highlighted companies title: mobile world (add; tp …€¦ · vinamilk and other stocks, as well...

Vietnam│Equity research│July 30, 2016

Strategy Note

THIS REPORT IS PREPARED IN ASSOCIATION WITH VNDIRECT SECURITIES CORPORATION. PLEASE SEE DISCLAIMER AND IMPORTANT NOTICES APPEARING AT THE END OF THIS DOCUMENT. IMPORTANT DISCLOSURES, INCLUDING ANY REQUIRED RESEARCH CERTIFICATIONS, ARE ALSO PROVIDED AT THE END OF THIS REPORT. THIRD-PARTY AFFILIATED RESEARCH.

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Vietnam Strategy Vietnam’s stock market at an 8-year high

Vietnam’s VN-Index (VNI) broke out of its two-year trading range, while CIMB’s top ■picks outperformed the VNI by 14% YTD (vs. 30% outperformance in 2015)

Sentiment is being boosted by the removal of foreign ownership limits (FOL) on ■Vinamilk and other stocks, as well as by growing confidence in the new government

Valuation is still reasonable at 13x FY16 P/E, versus 13% expected EPS growth ■ The VNI already hit our 648 target price (+12%), so we’re lifting our target price by ■7% to 694 (+20%); we expect the VNI to test (but not break) the 700 level in Q4

Strong stock market performance, despite Brexit and weak H1 GDP Vietnam’s 1H16 GDP growth was below expectations, but stock prices continued rising because weak H1 growth ensures ample liquidity (M2 grew 20% yoy in H1), and the H1 economic statistics revealed strength behind the headline figures; growth was held back by low oil prices and Vietnam’s worst drought in decades, but consumer spending grew 8% yoy, buoyed by strong consumer confidence, and manufacturing output grew 10%.

Sentiment boosted by FOL removal & new government The elimination of foreign ownership limits (FOL) has a profound impact on Vietnam’s stock market because it will enable the participation of a much wider range of investors in the local market, and because foreigners will now be able to directly influence the stock prices of companies like Vinamilk (VNM’s FOL has been full for years). Lifting FOL’s also demonstrates the new government’s commitment to reforms, further solidifying the esteem investors have for the county’s new, technocratic politburo.

The VND exchange is stable The SBV implemented a more flexible currency management regime this year – so the VND only depreciated by about 1% YTD. The currency is also firm because Vietnam ran a US$1.7b trade surplus in 1H16 vs. a US$3.5b deficit in 1H15, and because in CPI inflation is 2.5%. We forecast a 1% C/A surplus and a 3% BoP surplus this year, supported by 6.7%/GDP of overseas remittances and 7.4%/GDP of FDI inflows.

Vietnam has a good “LEVIS” fit - so we’re lifting our target price 7% Vietnam’s stock market scores well on the “LEVIS” stock market analysis framework: (L)iquidity is abundant, FY16 (E)arnings growth prospects continue to look good (note that Vietnamese companies are just starting to report their H1 earnings figures & it’s too soon to look at FY17 earnings in Vietnam), (V)aluation is still reasonable on a PEG basis, (I) interest rates are a bit high – which is the only LEVIS criteria for which Vietnam does not “check the box”, and (S)entiment is very positive – as evidenced by strong consumer survey data. The market already hit our 2016 target for the VNI – so we’re raising our target price by another 7%; we like VNM, MWG, VIC, and PVS.

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Figure 1: The VN-Index broke out of its long-standing trading range

SOURCES: CIMB, NEILSEN

▎Vietnam

Highlighted companies

Mobile World (ADD; TP VND144,000)

Vietnam’s leading mobile phone retailer is now aggressively growing its home electronics chain. The total number of its outlets doubled over the last year, so earnings grew 86% yoy in 5M15. MWG is trading at 12X FY16 P/E, versus ~50% expected EPS growth.

Vingroup (ADD; TP VND64,000)

Vietnam’s leading real estate developer is benefitting from the country’s buoyant property market. The company’s pre-sales surged 180% last year, which should drive 180% FY16 EPS growth. VIC is trading at a 20% discount-to-NAV.

Vinamilk (ADD; TP VND177,000)

Vietnam’s leading consumer company is a perpetual favourite with foreign investors – and the foreign ownership limits that previously restricted their VNM share purchases have now been eliminated. VNM is trading at 21x FY16 P/E vs 23% EPS growth

Ample liquidity to fuel asset prices

AC Nielsen’s VN Consumer Confidence

Analyst(s)

Michael KOKALARI, CFA

T (84) 90 797 4408 E [email protected]

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KEY CHARTS

Valuations are still reasonable Valuations in Vietnam are quite reasonable. For example, the market’s top two consumer companies are trading at 21x F16 P/E vs 29% EPS growth and 12x P/E versus 50% EPS growth. Foreign investors are still underweight Vietnam, despite the country’s strong macroeconomic fundamentals, due to market access issues – but these issues are now being solved. The foreign ownership limit of Vinamilk, the largest, most important

company in the country was eliminated two weeks ago.

Abundant liquidity to fuel asset prices Vietnam’s M2 money supply grew 20% yoy at end-1H16, because the central bank balancing three objects: 1) supporting GDP growth, given weak growth in H1, 2) helping the Vietnam Asset Management Company dispose of the $11b worth of NPL’s Vietnam’s banks transferred to the VAMC, and 3) maintaining macroeconomic stability

Stable VND Exchange rate The SBV’s new currency management regime has helped stabilize the VND exchange rate – which has depreciated by about 1% YTD. The SBV adjusted its “crawling peg” mechanism, introducing daily, incremental adjustments to the USD/VND trading band.

Gvt debt-to-GDP is the only significant risk Vietnam’s high government debt-to-GDP ratio is a concern and the only factor we believe could realistically derail the country’s growth juggernaut. The said, we believe it would be easy to solve this problem if the government were to finance infrastructure construction more efficiently (ie. more PPP / BOT financing), and to aggressively privatize the country’s attractive SOEs (ie. telco’s, beer companies, etc.)

SOURCE: CIMB, GSO, SBV

FY16 P/E FY16 EPS Growth

Malaysia 16.5 1%

Singapore 13.1 -2%

Thailand 15.6 7%

Indonesia 17.7 3%

Philipines 20.0 13%

Vietnam 13.2 13%

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Vietnam’s stock market is at an 8-year high

Overview

Vietnam’s stock market has a good “LEVIS” fit…

This report borrows the “LEVIS” framework, used by CIMB’s Malaysia research team to assess stock markets by analyzing:

(L)iquidity

(E)arnings growth

(V)aluation

(I)nterest rate expectations

(S)entiment

Stock markets tend to perform well when liquidity is ample, earnings growth is strong, valuations are attractive, interest rates are low or falling, and when sentiment is improving. Vietnam’s stock market unambiguously checks four of those five “LEVIS” boxes, with investors’ sentiment boosted by the removal of foreign ownership limits (FOL) on Vinamilk, and other companies, and boosted by the growing realization that Vietnam’s new government, which took office in March, is a boon for both the economy & the stock market. That said, interest rates in Vietnam are relatively high and likely to remain stable, but firm for the rest of this year.

Liquidity is ample – prompted by weak GDP growth & NPL disposals

Vietnam’s M2 money supply grew 20% yoy in 1H16 (or 8% YTD, versus 5% YTD growth in 1H15). The State Bank of Vietnam (SBV) is balancing three objectives:

1) supporting growth, given weak GDP growth in the first half of the year (5.5% yoy in 1H16, versus 6.3% in 1H15),

2) maintaining a stable macro-economy, following severe instability during 2009-2013 (inflation is currently 2.5%, versus 23% in mid-2011; the VND depreciated 1% YTD versus a 25% fall in 2010-12)

3) facilitating the disposal of US$11b worth of NPLs that local commercial banks transferred to the Vietnam Asset Management Company over 2013-16 (the bulk of those loans were transferred to the VAMC in 2015, and almost none of those NPL’s have been sold to distressed asset investors yet).

In addition to a high level of money supply creation in absolute terms, there’s currently also a modest spread between M2 growth and system-wide loan growth – which augers well for asset prices (money that does not flow into the “real economy” typically flows into financial assets). Also, as can be seen in the chart below, locals have lost some of their previous zeal for investing their savings in gold.


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Figure 2: M2 Growth and Credit Growth (yoy) Figure 3: Vietnam Gold Price vs World Price

SOURCES: CIMB, SBV SOURCES: CIMB, BLOOMBERG

Three years ago, Vietnam’s per-capita gold consumption was comparable to India’s and the price of gold in Vietnam stood at a 15% premium to world gold prices, because gold imports are restricted by the central bank. Incredibly, the price of gold in Vietnam traded at a 10% discount to world prices earlier this year. That said, we estimate that the amount of money flowing into the real estate market has grown by about 26% this year – so some of the funds that would have previously been used to purchase gold are now flowing into both the real estate market and the stock market.

Note that local investors have traditionally viewed real estate and gold as the preferred investment vehicles for their savings - and the stock market as a place to engage in quick, margin-fueled speculation. However, that perception has begun to change - especially among the emerging middle-class, who increasingly views the stock market as an appropriate savings vehicle.

Finally, FII inflows into Vietnam’s stock market have ranged between ~$100-250m/year in recent years, and the country has not experienced an FII outflow in 10 years. However, FII outflows reached $100m at the beginning of this year, prompted by an unexpected transition in the leadership of Vietnam’s government. The political situation has now completely stabilized, and the new government has already demonstrated itself to be highly competent, growth oriented, and cognizant of the need for further structural reforms (this topic is discussed in the “H1 Review” discussion below).

As the new government gained credibility with investors, the stem of outflows abated, and money started to rush back into the market in a series of large P-note basket buying programs. At end-1H16, foreign outflows totaled $40m, and we expect that to completely reverse by the end of the year.

Earnings growth and Valuation are both reasonable

CIMB has been forecasting 13% FY16 EPS growth since the beginning of this year, so we believe that the market’s current 13x FY16 P/E valuation is reasonable. Vietnamese companies have just begun reporting their 1H16 earnings, but several companies have already guided for better-than-expected earnings (VNM, VCB, HPG, MWG, PNJ, etc), or for H1 earnings that are in-line with expectations (FPT, DHG, etc.).

The notable exceptions are companies in the oil & gas industry (~8% of Vietnam’s market cap), with plunges in earnings by GAS (-44% yoy) and PVD (-90% yoy) – we had been forecasting -30% and –56% respectively. Also, we

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expect strong earnings from real estate sector this year, for reasons that are outline in the sector of this report about banks and real estate.

(Note that Vietnam’s stock market has not yet developed to the point that it’s feasible to track the % of stocks that beat / meet / disappoint consensus estimates, but we are steadily building the database that will facilitate tracking this in the future. Also, given that volatile nature of the economy in recent years, it’s more appropriate to refer to FY16 valuations until closer to the end of the calendar year – in contrast to other markets that have higher degree of earnings visibility over a longer time horizon).

Given the market’s reasonable FY16 earnings growth prospects, valuation still looks attractive on both a PEG basis, and relative to Vietnam’s regional peers, although the VNI’s 13x P/E is starting to look a bit high compared to the market’s typical valuations over the last five years.

