Date: 13.02.2015 Institutional Research & Investment Advisory
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Table of Contents
MACRO ...................................................................................................................................................... 3
2014 IN REVIEW: A RECOVERY IN DOUBT ............................................................................................................... 4
2015 OUTLOOK: REACHING NEW HEIGHTS ........................................................................................................... 10
Foreseeable factors in 2015 ................................................................................................................................................................ 10
1. We believe domestic consumption (65% of total GDP) will recapture its past glory while constituting as the fuel that will
ignite growth. ...............................................................................................................................................................................10
2. Irrelevant inflation ...............................................................................................................................................................11
3. We believe that with a healthy current account surplus, prudent capital control, and rising foreign currency reserve, the
VND could well weather the impact of the USD rally, and a 2% depreciation target is achievable. .............................................12
4. 2015 is the deadline for IPOs and divestment by the SOEs ...............................................................................................13
5. 2015 is also the deadline for the 1st phase of banking restructuring ...................................................................................15
Variable factors in 2015 ........................................................................................................................................................................ 19
1. Oil and gas price will remain volatile despite a sharp decline in 4Q2014. ...........................................................................19
2. Vietnam will see its fair share of free trade agreements (FTA) this year, specifically ASEAN FTAs from 2015-2018) .......19
3. Fiscal discipline is the risk to our forecast ...........................................................................................................................20
2015 MARKET OUTLOOK ...................................................................................................................... 22
SECTOR IN FOCUS ................................................................................................................................ 27
CONSUMER DISCRETIONARY .......................................................................................................................................................... 28
TIRE: OVERWEIGHT ..................................................................................................................................................................28
JEWELRIES: OVERWEIGHT ......................................................................................................................................................32
TEXTILE & GARMENT: OVERWEIGHT .....................................................................................................................................36
ICT RETAIL: NEUTRAL ..............................................................................................................................................................40
CONSUMER STAPLES ............................................................................................................................................................................. 42
SUGAR: NEUTRAL .....................................................................................................................................................................42
ANIMAL FEED: OVERWEIGHT ..................................................................................................................................................47
FISHERY: NEUTRAL ..................................................................................................................................................................51
DAIRY: OVERWEIGHT ...............................................................................................................................................................57
CONFECTIONARY: NEUTRAL ...................................................................................................................................................62
OTHER F&B: OVERWEIGHT......................................................................................................................................................66
ENERGY.................................................................................................................................................................................................... 69
OIL & GAS: UNDERWEIGHT ......................................................................................................................................................69
FINANCIALS ............................................................................................................................................................................................. 74
PROPERTY (COMMERCIAL DEVELOPERS): OVERWEIGHT .................................................................................................74
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PROPERTY (INDUSTRIAL PARK DEVELOPERS): OVERWEIGHT ..........................................................................................81
BANKING: UNDERWEIGHT .......................................................................................................................................................86
INSURANCE: UNDERWEIGHT ..................................................................................................................................................93
HEALTHCARE .......................................................................................................................................................................................... 99
PHAMARCEUTICALS: OVERWEIGHT .......................................................................................................................................99
INDUSTRIALS ......................................................................................................................................................................................... 103
PORTS: NEUTRAL ...................................................................................................................................................................103
SHIPPING: OVERWEIGHT .......................................................................................................................................................107
PLASTICS PIPE: OVERWEIGHT..............................................................................................................................................112
CONSTRUCTION: OVERWEIGHT ...........................................................................................................................................114
INFORMATION TECHNOLOGY .............................................................................................................................................................. 116
IT: OVERWEIGHT .....................................................................................................................................................................116
MATERIALS ............................................................................................................................................................................................ 119
STEEL AND CEMENT: OVERWEIGHT ....................................................................................................................................119
FERTILIZER: NEUTRAL ..........................................................................................................................................................128
NATURAL RUBBER: UNDERWEIGHT .....................................................................................................................................132
UTILITIES ................................................................................................................................................................................................ 135
ELECTRICITY: OVERWEIGHT .................................................................................................................................................135
RATING ................................................................................................................................................................................................... 138
DISCLAIMER ........................................................................................................................................................................................... 138
CONTACT ............................................................................................................................................................................................... 139
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MACRO
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2014 in review: A recovery in doubt
The macroeconomic climate in 2014 can be characterized in two words, ‘stability strengthening’. Macro stability was
exhibited by prolonged low interest rate and a stable currency which perpetuated the deleveraging process with less
pain. Deleveraging ushered in a period where banks sat on ample liquidity, however, banks failed to lend brazenly in
fear of risk. While macro stability was apparent and consistent, the same cannot be said for macro recovery which
was in doubt, and therefore restricted corporations and individuals from spending.
