms of P&C Insurance premium (55% market share in

6M14), and as a result, caused negative gross insurance profit

growth in 9M14 (-67% YoY) much lower than its peers (PTI: -19%

YoY, BVH Non-life: -13% YoY, BIC: -4% YoY and PGI: +8% YoY)

Life Segment: Negative profit despite strong premium growth

In 9M14, market premium growth rate of the life segment was

+25.79% YoY (compared to 20.6% YoY in 9M13 and 13.4% YoY in

9M12) thanks to the fact that life insurance products seemed to be

more attractive to customers (specially the Investment - Insurance

product) in the context of lower deposit interest rate. (3M deposit

0%

20%

40%

60%

80%

100%

120%

140%

160%


VNR

VNR Vn Index

23%

21%

10% 7% 6%

33%

Non-Life Insurance Premium Market Share in 9M14

PVI

BVH

BMI

PJICO

PTI

Others

32%

29%

12%

9%

9% 10%

Life Insurance Premium Market Share in 9M14

Prudential

BVH

Manulife

Dai-ichi

AIA

Others



interest rate decreased to 5.8% in 2014 from 6.8% in 2013)

In terms of new business premium, BVH exceeded Prudential

(24.16%) with proportion of 25.1% after many years, thanks to

(1) BVH life insurance contract fee remained at a low level

(compared to its competitors such as Prudential and Dai-ichi

Life)

(2) BVH’s efforts in increasing the number of insurance agents to

gain market share. In 6M14, BVH ranked No.2 position (after

Prudential) in terms of number of agents with 42,360 agents

(+28% YoY, while the agent number of Prudential decreased

11% YoY).

Despite of this premium growth, BVH’s profit from life insurance

operation was negative VND 694 bn mainly due to an increase in

mathematical reserves (+80% YoY) (partially due to lower technical

interest rate used in calculation reserves).

Supportive Policies: Resolution No. 63/NQ-CP on change to tax

calculation method encouraged enterprises to purchase pension

insurance for employees (in which, the maximum deductible welfare

expenses used in calculating CIT increased to VND 3

mn/person/month from current VND 1 mn/person/month). This

resolution was issued at 26th June, 2014, taking effect from 15

th Aug,

2014).

Reinsurance: Rising competition

VNR’s reinsurance inward premium growth of 5.8% YoY (VND 1,175

bn) in 9M14 was much lower than the total market direct premium

growth of 17.8% YoY. We think this can be traced to (1) Rising

competition from PVI Re (established in 2011, and in 2014, PVI Re’s

estimated reinsurance inward premium of VND 1,646 bn, +23%

YoY), and (2) Many insurance companies tried to find foreign

strategic shareholders and partners, therefore they did not only cede

in the domestic market but also in the foreign market. In 6M14, there

were 27/29 non-life ins companies participated in overseas

reinsurance ceding, with the overseas reinsurance premium

accounted for 23% of total direct insurance premium (+8% YoY).

Recently, BVH has signed cooperation agreement with Dhipaya



Insurance company (Thailand) and ENC Plus Insurance Brokers

Co., Ltd (Korea-based) for insurance services both in Vietnam,

Thailand & Korea.

2015 Expectation


Positive growth in total premium: We believe that premium

growth will maintain at 15% level in 2015 (higher than the growth of

14.2% in 2014) thanks to:

GDP 2015 is expected to reach 6.5% (SSI estimate) or 6.2%

(the government’s target) compared to 5.9% in 2014. Which

underpins the premium growth of motor vehicle insurance

(accounted for 27.4% of 9M14 total insurance premium),

Property & Casualty Ins (22.4%), Health Ins (20.6%) and Cargo

Ins (9.1%)

Bancassurance distribution will play a more important role in

supporting premium growth since the insurance companies

could take advantage of potential customer lists and good

reputation of banks.

Slight increase expected in Motor and Vehicle fee level: In late

2014, insurance companies agreed to submit new rules, terms and

fee schedule of motor vehicle insurance to the MoF to be approved

because of continuous losses in this segment. This fee schedule is

expected to be approved in 2015 and will help non-life insurance

premium increase slightly.

Issues and risks

Issues and risks: Premium and earnings growth of listed insurance

companies would decrease slightly due to:

Rapid competition from foreign insurance companies. Relating to

insurance services in FTA EU – Vietnam, EU requested Vietnam

to facilitate EU insurance companies to provide insurance

services across borders; insurance companies invested by EU to

provide health insurance services; and insurance companies

based in EU to sell inland transport insurance contracts across



borders. In 2014, BIDV Metlife Insurance company was

established (joint venture between BIDV and Metlife - one of the

largest life insurance companies in the world, with charter capital

of VND 1,000 bn, ranked 6th among 17 life insurance

companies). These foreign invested companies will intensely

compete for market share, resulting in decrease in premium

growth of listed insurance companies.

Further claims from Dong Nai, Binh Duong and Ha Tinh

provinces accidents (damaged value is estimated at VND 2,500

bn (according to ISA of the MoF), of which, only VND 268 bn

was insured in 2014.

Lower interest rate context would adversely affect earnings since

financial profit plays a significant role in insurance companies’

earnings results. According to estimates of MoF, government bond

accounted for 50% life insurance companies investment portfolio

and bank deposit accounted for 70% of non-life insurance

companies investment portfolio. Therefore, non-life insurance sector

would be affected by lower deposit interest rate more than life

insurance sector.


Earnings outlook

Despite the positive premium growth estimated in 2015, we think

that insurance sector earning results would be significantly affected

by intensely rising competition, further claim loss from Dong Nai,

Binh Duong and Ha Tinh provinces accidents, as long as lower

interest rate context.

On 31 Dec 14, current valuation of listed insurance companies

(average PE of 15.4x) is higher than overall market (PE of 12.3x),

therefore, we hold underweight view on the whole sector on 2015.

Favorite Stock:

BVH: We like this stock because

(1) Solid fundamentals with large market share (2nd

in both life



and non – life insurance). In non-life segment, proportions of

revenue from retail is equivalent to revenue from wholesale,

this would underpin stable growth in the next few years.

(2) High reputation compared to other insurance companies

(very important factor as consumers’ awareness and trust in

insurance products remains low).

(3) In 2015, BVH continues to improve non-life insurance

sector, via (1) completing data base software system as

they did with life insurance sector for better risk control &

management and (2) promoting retail segment by utilizing

potential client list of life-insurance agents which have good

relationship with individual customer. Furthermore, BVH is

planning 7% stake private placement to foreign investor,

which could increase BVH’s retained premium.

However, valuation of BVH is very demanding and is quite high

compared to the whole market. On 31 Dec 2014, BVH is being

traded at current PE of 17.4x, higher than market PE of 12.3x

Therefore, investors should consider buying on price weakness.

BVH (31/12/2014)

Stock

Price (VND)



2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E

BVH 32,200 1018.7 17.4, na 1.8 na 1.4 6.2 4.7% na 1,839 Na 9.9% na 14.5% na 9.5% na




HEALTHCARE

PHAMARCEUTICALS: OVERWEIGHT (Last year call: Overweight)

Key call: DHG

Thu Le, +84 8 3824 2897 ext. 2137, [email protected]

Healthcare sector performance in 2014

Source: Bloomberg


Industry performance (benchmark with VN Index)

Outperformed the VN Index: The healthcare sector gained

12.19% in 2014 compared to 8.15% of the VN Index. DHG, which

represents more than 50% of the sector weight, advanced 14.03%

while the performances of smaller tickers were dispersed. Other

outperformed stocks included IMP (+72.73%), DMC (+23.80%) and

DCL (114.75%) while underperformers included SPM (+1.44%),

TRA (-14.13%), JVC (+6.82%), OPC (-4.84%) and PMC (+2.74%).

The best performing stock was IMP while the worst performer was

TRA.


Despite no significant amendments to Circular 01, most

pharmaceutical companies posted positive net income growth

in 9M14.