Figure 4: ASEAN Peer Valuation Figure 5: 5-year VN Index trailing P/E (+/- 1SD)

SOURCES: CIMB, BLOOMBERG SOURCES: CIMB, BLOOMBERG

That said, conditions for Vietnam’s stock market over the last five years have been quite unfavorable, given the country’s NPL crisis, high macro-economic instability, stalled structural reforms, etc. We think the current re-rating of the market is warranted given that the economy is now very stable, with a brisk & steady rate of growth, and the government is pursuing key reforms, including lifting foreign ownership limits and reducing the state’s ownership of Vietnam’s SOE’s.

We also note that Vietnam’s stock market previously traded at much higher valuations, when it was in favor with international investors, as can be seen in the chart below.

Figure 6: 10-year VN Index trailing P/E

SOURCES: CIMB, BLOOMBERG

FY16 P/E FY16 EPS Growth

Malaysia 16.5 1%

Singapore 13.1 -2%

Thailand 15.6 7%

Indonesia 17.7 3%

Philipines 20.0 13%

Vietnam 13.2 13%

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Interest rate outlook is neutral

As we mentioned above, the SBV is encouraging an ample flow of liquidity to the economy, in order to facilitate the resolution of the NPL’s currently held by Vietnam’s Asset Management Company (~4%/system-wide, outstanding loans). To a lesser extent, the SBV also wants to support the housing market (given a dearth of affordable housing in the country), and to support Vietnam’s immediate growth prospects (given weak H1 GDP growth). However, the central bank has balanced this ample liquidity by allowing interest rates to be more-or-less set by market forces, and the SBV has not cut policy rates (current 6.5%) since March 2014.

As a result, in 2015 deposit interest rates at commercial banks fell by about 25 from the beginning of the year until the middle of 2015, but then subsequently rebounded by the end of 2015. This year, deposit rates have remained firm at around 5.5%, with a slight upward bias, while lending rates are more-or-less unchanged at about 10%. Vietnam’s real interest rates are moderately high at ~4% (inflation is 2.5%), but this reflects the strong demand for capital among local firms, in the face of a rebounding economy (local consumers’ spending is growing at an ~8% yoy pace, and manufacturing is growing at a 10% pace).

Figure 7: Vietnam Policy Interest Rate Figure 8: 1-year Government Bond yield (%)

SOURCES: CIMB, SBV SOURCES: CIMB, BLOOMBERG

Earlier this year, the State Bank of Vietnam (SBV) guided its intention to introduce new macro-prudential regulations that would have constrained the flow of long term credit, and would have clamped down on mortgage lending (the SBV was previously concerned about the possibility of a nascent real estate bubble, given 25% growth in outstanding mortgages last year). However, the SBV subsequently backed down, thus removing this potential source of upward pressure on interest rates. Furthermore, Vietnam’s new Prime Minister even publicly jawboned the country’s State Owned Commercial Banks (SOCB’s) to lower their lending rates, in response to Vietnam’s weaker-than-expected 1H16 GDP growth.

That said, weak growth in beginning of the year was attributable to a severe drought and to weak oil prices (this is discussed at length in the section about Vietnam’s economy below), but both of these factors have already abated – so lending rates for most ordinary businesses are stubbornly stuck at 10%, and the central bank guided last week that it believes interest rates in Vietnam are likely to remain stable for the rest of this year.

Regarding the relatively high loan interest rates that most ordinary businesses endure, note that: 1) the government is encouraging the extension of loans on conciliatory terms to agriculture businesses and to other sectors affected by the

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drought, as well as to those affected by the environmental catastrophe caused by the Formosa steel plant. and 2) the high level of loan rates is partially attributable to the efforts banks are currently making to earn their way out of their NPL issues - banks are required to make annual provisions against the loans they transferred to the VAMC.

Figure 9: VGB Yield Curve


Finally, the combination of ample liquidity and a neutral outlook for short term interest rates has encouraged modest flows into the bond market, resulting in a ~50bp decline in 5-year yields, as can be seen in the chart above. In theory, the decline of long-term rates should boost stock prices via the application of lower risk-free rates in analysts’ valuation models, but the adoption of sophisticated valuation techniques is not yet widespread among the retail brokers / investors that dominate trading on Vietnam’s stock exchange.

Sentiment among local and foreign investors is positive

Vietnam currently has the highest consumer confidence in Asia, according to the latest ANZ-Roy Morgan consumer survey, and survey data from AC Nielsen illustrated below indicates that Vietnam’s consumer confidence is near record high levels, having nearly rebounded from a modest dip last year that was prompted by locals’ concerns about China.

Figure 10: Vietnam Consumer Confidence Index

SOURCES: CIMB, NEILSEN

This strength is reflected by the fact that real consumer spending grew 8% yoy in H1, despite the country’s weak overall-economic growth. Furthermore, sentiment among emerging middle-class consumers – those who are among

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the most likely to purchase stocks for investment purposes – is even stronger than the survey statistics would indicate. We base that assertion on the tremendous growth rates in the consumption of products and services demanded by middle-class consumers: automobile sales in Vietnam grew 50% last year and increased 35% 1H16, insurance premium growth currently exceeds 30% yoy, consumer credit is growing by more than 50% this year, smartphone sales are growing 25% yoy, etc.

One of the reasons we think it’s important to highlight the buoyant sentiment of Vietnam’s middle-class consumers is because of the desire of many young, urban parents to fund their children’s higher education at overseas universities – by funneling their savings into the stock market (the high school education system in Vietnam is outstanding, but the country’s university system is not as strong – prompting legions of students to study abroad in Australia, the UK, the US, etc.). In Vietnam, the stock market has traditionally been viewed as a forum to engage in margin-fueled speculation - real estate and gold were previously viewed as the only “safe” investments - but middle class consumers are increasingly viewing stocks as a more attractive investment alternative.

Next, we observe that foreign investors’ sentiment towards Vietnam has improved markedly this year – although foreigners are still frustrated by market access issues (liquidity, foreign ownership limits, etc.). The improvement in foreign institutional investors’’ sentiment can be indirectly inferred in a ~100bp improvement in the country’s credit default swap rate since the beginning of the year – when foreign and local investors alike were uncertain about the policies of the government’s new leaders, who took office in March.

Figure 11: Vietnam 5-Year CDS rate


Also, in the past, foreign investors represented nearly 1/3 of daily market turnover, but over the last few years, foreign participation in the Vietnam stock market has only been about half that figure. The recent improvement in sentiment among foreign investors – prompted by the on-going lifting of foreign ownership limits – has not let to an increase in that proportion yet, but we’re monitoring this closely.

Finally, we note that sentiment among another group of foreign investors – the overseas Vietnamese diaspora – is also buoyant, as evidenced by another year of record overseas remittances. We have often made the point that remittances from overseas Vietnamese (~6.5-7%/GDP) should be viewed as investment flow (unlike cases such as the Philippines, where remittance inflows are driven by overseas salaried workers, who can’t get a job at home).

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Figure 12: Remittances (US$ bn)

SOURCES: CIMB, GSO

Early indications are the remittance inflows are up about 10% this year – although over half of that money is likely to flow into the property market.

H1 review – quick recovery from January sell-off

An unexpected transition in the leadership of Vietnam’s government at the beginning of this year prompted a steep sell-off of the market in January, and ~$100m of stock market outflows by foreign investors (FII inflows ranged between $100-250m in recent years).

Unexpected leadership transition prompts steep sell-off

Investors had widely expected the country’s former Prime Minister, Nguyen Tan Dung, who had reached his two-term limit, to assume the job of General Secretary of the Communist Party (GenSec), which probably would have accelerated the country’s structural reforms; Dung spearheaded the country’s efforts to join the TPP, he pushed for higher foreign ownership limits (Dung had been responsible for lifting the FOL’s of most listed Vietnamese companies from 30% to 49% in 2006), etc.

However, following some last-minute maneuvering, the government’s GenSec Nguyen Phu Trong, managed to hold onto his job, despite being older than Vietnam’s mandatory retirement age for that position. Investors and business people were uncertain what impact the solidification of Trong’s power would have on the stock market, because he was (previously) perceived as being more ideologically minded, and less inclined to pursue structural reforms such as privatization, etc. so panic selling briefly swept the stock market.

Note that Trong was the GenSec when Dung was the PM, but at that time Dung commanded an inordinate amount of clout within the government. That said, Dung was oriented towards reforms and economic growth, but Vietnam’s banking system NPL crisis flourished under his administration, and Vinashin a large SOE that was championed as a Vietnamese-style “chaebol” went bankrupt, in a well-publicized scandal that resulted in the leaders of the company being prosecuted for corruption, etc.

Quicker-than-expected recovery in the VN-Index

At the time we published our “Navigating Vietnam 2016” report in the beginning of this year (after having re-writing large portions of the report - to reflect the sudden shift in the political wind), we stated our belief that Vietnam’s new government was unlikely to impede the country’s immediate economic growth

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prospects, or impede FY16 EPS growth. We also outlined our belief that the stock market would probably be volatile in H1, but would then likely recover in H2, after investors came to this realization… In actuality, our view was too pessimistic, as can be seen in the chart below.

Figure 13: VN Index YTD


By the end of Q1, the VNI had completely recovered from the January sell-off, and by the end of H1 the VNI had nearly reached its prior highs of 2015, while trading about ~$125m ADTR. Strong sentiment – despite the Brexit-driven sell off of global markets on June 24th – led Vietnam’s stock market to subsequently reach its highest level in over 8 years within the last few weeks… The quick recovery of the market’s sentiment was bolstered by the removal of the foreign ownership limit of Vinamilk (VNM), which was announced at the company’s AGM on April 21st, but much of credit for this speedy recover in Vietnam’s market belongs to the country’s new government (which also implicitly sanctioned the removal of VNM’s FOL).

New government gets high marks from business community

Confidence in Vietnam’s stock market increased as investors and local & foreign business people garnered a better understanding of the new government’s policies, and as it became clear that the composition of the new politburo, which assumed office in March, was cause for optimism about the direction the new government intends to steer the country. New members of the country’s all-important politburo are about 10 years younger than appointees to the last government’s ruling body, and most of the current politburo members are well educated – and can be characterized as archetypal “technocrats”.

The new government has already handled a series of challenges fairly well, including weaker-than-expected H1 GDP growth (attributable to some specific factors that have already started to abate), and a large pollution scandal involving the new Formosa steel complex in the middle of the country, which caused the deaths of millions of fish off the coast of four affected provinces in the middle of Vietnam – prompting widespread, small-scale protests.

Acceleration of reforms under new government boosts confidence

Businesspeople (and investors) were also encouraged that the new government has shown its willingness to follow through with the proposed reforms of the last government – and Trong’s government has even accelerated the pace of some of those reforms… For example, the lifting of Vietnam’s foreign ownership limits (FOL) was championed by the last

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government, but the removal of FOL’s proceeded at a snail’s pace under Dung. In contrast, Vinamilk the biggest and most important listed company in the country has now completely removed its FOL. That’s great news for the stock market, but lifting VNM’s FOL also gives investors confidence in the government’s ability to deliver other overdue reforms.