Growth was not exceptional in 2014 although Vietnam GDP growth did exceed the government’s target (5.98% vs
5.6%, YoY). Main growth stimulants remained the familiar factors, namely export and investment. Although
consumption (roughly 65% of GDP) was unquestionably the key stimulant behind growth, however, because
individuals remained restricted in spending, private consumption was reticent, as observed by FMCG sales and sales
of large listed consumer companies such as VNM and MSN.
Private consumption in GDP
Source: GSO, SSI Research
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
12.00%
62.50%
63.00%
63.50%
64.00%
64.50%
65.00%
65.50%
66.00%
66.50%
67.00%
67.50%
68.00%
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Weight
Growth
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Vietnam FMCG Sales
Source: Kantar Worldpanel
Export (82% of GDP) and net export (2% of GDP): Net export reversed from negative to positive since 2012.
However, the weight of net export in total GDP remains insignificant. Net export improvement has a strong
correlation with rising FDI in Vietnam in recent time, as exhibited by key export drivers (handphone: USD 23.6
bn, 11.1% YoY growth, garment and textiles – USD 20.95 bn,16.8% YoY growth, footwear USD 10.34 bn,
23.1% YoY growth)
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Net export in GDP
Source: GSO, SSI Research
Investment (30-31% of GDP) and FDI: Apart from the gap in salary between the Vietnamese and Chinese
workers, Vietnam continued to be a relatively attractive destination for foreign investors given the country’s
strategic geographic position, political stability and labor supply. Total investment growth was unprecedented in
2014 (represented by gross fixed asset formation) with 8.9% YoY (vs 5.45% in 2013) and this was attributed to
foreign direct investment, which resulted in expedited growth for manufacturing and export. Most prominent
being Samsung which has been a bedrock for Vietnam, with total investment at USD 11.2 bn (and expected to
rise in 2015) and accounted for roughly 20% of Vietnam’s total export (approx. USD 30 bn). New significant
FDI projects in 2014 include the 3 biggest projects, all from Samsung, USD 3 bn for the expansion in SEVT –
Thai Nguyen, USD 1.4 bn for Samsung Consumer Electronics Complex in Ho Chi Minh City and USD 1 bn for
Samsung Display in Bac Ninh)
Most notably, in 2014, the private sector’s investment witnessed 13.6% YoY growth, which doubled 2013
growth of 6.6%. The rise in private investment is suggestive of a healthy economic recovery.
-12.00%
-10.00%
-8.00%
-6.00%
-4.00%
-2.00%
0.00%
2.00%
4.00%
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Weight
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Gross fixed asset formation in GDP
Source: GSO, SSI Research
When looking at the supply side, industrial and construction spearheaded 2014 GDP growth, overtaking the
service sector (industrial and construction contributed 2.75% to total GDP growth vs 2.62% of the service sector
while 2013 data were 2.09% vs 2.85%). Within the industrial and construction sector, the manufacturing segment
(with 8.45% YoY growth) spearheaded growth. Additionally, construction posted a 7.07% annual growth (much
higher than 2003 of 5.87% YoY). All this corroborate our outlook in our 2014 Strategy Note when we anticipated
increase activities of infrastructure-related industries. Banks’ lending to the SOEs sector increased in 2014 in
order to finance infrastructure-related projects. Furthermore, increased liquidity in the property sector also helped
ignite construction activities. By end of November 2014, there were 9,950 successful transactions in Hanoi
(+100% YoY) and 8,850 in Ho Chi Minh City (+35%YoY) with a high focus on mid and low-end segments.
-10.00%
-5.00%
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
30.00%
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
30.00%
35.00%
40.00%
2006 2007 2008 2009 2010 2011 2012 2013 2014
Weight
Growth
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Registered FDI to manufacturing sector (mil USD)
Source: GSO
All other macroeconomic indicators in 2014 acutely corresponded with our expectations, including: tamed CPI
(year-end at 1.84% YoY and 4.09% YoY on average), lower interest rate – about 150-200 bps lower from 2013
year-end (the State Bank of Vietnam curtailed policy rates twice, in March and October 2014), 1% depreciation of
the VND against the USD, and in fact the VND was one of the best performers amongst Asian currencies in 2014.
Notably, given the low deposit rate (5% for the less than 6-month terms) and a stable currency, property rent yield
increased to a reasonable level (6-7% at some favorable locations) which attracted more home buyers.