(VND bn) DHG TRA DMC IMP OPC SPM PMC JVC DCL

Net sale 2,601 1,134 1,102 591 479 399 265 618 510

YoY 9% -11% 10% -3% 17% 26% 3% 78% 4%

Net income 414 118 95 63 47 42 46 107 34

YoY -8% -14% 27% 5% -2% 45% 16% 349% 13%

12M Trailing P/E

15.1 11.8 8.7 17.2 13.6 12.2 6.6 8.3 12.5

Source: Company data

DHG: Core business remained sound. For FY 2014, net sales

increased 11% YoY to VND 3,913 bn and net profit declined 10.6%

YoY to VND 530 bn. Negative earnings growth in 2014 was due to

i) a one-off allocation of VND 36 bn to R&D fund in 2013, and ii) a

one-off income of VND 127 bn from transferring Eugica brand in

80%

85%

90%

95%

100%

105%

110%

115%

120%

125%

130%

Vn Index Health Care




2013. Ignoring these events, net income advanced 5.6% YoY in

2014.

IMP: For FY 2014, net sales increased 6.6% YoY to VND 897 bn

and net income increased 41% YoY to VND 85 bn. It is worth noting

that in 2013, marketing expense exceeded 10% of total expense

and IMP’s PBT used for tax calculation was adjusted by an

additional VND 45 bn. Ignoring this one-off event, net income

increased 19% YoY in 2014. In addition to encouraging earnings

result, IMP stock performance (+72.73%) was influenced by news

of share issuance plan which comprised of a bonus share (1 bonus

share for every 2 existing shares), an ESOP and an issuance to a

strategic partner.

TRA: 2014 marked a significant transformation in TRA’s selling

policy in which it aims to sell directly to more retail stores, hence,

eliminating middlemen and stabilizes retail prices for end users.

The new policy costs TRA some of its wholesales clients but the

company acquired more retail clients in return. However, because

orders from wholesales clients are more significant than that from

retail clients, TRA’s sales and net income declined 11% YoY and

13% YoY respectively in 9M14. TRA also expects its sales force to

advance by 20% YoY as the total number of clients increased from

10,000 at the beginning of 2014 to more than 18,000 at the end of

2014.

Source: Business Monitor International (BMI)

2015 Expectation


According to BMI, Vietnam pharmaceutical industry will remain

robust in the next few years thanks to i) low level of per capita

drug expenditure: The Ministry of Health (MoH) revealed that on

average each Vietnamese spent USD 31 on medicine in 2014

compared to Thai (USD 60), Chinese (USD 100) and Korean (USD

300), ii) increasing health awareness, and iii) growing access to

pharmaceuticals. BMI forecasts that the industry will expand with a

CAGR of 15% during the period 2015-2018. For 2015, in particular

sales will increase 16% compared to 2014.

Marketing and promotion expense is no longer limited to 15%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

-

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

Pharmaceutical sales (VND bn)

YoY growth (%)



of total expense starting 01 January 2015. The removal of this

ceiling will most likely benefit pharmaceutical companies in 2 ways:

i) improved OTC sales: Most major companies now seek growth in

the OTC channel amid gloomy ETC sales as a result of Circular 01,

and ii) increase domestic companies’ competitiveness against

foreign players: Domestic companies will have more room to

promote their brands and boost consumers’ awareness.

Key developments in notable companies:

DHG: The beta-lactam factory with a designed capacity of 1 billion

units per year will likely commence operation in 1Q15. 2015 marks

the beginning of the tax subsidy period for the new factory which

will last for 15 years and will save DHG approx. VND 1,000 bn in

tax expense in total. Earnings growth will be supported by

significantly lower corporate income tax rate.

IMP: Phano Pharmacy, IMP’s new strategic partner, is believed to

help the company grow its distribution network and OTC sales.

Phano Pharmacy has retail stores in major cities (Ho Chi Minh city,

Can Tho, Da Nang, etc.) and plans to expand its retail space in

2015. Although no detailed plan is announced, we believe IMP will

benefit from this collaboration. Stock price will likely to rally on news

of extended foreign ownership room.

Issues and risks

Non-diverse and low-value products: According to the MoH,

domestic companies produce 12,000 types of medicine from 520

active ingredients while foreign companies produce 11,000 types of

medicine from 1,000 active ingredients. In addition, local players

lack specialized and high value drugs. As a result, only 13% of

medicines used in central hospitals are domestically produced.

Reliance on imported raw materials: According to BMI, 90% of

pharmaceutical raw materials are imported.


Earnings outlook (positive/negative with comparison with last

year etc.) & sector valuation



We hold an Overweight position for the sector based on its long-

term positive outlook and earnings upside of major stocks.

For DHG, we believe growing production capacity will support net

sales which are estimated at VND 4,647 bn in 2015 (19% YoY).

Assuming a 14% CIT rate, our forecast for 2015 net income is VND

746 bn (33% YoY), equivalent to an EPS of VND 8,490 and 2015

PER of 11.3x. Our target price for DHG is VND 121,000/share.


DHG (31/12/2014)

Stock

Price (VND)



2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E

DHG 96,000 398.42 15.0 11.3 3.7 3.2 9.2 7.8 2.6% 3.1% 6,390 8,490 -5.4% 32.9% 10.5% 19.2% -5.4% 32.9%




INDUSTRIALS

PORTS: NEUTRAL (Last year call: Neutral)

Key call: VSC

Huong Vu, +84 4 3936 6321 ext. 624, [email protected]

Port industry performance in 2014

Source: Bloomberg



The port industry gained 17.9% in comparison with 8.15% of the VN

Index. Although most failed to approximate to their performances in

2013, stocks such as DVP (18.11%), VSC (15.22%) did enjoyed

upbeat performances


VSC and DVP achieved encouraging sales compared to end-2013.

In 11M14, DVP achieved VND 532bn in sales, equaling to 102% of

2013’s result. For VSC, ending 9M14, the Company fulfilled around

80% of the year end target, representing a 12% YoY growth.

Coupled with positive business performances, high cash and stock

dividend payments helped boost stock performances during the

year.

In 2014, the through put volume of all Vietnam’s marine ports

reached 370.3 mil tons (14% YoY), of which container volume

achieved 10.24 mil TEUs (20.1% YoY). According to Vietnam

Maritime Administration (VMA), the through put volume of Ports

Group 1 (including Hai Phong Port) achieved 120,3 mil tons (13%

YoY) and covered 33% of total goods transported nationwide.

In particular, during 11M14, through put volume in the Hai Phong

area reached 55.52 mil tons, a 16% YoY growth. In terms of

container volume, Hai Phong Port area received 3.36 mil tons

(20.3% YoY). For 2015, Hai Phong targets through-put volume to

reach 65 mil tons.

Ports in Cai Mep-Thi Vai area (Group 5) recorded positive

70%

80%

90%

100%

110%

120%

130%

140%

150%

Vn Index Industrials Port




development with 59.3 mil tons in 2014, a 20% YoY growth.

Containers through put also recorded positive growth rate of 27%

with 1.15 mil tons.

However, Ha Tinh Port area saw the biggest growth in 2014 with

4.09 mil tons, 33% YoY growth. This can be explained by the

behemoth FDI port-steel Formosa project.

According to the plan of Vietnam Marinetime Association, expected

through put volume up to the year of 2015 is 410 mil tons, 2014 has

already achieved 90% of the pathway with 370.3 mil tons. As the

target for through put volume in 2015 is 410 mil tons, 2014’s result

achieved 90% of the plan. For 2015, VMA targets a 10% yearly

growth with 407 mil tons and 11.5 mil TEU for container, a 13% YoY

growth.

VSC (15.22%): New Green VIP Port will help stay afloat

2014 saw a substantial change to VSC with the acquisition of a new

port. The JV with VIP, in which VSC holds 65%, is said to be a

critical growth catalyst for VSC in the near future. In the context of

fierce competition and dormant growth from current capacity, port

expansion is critical for VSC.

Ending 9M14, VSC’s revenue and net profit reached VND 647bn

(12% YoY) and VND 162bn (0.5% YoY) respectively, achieving 84%

and 86% of the yearly plan respectively.

DVP (18.11%): Geographical advantage

With the exisiting advantage of geographical location as well as port

infrastructure, DVP is on track to achieve its yearly target of VND

500bn in revenue and VND 195bn in net profit. However, DVP is not

immune to the competition among ports in Dinh Vu area, DVP had to

lower its handling freight fee given the introduction of the new Nam

Hai Dinh Vu Port of GMD. Because Lach Huyen deep water port is

not expected to come into operation until the near future, DVP would

be able to maintain its relative advantage for a certain number of

years to come.