That confidence was further boosted by recent comments from the country’s new prime minister that he wants to accelerate the disposal of the government’s ownership in companies like Sabeco, a ~$2.5b unlisted beer company, Habeco, another beer company, Vinamilk, and other companies. Those comments were particularly confidence engendering because Vietnam’s State Capital Investment Corporation (SCIC), which holds the government’s shares in privatized companies, had been playing coy about its intentions to sell the 45% worth of VNM’s outstanding shares that it holds.

Last year, the SCIC announced its intention to dispose of its VNM shares, which enthused the stock market, but earlier this year, when the SCIC published a list of stocks it intends to sell in 2016, VNM was not on the list. We believe the SCIC intentionally left VNM off that list as part and parcel of a negotiation strategy that aims to maximize the value of its shares - but Vietnam’s PM seems to have neutered the SCIC’s negotiation tactics by calling for a quick disposal of the VNM shares held by the SCIC. A growing body of small anecdotal evidence (such as this case) has made investors and business people perceive the members of new government as being business oriented and straightforward.

Further to that last point, we’ve noticed that ministers and other high ranking officials in the new government tend to communicate to the public is a clear and direct style, and Trong’s government seems more inclusive than previous administrations. For example, Vietnam’s government holds an annual conference with leaders of industry, but this past April’s meeting included a broader range of businesses than is typical (with many more SME leaders), and the conference was televised, for the first time in memory. Finally, we note that the new government embraced the TPP, welcomed Obama’s visit in May (following Trong’s visit to Washington last year), and has generally come across as progressive and business friendly.

Vietnam is a post-Brexit safe-haven

Another factor which helped Vietnam’s stock market recover quickly from its difficult start at the beginning of the year is the increasing perception of the Vietnam stock market as a post-Brexit safe haven by investors, as its growth is decoupled from Brexit-related factors. Part of this decoupling is attributable to the fact that Vietnam is once again out-of-sync with the world economy. The country was a basket-case in 2010-2011, when QE driven inflows propelled the world’s other EM/frontier stock markets, but Vietnam’s growth is now being driven by the tremendous progress the country made cleaning up its banks, a rapidly growing middle class, and by surging infrastructure construction. None of these are likely to be impacted by Brexit.

We acknowledge concerns that the global economy could be headed for a bought of deflation, but manufacturing companies that aim to cut costs have few better alternatives in the world than to move their factories to Vietnam, which is helping drive 8-9% manufacturing output growth. Also, in addition to a surge of FDI into the manufacturing industry (FDI inflows are up 15% yoy in 2016), an increasing amount of FII from strategic investors (rather than portfolio / financial investors) is now finding its way into Vietnam’s stock market.

Thai companies have been the most notable strategic FII investors, showing strong interest in a variety of listed (Vinamilk, etc.) and unlisted (Sabeco) companies. That said, Japanese and Korean companies are primarily FDI investors, but Japan’s Taisho Pharmacy recently bought ¼ of DHG. The strong JPY, and weak Japanese GDP growth could prompt more of such acquisitions – and this prospect has made local investors more bullish on the stock market.


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Finally, while our intention here is to highlight Vietnam as an attractive post-Brexit safe haven, we also think emerging markets / frontier markets in general look very attractive, especially following last year’s record EM outflows. We view the Brexit vote as an extraneous event which is likely to lead the US Federal Reserve to leave interest rates too low, for too long, despite the fact that the US economy continues to steadily recover. In that regard, we see analogies between the current situation and the aftermath of the “Dotcom” bubble, and the tragic 9-11 attacks. The impact of both of these on the “real economy” was minimal, but low rates fueled inflows into EM and other risky assets…

Vietnam’s weak H1 economy ensures ample liquidity in H2

Overview: weaker-than-expected 1H16 growth

Vietnam’s GDP grew by just 5.5% yoy in 1H16, vs 6.3% yoy growth in 1H15, but we still expect the country’s GDP growth to reach 6.5% in 2016, which is just above consensus forecasts for 6.3% growth in 2016. Recall that: 1) Vietnam’s GDP growth tends to accelerate as the calendar year progresses, and 2) GDP grew 6.7% in 2015 – which was the country’s fastest GDP growth rate in seven years.

Figure 14: Vietnam's annual GDP Growth Figure 15: Quarterly GDP Growth

SOURCES: CIMB, GSO SOURCES: CIMB, GSO

In the first half of the year, temporary factors (a severe drought and weak oil production) constrained growth, but those factors are now alleviating, while powerful cyclical and structural drivers continue to drive Vietnam’s growth. In our view, the underlying cyclical growth story is wholly intact, driven by strong consumer confidence, as well as by a resumption of lending by banks, now that NPL’s have fallen from 17% in 2012 to about 3%/outstanding loans at present (not counting the ~4%/outstanding loans worth of NPL’s the VAMC is tasked with disposing of). Credit growth accelerated slightly from 7.9% yoy in 1H15 to 8.2% yoy in 1H16 (system-wide outstanding loans grew 17.6% yoy at end-1H16).

Vietnam’s “Goldilocks economy”

Extraneous factors dampened growth in H1, making it likely the central bank will maintain a flow of easy liquidity to the economy that helps support stock prices, especially given that inflation is reasonably well-contained (despite rising food prices, due to the drought). We continue to believe that Vietnam has a “Goldilocks economy” which is, to quote the children’s story of “Goldilocks and the Three Bears”, not too hot, not too cold, but “just right”. The term

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“Goldilocks economy” was first used to describe the US economy in the mid- 1990s, as the largest bull market in history was gathering pace. The benefits of a Goldilocks for Vietnam’s stock market are:

1) inflation is sufficiently low to allow accommodative monetary policy,

2) growth is sufficiently high to propel earnings.

The Goldilocks economy Vietnam experienced in 2015 (which helped Vietnam’s stock market outperform its Asean peers by 24% last year) has persisted in 2016, partly because of the two exogenous factors mentioned above (the drought, and low oil prices), but the economy is stronger than the headline GDP figures suggest.

Strength behind the headline GDP numbers

Vietnam’s 1H16 GDP growth was held back by a ~10% fall in the volume of the country’s oil production (vs 8% volume growth in 2015), and by a 1% yoy fall in agriculture output (rice production fell ~7% yoy). These factors led to a decline in the nation’s rate of industrial production growth from 10% in 1H15 to 8% in 1H16, despite healthy growth in manufacturing, steel production, electricity production, etc.

Exogenous factors that impeded H1 growth now abating

In 1H16, oil exports fell 47% yoy, which implies a ~10% fall in production volume. As a result, the mining sector recorded a 2.2% drop in output between 1H15 and 1H16, versus 8.5% growth for the same period last year – when oil production was growing by more than 5% yoy. Oil production is now recovering because production costs are $30/barrel, because Vietnam became a (small) net importer of petroleum products a few years ago due to an explosion of demand, and because the government has been running persistent 5-6%/GDP budget deficits (largely to finance the construction of infrastructure), so it needs to increase its revenues.

Figure 16: Weak oil prices prompted production cuts in H1


PetroVietnam (PVN), Vietnam’s national oil company / SOE, originally planned to produce 14.2m tons of oil this year but the government recently guided the company to raise its 2016 production target by 1m tons (some cohorts within the government called for an even bigger boost to PVN’s oil production). In 2015, the government originally planned to produce 14.7m tons of crude oil, but raised its production target by 1m tons in 3Q15. Vietnam ended up producing 16.8m tons of oil last year, beating its original production plan by 14%. We expect this to happen again in 2016.

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Next, note that H1 growth was also constrained by banks’ reluctance to extend loans, due to the State Bank of Vietnam’s (prior) intention to clamp down on mortgage lending, following 25% growth in outstanding mortgages last year. However, the SBV backed away from proposed macro-prudential regulations that would have restricted credit because conditions in Vietnam’s real estate market are not overheated (yet), so we expect 18% system-wide credit growth in 2016.

Finally, note that the El Nino weather phenomenon, which caused Vietnam’s worst drought in decades, has now subsided. According to the World Bank, the drought affected 360,000ha of land (26,000ha of farms were not even re-planted), in 22 out of Vietnam 63 provinces. Declines in yields/rice production of 70% or more were observed in affected rice paddies, so the country’s overall rice exports are expected to drop 10% this year, and coffee exports are expected to decline 25%.

Strength behind the headline numbers

Looking past the headline GDP numbers, consumption (~60%/GDP), grew by 8% yoy in real terms, electricity demand grew 12% yoy, manufacturing grew 10% yoy, the services sector (41% of the economy) grew 6.4% yoy (it’s fastest pace in five years), and construction activity grew 9% yoy, its fastest pace in six years – driven by vibrant new housing starts, and by a surge in infrastructure construction from 2-3%/GDP four years ago to 5-6%/GDP at present.

Figure 17: Real retail sales growth, 3month m/a, and forecast

SOURCES: CIMB, GSO

At the time the H1 GDP figures were released, officials from the government’s statistics office mentioned that they expect manufacturing growth to accelerate in H2 (it’s relatively unusual for the government’s statisticians to go out on a limb and make such predictions), given the 15% yoy increase of Vietnam’s FDI inflows in H1. Vietnam’s 52.6 June PMI survey reading supports that prediction.

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Figure 18: Vietnam PMI

SOURCES: CIMB, HSBC

Also, although H1 industrial production growth was held back by a decline in the volume of oil production, the nation’s steel consumption surged 39% yoy in H1, according to the Vietnam Steel Association, the production of motor vehicles (ie. assembly from kits) surged 115%, driven by surging automobile sales, the production of computers/electronics surged 70% yoy (driven by FDI inflows), and the production of paper products such as packaging for consumer goods surged 33% yoy.

We could recite a litany of additional facts & figures to illustrate the vigor of the economy, but the clearest evidence is garnered by direct observation of the growing number of busy shopping malls, of the increasing difficulty in hailing a taxi in the country’s major cities, and of the tangible signs of wealth radiating out to the provinces.

Finally, in the section below about the banking sector & property market, we’ll go into more detail about developments in both sectors are supporting GDP growth (the issues discussed impact both GDP growth and the stock prices of banks and property developers, which is why this discussion is separated out from this discussion about Vietnam’s macro economy). As a preview, the government has signaled its intention to accelerate completing the clean-up of the banking sector, and inflows to Vietnam’s property market are up by about 26% this year – which is helping support growth in construction activity, and growth in a wide range of other industries due to the high multiplier effect of housing investments.

Exports continue to support growth

Vietnam’s exports (~85%/GDP) grew by 6% yoy in 1H16, versus 8% growth in 2015, and 14% growth in 2014. Exports to the US contributed ~¼ of Vietnam’s overall exports in 1H16 (Vietnam is Asean’s largest exporter to the US), but export growth to the US decelerated from 17% yoy in 2015 to 15% in 1H16.

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Figure 19: Vietnam's 2015 Export destinations (US$b)

SOURCES: CIMB, GSO

A reasonable proportion of Vietnam’s exports flow the EU, but 70% of the products Vietnam exports to the EU are low-end consumer goods that showed resiliency when the EU suffered its various crises in recent years. For example, Vietnam sells Pangasius fish (a cheap substitute for cod) to EU consumers, and products such as this sell well when economic conditions are weak.