Economic restructuring which was inaugurated in late 2011 flaunted signs of growth and fortitude after coming out
of the corners stumbling. In the past, the government was fixated on equitizing only small and medium state owned
5,979
7,789
11,702
17,141
14,490
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
18,000
2010 2011 2012 2013 2014
4.00%
4.50%
5.00%
5.50%
6.00%
6.50%
7.00%
7.50%
1M Deposit rate (%)
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enterprises (SOEs), and although the number of SOEs reduced from 1,406 by the end of 2009 to 857 in Sep,
2014, their contribution to GDP was inconsequential (from 34.7% in 2009 to 32.2% in 2013). Starting from 2014,
we saw sizeable SOEs’ IPO, namely Viglacera, Vinatex or Vietnam Airlines. Together with the request for non-core
divestment, and permitting the sales of state-assets under book value - under the newly issued 51/2014
government decree, we believe SOEs reform will continue to flourish in 2015 – the deadline for IPOs and non-core
divestment (with about 200 SOEs in the pipeline in 2015).
With an improved macroeconomic climate, Moody’s and Fitch upgraded Vietnam sovereign credit rating, which
was well deserved, coupled with the astounding success of the US dollar bond issuance by the government
(outstanding issuance of USD 1 bn of 10Y bond at par on a semi-annual coupon of 4.8%, bid to cover ratio at
10.8x, Nov 2014). All the evidences have solidified Vietnam economic dexterity.
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2015 outlook: Reaching new heights
In 2014, although private consumption was sluggish, the macro indicators pointed to encouraging private
investment which is a good start for 2015. In 2015, the government targets higher GDP growth (at 6.2% YoY),
stable CPI (lower than 5% YoY) and a stable VND (VND depreciation within 2%, which has been partly achieved
as the State Bank of Vietnam officially adjusted VND 1% lower in Jan 2015). From our assumptions, we believe
the targets are quite conservative, whereas we estimate that GPD growth will deliver 6.5% and CPI at 2.28%
YoY. Our key assumptions for 2015 are summarized into 2 groups: Foreseeable factors and the Variables in 2015
Foreseeable factors in 2015
1. We believe domestic consumption (65% of total GDP) will recapture its past glory while constituting as
the fuel that will ignite growth.
Lower oil and gas prices will be strong supportive factor for growth, serving as an unofficial tax cut for both
consumers and enterprises. A simple calculation reveals that if petroleum product retail price drops 20% from
2014’s average, consumers and enterprises would save around USD 4 bn, and this will unquestionably trickle
down to consumption. 2013 and 2014 average gasoline prices were almost identical, and by the beginning of
February 2015, average gasoline price was 30% lower than 2014, implying that the significance of low oil and gas
prices will radiate its true colors in 2015 in terms of YoY comparison. Consumption will revitalize with
strengthened consumer confidence, which needs time to recover after a prolonged depression period. We would
like to note that in a low interest rate environment, banks and individuals are sitting on abundant cash, which was
partially disbursed to the property sector as mentioned above. However, room for further investment and spending
by the private sector remains ample in 2015.
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Gap between Total deposit and Total credit (VND Billion)
Source: GSO, SSI Research
Private consumption and GDP growth 2006-2015
Oil price and retail sale growth
Source: GSO, SSI Research Source: Bloomberg, GSO
2. Irrelevant inflation:
We expect that average CPI, the key indicator for the government, will continue to drift lower in 2015, thanks to the
built-in momentum from 2014 and could only rebound from 4Q2015. Our call on low inflation already take into
account the scenario where the government might consider slashing its subsidies on a number of utilities, including
raising the electricity price, possibly by 10% in 1Q2015. In essence, room for both fiscal and monetary policies is
(500,000)
(400,000)
(300,000)
(200,000)
(100,000)
-
100,000
200,000
300,000
400,000
500,000
Jan
-09
Ma
r-09
Ma
y-0
9
Jul-0
9
Se
p-0
9
Nov-0
9
Jan
-10
Ma
r-10
Ma
y-1
0
Jul-1
0
Se
p-1
0
Nov-1
0
Jan
-11
Ma
r-11
Ma
y-1
1
Jul-1
1
Se
p-1
1
Nov-1
1
Jan
-12
Ma
r-12
Ma
y-1
2
Jul-1
2
Se
p-1
2
Nov-1
2
Jan
-13
Ma
r-13
Ma
y-1
3
Jul-1
3
Se
p-1
3
Nov-1
3
Jan
-14
Ma
r-14
Ma
y-1
4
Jul-1
4
Se
p-1
4
Nov-1
40.00%
2.00%
4.00%
6.00%
8.00%
10.00%
12.00%
Private consumptiongrowth
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
-
20
40
60
80
100
120
140
160
180
200
2005200620072008200920102011201220132014
Average Oil Price (LHS)
Real Growth in Retail Sales (RHS)
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ample in 2015. The SBV might lower its policy rate at the start of 2015, and later remove the cap on short term
deposit rate (less than 6-month tenure) to reign in a market-based mechanism to nurture competition among banks.