Ending 9M14, DVP’s revenue and net profit reached VND 402bn

(7% YoY) and VND 172bn (12% YoY) respectively, achieving 80%



and 88% of yearly target.

2015 Expectation


In theory, plummeting oil price would encourage more seaborne

trading, therefore, port services companies will benefit from more

ships docking. As a result, ports companies' top line is expected to

benefit from the situation.

In order to maintain growth, ports either need to upgrade logistics

capacity, to exploit the current limited capacity and eventually

increase capacity or, acquire and build new ports. We believe the

future belongs to those who are capable of expanding.

Issues and risk

Although seaborne trading may see better result in the coming year,

the economy has yet to blossom. Together with that, fierce

competition between ports to attract shipping clients is expected to

persist. Oversupply is a matter that remains unsolved to ports

industry. Ports situated good locations with advanced logistic

equipment have a better chance to stay competitively fit.


Earnings outlook

Taking into consideration all the factors, we expect that the industry

will not see any significant changes in 2015. Fierce competition

among ports will persist. However, because listed port companies

are all operating at maximum capacity, we expect to see meager

growth in 2015.

Stocks that we expect to outperform in 2015: VSC

VSC: Short term pain for long term gain

VSC mostly operates in the Hai Phong area with past intention to

expand to different regions of Da Nang and Ho Chi Minh City.

However, we believe VSC made the right decision to channel of its



efforts into the new port in Dinh Vu-Hai Phong area. The new port,

named VIP Green Port is a JV between VSC and VIP in which VSC

holds 65% and is expected to be the key contributor of the port

opeartion. The construction is divided into 2 phases in which the first

phase is expected to be completed by end 2015. Once the first

phase is completed, VSC will double its current capacity of 350k

TEU.

However, until the new port commences operation, the Company

would undergo a period of capital expenditure with meager financial

income, no immediate revenue growth, increasing debt interest, and

contracting cash dividend. 2015 is expected to be a preparation year

for VSC’s sustainable growth

We expect 2015’s revenue and net profit to reach VND 953bn (7%

YoY) and VND 275bn (11% YoY) respectively, translating into EPS

of VND 7,964. VSC is trading at 6.8x PER, which is quite attractive

for a fundamentally sound company with foreseable significant

growth.

VSC (31/12/2014)

Stock

Price (VND)



2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E

VSC 50,000 82.32 7.0, 6.3 1.6 1.2 3.6 3.3 4% 0% 7,182 7,964 -13.9% 10.8% 11.8% 11.2% 4.0% 11.0%




SHIPPING: OVERWEIGHT (Last year call: Neutral)

Key call: VOS, PVT

Huong Vu, +84 4 3936 6321 ext. 624, [email protected]

Shipping industry performance in 2014

Source: Bloomberg

Source: Bloomberg



The shipping sub sector gained 16.7% in comparison with. 8.15% of

the VN Index. Although the sub sector failed to match 2013’s

performance of 99%, VOS and VIP did enjoyed encouraging

performances of 44% and 56%, respectively.


2014 was a year which saw great volatility for the Baltic Dry Index

(BDI). The BDI concluded the year down 60% YTD. Although the

BDI had surged in March and October, it dramatically dropped in

November which coincided with declining oil price. Slumping BDI in

the few last months of the year is normal due to dormant demand

during the long holiday’s season. 2014 was distinctive as declining

oil price drove down freight rates as a way to share difficulties

between shipping companies and their clients. However, because

BDI comprises of different types of ship sizes and is heavily affected

by the highest weight size, which is Capesize, BDI did not truly

reflect the situation in Vietnam which mainly comprises of small

ships. In terms of BDI for handisize and Supramax, there was little

improvement during the year. Both sub-indices remained shallow

during the year amidst little improvement in August and September.

Because most of the dry bulk fleets in Vietnam comprise of

Handisize and Supramax, little improvement in the sub-indices

implied meager changes in freight rates. As a consequence, dry

bulk shipping companies such as VOS experienced minimal rates

growth and sales growth during the year.

On the other hand, liquid shipping companies continued to benefit

from their customers that are also their parent companies with

guaranteed rates and demand such as VIP, VTO with Petrolimex,

70%

80%

90%

100%

110%

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150%

Vn Index Industrials Shipping

0

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40

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120

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2014 BDI vs. WTI

BDIY Index (R2) CL1 Comdty (R1)




PVT with Petro Vietnam. During 2014, total carriage volume by

Vietnam shipping companies reached 98.5 mn tons, a slight

increase of 0.13% vs.2013. Vietnam shipping companies only cover

10-12% of Vietnam total import and export carriage.

Although domestic marine shipping is covered 100% by local

shipping companies, marine shipping only covers 19% of cargo

shipping volume of all transportation types. In terms of international

shipping activities, Vietnamese shipping liners only played a minor

role in Vietnam import-export cargo shipping. In 2014, nationwide,

local shipping liners held only 10-12% market share, according to

VMA.

VIP (56%):

VIP enjoyed an eventful year that resulted in a 56% gain of the stock

price. In November, VIP announced its sales of VIPCO Dinh Vu

container port to VSC and the establishment of VIPCO Green Port, a

JV between VIP and VSC. VIP received VND 350bn from VSC but

contributed VND 135bn to VIP Green Port (actual receipt of VND

215bn). VIP currently holds 30% of the JV. Moreover, in December,

VIP announced its 25% cash dividend which significantly propelled

VIP’s stock performance. Closing the year, VIP’ share price

enhanced 56% vs. the beginning of the year.

Ending 9M14, VIP’s revenue and net profit reached VND 528bn (-

14% YoY) and VND 29.6bn (-78% YoY) respectively.

VOS (44%):

VOS is a possible turn around stock. Ending 9M14, VOS’s revenue

and net profit reached VND 1,575bn (-2.4% YoY) and VND -22.1bn

(-86.8% yoY). However, with the sales of Diamond Star in

December, it is expected that VOS would enjoy a noticeable growth

in its bottom line in 2014. The Diamond Star was announced to be

priced at USD 5.46mn and was fully depreciated. After two years of

losses (2012: VND -34.690bn and 2013: VND -193.751bn), a

positive net profit in 2014 would help VOS to maintain listing on the

Ho Chi Minh City Stock Exchange. VOS’s stock price advanced 44%

on the expectation that it would remain listed.



2015 Expectation


The recent oil price slump has reduced fuel cost for shipping

companies. As fuel accounts for around 50% of cost of goods sold,

fuel plays an important role in contributing to gross margin of

shipping companies. Nevertheless, declining oil price affects

shipping companies differently. For dry bulk shipper with

international voyages, declining oil price would obviously result in

lower cost of goods sold. Companies with time charter shipping

fleets, oil price effect would be reduced as the freight rate would be

somehow fixed regardless of rapid movement of freight rate and fuel

price changes.

Apart from favorable fuel price, it is safe to assume that declining oil

price may also lead to increasing demand for shipping. More

seaborne trading activities would help enhance top line of shipping

companies.

Issues and risks

Liquid shipping companies may have to share difficulties with their

customers, who are also their parent companies during this tough

time for oil and gas companies. Although they are in time charter

contracts, it is believed that freight rates would be adjusted to

partially reflect low crude oil price.

Low BDI and single digit growth rate of China indicates the global

economy has yet to fully recuperate. Therefore, seaborne trading is

not expected to experience extraordinary growth next year.


Earnings outlook

Taking into consideration all the factors, we expect that shipping

companies will have better business performance in 2015. The main

contributor to margin expansion and revenue growth is low oil price.

Although each company would benefit differently, the consensus is



that industry players will all benefit.

Stocks that we expect to outperform in 2015: VOS and PVT

VOS:

As a dry bulk shipping company, VOS is benefiting from low oil price

via favorable bunker price. Although bunker price is expected to

have a less steeper decline that crude oil, given that bunker oil

makes up 50% of cost of goods sold, VOS expects to see more cost

saving for 2015. Additionally, in case freight rates do not decline

significantly, VOS may enjoy margin expansion.

In addition to favorable bunker rates, VOS expects to restructure its

debt situation in 2015. This will greatly mitigate existing burden on

VOS’ income statement during 2014-2016. We also expect that VOS

would sell one or two dry bulk ships during 2015. The ships are said

to be fully depreciated.