High tech export growth rate damped by high base effect

High tech items (cell phones, electronics, etc.) contributed 32% of Vietnam’s overall exports in 1H16 (versus 30% in 2015), following years of stunning growth. But this rapid growth has resulted in a high base effect that’s made it more difficult for the country to achieve comparable rates of growth going forward (Vietnam’s high tech exports grew 30% in 2015, but cell phone exports only grew 18% yoy in 1H16).

That said, FDI continues to pour into the manufacturing industry; nearly 2/3 of Vietnam’s recent FDI inflows are earmarked to develop manufacturing facilities – and most of this investment will be used to build factories which produce electronics and other high tech items (garments & footwear still account for 20% of Vietnam’s exports, but that figure is steadily shrinking). Over 2/3 of Vietnam’s exports are produced by FDI firms, and we expect FDI inflows to grow 15% yoy to 7.4%/GDP in 2016, versus 7.1%/GDP in 2015; FDI firms contribute nearly 20% of Vietnam’s GDP and about ¼ of its investment capital.

At the other end of the spectrum, commodities still contribute about 13% of Vietnam’s overall exports, so weak commodity prices in 2015-16 are another factor that helped drag down the country’s export growth rate.

Weak imports drove a modest trade surplus in H1

Vietnam’s trade balance improved from a $3.5b trade deficit in 1H15 to a $1.7b trade surplus in 1H16, because imports fell 1% yoy in 1H16 - due to concerns about global growth (which also caused Vietnam’s PMI to briefly dip below 50 at the end of last year). Over 2/3 of Vietnam’s imports consist of production equipment and materials used by FDI companies to manufacture exports. According to the World Bank, over 80% of Vietnam’s overall imports are of machinery, materials, and other production inputs, while consumer goods only represent about 10% of the country’s imports. Note that Vietnam imports a significant amount of the production equipment and materials it uses to manufacture exports from China, so Vietnam runs a trade deficit with China that exceeds 10%/GDP if “unofficial” imports are accounted for.

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Figure 20: Monthly Trade Balance (US$ bn)

SOURCES: CIMB, GSO

Modest impact from China’s slowdown

Vietnam’s Asean neighbors export commodities and intermediate goods to China that are further processed into goods destined for the developed world, or for consumption within China. In contrast, unlike the export model of its Asean neighbors, Vietnam imports capital goods and production materials (textiles, plastic resin, etc.) from China, which are then used to produce goods that Vietnam exports directly to the US/EU. That’s one reason Vietnam’s export growth continues to outperform is Asean peers.

Figure 21: ASEAN Export and GDP Growth in Q1 (latest data available for ASEAN)

SOURCES: CIMB, GSO

The weakness in China’s economy has lowered the cost of the inputs needed to feed Vietnam’s export machine, but Vietnam still ran a US$32bn (16%/GDP) trade deficit with China in 2015, driven by a 13% yoy increase in Chinese imports (H1 trade figures with China are not available yet). Also, while Vietnam was not significantly impacted by China’s slowdown last year, exports to Asean dropped by about 10% yoy in 1Q16, partly as an indirect consequence of the China slowdown (H1 trade figures with Asean are not available yet), so China’s slowdown is having a modest impact on Vietnam’s economy this year.

That said, some analysts have raised concerns that Vietnam could lose some of its competitiveness vis-à-vis China, because of the prospects of further RMB weakening (while Vietnam’s currency is essentially linked to the USD), but we believe there is no cause for concern. Factory workers’ wages in Vietnam are less than half those in China, so a modest RMB depreciation will hardly dent that differential. Finally, the on-going and substantial shift of high tech manufactures’ production activities from China to Vietnam is being driven by both cost considerations and by other factors (ie. Japan’s diversification of its production base away from China).

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Malaysia 1.0% 4.1%

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Minimal impact from Brexit

Exports to the EU contribute nearly 20% of Vietnam’s exports, but the vast majority of the products Vietnam sells in the EU are low-end consumer products that have enjoyed resilient sales when the EU economy weakens. Also, only 3% of Vietnam’s exports are sold in the UK, and FDI inflows from the EU comprise less than 8% of Vietnam’s overall FDI inflows, so Vietnam is relatively insulated from the after effects of the UK’s “Brexit” votes.

Low inflation lead to stable interest rates and exchange rates

Vietnam’s CPI inflation rate is currently 2.5% yoy, and consensus forecasts are for an increase to a 4% yoy rate by the end of the year, driven by higher food prices (due to the drought in the first half of the year), and driven by strong domestic demand. For that reason, policy interest rates are expected to remain stable around 6.5%, but monetary conditions are loose, as evidenced by 20% yoy M2 growth at end-1H16.

Figure 22: Vietnam Policy Interest Rate Figure 23: Annual inflation (CPI y/y)

SOURCES: CIMB, SBV SOURCES: CIMB, GSO

The central bank is maintaining a healthy flow of liquidity to the economy in order to help the Vietnam Asset Management Company (VAMC) dispose of the US$11b worth of NPLs the nation’s commercial banks transferred to the VAMC over 2013-15 (system-wide NPL’s peaked at 17% in 2012, and currently sit at about 3%). To prevent this excess liquidity from fueling inflation, the central bank has allowed the market to set interest rates, unencumbered by any form of SBV intervention (the government has tried to jawbone interest rates lower, which has not had much effect). The resulting, moderately high (~4%) real interest rates, have helped stabilize Vietnam’s currency.

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Figure 24: VND Official vs unofficial Exchange Rate

SOURCES: CIMB, SBV

The VND is stable

Vietnam depreciated its currency three times last year, and consensus expectations at the beginning of 2016 were for 5% depreciation in the VND exchange rate against the USD this year. However, low inflation and modestly high real interest rates have helped support the VND in 2016, so the unofficial FX rate has fallen by just 1% YTD – despite the Brexit-driven turmoil in global FX markets.

In the past, high inflation was the main factor that drove Vietnam’s currency lower, although the currency is also firm due to: 1) persistent 6.5%/GDP remittances from overseas Vietnamese – which have flipped the current account to a ~1%/GDP surplus (we expect a 3%/GDP BoP surplus in 2016), 2) the ~3 months’ imports worth of FX reserves the central bank holds, and 3) the SBV’s new “crawling peg” currency management regime.

Figure 25: Trade and C/A Balances (% of GDP) Figure 26: FX reserves

SOURCES: CIMB, WORLD BANK SOURCES: CIMB, IMF

Two caveats to that rosy picture outlined above, are that:

1) the 6-7%/GDP worth of FDI inflows that fueled the country’s export growth in recent years are now putting a drag on Vietnam’s current account balance due to the repatriation of profits to those overseas FDI investors

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2) The central bank bought about $8b of USD from the local market this year, boosting its FX reserves to $38b, but the SBV appears not to have sterilized its purchases, which is probably part of the reason M2 growth accelerated in H1.

Further to that last point, we also acknowledge that Vietnam’s FX reserves continue to be among the lowest in the region (in terms of months-of-imports), although the country’s BoP has been supported by healthy capital account inflows.

Figure 27: Balance of Payments (% of GDP)

SOURCES: CIMB, IMF

Vietnam’s new currency management regime has stabilized the VND

The central bank implemented a more flexible “crawling peg” regime at the beginning of this year in order to alleviate volatility in the USD/VND exchange rate. Previously, the official exchange rate was fixed, but when the “unofficial” FX rate diverged significantly, the SBV depreciated the official rate. Those depreciations typically generated handsome profits for speculators, and caused undue volatility in the FX rate – which depreciated in a series of outsized “staircase” moves. This year, the SBV moved towards a more market-driven approach to managing Vietnam’s FX rate.

Figure 28: VND Official vs unofficial Exchange Rate

SOURCES: CIMB, IMF

The new regime still employees a “crawling peg” mechanism, but the central bank began making daily, incremental changes to the official FX rate – which

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helped stabilize the market, as can be seen in the chart above (the contrast between the daily movements in the official upper band of the VND rate and the prior “staircase” movements of that rate can also be seen above).

Gold-hungry Vietnamese are keeping their VN Dong

The price of gold in Vietnam actually traded at a 10% discount to world prices earlier this year – which is a remarkable indicator of the confidence locals now have in their county’s currency.

Figure 29: Vietnam Gold Price vs World Price


Locals’ desire to hold the Dong is driven by their confidence in the VND and by their desire to take advantage of the thriving domestic economy. Vietnam essentially has three currencies: the Dong, the US$ and gold. The government clamped down on “dollarization”, and on the use of gold to pay for real estate, so entrepreneurs that want to start businesses, or investors that want to buy stocks need to hold VND. In contrast, three years ago, Vietnam’s per-capita gold consumption was comparable to India’s, and the price of gold in Vietnam stood at a ~15% premium to world gold prices, owing to insufficient imports by the central bank (Vietnam’s official gold importer).

Long-term growth prospects continue to look outstanding

Vietnam’s outstanding long-term growth prospects are supported by: 1) one of the fasting growing middle-class populations in the world, 2) FDI fueled growth of high-tech exports, and 3) infrastructure development.

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Figure 30: FDI Inflows (% of GDP)

SOURCES: CIMB, GSO

In our past Vietnam strategy reports, we purposely left out “SOE reform” from this list, but Vietnam’s new government has raised optimism on this front, given its willingness and ability to deliver reforms, evidenced by the removal of FOL’s and evidenced by various statements made my senior officials in the new government. The country’s last government initiated some key reforms, such as requiring SOE’s to disclose more detailed financial performance information to the National Assembly, and the new government has already announced proposals that would build on these initial, tentative steps towards SOE reform.

Vietnam’s rapidly growing middle class

BCG, AC Nielsen and others forecast that the proportion of the population in Vietnam that can be characterized as middle-class will increase from 15% at present to about 1/3 by 2020. We have oft-quoted those figures, but year-after-year we’re presented with ample data points highlighting just how vigorous the growth of Vietnam’s middle-class is. We were recently struck by the comments of the CEO of Home Credit in Vietnam (a leading consumer credit firm that extends ~$1,000 loans to consumers), lamenting the fact that the company’s outstanding loans are “only” growing by ~80% this year !

The extension of consumer credit and mortgages will help drive Vietnam’s consumption growth for years to come (the country’s household debt/GDP ratio is still below 20%), but the demand for products and services desired by new middle-class consumers is likely to drive disproportionate growth in the consumption of those goods. For example, automobile sales in Vietnam rose 35% yoy in H1 (versus 50% in 2015), but sales of motorbikes (which most middle class consumers already own) only grew 8% yoy in 1H16.

Infrastructure development continues to power ahead

The Ministry of Transport held a conference earlier last month, at which it reiterated the government’s commitment to an aggressive ~US$40b transport infrastructure development program over 2016-20. The MoT had held a similar conference in the middle of last year, at which time a similar magnitude of expenditures on infrastructure development was discussed (in last year’s conference, the MoT also specified that about 2/3 of this spending would be on building roads and highways).

Most observers at the MoT’s conference were not surprised by the continuity of the new government’s policy, given Vietnam’s pressing need to develop better physical infrastructure, but the new government, which took office earlier this year, has placed additional emphasis on the need to refine and professionalize

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the country’s legal framework for PPP & BOT based financing of infrastructure development. At the MOT’s conference, specific mention was made of the fact that the regulations governing PPP projects changed 4 times in recent years – making private sector/foreign investors uncomfortable.

We expect infrastructure development, together with real estate construction to drive 15% volume growth in Vietnam’s cement consumption and 30% growth in volume sales of construction steel this year.

Modest productivity growth

According to Oxford Economics, Vietnam’s 5% annual productivity growth rate over the last 10 years is the highest in Asean, and the think-tank expects 4% annual growth over the next five years - which Oxford Economics expects to drive 6.5% annual GDP growth. That said, the World Bank notes that Vietnam’s productivity rate is only about half that of China’s, although it concedes that 2/3 of Vietnam’s 6.7% historic GDP growth rate over the last 10 years is attributable to increases in labor productivity.

Studies the World Bank and Oxford Economics highlight the role of FDI, urbanization (~3% a year), and a shift to higher-value added industries (electronics, etc) in Vietnam’s improving labour productivity.

Banks and real estate devleopment support GDP growth

Banks are lending again

Credit growth in Vietnam accelerated from 12%/yr over 2011-14 to 18% yoy in 2015, and a comparable pace in 2016, following a slow start at the beginning of this year. Vietnam’s system-wide NPL ratio fell from 17% in 2013 to ~3% at present, three banks were nationalized last year, and a plethora of bank executives have been arrested (a well-publicized trial of one nationalized bank’s former executives is currently being held).

The worst is over for Vietnam’s banks, but Vietnam’s new Prime Minister recently eluded to the government’s preference that Vietnam’s banks expedite completing the clean-up of their balance sheets. To that end,

1) the government will acquire 52% of PVCom Bank (a weak bank),

2) the VAMC may soon begin buying NPL’s directly from banks at market prices (in lieu of banks transferring their NPL’s to the VAMC at book value), and

3) the VAMC targets the disposal of $1.3b worth of NPL’s this year,

Note that the Vietnam’s commercial banks transferred $11b of NPL’s Vietnam’s commercial banks as of end-1H16 (including $400m of NPL’s transferred in H1).

The good news is that Vietnam’s banks have made enough progress cleaning up their balance sheets that they are now aggressively extending mortgages, auto loans and other forms of credit, in contrast to 2011-14, when local banks bought government bonds instead of extending loans, creating a classic “liquidity trap”, in which GDP growth was held back by businesses’ inability to access credit.


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Figure 31: Credit-to-GDP ratio

SOURCES: CIMB, IMF

A re-leveraging of Vietnam is now clearly underway – as can be seen in the chart above, and we note that the recovery of Vietnam’s credit growth is even more dramatic than the system-wide loan growth figures indicate, because we estimate that the “real” rate of Vietnam’s credit growth in 2012-14 was closer to 6% because the regulations that governed the recognition of NPLs were quite lax at that time; banks had an incentive to “loan good money after bad” to troubled borrowers in order that those borrowers could continue making their loan payments. New regulations in 2015 clamped down on this practice…

We also note that the clean-up of Vietnam’s banks is facilitating the emergence of a retail mortgage market. We estimate that the outstanding loans extended to fund the purchases of apartments and houses by end-buyers grew by more than 25% in 2015, although we expect lower growth in 2016. In our understanding, over half of home purchases in Vietnam are now being funded by mortgages, compared to less than 15% just a few short years ago (obviously, there is a substantial multiplier effect to these new home purchases for the real economy).

Vietnam is balancing GDP growth with cleaning up its banks

Vietnam’s new prime minister directed the country’s state owned commercial bank to keep lending rates stable (or to lower rates), and has given private sector banks similar guidance with the aim of helping support growth, in light of Vietnam’s weak H1 GDP growth. In addition, a new macro-prudential regulation called Circular 06 (C06) that’s intended to strengthen Vietnam’s banking system has been watered down vis-a-vis the central bank’s original draft / guidance.

Specifically, the adoption of limits on how much short term deposits banks can use to fund mid-and-long-term loans has been delayed, foreign banks will be now allowed to buy more VGBs, and the risk weight on loans to property developers will now be raised from 150% to 200% in 2017 – instead of being raised to 250% this year. The implementation of the current version of C06 will depress Vietnam’s system-wide CAR by ~50bps, but the implementation of Basel II, which is still on track for 2018, will reduce bank’s CARs by 200-400bp. There has been considerable discussion in the local business press about C06, but Basel II is a bigger issue for local banks over 2016-18.

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Relaxation of long-term lending limits

Several changes have been made to C06, from the original draft version of new legislation, which will have certainly taken into consideration the prime minister’s directive to ease lending rates. One change is the delay and phased implementation of a 60% limit on the ratio of short-term deposits that can be used to fund mid- and long-term loans.

That said, the system-wide ratio of short-term deposits that are currently used to fund the extension of mid and long-term loans is considerably below the new 60% limit. According to the SBV, as of end-April 2016, the average ratio for SOCB’s stood at 35% and the average ratio for private sector banks stood at 36%. Among the 15 largest banks, Eximbank (EIB) and VPBank (unlisted) had the highest ratios of 49% and 43%, respectively (at end-FY15).

Figure 32: Banks’ ratios of short-term funding to mid- and long-term loans

SOURCES: CIMB, COMPANY REPORTS

Given the above, C06 should guide banks to gradually rebalance their asset-liability-mix’s without causing undue pressure on interest rates, but we still think the relaxation of this aspect of C06 is important for two reasons: 1) it signals to banks that the SBV is amenable to the continued aggressive expansion of their long term loan books (loan growth at the beginning of this year was quite weak, despite the fact that the new C06 limits would be non-binding for most banks – because of the negative signaling effect of the SBV’s guidance), and 2) it will encourage the further development of the mortgage market.

Modest increases of risk weightings on property loans

The government also relaxed the new regulations related to the risk weightings on banks’ outstanding loans to property developers - for the purposes of calculating their capital usage and capital adequacy ratios. The risk weighting on loans to property developers will be lifted from 150% to 200% in 2017, but the initial draft version of C06 stipulated that the risk weighting of such loans would be raised to 250%, and the initial, informal guidance of the SBV to industry was that the increase would take place this year. Also, the higher risk-weight will only be applied to loans made to property developers, and not applied to retail loans (i.e. mortgages).

We don’t expect the implementation of higher risk weightings on loans to property developers to interfere with the government’s objective of maintaining stable interest rates, although the new rules will impact credit growth because it will reduce banks’ appetite to lend to property developers, and it will reduce banks’ capacity to lend via pressure on their CARs. Based on banks’ outstanding property loans at end-April 2016, we estimate that system-wide

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CAR would decrease by about 50bps if the risk weightings on property loans were immediately raised from 150% to 200%, and that CARs would fall by about 100bp if the risk weightings were raised to 250%.

Figure 33: Impact of higher property loan risk-weightings on banks' CARs


Most of the larger listed banks will likely experience 20-40bps declines in their CARs but some of the smaller, unlisted banks (such as Maritime Bank, Techcombank and VPBank), which extended a high proportion of their loan books to the property sector are likely to be impacted significantly, with their CARs reduced by 70-170bps. Finally, although the higher risk weightings on property loans will only take effect from next year, local banks are likely to scale back their lending to the property sector for the remainder of this year, so we only expect 15% system-wide growth in outstanding mortgages in 2016 (versus 25% in 2015).

The property market has reached an inflection point

We believe that Vietnam’s property market has reached the inflection point of its on-going bull market. The property market’s still going up, but the rate of increase is no longer accelerating. CIMB has been predicting that Vietnam’s real estate market will peak in 2018-9 and we believe recent developments add credence to our expectations.

Figure 34: YTD performance - By sector

SOURCES: CIMB

Banks Ticker

% property

loan/total loans

Current CAR

(at 150% risk

weight)

Est. CAR (at

200% risk

weight) Difference

Overall sector 8.5% 12.8% 12.3% -0.50%

Maritime Bank Unlisted 34.9% 24.5% 22.8% -1.70%

Techcombank Unlisted 15.7% 14.7% 13.9% -0.88%

VPBank Unlisted 16.3% 11.3% 10.6% -0.66%

Saigon-Hanoi Bank SHB 7.1% 11.4% 10.9% -0.52%

Vietcombank VCB 8.0% 11.0% 10.6% -0.40%

Vietinbank CTG 7.9% 10.6% 10.2% -0.36%

BIDV BID 6.9% 9.8% 9.5% -0.32%

Eximbank EIB 1.8% 17.0% 16.9% -0.17%

Military Bank MBB 3.8% 12.9% 12.7% -0.15%

Asia Commercial Bank ACB 1.9% 12.8% 12.7% -0.13%


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Transaction volumes fell by about 13% yoy in H1, the rate of price increases has paused, and purchases by speculators increased significantly over the last year, but we estimate that the flow of money into the property market increased 26% yoy in H1, and we note that there’s a dire need for housing in Vietnam (especially at the low end), and that banks only started offering a meaningful quantum of mortgages to retail clients within the last 3-4 years.

Transaction volumes down 13%, transaction value up 26% in H1

The number of real estate transactions in Vietnam fell by about 13% yoy in H1, but we estimate that the value of those transactions actually increased by about 26% yoy, because of increased purchases of mid-end and high-end housing units:

1) Some home buyers that might have wanted to purchase affordable housing units (~$800/sqm) are being thwarted by a dearth of supply of suitable products, while at the same time, they are being enabled to move up to mid-end segment products ($1,200/sqm) by the growing availability of retail mortgages.

2) Rising property prices – especially in periphery areas of HCMC such as District 9 and Binh Tan District (due to infrastructure development) – has made developing new affordable housing projects in these areas less feasible.

3) Increased supply of mid-end products is also being driven by the higher margins developers earn from developing mid-end, and high-end products.

4) In HCMC, demand for high-end products is being partly driven by an increasing number of buy-to-let purchases, which is in turn being driven by the steady inflow of expat workers to the city. Demand for high-end units is also being driven by purchases funded by remittances from overseas Vietnamese.

5) In Hanoi, demand for high-end products from overseas buyers is less of a factor than in HCMC, but purchases by local individuals requiring a store-of-value for money that was earned through informal means is helping drive purchases of high-end units.

Further to the above, the enormous imbalance between excess demand and insufficient supply in the affordable segment of the market has led to a ~10% increase in the price of affordable housing units this year, according to Cushman & Wakefield. Also, note that Vietnam’s Ministry of Construction estimates that the inventory of unsold property in Vietnam fell by 26% YTD at end-1H16 to $1.7b, with a 13% YTD fall in Hanoi, and a 33% YTD fall in HCMC. We believe these statistics support our assertion that although the number of real estate transactions declined in H1, the value of those sales increased meaningfully.

Vietnam’s stock market is at an 8 year high

The VN-Index breaks out of its 2-1/2 year trading range

From the beginning of 2014 until earlier this month, Vietnam’s benchmark VN-Index (VNI) traded in a 500-650 range, encountering significant resistance every time the VNI approached 650, but significant support whenever the VNI fell near 500. This month, the market broke out of its 500-650 range and reached its highest level since 2008, when the index was in the midst of a precipitous fall, following Vietnam’s liquidity fueled stock market and real estate bubbles (the VNI fell by 80% over two years, from 1179 in March 2007 to 243 in February 2009).