We expect 2015 revenue and net profit would reach VND 1,993bn (-

4.2% YoY_ and VND 24,394bn (110% YoY), translating to an EPS

of VND 154 and BVPS of VND 8,965. VOS is trading at 0.7FPBR in

2015, which is attractive given its turn around characteristic.

PVT:

Low oil price has caused weak price performances of PVN-related

companies including GAS, PVD, PVS, PGD, PGS, PVT and PET. As

a service provider company rather than a trading company with

direct business linked to oil price, PVT’s core business is somewhat

sheltered from low oil price. However, it should be noted that the

largest transportation expense is oil, therefore, low oil price will

benefit PVT as oil price reduces, partially counterbalancing the

decline of freight rate.

For the FSO/FPSO segment, we expect that declining oil price will

not play a significant role as their contracts are 10Y long and already

signed. In addition, new FSO commencing operation in April 2015

will be a new long term driver for growth. The new FSO is expected

to contribute an additional USD 10mn revenue/year, increasing the

segment’s revenue by 30% in 2015 and 15% onwards.

Also, we expect that coal transportation will help PVT”s revenue to



increase.

With all the positive news surrounding fuel cost and core business,

we forecast PVT’s revenue and net profit will reach VND 6,333bn

(17.4% YoY) and VND 364bn (6.1% YoY) respectively, resulting in

an EPS of VND 1,093 (6.2% yoy) in 2015.

VOS, PVT (31/12/2014)

Stock

Price (VND)



2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E

VOS 6,200 41.33 98.9 42.7 0.77 0.75 6.95 7.81 0% 0% 68 154 -104.8% 127.6% -6.0% -4.2% -106.1% 109.9%

PVT 14,000 170.57 14.6 13.7 1.24 1.23 5.3 4.7 6.7% 6.7% 1,029 1,093 1.6% 6.2% 8.5% 17.4% 11.8% 6.2%




PLASTICS PIPE: OVERWEIGHT (Last year call: Neutral)

Key call: BMP

Kien Nguyen, +84 4 936 6321 ext510, [email protected]


Source: Bloomberg


Slightly outperformed the VN Index: The sector gained 11.17% in

comparison with 8.3% of the VN Index even though constituents

including BMP and NTP exhibited minimal improvement in earnings

performance.

Despite output increasing by 13-15% YoY in 2014, gross profit

margin of the sector declined as key players increased sales to

projects at lower prices. In addition, BMP and NTP both increased

their selling/sales ratio by 1-2% to increase their competitiveness,

leading to a decline in profit for NTP and slight profit growth for BMP

in 2014.

PVC price increased slightly by 1.2% YoY in 9M14 and as a result,

hindered gross profit margin of the sector.

2015 Expectation

Benefit from low resin price:

Since Nov 2014, following declining oil price, PVC resin price

declined significantly by 20% from USD 1,000/ton to only USD

800/ton. Resin price in 4Q14 declined by 8.6% compared to 9M14.

As oil price is expected to remain low in 2015, we expect that

average resin price in 2015 will be 10% lower than that in 2014, and

this will theoretically increase the gross profit margins of NTP and

BMP by approximately 5% as both companies must lower the selling

prices accordingly.

Increasing discount will lower PBT margin: In the past BMP and

NTP both had relative monopoly in the South and the North where

they both controlled market prices and benefited from resin price

decline. As the competition landscape has changed in which private

60%

80%

100%

120%

140%

160%

180%


Vn Index

Industrials

Pipe plastic

700

800

900

1000

1100

1200

1300

1400

1500

1600

1700

Resin Price

PVC HDPE




companies have increased their presence and competed directly

with the two behemoths, BMP and NTP must increase their

discounts to agents and to project managers to retain and gain

additional market share. We expect they will increase their selling

expense/sales ratio by 1% in 2015.

Issues and risks

Price war remains an inherent risk: Because producers have

increased discount to agents, it is very difficult for BMP and NTP to

lower their discount when resin price recovers. In addition, both

companies tend to increase their discount to retain their market

shares.


We expect that output will advance by 5-7% YoY in 2015 thanks to

increasing demand for construction activities and water system.

However, revenue growth will be neutralized by lower prices.

Although selling discount might continue to increase, we cannot

deny that plastic pipe’s PBT margin must increase as the resin price

has declined significantly. We expect that profit before tax of the two

companies in the sector will increase more than 15% YoY in 2015.

We favor BMP thanks to its good corporate governance, high margin

and better cost control. We expect revenue and PBT of BMP might

increase by 3.8% and 18% YoY in 2015 to VND 2,473bn and VND

600.5bn, resulting in EPS of 10,300. BMP is trading at 2015 PER of

7.3x, which is very attractive.

BMP (31/12/2014)

Stock

Price (VND)



2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E

BMP 73,000 154 8.4 7.1 2.1 1.7 4.7 4 4.10% 4.10% 8728 10298 7% 18% 14.10% 3.80% 7% 18%




CONSTRUCTION: OVERWEIGHT (Last year call: Overweight)

Key call: FCN



Source: Bloomberg


Outperformed the VN Index: The construction sector gained

29.85% in comparison with 8.15% of the VN Index. The sector’s

upbeat performance was mostly attributed to turnaround stocks that

were exposed to the infrastructure industry including HUT and LCG.

Construction companies’ performances failed to approximate that of

infrastructure companies but still managed to outperform the VN

Index. Project delay and provision booking are main risks facing the

sector.

While VCG and CTD experienced strong earnings growth in 2014,

FCN and HBC experienced modest earnings growth and even

decline due to project’s delay and high provision for bad debt.

In 2014, total construction value reached VND 6,76 trillion,

increasing by approximately 7.6%, highest since 2011, mostly in

residential construction.

2015 Expectation

The construction industry is expected to flourish at a higher rate than

in 2014 thanks to improvement in the property segment, especially

in the low income housing segment.

Increasing industrial construction: Industrial construction is expected

to flourish at a faster pace than residential construction thanks to

continuous FDI investment and aggressive investment in industrial

projects including thermal power plants, and oil refineries. Gross

profit margin for industrial projects is usually twice as much as

residential ones.

Issues and Risks:

60%

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180%

Vn Index

Industrials

Construction




Delay and bad debt provision are two inherent risks of the sector.

Failure to deliver project on time might eat up thin profit margin.


Because earnings are contingent on provision, we conservatively

assume that most construction companies will not experience high

earnings growth in 2015 except for FCN, as large projects including

Long Son Refinery, Vinh Tan 4 Thermal Power Plant, and the Metro

line will be implemented in 2015. CII is another favored stock as it

provides wide range of products from BOT toll collection and

property development, construction and water services. All of CII’s

services are profitable and stable.

FCN’s revenue and PBT are expected to grow by 22.3% and 30.5%

YoY in 2015, resulting in EPS of 3,293. FCN is trading at 2015 PER

of 6.2x, which is quite low.

CII’s revenue and net profit to parent are expect to grow by 33% and

24% YoY in 2015, resulting in diluted EPS of 2,246/share (after 70%

CB converted). CII is trading at PER of 8.4x, which is quite low.

FCN (31/12/2014)

Stock

Price (VND)



2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E

FCN 20,700 44 7.39 6.28 1.29 1.14 4.47 3.35 7.2% 7.2% 2,801 3,297 25.2% 30.5% 16.6% 22.3% 25.2% 30.5%




INFORMATION TECHNOLOGY

IT: OVERWEIGHT (Last year call: Overweight)

Key call: FPT


IT industry performance in 2014

Source: Bloomberg



Outperformed the VN Index: Two of the biggest IT stocks

including FPT and CMG both performed exceptionally in 2014.

Although FPT, the biggest constituent in the sector experienced

meager earnings growth in 2014, the sector is likely to enjoy rerating

as a defensive sector.

FPT advanced substantially when it signaled high cash and stock

dividend payments before AGM and actual payments in mid-2014.

Key highlights on the sector:

According to GFK, Vietnam’s mobile market increased by 18% in

volume and 35% in value in 2014, resulted from switch from featured

phones to smart phones. Phone Distribution and retail companies

are benefiting from the booming of the market. Total internet

subscribers increased by 15%. On the other hand, IT hardware and

notebook import decline by 7% and 12% respectively.