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Figure 35: VN-Index breaks out of its recent trading range


The index was propelled higher by the elimination of Vinamilk’s FOL this month – which signals that more big companies are also likely to raise their FOL’s, and by the increased comfort with which investors view Vietnam’s new government.

We didn’t expect the VNI to break out of its trading range in 2016

We were caught off guard by the VNI’s strength in the first half of this year. We had expected the market to remain volatile in H1, because of investors’ uncertainty about the policies and orientation of the new government (that prompted a steep sell-off at the end of 2015 / beginning of 2016). We expected the market to start rising in the second half of the year – but did not expect the VNI to muster enough momentum to break through the upper limit of its long-standing 500-650 trading range (our original 2016 VNI target price was just below the upper bound of this trading range).

The elimination of VNM’s FOL and increasing comfort with the new government helped propel stocks, as did ample liquidity (coupled with the fact that M2 growth outpaced loan growth slightly), but an accumulation of margin in the system also helped pushed stock prices higher. That said, local investors are increasingly viewing stocks as their best investment alternative because: 1) real rates in Vietnam are fairly high at ~4%, but nominal deposit rates (~6%) aren’t high enough to enthuse investors, 2) five-year government bonds only yield ~6%, 3) gold prices in Vietnam have been quite volatile over the last three years (more so than world gold prices), which has dampened local investors’ enthusiasm to hold gold, and 4) the easy money in the current real estate cycle has already been made.

We’re raising our VNI target price by 7%

At the beginning of 2016, we forecast a 12% increase in the VNI to 648 this year, predicated on 13% EPS growth, and a 13x FY16 P/E target valuation, but we’re raising our VNI target by 7% to 694. Our 694 target price is based on a 14x target valuation, which implies a 20% increase in the VNI this year.

We may raise our FY16 EPS growth forecast from 13% to ~15% after local companies finish reporting their H1 earnings; a handful of companies have released their full H1 earnings figures (Vietnamese companies typically lag their regional peers in reporting their results), but a reasonable number of companies have guided for better-than-expected H1 earnings.

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We remind investors that Vietnam’s stock market and its corporate sector are still not as developed as those of its Asean peers (one indication of this is Vietnam’s 40% stock market capitalization / GDP ratio – which is the lowest in the region). For that reason, the local market is still focused on FY16 earnings, and we won’t have more clarity about FY17 earnings until companies report their Q3 earnings later this year.

The VNI already reached our 2016 target price

The VNI currently sits at 652 (+13% YTD) and traded as high as 682 (+18% YTD) earlier this month. From a technical analysis / charting point-of-view, the ascent of the VN-Index has unfolded in a near perfect sequence of “higher highs and higher lows” since the VNI’s bottom in February, when panic selling stemming from the unexpected change in the leadership of Vietnam’s government finally abated.

We didn’t expected investors’ concerns about the political situation in Vietnam to alleviate until the second half of 2016, so we did not think the stock market would break out of its 500-650 range this year. However, as we have discussed several times in this report, Vietnam’s new government has earned kudos from investors & business people alike, and Vietnam also scores well on the LEVIS analysis framework presented at the beginning of this report.

VNI poised to test the 700 level

Now that the market has broken out of its long-standing trading range, and given that Vietnam managed to shrug off the Brexit-driven panic selling of world stock markets at the end of last month, investors are increasingly focusing on the 700 level of the VNI – if for no other reason than the fascination stock market traders have with round numbers (Vietnam’s stock market is dominated by retail investors – exacerbating this idiosyncrasy).

Vietnam’s stock market first reached the 700 level in December 2006, during the market’s ascent in its great 2006-2007 bubble, but the VNI saw the 700 level again a year later in February 2008, as prices collapsed. We’re skeptical the market can convincingly break the 700 level this year (although we were also skeptical it could break out of its 2-year trading range), especially given a few minor hindrances to investors’ sentiment at present, including: 1) the increasingly likelihood that the TPP trade agreement will not be ratified in the US, given developments in the US presidential election, 2) the well-publicized trial of the former executives of a local bank that was nationalized, and 3) some modest upward pressure on interest rates (which is unlikely to result in significant interest rate hikes this year, in our opinion).

Our top Vietnam stock picks outperformed the VNI by 14%

CIMB’s 2016 top picks (MWG, VIC, FPT, PVS) outperformed the benchmark VN-Index by 14% YTD, versus the 30% outperformance our top picks achieved in 2015, but the performance of our top picks was held back by some specific developments at FPT (its stock price is unchanged this year), which are discussed below. For that reason, we’re replacing FPT in our model portfolio with VNM – our top Vietnam stock picks are now MWG, VIC, VNM and PVS.

We had considered including VNM in our top picks from the beginning of the year, but at that time Vinamilk’s valuation too high – and did not anticipate that the stock would be rerated, in light of the removal of its foreign ownership limit (our target VNM target price is now based on the valuations of VNM’s regional peers). Also, the outperformance of our top picks is higher based on total returns, owing to PVS’s 7% dividend yield – versus ~2% for the overall market (PVS’s high, sustainable dividend yield was our primary motivation for selecting it as a top pick, given the on-going hunt for yield by global investors).


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Finally, our small-cap top picks (PNJ, DRC, KDH, KBC, DXG), which we also published in CIMB’s Navigating Vietnam 2016 report at the beginning of this year, only outperformed the VNI by 9% due to a 20% drop in the stock price of affordable housing developer DXG, due to some negative publicity involving the personal life of one of the executives of the company (which is unrelated to the business – so we’re retaining the stock as one of our small-cap stock picks). Excepting the peculiar case of DXG, our top small-cap stock picks would have outperformed the VNI by a bit more than our large-cap picks.

Mobile World: Rocketing growth

MWG’s revenues and earnings grew 80% and 86% yoy respectively in 5M16, so we may need to raise our current 50% FY16 EPS growth forecast after the company releases its 1H16 results. The company’s explosive growth is being supported by a doubling of the number of outlets in the company’s two retail formats over the last year. The number of MWG’s flagship Thegioididong, mobile phone retail stores grew 88% yoy to 790, while the number of stores in its up-and-coming Dienmay home electronics stores surged 325% to 102 (as of end-5M16).

Figure 36: MWG stock price – YTD

SOURCES: CIMB, VNDirect

Some observers (including us) were concerned about the possibility that MWG’s new mobile phone stores - especially those in greater HCMC - would cannibalize sales from existing stores because the total number of Thegioididong stores grew 60% CAGR over the previous two years, and the stores are now ubiquitous in the city. However, the same-store-growth of this format is still around 7% because most of the stores the company is now opening (across both formats) are in rural areas and 2nd tier cities - wealth in Vietnam is emanating from Hanoi & HCMC out to the provinces at an increasing pace. Also, the Thegioididong stores MWG is opening in the city are able to absorb some of the customer overflow from popular, established Thegioididong stores that often have full parking lots at peak times.

The company now has equally resounding ambitions to grow its home electronics / consumer electronics chain (currently ~¼ of revenues) because that industry is highly fragmented, with over half the country’s televisions, refrigerators, etc. still sold at small “mom & pop” stores, but the two Vietnamese home electronics chains in a position to challenge MWG’s ambitions – Nguyen Kim and Vinpro - are both in somewhat of a state of disarray.


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MWG is trading at 12x FY16 P/E and we expect its EPS to grow by at least 50% this year.

Vinamilk: Rerating driven by FOL removal

We expect VNM to report a 16% yoy increase in 1H16 revenues, and a 35% yoy earnings growth, driven by a 15% increase in domestic revenues (80%/overall revenues). VNM continues to grow its revenues faster than the rest of the local industry, so its share of the local liquid milk and powdered milk markets now sit at 54% and 40% respectively, versus 50% and 30% a few years ago, and the company recently unveiled an ambitious plan to achieve 75% and 50% market share respectively within the next five years.

Figure 37: VNM stock price - YTD


We expect the firm to continue spending aggressively on advertising and promotion in FY16, but while Vinamilk’s SG&A/Revenues ratio leapt from 13% in FY14 to 19% in FY15, we expect this ratio to decrease by 160bp in FY16. We also expect the company to earn a record high, 42% gross margin, because the per-unit cost of VNM’s imported SMP & whole milk powder (WMP) should fall by 10% this year, as Vinamilk negotiated the purchase of a full years’ worth of imported raw material inputs back in November 2015.

That said, the company’s fundamental characteristics are as impressive as ever (VNM generates a 40% ROE with a -40% net gearing ratio, for example), but the compelling Vinamilk story this year is the removal of the company’s foreign ownership limit. That topic has been discussed at length above, but we’d also like to mention that the removal of VNM’s FOL has prompted us to revise our target price basis to 23.5x FY16 P/E, which is in-line with VNM’s regional peers – but the EPS growth rates of those peers is much lower than that of Vinamilk.

VNM is trading at 21x FY16 P/E versus 29% expected EPS growth this year.

Vingroup: The easiest way to get exposure to VN’s real estate market

VIC, Vietnam’s premier real estate developer has a 10,000ha landbank that dwarfs the landbank of any other local property developer, and a market capitalization which is equivalent to about 60% of the sector’s total market cap. The latter makes the stock the easiest, most liquid way for stock market investors to get exposure to Vietnam’s booming real estate market. The


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company’s stature in the local real estate market also gives it an ability to secure the most desirable sites to develop.

Figure 38: VIC stock price – YTD


We expect VIC’s net profits to leap 190% in FY16, driven by a 180% surge of pre-sales in FY15, and by a booming local real estate market. That surge in FY15 sales of newly launched-for-sale apartment units was driven by a 150% increase in the number of units sold and a 25% increase in the selling prices of VIC’s apartments. However, under Vietnamese accounting regulations, the company is not allowed to recognise any of the revenues or earnings associated with those sales until the fully constructed apartment units are handed over to the end-buyers of those apartments/houses. For that reason, Vingroup’s US$3.1b order book virtually assures robust earnings growth over the next few years.

VIC is trading at a 20% discount-to-RNAV and we expect its EPS to grow 40% CAGR over FY16-18

PVS: Sustainable 7% dividend yield

PetroVietnam Technical Services, which is Vietnam’s leading diversified oil services provider: 1) owns five FPSO vessels and has ownership stakes in five FSO vessels, 2) owns a fleet of 19 Offshore Vehicles (OSV) to service the local oil industry (and subleases additional OSV’s), 3) operates ports (both container/bulk ports and specialist ports for the oil industry), and 4) is also an O&M contractor to the local oil industry.


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Figure 39: PVS stock price - YTD


PVS’s holds cash equivalent to ~80% of its market cap, and its dividend payout ratio is just ~1/3, despite a steep fall in oil prices over the last two years, so we believe the company should be able to maintain its current dividend, which equates to a 7% yield at PVS’s current stock price.

PVS is trading at 0.75x FY16 P/B

Comments on FPT

We chose FPT as a top pick in our Navigating Vietnam report at the beginning of the year because valuation was cheap (and it still is at 8x FY16 P/E), and because we expected the company’s earnings growth to roar back to life this year following the completion of FPT’s buildout of its “last-mile” fiber optic infrastructure in Hanoi and HCMC (those expense were depreciated over a two–year horizon). However, we’ve had to cut our FY16 earnings estimates three times, and now expect 15% FY16 EPS growth. The firm’s (unexpected) decision to build its fiber optic network in Vietnam’s 2

nd tier cities, such as

Haiphong, Danang, etc. prompted one of those FY16 EPS forecast cuts.