FPT is expected to grow by 16% in sales and 5% in net profit, mainly

thanks to growth of software outsourcing, Retail and Distribution

segments.

2015 Expectation

Integration System: Increasing demand for software solutions

rather than hardware will reduce the size of IS projects.

Additionally, margin of the segment is expected to decline due to

60%

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160%

Vn Index

Information Technology




competition from small IT companies with no VAT or CIT.

Retail and distribution: Vietnam’s mobile market is expected to

enjoy double digits growth in terms of sales in 2015. Because of

the revenue of large IT companies still derive from this segment,

revenue of IT companies are expected to grow at more than

10% YoY in 2015.

Telecom: The telecom landscape will become increasingly

competitive after Viettel Telecom and Mobifone, which will

separate from VNPT, boost investments in fiber optics and

recapture market shares from FPT Telecom. Although revenue

will continue to advance thanks to increasing subscribers, profit

might remain flat due to heavy investments in fiber optics.

Software outsourcing: Vietnam continues to become a

China+1 for software outsourcing market. The segment holds

great potential in the long term thanks to low labor cost and

highly skilled workers. The sector is expected to experience 30%

YoY sales growth in 2015.

Issues and risks

Low ICT spending: Low ICT spending by banks and governmental

related agencies.

High competition in the mobile retailing and distribution

businesses: Mobile World Group is the largest retail player, whose

number of shops is double that of FRT. In 2015, the third largest

mobile distributor, Digiworld is expected to be listed. PSD and

Digiworld are gaining market share from FTG.

JPY depreciation: Software outsourcing’s revenue is partially

affected by JPY’s weakness.

Global risk: As IT companies increase their exposure to

international projects, they are subjected to risks relating to the

countries they implement their projects.

Our Investment stance: OW

Although ICT spending will not increase, mobile market growth and



software export and outsourcing will continue to help ICT companies

maintain their 10-15% profit growth. We maintain a positive view on

the leading company in the sector, which is FPT

Stocks that we expect to outperform in 2015: FPT

In 2015, we expect that FPT”s revenue and PBT might reach VND

37,326bn (+ 14.6%YoY) and VND 2,779bn (+ 9.2% YoY) thanks to

strong growth of FRT. Net profit to the parent company and EPS are

expected to reach VND 1,913bn (+ 12.5% YoY) and VND 5,533.

At the year-end price of VND 48,000/share, FPT is trading at 2014

and 2015 PER of 9.7x and 8.6x, which is quite low. We recommend

BUY FPT at 1Ytarget price of VND 58,600/share (22.6% upside).

FPT (31/12/2014)

Stock

Price

(VND)

Market cap

(mil USD)


2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E

FPT 48000 772 9.8 8.7 1.6 1.4 5.3 4.7 4.20% 4.20% 4921 5535 5.80% 12.50% 16% 14.60% 5.80% 12.50%




MATERIALS

STEEL AND CEMENT: OVERWEIGHT (Last year call: Neutral)

Key call: HSG, BCC



Steel industry performance in 2014

Source: Bloomberg


Steel industry performance

The steel industry gained 44.25% in comparison with 8.15% of the

VN Index and 21% of the material sector. The outperformance was

driven by HPG (+52.42%) and HSG (+20.14%).

HPG (+52.42%): Impressive earnings growth

Thanks to Phase 2 of the Integrated Steel Complex, for the first

time in history, HPG’s construction steel sales volume reached 1

mil tons, a 43% YoY increase. With such sales volume, HPG’s

construction steel market share advanced to 19% in 2014 from

15.2% in 2013.

In 2014, Mandarin Garden Apartment Project contributed over

VND 3,100 bn in revenue and VND 670 bn in net profit.

Earnings results exceeded all expectations: Thanks to high steel

sales volume and Mandarin Garden Project, 9M14 revenue and

net profit reached VND 18,944 bn, a 51.9% YoY increase, and VND

2,755 bn, a 81.2% YoY increase.

HSG (+20.14%): Overcoming a difficult period when HRC price

declined

In 4Q13, net profit declined to VND 46 bn, a 42.5% YoY and

75.2% QoQ decrease, because the company purchased HRC

when price was peak. Nevertheless, earnings recovered in four

subsequent quarters with average quarterly net profit reaching

60%

80%

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180%

200%

Vn Index Materials Steel





VND 103 bn.

The two new cold-rolling lines, each has a production capacity of

200,000 tpa, commenced operation in June and Aug 2014,

enhanced profit margin because HSG no longer had to purchase

CRC from external suppliers.

Cement industry performance in 2014

Source: Bloomberg

Cement industry performance

The cement industry gained 83.88%, compared with 8.15% of the

VN Index and 21% of the material sector. The outperformance was

driven by HT1 (+228.3%) and BCC (+166.67%).

HT1’s 9M14 revenue reached VND 4,905 bn, a 6.6% YoY

increase. 9M14 net profit reached VND 91 bn, compared with a

loss of VND 70 bn in 9M13. HT1 gained VND 170 bn from FX,

and interest expense declined from VND 605 bn in 9M13 to VND

403 bn in 9M14.

BCC’s 9M14 revenue and pretax profit reached approx. VND

3,118bn (+16% YoY), and VND 66bn (+81% YoY) respectively.

Increase in revenue was mainly driven by an increase in sales

volume of approx. 15% YoY. Additionally, in 9M14, BCC gained

approx. VND 55bn from FX, and interest expense declined

approx. 16% YoY due to low interest rates.

Source: VSA

Key highlights on the steel industry

Steel demand exhibited clear signal of improvement

For the first time since 2010, construction steel sales volume

attained encouraging growth. In 2011 and 2012, sales volume

decline by 1.6% and 6.7% YoY, then slightly increase by 2.1% in

2013. In 2014, it is estimated that construction steel sales volume

advanced by 12% YoY, reaching 5.12 mil tons.

Steel sheet and pipe sales volume maintained high growth in 2014,

with estimated growth rates of 21% and 44% YoY respectively,

contributed by both domestic sales and exports.

Overcapacity remained in the industry

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Vn Index Materials Cement

4,7

96

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633

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0

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Constructionsteel

Steel sheet Steel pipe

Steel sales volume of total industry (1,000 tons)

2011 2012 2013 2014E



At present, production capacity of Vietnam steel industry reached

8.5 mil tons for construction steel, 3.3 mil tons for coated steel

sheet, and 2.1 mil tons for steel pipe. Consequently, utilization rate

only reached 60% for construction steel, 58% for coated steel sheet,

and 52% for steel pipe.

Overcapacity has dampened profit margins of steel makers.

Therefore, few companies can benefit from the growth in steel

demand. Of the 9 listed steel companies, 7/9 companies saw sales

growth in 9M14, but only 5/9 companies attained profit growth. Only

HPG and HSG has gross profit margin of over 10%, and only HPG,

HSG and TLH has net profit margin of over 2%.

That is to say there is a large divergence among steel companies.

Only companies which are competitive in production cost and have

high market share can be attractive enough for investment.

9M14 business results of listed steel companies

(VND bn) DNY DTL HPG HSG NKG POM TLH VGS VIS

Net sales 1,435.8 1,398.5 18,943.6 11,691.9 4,378.4 8,089.0 2,590.2 1,927.9 2,684.2

YoY growth -17.7% -4.4% 51.9% 29.0% 38.2% 5.0% 19.1% 8.9% 11.5%

Gross profit 76.9 127.2 4,152.2 1,340.2 236.1 326.5 158.4 80.3 178.0

Margin 5.4% 9.1% 21.9% 11.5% 5.4% 4.0% 6.1% 4.2% 6.6%

Net profit 4.8 15.3 2,670.6 307.6 58.8 -20.2 63.6 19.9 15.8

YoY growth -57.5% 46.8% 82.3% -32.5% 39.4% n.a. -55.0% 188.2% n.a.

Margin 0.3% 1.1% 14.1% 2.6% 1.3% -0.2% 2.5% 1.0% 0.6%

Source: Financial statements of steel companies

Steel sheet makers confronted with counterfeit products

Low-quality coated steel sheets have become omnipresent in the

market. Retailers purchase low-quality steel sheets, perhaps from

China, and print well-known brands on the sheets. In addition, they

defraud customers by declaring that the sheets have a higher

thickness. In 10M14, domestic steel sheet sales volume only

advanced by 11.4% YoY, compared with 28.3% YoY in 10M13.

In Nov 2014, leading steel sheet makers initiated several reports on

the media in an attempt to combat against counterfeit products. We

expect that consumers will become more aware of fraudulent and

will not purchase from untrustworthy retailers. In addition, the State

authorities will supervise the steel sheet market more strictly and



penalize frauds.

Key highlights on the cement industry

The industry’s production capacity is estimated at 81.6mn tons by

the end of 2014, up from 73.5mn tons in 2013, 62.6mn tons in 2010,

and 39.5mn tons in 2008. In 2014, total produced volume is

estimated at approx. 55mn tons of cement (+14% YoY and 67% of

designed capacity).

However, growth in domestic demand has yet to parallel that of

supply. Domestic cement consumption is estimated at 50.6mn tons

in 2014 (+10% YoY). Export is only a temporary solution to combat

oversupply as profit from exporting is negligible. In 2014, the

industry is estimated to export approx. 6.8mn tons of cement and

12.9mn tons of clinker.

2015 Expectation


Higher GDP growth target in 2015

2014 GDP growth reached an encouraging 5.98%, compared with

5.42% in 2013 and 5.25% in 2012. Of which, growth of the

construction industry reached 7.07% in 2014, compared with 5.83%

in 2013 and 2.09% in 2012.

The National Assembly targets 2015 GDP growth at 6.2%, which is

a positive indicator for the construction material industry. Higher

economic growth target implies a higher total social investment

capital and construction investment value which will boost demand

for cement. Given 2015’s GDP target of 6.2%, total construction

investment value is forecast to achieve a growth of 6.8% YoY, and

growth in domestic demand for steel and cement is expected at 11%

and 10.9% in 2015.

Higher housing demand in the near term will be supported by

favorable conditions in Vietnam, including (1) expected low interest

and inflation rates, (2) increasing income per capita, and (3) urban



population rate of 33%, and is expected to grow at 2.3% p.a.

Tightening cement supply

Given the oversupply situation in the cement industry, the Ministry of

Construction (MoC) has conducted two significant adjustments to

the cement industry’s master plan. According to Decision 1488/QĐ-

TTg in 2011 which stipulates production capacity expansion of

Vietnam’s cement industry, total production capacity was planned to

reach 90.5mn and 94.3mn tons of cement by the end of 2014 and

2015 respectively. Nevertheless, two major adjustments have been

made to the plan.

In April 2013, MoC decided to eliminate 9 projects with designed

capacity of under 0.6mn tons of cement pa, and rescheduled 7

projects to start operation after 2015.

In Sep 2014, MoC eliminated an additional 5 projects from the

master plan.

By implementing these adjustments, no additional cement plants will

commence operation in 2015 and 2016. New production capacity by

the end of 2015 is planned at 82.6mn tons of cement, equivalent to

a reduction of 11.7mn tons. Judging by the action, this can be seen

as a supporting factor for the cement industry in the next few years.

Weak coal price may enhance profit margin of cement

producers

Coal, the main fuel in clinker production which accounts for approx.

50% of total clinker production cost, is under pressure from

oversupply. In 2014, average selling price of coal remained weak

due to oversupply in the domestic and global coal industry. Global

coal prices steadily declined in 2014 in response to supply increase

and weak demand in China – the biggest consumer of coal. Weak

coal prices are forecasted to persist in the next 3 years.

Issues and risks

Overcapacity and fierce competition in the steel industry

As we mentioned above, overcapacity in the steel industry is rather



severe. In addition, there are threats from Formosa steel project,

Chinese steel, and in the longer term, Russia Steel.

The behemoth Formosa project in Ha Tinh province: The 1st

phase, which will commence operation in mid-2015, is invested

with USD 7.9 bn and will produce 7.5 mil tons of steel per annum.

In the 2nd

phase, an extra USD 20.1 bn will be invested to raise

production capacity to 22.5 mil tons p.a. Formosa’s major product

will be hot-rolled coil, which is not manufactured in Vietnam at

present. Nevertheless, whether Formosa will also manufacture

long steel and compete with local companies like HPG remains a

mystery.

Import of Chinese steel to Vietnam is increasing as importers

declare construction steel as alloyed steel to be granted with zero

import tax instead of 12-15%. It is estimated that Chinese steel

represents approximately 10% market share and there has been

no effective measure to prevent the trade frauds.

Russian steel: Because of the Free Trade Agreement with the

Customs Union of Russia – Belarus – Kazakhstan (VCUFTA),

which will take effect early this year, import duty on most steel

products from Russia will be reduced from the current 12-15% to

zero in a few year. However, when the import duty will be

reduced is still under negotiation because the Vietnam Steel

Association has appealed that the exemption of import duty steel

from Russia should be delayed.

Source: Bloomberg

Steel price is declining

Since the beginning of 2014, global iron ore price has declined from

approximately USD 135/ton to USD 70/ton. During the first three

quarters of 2014, domestic steel selling price did not decline

significantly. Nevertheless, steel price started to decline in

December 2014. There was an approximate 5% decline in

December 2014 and 3% in January 2015. In such circumstance,

profit of companies with low inventory turnover will be affected. For

HPG specifically, advantage of low production cost thanks to the

blast furnace technology and low domestic iron ore price will

diminish.

0

100

200

300

400

500

600

700

800

900

Steel material price (USD/ton)

Hot rolled coil Steel scrapIron ore



Coal price recovery

A recovery in coal price is regarded as the major risks for cement

producers. Cement producers profitability would be negatively

affected in cases of increases in coal prices. In others words, the

issue is highly corrosive to cement producers’ earnings.

Nevertheless, we see a low probability of a recovery in coal price to

materialize in the next 3 years given the increases in supply of coal

in China and Australia, and slow economic recovery in the Euro

zone forecasted by the IMF.


We believe that increasing demand will be the critical factor in

driving earnings growth of construction material. In addition, cement

companies will benefit from decline in financial expense and gain

from FX.


HSG

The largest steel sheet maker in Vietnam with 35.5% market

share, the 2nd

largest steel pipe maker with 18.6% market share.

The most profitable steel sheet maker.

The two new cold-rolling lines, each has a production capacity of

200,000 tpa, commenced operation in June and Aug 2014, will

enhance profit margins because HSG no longer has to purchase

CRC from external suppliers.

The company is constructing new plants in Nghe An and Binh

Dinh Province, which will ensure sales growth in coming years.

Investment risks: Current high inventory can impact profit

margin in the short-term; large CAPEX (an average of roughly

VND 1,200 bn each year in 2015-2017) will increase debt and

interest expense.



BCC

Brighter outlook supported by (1) increasing demand for cement,

(2) debt and interest expense reduction, (3) FX loss allocation

completion, and (4) stable coal prices.

Given optimistic signs of demand for cement in the industry, and

production capacity of BCC, BCC’s sales volume is expected to

grow 8.5% and 8% in 2015 and 2016 respectively. While the

industry’s supply YoY is tightened, domestic demand for cement

is expected to improve which will support average selling prices

of cement.

From 7 Oct 2014, average selling prices of PCB30 at BCC’s

factories have increased 4% compared with the price in 9M14.

BCC is undergoing deleveraging. By the end of 1H14, long term

debt totaled approx. VND 2,521bn (including VND 620bn due

within 1 year) in which BCC’s EUR debt reached approx. EUR

64.6mn (~ VND 1,865bn). According to the repayment schedule

of EUR debt, BCC’s EUR debt will reduce to approx. EUR 55.6mn

by the end of 2014 (including EUR 18mn due within 1 year), and

will be fully repaid by Mar 2018. BCC’s debt to equity ratio

currently stands at 2.57x and is forecasted to decline to 1.8x and

1.16x by the end of 2015 and 2016 respectively.

In 2015, BCC’s revenue and pretax profit are forecasted at VND

4,570 bn (+6.5%YoY), and VND 332 bn (+137% YoY)

respectively, translating to an EPS of VND 2,707. The forecasts

are based on the assumptions that (1) cement sales volume will

increase 8.5%, and clinker sales volume will decline 46%, (2) 1%

increase in ASP, and (3) 14% decline in interest expense.