Also, FPT’s stock price is lacking clear catalysts that can push its price higher this year (it will be difficult for FPT to raise its FOL because of its involvement in the telecommunications business). We still rate FPT an ‘Add’, but we’ll wait until the end of this year to see if the stock merits selection as one of our 2017 top picks – we’re currently penciling in 28% CAGR EPS growth over FY17-18.

Investment themes to watch

There are several themes investors in the Vietnam stock market should be aware of:

Banking sector: we have a “Neutral” rating on Vietnam’s banking sector because the sector-wide valuation is fairly high at 1.3x FY16 P/B vs. ~8% industry-wide ROE, following a mini-bubble in Vietnamese bank share prices last year (the SBV tacitly encouraged higher bank shares as part of its efforts to consolidate Vietnam’s banking sector – large banks used their shares as a currency to purchase smaller banks in 2015).

Earlier this year, sentiment towards bank stocks was depressed by fears that the SBV would clamp down on lending – but the central bank’s proposed macro-prudential regulations were subsequently


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watered down. That said, investors have not generally understood the full impact the implementation Basil II will have on local banks, in our opinion. We estimate that Basil II would depress Vietnam’s system-wide CAR from about 12% to 9% (Vietnam’s statutory minimum CAR is 9%), if it were implemented immediately – so local banks need to raise capital (several banks, including ACB are raising Tier II capital, and VCB plans to increase its Tier I capital by about 10% later this year). Furthermore, the Ministry of Finance is pressuring CTG and BID, which are owned by the State Bank of Vietnam to pay overly generous cash dividends, which exacerbates their need to raise capital, and also damped sentiment towards bank stocks this year.

Property sector: we estimate that the sector-wide discount-to-NAV valuation of Vietnam’s property developers is currently 20%, and we expect developers’ earnings to soar this year, and next year, but real estate stocks are underappreciated foreign and local investors alike. Developers’ pre-sales more-or-less doubled last year, but under Vietnamese accounting standards, developers are not allowed to recognize any of the revenues/earnings generated by those pre-sales until the newly developed housing units are constructed and delivered to the end-buyers (which takes ~18 months for an apartment building). Real estate developers collect progress payments from home buyers as the pre-sold housing units are being constructed, so developers’ future earnings have a high degree of visibility.

Despite that rosy outlook, sentiment towards real estate stocks has been held back by industry-wide statistics indicating that the number of property transactions in Vietnam’s major cities declined this year, after having surged 4-fold over 2014-15. We’re not concerned about these well-publicized statistics because we estimate that the amount of money that flowed in the property market in H1 increased 26% yoy – because buyers focused on mid-end housing products (which have a higher prices), enabled by the growing availability of retail mortgages.

ETF inclusion: the removal of Vinamilk’s foreign ownership limit should make VNM eligible for inclusion in the two popular Vietnam ETF’s from Van Eck (listed on the NYSE) and Deutsche Bank (listed on the FFT and other exchanges), which currently have an aggregate $700m AUM (the aggregate AUM of these funds exceeded $1b in recent years). Both ETF’s track proprietary indices that are constructed with deference to Vietnam’s foreign ownership limits, so additional Vietnamese large-cap companies should also become eligible for inclusion in the ETF’s as they raise their FOL’s.

Inclusion into the Vietnam ETFs significantly impacts the stock price of the particular name that’s included in (or dropped from) the funds – especially when a particular stock is included in both ETF’s. Vietnam’s leading insurance company, BVH traded at 4x P/B after it was included in the two Vietnam ETF’s in 2009. In September 2015, both ETF’s announced the inclusion of BIDV, a recently listed state-owned bank in their ETF’s, but then both retracted these announcements almost immediately when they realized that BID does not satisfy their inclusion criteria. This series of events caused BID’s share price to initially shoot up 16%, but then to immediately plunge 15% after the announcement that it would not actually in included in the two Vietnam ETF’s.

Focus on stocks, rather than sectors: in general, picking stocks is more important in the Vietnam stock market than picking sectors because most of the market’s individual sectors are populated by a handful of stocks that are easy to invest in, and a plethora of smaller stocks. The banking sector is the exception, with seven fairly large


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stocks, but the consumer sector only has 2-3 large-cap stocks, the real estate sector is dominated by one stock and there are three investable oil & gas stocks, etc. This is because Vietnam’s stock market is populated by a large number of small companies.

Over 700 companies are listed on Vietnam’s two stock markets, but only a small handful of these have market caps of over US$500m. In the government’s initial zeal to embrace privatisation, it privatised many tiny companies that probably should have been amalgamated and listed as a single company (for example, Vietnam has a plethora of tiny listed port companies). Many of the country’s industries are highly fragmented as a result (at some point we expect major private equity firms to consolidate these industries).

In addition to the themes above, in the next section we discuss an increasing bias toward liquid, large cap stocks, driven by foreign investors.

Foreign investors are buying liquid, large-cap “proxy” stocks

The stocks we chose as our top picks in CIMB’s Navigating Vietnam 2016 report (MWG, VIC, FPT, PVS, plus 5 small-cap picks) were all chosen for their modest valuations in the face of robust, reasonably-assured earnings growth. However, we’ve noticed another factor that seems to be guiding some investors’ decisions this year. At first glance, it appears that the sectors below are the ones which have been leading Vietnam’s stock market higher.

Figure 40: YTD performance - By sector SORT BY YTD PERFORMANCE


However, upon closer examination, it becomes evident that some foreign investors have been focused on buying relatively liquid, large-cap names which can be easily acquired in order to get exposure to Vietnam – and the purchase of those stocks has helped drive the sector performances observed in the table above. This hypothesis is supported by market talk of several large “P-note” baskets that were executed in Q2 and Q3, because the constituents of those basket trades are typically liquid, large-cap names with ample foreign ownership room.

The names these investors appear to have focused on have reasonable fundamental characteristics, but their selection criteria seems to weigh liquidity and magnitude of market cap more heavily than valuation considerations, or even than the sector the stock belongs to - which is also consistent with the hypothesis that these stocks were purchased to get “Vietnam exposure”. For example, the valuation of GAS is quite high at 19x FY16 P/E, versus -35% EPS growth; GAS’s regional peers are trading at 17x, and have reasonable earnings growth. We recently downgraded GAS to a “Reduce” rating – the stock was up 100% earlier this year, despite plunging earnings both this year and last year, due to P-note buying.

In the case of VIC, we believe valuation is still attractive, but we don’t think that’s what motivated its inclusion P-note basket buying programs - most foreign investors we speak to have eschewed Vietnamese real estate stocks in

Sector YTD performance

Oil & gas 62%

Industrial 29%

Real Estate 26%

Consumer 24%

Insurance 14%

Bank 13%


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favor of consumer names (although we believe the real estate sector looks interesting).

Figure 41: GAS vs Oil & Gas sector Figure 42: VIC vs Real Estate Sector

SOURCES: CIMB, COMPANY REPORTS SOURCES: CIMB, COMPANY REPORTS

Another case is VCB, a $6.5b blue chip stock with a $1.5m ADTR that has ample available foreign ownership. VCB has the duel advantage of giving investors exposure to Vietnam and the stock is being used by investors as a proxy to Vietnam’s banking sector.

Figure 43: VCB vs Bank Sector


Vietcombank’s fundamentals are reasonable – it’s the only bank in Vietnam which has truly finished dealing with its legacy asset issues and has begun to aggressively grow its core business again, VCB has one of the strongest retail banking franchises in Vietnam, and the bank has a reasonable capital base, etc. However, VCB is trading at 3.3x P/B, despite only generating a ~12% ROE because it’s the only high quality bank in Vietnam which has ample foreign room available and is easy for foreign investors to buy (ACB and MBB are the two other banks foreigners appreciate – but both are harder to buy).

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The mechanism and meaning of higher FOL’s

Legislation went into effect last year that enables Vietnamese companies to set their own foreign ownership limit’s – as long as those companies do not operate in certain “conditional sectors”, such as banking, etc. Companies that want to raise (or eliminate) their FOL’s resolve to do so at an AGM/EGM and then send an official letter to the State Securities Commission (SSC), which is Vietnam’s securities regulator, informing the SSC that the company’s board approved an increase in the company’s FOL (in VNM’s case, its BoD did not put the matter to a vote by shareholders).

Based on the cases of Vinamilk, and a handful of other companies that already raised their FOL’s, the approval of the SSC, which is just a formality, takes a few weeks, after which the company petitions the Vietnam Securities Depository (VSD), to unblock its shares to foreign buyers. Vietnam’s stock market is an ID market, so the VSD blocks foreign buyers from entering buy orders on stocks for which the FOL is already full. Based on prior cases, it should only take a few days for the VSD to “flip the switch” that allows foreigners unrestricted ability to buy the stock in question.

In Vinamilk’s case, the whole process, from the time that the company officially petitioned the SSC, until foreign investors could purchase its shares directly on the stock market, took less than 1 month.

The universe of investors that can VNM just got much bigger

Vinamilk’s foreign ownership limit was full for years, so VNM shares traded between foreign investors at prices that were typically at a ~10% premium to the VNM price on the local stock market.

The problems with this foreign premium system stem from the fact that the premium levels are not transparent. This creates a plethora of compliance and operational problems (the foreign premium level is not published anywhere and the transactions involve off-market side payments), but it also creates an even more insidious problem… When fund managers bought VNM at premium prices, their NAV’s “took a hit”, because the VNM shares they just purchased are marked-to-market at the lower, local market prices. For these reasons, many institutional investors are restricted from purchasing Vietnamese stocks that have reached their foreign ownership limits.

Removal of FOL’s means higher share prices

Over the past year, foreign investors often asked, “should I wait until Vinamilk’s FOL is removed to buy the stock, so I don’t have to pay a foreign premium ?”. Our answer to that question was always that VNM’s market price would likely increase to the foreign price (ie. local price, plus foreign premium), rather than the foreign premium collapsing – and that’s what happened. In May, when it became clear that VNM’s FOL would be eliminated, VNM’s foreign premium shrunk to 1% - driven by an increase in its share price on the local exchange, as can be seen in the chart below.


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Figure 44: VNM vs VNIndex


A larger universe of investors that can buy VNM (and other FOL stocks) helps support their stock prices – especially because foreign institutional investors tend to use more sophisticated valuation techniques that ascribe a higher fair values to the stock prices of those companies (which is one reason their FOL’s were full). Also, in the past foreign investors only indirectly influenced the stock prices of local shares that had reached their foreign ownership limits – because foreigners traded those shares among themselves. However, now that Vietnam’s previously broken price-discovery mechanism is being fixed, investors will be able to directly set market-clearing prices on the stock market – rather than navigating the existing, murky OTC trading mechanism for stocks that have reached their FOL’s.