Valuation: At the price of VND 14,900/share, the stock is being

traded at 2014PE of 13x, 2015PE of 5.5x; and 2014EV/EBITDA

of 6.3x, 2015EV/EBITDA of 5.6x. BCC’s stock 1-year target price

is derived from an average of DCF, EV/EBITDA multiple, and PE

multiple at VND 22,600/share, an upside of 52% compared with

the current price.



BCC (31/12/2014)

Stock Price

(VND) Market cap

(mil USD)


2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E

BCC 14,900 67 13.06 5.51 1.16 0.96 6.3 5.6 0% 0% 1,141 2,702 -605% 137% 16% 6% 293% 137%

HSG 47,500 213.8 10.3 8.7 1.8 1.7 9.2 7.5 2.3% 3.2% 4,260 5,498 -28.3% 29.1% 27.4% 7.2% -29.8% 29.1%




FERTILIZER: NEUTRAL (Last year call: Underweight)

Key call: DPM


Fertilizer industry performance in 2014

Source: Bloomberg

Source: Bloomberg



Strongly underperformed the VN Index: The fertilizer industry lost

14%, compared with 8.2% of the VN Index. Best-performing stock

was LAS (+ 3.7%) and DPM (- 16.6%) was the worst performing

stock.


In 2014, total demand for fertilizer is estimated at approx. 10.8mn

tons compared with approx. 10.4mn tons in 2013. Demand for NPK

fertilizer is estimated at 3.9mn tons in 2014 which is typically met by

local producers. In 2014, NPK imported volume declined by 70%

YoY, reaching 247,000 tons. In addition, smuggled NPK imported

into Vietnam had accelerated real total supply in the industry, and

asserted pressure on average selling prices.

Urea: Oversupply persists in both international and domestic

markets, exerting downward pressure on urea price: During

2013-2017 it is estimated by the International Fertilizer Association

that the world’s total urea capacity will increase by a net of 43 million

tons, to 236.3 million tons in 2017, implying a CAGR of 4.5%.

Meanwhile, demand for urea is forecasted at 195 million tons in

2017, representing a CAGR of only 3.2%. Therefore, over the next

several years, oversupply is expected to gradually increase with a

potential surplus of ~6%, thus, exerting additional downward

pressure on global urea price. In the local market, prior to 2012 and

starting from 2013, with the full operation of two new plants (Ca Mau

Fertilizer Plant- PVN and Ninh Binh Fertilizer plant – Vinachem)

total urea supply doubled. The situation shifted from under supply to

a meager over supply since then. Oversupply will intensify starting

from 2015 when Ha Bac Fertilizer Company (Vinachem) completes

60%

80%

100%

120%

140%

160%

Vn Index Materials Fertilizers

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Urea price (USD/ton)




its expansion.

According to information in recent investors bulletin of DPM, 2014

revenue and PBT are expected to reach VND 9975 bn (down 4.2%

YoY) and VND 1390 (down 43.7% YoY). Urea selling volume could

reach 840k tons (vs. 826k tons in 2013) while trading volume totaled

380k tons (vs 360k tons in 2013). On average, selling price reduced

13-14% in 2014. In our estimate, we suppose that the final profit

number could be slightly higher.

In 2014, LAS would record negative earnings growth. The additional

transportation tariff would be an unexpected burden for LAS this

year. We maintain our estimates for 2014 net income of VND 303 bn

(-32.2% YoY), translating to 2014 EPS of VND 3,896, reflective of

additional transportation tariff, the increase in sulfur price since

4Q13 and the decrease in average selling price (ASP).

2015 Expectation


Recently, the Ministry of Finance issued Regulation 17709/BTC-

TCT, which categorizes fertilizer products under non-VAT bearing

goods. Under the new regulation, fertilizer producers could no longer

claim VAT return from input materials for their production.

Accordingly, Cost of goods sold of fertilizer companies will increase

in 2015. In the meantime, as the regulation will be applied to all

fertilizer producers, fertilizer producers might collaborate to increase

selling price in order to safeguard profit.

Oversupply and smuggled fertilizer continue to hinder in the

industry. In 2015, total demand for fertilizer is forecasted at approx.

11mn tons, in which demand for NPK fertilizer is estimated at 4mn

tons which is relatively balanced by local producers. However,

smuggled NPK remains the most significant threat facing the

industry.

Phosphate fertilizer also faces oversupply given the production

capacity of the segment of 2.4mn tons while total demand for

phosphate fertilizer (superphosphate and FMC) is expected at



1.85mn tons in 2015.

While oversupply of urea will hinder growth and declining oil price

will exert pressure on urea price, we see positive catalysts that can

stimulate growth for DPM in 2015:

Input gas price would be lower thanks to oil price downturn

Urea import tax increased from 3% to 6%, which might help to

reduce China urea consumption.

Issues and risks

Smuggled fertilizer and increases in input prices (sulfur and SA)

remain the dominant risks for LAS in 2015.

A strong recovery in crude oil price, pushing up input gas price


LAS: For 2015, it would be difficult for LAS to garner positive

earnings growth as the market is saturated and the regulation on

capacity and weight of container trucks would be a factor for the

entire year (instead of three quarters in 2014). Our estimates

revealed that 2015 net income would total VND 297 bn (-2% YoY),

translating to 2015 EPS of VND 3,821

Investment view: At the current price of VND 35,000/share, LAS is

being traded at 2014 and 2015 PE of 8.9x and 9.2x. Negative

earnings growth in 2014 has tainted the stock appeal for the time

being. We assume that 2014 dividend would be at least VND

2,000/share, translating to a dividend yield of at least 5.7%/year at

current price.. Our 1 year target price for LAS is VND 33,500/share

(based on DCF model and relative valuation), implying a HOLD

recommendation.

DPM:

2015 estimates & investment view: We believe that the new

regulation on VAT will partially hinder earnings upside derived from

lower input gas price. Accordingly, in our base case in which oil

price remains at USD 60/barrel, net profit of DPM is estimated to



reach VND 1,371 bn in 2015, increasing 9.9% YoY (vs. 19.9% YoY

in our previous forecast). At yesterday market price of VND

30,600/share, DPM is being traded at 2015PER of 8.7x, which is a

slight discount to its fair value. Dividend yield of ~9% pa. is always

an added bonus for DPM. Our revised 1-yr TGP for DPM comes to

VND 33,500/share. We reiterate our HOLD recommendation.

We provide below 2015 earnings outlook of DPM at different oil price

scenarios:

Oil price (USD/barrel) 80 60 40

2015 EPS growth -36.70% 9.90% 38.50%

LAS, DPM (31/12/2014)

Stock Price

(VND) Market cap

(mil USD)


2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E

LAS 35,000 128 9.0 9.2 1.8 1.8 4.9 5.0 6% 9% 3,896 3,821 -32% -2% 0% 2% -32% -2%

DPM 30,800 537.4 9.6 8.7 1.3 1.3 3.5 3.1 10% 10% 3,207 3,524 -43% 10% -10% -4% -43% 10%




NATURAL RUBBER: UNDERWEIGHT (Last year call: Underweight)

Key call: HAG


Natural rubber industry performance in 2014

Source: Bloomberg


Industry performance (benchmark with VNindex)

Underperformed the VN Index: The natural rubber industry

(including PHR, DPR, TRC and HRC) lost 12%, compared with a

gain of 8.2% of the VN Index. Best-performing stocks were PHR (-

7%), and DPR (- 10.8%).


In 2014, global natural rubber production is estimated at approx.

12.3mn tons (+2% YoY) while natural rubber consumption is

estimated at approx. 11.9 mn tons (+ 4.5% YoY), adding approx.

0.4mn tons to 2.9mn tons of world ending stock by the end of 2014.

Vietnam natural rubber industry exported approx. 1.08mn tons of

rubber (+ 0.2% YoY) with a total value of USD 1.8bn (- 28% YoY).

PHR, DPR, TRC and HAG have been negatively affected by

worldwide oversupply. Natural rubber average selling prices of those

companies declined approx. 25% YoY.

2015 Expectation


Oversupply persists - Production will outpace demand by 202,000

metric tons in 2015, down from 371,000 tons in 2014 and 650,000

tons in 2013. Global natural rubber production is forecasted at

approx. 12.5mn tons (+2.4% YoY) in 2015. On the other hand, world

natural rubber consumption is forecasted at approx. 12.3mn tons (+

4.2% YoY). The gap between supply and demand is then estimated

60%

80%

100%

120%

140%

160%


Vn Index Materials Natural Rubber




at 0.2mn tons, adding up to 3.3mn tons ending stock.