Finally, we note that: 1) Vinamilk is the first large company with a full FOL to raise its foreign ownership limit – we expect Vietnam’s other large companies to raise their FOL’s during Vietnam’s next AGM season in early 2017, 2) VNM’s stock price will likely get another boost from inclusion in the two popular Vietnam ETF’s from Deutsche Bank and Van Eck, 3) the impact on VNM’s stock price from the removal of its FOL may be more pronounced than what other local companies will experience when they raise their FOL’s, but the increase in VNM’s valuation, coupled with the fact that Vinamilk is the largest, most important listed company in Vietnam should encourage those companies to follow VNM’s lead, and 4) higher FOL’s should pave the way for Vietnam to be moved from the MSCI Frontier index to the MSCI EM index.

Risks…and non-risks

In our view, the only real risk for Vietnam’s stock market and economy stems from the country’s high government debt-to-GDP ratio, which increased by nearly 11%pts since 2010. Before elaborating on this topic, we’d like to point out that the risk to Vietnam’s economy/stock market we get asked about the most often by foreign investors is the possibility of significant VND depreciations, such as those seen between 2010-12, when the value of the Dong fell by 25%.

However, we’re not concerned about the prospects for significant VND depreciations because the central bank is now much more vigilant in its efforts to prevent hyper-inflation, given the depletion of the country’s FX reserves to ~4 weeks’ worth of imports during Vietnam’s last bout of inflation (which peaked at 23% in mid-2011). Vietnam imposes strict capital controls on its citizens, but it’s relatively easy for local investors to shift their savings between VND, USD and gold (which resulted in a 14% “errors and omissions” in the country’s balance of payments accounts during Vietnam’s last inflationary period).

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Finally, an increasing number of investors also ask about the potential negative consequences to Vietnam if the TPP agreement is not ratified in the US – because Vietnam is the country in the prospective trade block with the lowest GDP-per-capita (so Vietnam should benefit the most from the TPP). In our view, although Vietnam would clearly benefit from the TPP, the direct economic benefits the country will accrue have been overstated. The World Bank estimates that the TPP would add 0.50% to Vietnam’s annual GDP growth rate over the next 5-10 years, but we believe that figure is too high.

Rising government debt-to-GDP ratio is Vietnam’s largest risk

Vietnam’s government has been running 5-6%/GDP budget deficits for years, so the country’s government debt-to-GDP ratio hit 62% in 2015. To make matter worse, the government plans to increase its bond issuance by 14% this year in order to compensate for falling oil revenues. Vietnam is not at immediate risk of suffering a debt crisis, according to the IMF, so the various credit ratings agencies all assign the country’s sovereign debt a “BB-“ rating, with a stable outlook following credit ratings upgrades in 2014. Also, the country’s external debt/GDP has hovered around 40%/GDP for years, which also lessens the probability of a debt crisis. That said, Vietnam’s National Assembly previously imposed a 65%/GDP ceiling, which will likely be approached (and possibly breached) this year.

Figure 45: Budget deficit (% of GDP) Figure 46: Government Debt-to-GDP

SOURCES: CIMB, GSO SOURCES: CIMB, GSO

The core problem is an increase in infrastructure spending, coupled with a decline in the government’s revenues as a proportion of GDP, owning to: 1) falling oil-related revenues, which contributed 13% of the government’s budget revenues in 2014, but just 4% in 1H16, and 2) tax cuts that have reduced corporate tax rates in Vietnam from 25% in 2013 to 22% in 2014 and 20% in 2016.

Title:

Source:


-8.0%

-7.0%

-6.0%

-5.0%

-4.0%

-3.0%

-2.0%

-1.0%

0.0%2010 2011 2012 2013 2014 2015 2016F Title:

Source:


0%

10%

20%

30%

40%

50%

60%

70%

2010 2011 2012 2013 2014 2015


40

Figure 47: Government revenue as a % of GDP

SOURCES: CIMB, GSO

To counter those pressures, the government has intensified its tax-collection efforts; in 2015, government revenues were only about 3% below-budget despite a ~25% shortfall in planned oil revenues (VAT and personal tax receipts both increased by about 15-20%), but this widening of Vietnam’s tax base is not sufficient to solve the problem.

New methods to finance infrastructure needed

We estimate that infrastructure spending in Vietnam increased from 2-3%/GDP four years ago to 5-6% of GDP at present. However, this dramatic ramp-up in infrastructure spending has not been matched by the introduction of more appropriate schemes to finance the elevated spending, such as the increased deployment of public-private-partnerships (PPP), or even the use of long-dated infrastructure bonds which are backed by revenues generated by tolls, usage fees, etc.

The Public Investment Law was revised in 2014, paving the way for the broader use of PPP financing, and the government also initiated a five-year capital budgeting mechanism to displace the current system of funding such expenditures on a year-by-year basis. The greater predictability this will bring should also facilitate the introduction of more appropriate, longer dated financing schemes (for example, local banks currently find it very difficult to evaluate and lend to long-dated infrastructure projects).

The government’s high debt is a solvable problem

Although Vietnam’s high government’s debt-to-GDP ratio is the only real risk we see to the country’s economic juggernaut (and the stock market), we also believe this is a fairly easy problem to solve if the government were to: 1) finance its infrastructure development more efficiently, and 2) embark on a more serious effort to privatize the country’s SOEs than is currently being undertaken. The government still has very attractive assets (especially telco’s) that foreign investors would be very interested to purchase, and the government still holds very high ownership stakes in the major SOE’s that have already been partially privatized, including GAS, and all of the state owned commercial banks – VCB, BID, CTG.

Title:

Source:


15

20

25

30

2009 2010 2011 2012 2013 2014 2015 2016F


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Other jurisdictions: In any other jurisdictions, except if otherwise restricted by laws or regulations, this report is only for distribution to professional, institutional or sophisticated investors as defined in the laws and regulations of such jurisdictions.

Corporate Governance Report of Thai Listed Companies (CGR). CG Rating by the Thai Institute of Directors Association (Thai IOD) in 2015, Anti-Corruption Progress Indicator 2015.

AAV – Very Good, 3B, ADVANC – Excellent, 3A, AEONTS – Good, 1, AMATA – Very Good, 2, ANAN – Very Good, 3A, AOT – Very Good, 2, AP - Good, 3A, ASK – Very Good, 3B, ASP – Very Good, 4, BANPU – Very Good, 4, BAY – Very Good, 4, BBL – Very Good, 4, BCH – not available, no progress, BCP - Excellent, 5, BEM – not available, no progress, BDMS – Very Good, 3B, BEAUTY – Good, 2, BEC - Good, 3B, BH - Good, 2, BIGC - Excellent, 3A, BJC – Good, 1, BLA – Very Good, 4, 1, BTS - Excellent, 3A, CBG – Good, 1, CCET – not available, 1, CENTEL – Very Good, 3A, CHG – Good, 3B, CK – Excellent, 3B, COL – Very Good, 3A, CPALL – Good, 3A, CPF – Very Good, 3A, CPN - Excellent, 5, DELTA - Very Good, 3A, DEMCO – Very Good, 3A, DTAC – Excellent, 3A, EA – not available, 3A, ECL – Good, 4, EGCO - Excellent, 4, EPG – not available, 3B, GFPT - Very Good, 3A, GLOBAL – Very Good, 2, GLOW - Good, 3A, GPSC – not available, 3B, GRAMMY - Excellent, 3B, GUNKUL – Very Good, 1, HANA - Excellent, 4, HMPRO - Excellent, 3A, ICHI – Very Good, 3A, INTUCH - Excellent, 4, ITD – Good, 1, IVL - Excellent, 4, JAS – not available, 3A, JASIF – not available, no progress, JUBILE – Good, 3A, KAMART – not available, no progress, KBANK - Excellent, 4, KCE - Excellent, 4, KGI – Good, 4, KKP – Excellent, 4, KSL – Very Good, 2, KTB - Excellent, 4, KTC – Very Good, 3A, LH - Very Good, 3B, LPN – Excellent, 3A, M - Good, 2, MAJOR - Good, 1, MAKRO – Good, 3A, MALEE – not available, 2, MBKET – Good, 2, MC – Very Good, 3A, MCOT – Excellent, 3A, MEGA – Very Good, 2, MINT - Excellent, 3A, MTLS – Good, 2, NYT – Good, no progress, OISHI – Very Good, 3B, PLANB – Good, 3B, PS – Excellent, 3A, PSL - Excellent, 4, PTT - Excellent, 5, PTTEP - Excellent, 4, PTTGC - Excellent, 5, QH – Very Good, 2, RATCH – Excellent, 3A, ROBINS – Excellent, 3A, RS – Very Good, 1, SAMART - Excellent, 3B, SAPPE - Good, 3B, SAT – Excellent, 5, SAWAD – Good, 1, SC – Excellent, 3B, SCB - Excellent, 4, SCBLIF – not available, no progress, SCC – Excellent, 5, SCN – Good, 1, SCCC - Good, 3A, SIM - Excellent, 3B, SIRI - Good, 1, SPALI - Excellent, 3A, SPRC – not available, no progress, STA – Very Good, 1, STEC – Very Good, 3B, SVI – Very Good, 3A, TASCO – Very Good, 3A, TCAP – Very Good, 4, THAI – Very Good, 3A, THANI – Very Good, 5, THCOM – Excellent, 4, THRE – Very Good, 3A, THREL – Very Good, 3A, TICON – Very Good, 3A, TISCO - Excellent, 4, TK – Very Good, 3B, TKN – not available, no progress, TMB - Excellent, 4, TPCH – Good, 3B, TOP - Excellent, 5, TRUE – Very Good, 2, TTW – Very Good, 2, TU – Very Good, 3A, UNIQ – not available, 2, VGI – Excellent, 3A, WHA – Good, 3A, WORK – not available, no progress.

Comprises level 1 to 5 as follows:

Level 1: Committed

Level 2: Declared

Level 3: Established (3A: Established by Declaration of Intent, 3B: Established by Internal Commitment and Policy)

Level 4: Certified

Level 5: Extended

Rating Distribution (%) Investment Banking clients (%)

Add 56.5% 7.1%

Hold 32.2% 2.9%

Reduce 9.8% 0.6%

Distribution of stock ratings and investment banking clients for quarter ended on 30 June 2016

1574 companies under coverage for quarter ended on 30 June 2016


46

CIMB Recommendation Framework

Stock Ratings Definition:

Add The stock’s total return is expected to exceed 10% over the next 12 months.

Hold The stock’s total return is expected to be between 0% and positive 10% over the next 12 months.

Reduce The stock’s total return is expected to fall below 0% or more over the next 12 months.

The total expected return of a stock is defined as the sum of the: (i) percentage difference between the target price and the current price and (ii) the forward net dividend yields of the stock. Stock price targets have an investment horizon of 12 months.

Sector Ratings Definition:

Overweight An Overweight rating means stocks in the sector have, on a market cap-weighted basis, a positive absolute recommendation.

Neutral A Neutral rating means stocks in the sector have, on a market cap-weighted basis, a neutral absolute recommendation.

Underweight An Underweight rating means stocks in the sector have, on a market cap-weighted basis, a negative absolute recommendation.

Country Ratings Definition:

Overweight An Overweight rating means investors should be positioned with an above-market weight in this country relative to benchmark.

Neutral A Neutral rating means investors should be positioned with a neutral weight in this country relative to benchmark.

Underweight An Underweight rating means investors should be positioned with a below-market weight in this country relative to benchmark.

highlighted companies title: mobile world (add; tp …€¦ · vinamilk and other stocks, as well...

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