Average selling prices are expected to remain weak in 2015 and

2016 given (1) increasing inventory, and (2) slow global economic

growth forecasted by the IMF in Oct 2014, especially in China, and

EU zone, which consume over 50% of the world natural rubber

production.


Given worldwide oversupply situation, natural rubber companies’

average selling prices will be curbed. Natural rubber companies

expect ASP will decline approx. 7% YoY in 2015.

PHR, DPR, and TRC’s sales volume are expected to remain flat as

new planted areas in Cambodia of the three companies have yet to

be tapped in large scale, reaching approx. 30,000 tons, 19,000 tons,

and 13,600 tons of natural rubber. PHR, DPR, and TRC revenue are

expected at VND 1,434bn (- 7% YoY), VND 939bn (- 6% YoY), and

VND 578bn (- 5% YoY) respectively. However, pretax profit of PHR,

DPR, and TRC are expected to decline by 25%, 25%, and 26.6%

YoY, reaching VND 183bn, VND 204bn, and VND 95bn respectively

in 2015 due to margin contraction.

In 2015, HAG’s natural rubber tapping area will reach approx.

13,000ha (+ 92% YoY), yielding approx. 16,000 tons (+100% YoY).

Given the estimated ASP of VND 31mn/ton, HAG’s rubber revenue

and pretax profit are expected at VND 517bn (+ 80% YoY), and

VND 68bn (+22% YoY) respectively. Pretax profit margin is

expected to be contracted to 13% in 2015 from 19% in 2014.

In 2015, HAG’s business performance will welcome new earnings

sources including beef cattle, palm oil, Myanmar Complex, and

hydropower in Laos, which we anticipate will contribute approx.

19%, 4%, 12%, and 4% to HAG’s 2015 revenue respectively. HAG’s

2015 revenue and pretax profit (excluding one-off earnings from

selling stake in HAGL in 2014) are forecasted at approx. VND

3,715bn (+29% YoY), and VND 1,289bn (+ 15%%% YoY),

translating to an EPS of VND 1,583. If including the one-off earnings

from selling stake in HAGL in 2014, HAG’s 2015 PBT will reach

approx. VND2,579bn, increasing 36% YoY, translating to an EPS of



VND 3,167.

HAG’s 1-year target price is derived from RNAV method at VND

27,500/share, an upside of 24%.

HAG, PHR, DPR, TRC (31/12/2014)

Stock

Price (VND)



2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E

HAG 22,100 831 9.57 7.04 1.17 1.06 10.0 8.5 5% 6% 2,330 3,167 77% 36% 4% 29% 89% 36%




UTILITIES

ELECTRICITY: OVERWEIGHT (Last year call: Underweight)

Key call: NT2



Source: Bloomberg



The utilities gained 30.1%, in comparison with 8.15% of the VN

Index. Key driver mainly derived from hydro power stocks including

SHP, CHP, TBC, TMP and SJD. SHP played as the best performer

with 114% advance in 2015


In the first 10 months of 2014, the sector consistently

underperformed the VN Index, reflecting our negative view on the

sector due to the regulation which requires Electricity of Vietnam

(EVN) to calculate selling prices based on power companies’ charter

capital at their IPO date minus accumulated depreciation. Applying

this regulation, profit of power companies declined YoY as

accumulated depreciation increased YoY. However, applying

Circular 41/2010/TT-BCTC, EVN and power companies signed long

term contracts, and therefore stabilized profit and eliminated price

decline risk. The sector outperformed the VN Index from Nov 2014

when the new pricing schedule was applied.

Hydropower continued to outperform thermal power ones as they

benefited more from higher portion of output sold to the market at

competitive prices.

2015 Expectation

Totally changed fundamental

According to Circular 41/2010/TT-BCT which provides guidelines on

60%

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140%

160%

180%

Vn Index Utilities




power purchase agreement (PPA), Independent Power Plants (IPP)

and Electricity Vietnam (EVN) will apply the DCF method to

calculate yearly selling price, in which IPP will secure a pro-rata

profit after deducting all expenses including deprecation, labor cost,

estimated material cost, interest expense, and admin expense. In

the old annual PPA, when expenses decline, selling price will

decline accordingly. In the new DCF based PPA, prices will be fixed

for the contract’s life and when expenses decline, profit margin will

improve accordingly. The new PPA will eliminate the price decline

risk.

Increasing portion of output sold to the unregulated market

(contracted price versus market price):

According to the Roadmap VII to develop Vietnam Electricity Market

approved in 2011, by the end of 2014, Vietnam generation market

will be completely unregulated. However, up until now, only 10% of

total national output is sold at market price at the unregulated market

(the remaining is sold according to contracted price in the PPA). The

sales to unregulated market portion will increase gradually to 100%

in the next 3-5 years. Usually, hydro power and declining

depreciation thermal power companies will benefit most from the

unregulated market as they might offer competitive prices while

gaining additional profit besides pro-rata profit from PPA. VSH and

SHP are two cases where hydropower companies might offer price

which is 50%-100% higher than contracted price.

Issues and risks

FX loss risk: Most thermal power companies are exposed to foreign

currency debt, including JPY, EUR and KRW. Although USD is

strong compared to other currencies and payment schedules are

extended throughout several years, FX loss risk remains persistent.


As power companies signed PPA, and expense (deprecation)

continues to decline, we expect most companies in the sector will

enjoy core business earnings growth in 2015.



Stocks that we expect to outperform in 2015: NT2

NT2’s revenue and net profit are expected to advance by 5.1% and

8.4% YoY respectively in 2015 thanks to increase output, one-off

booking of 2010-2013 restorative profit. NT2 is trading at 2015 PER

of 5.2x (core PER of 6.8x) and EV/EBITDA of 6.6x which is very low

compared to the industry’s average of 10x and 7.5x, respectively.

NT2 (31/12/2014)

Stock

Price

(VND)

Market cap

(mil USD)


2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E

Nt2 20,600 245.28 5.6 5.2 1.6 1.3 6.5 6.6 7.30% 7.30% 3647 3952 12250% 8% 9.20% 5.10% 12250% 8%




Within 12-month horizon, SSIResearch rates stocks as either BUY, HOLD or SELL determined by the stock’s expected return relative to the market required rate of return, which is 18% (*). A BUY rating is given when the security is expected to deliver absolute returns of 18% or greater. A SELL rating is given when the security is expected to deliver returns below or equal to negative 9%, while a HOLD rating implies returns between negative 9% and 18%.

Besides, SSIResearch also provides Short-term rating where stock price is expected to rise/reduce within three months because of a stock catalyst or event. Short-term rating may be different from 12-month rating.

Industry Rating: We provide the analyst’ industry rating as follows:

Overweight: The analyst expects the performance of the industry over the next 6-12 months to be attractive vs. the relevant broad market

Neutral: The analyst expects the performance of the industry over the next 6-12 months to be in line with the relevant broad market

Underweight: The analyst expects the performance of the industry over the next 6-12 months with caution vs. the relevant broad market.

*The market required rate of return is calculated based on 1-year Vietnam government bond yield and market risk premium derived from using Relative Equity Market Standard Deviations method. Our rating bands are subject to changes at the time of any significant changes in the above two constituents.

The information, statements, forecasts and projections contained herein, including any expression of opinion, are based upon sources believed to be reliable but their accuracy completeness or correctness are not guaranteed. Expressions of opinion herein were arrived at after due and careful consideration and they were based upon the best information then known to us, and in our opinion are fair and reasonable in the circumstances prevailing at the time. Expressions of opinion contained herein are subject to change without notice. This document is not, and should not be construed as, an offer or the solicitation of an offer to buy or sell any securities. SSI and other companies in the SSI and/or their officers, directors and employees may have positions and may affect transactions in securities of companies mentioned herein and may also perform or seek to perform investment banking services for these companies.

This document is for private circulation only and is not for publication in the press or elsewhere. SSI accepts no liability whatsoever for any direct or consequential loss arising from any use of this document or its content. The use of any information, statements forecasts and projections contained herein shall be at the sole discretion and risk of the user.

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