Interest rate would bottom out in 1H2015 and is likely to stabilize afterwards, as room for further adjustments is
narrow, given that it’s in the SBV’s interest to protect the VND against the global USD rally. In short, we don’t view
inflation as a threat of any kind in 2015.
Consumer Price Index 2009-2015 (monthly)
RON 92 gasoline retail price 2013-2015
Source: GSO, SSI Research Source: Petrolimex
3. We believe that with a healthy current account surplus, prudent capital control, and rising foreign
currency reserve, the VND could well weather the impact of the USD rally, and a 2% depreciation target
is achievable.
For the current account surplus, we anticipate that the trade balance would slightly improve to USD 4.8 bn in 2015
vs. USD 2 bn of surplus in 2014, as Vietnam would pay a smaller bill for its oil-related imports (Vietnam recorded a
trade deficit of USD 14 bn for oil-related products in 2014). Couple with the increase of Samsung exports and the
expansion in supporting industries, all of these factors can more than compensate for the higher growth in
machinery and other imports as a result of stronger consumption and production. 2014 growth in FDI disbursement
and overseas remittances will be repeated in 2015.
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
Jan
-09
Jun
-09
Nov-0
9
Ap
r-10
Se
p-1
0
Fe
b-1
1
Jul-1
1
Dec-1
1
Ma
y-1
2
Oct-
12
Ma
r-13
Au
g-1
3
Jan
-14
Jun
-14
Nov-1
4
Ap
r-15
Se
p-1
5
CPI(average)
10000
12000
14000
16000
18000
20000
22000
24000
26000
28000
2015
2014
2013
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Foreign Direct Investment
Foreign reserve
Source: CEIC Source: MOF
4. 2015 is the deadline for IPOs and divestment by the SOEs:
We believe SOEs restructuring will be in full throttle in 2015 and preference will go towards bigger-size SOEs. The
new Circular 01/2015 (effective from March 1, 2015) requiring SOEs, after IPO, to list on UpCom within 90 days
once they receive their registration certificates, and for those that IPO before Nov 1st, 2014, to list before Nov 1
st,
2015,will serve as an important catalyst for attracting investors. It is believed to be more direct impact on
administering SOEs to become listed, than what was stipulated in the government’s Decree 108/2013, which
simply levied small fines on SOEs that failed to list. Please find below a number of expected IPO in 2015, and
possible listings in 2015 for those that IPO-ed in the past.
Expected listing in 2015 (those with chartered capital higher than USD 50 mil)
IPO Date Company name (English) Chartered
capital (USD mil)
Average IPO price
(VND/share)
Market cap (USD mil)
27/03/2008 Hanoi Beer Alcohol And Beverage JSC (HABECO) 108.4 50,017 542.4
28/01/2008 Saigon Beer-Alcohol-Beverage JSC (SABECO) 300.0 70,003 2100.3
15/05/2009 Thai Nguyen Iron and Steel JSC 86.1 10,113 87.1
27/09/2010 Vietnam Electrical Equipment Corporation 65.5 10,502 68.8
29/12/2010 PETEC Trading & Investment Corporation 121.6 21,010 255.6
10/06/2011 Vietnam Steel Corporation 318.1 10101 321.3
28/07/2011 Vietnam National Petroleum Group 500.6 15032 752.5
20/07/2011 Mekong Housing Bank* 211.2 11,025 232.9
28/11/2013 Ha Tinh Minerals and Trading Joint Stock Corporation 61.8 10,000 61.8
0.000
200.000
400.000
600.000
800.000
1,000.000
1,200.000
1,400.000
1,600.000
1,800.000
0.000
10,000.000
20,000.000
30,000.000
40,000.000
50,000.000
60,000.000
70,000.000
80,000.000
FDI: Registered
FDI: Disbursed
FDI: No of Project Licensed
3 4 4 6 7
9
13
23 24
16
12 14
26 26
36
-
5
10
15
20
25
30
35
40
Billion USD
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IPO Date Company name (English) Chartered
capital (USD mil)
Average IPO price
(VND/share)
Market cap (USD mil)
03/10/2014 Hanoi Construction Corporation 88.9 10,201 90.7
20/02/2014 Viglacera Corporation 143.6 10,301 147.9
05/08/2014 Hai Phong Port JSC 153.0 13,507 206.6
31/10/2014 DAP - VINACHEM JSC 68.4 10,034 68.6
27/07/2014 Vietnam Vegetable Oils Industry Corporation 57.0 13,428 76.5
18/09/2014 Southern Airport Services JSC 61.5 19,330 118.9
22/09/2014 Vietnam National Textile and Garment Group (VINATEX) 233.9 11,000 257.3
14/11/2014 Vietnam Airlines 659.7 22,307 1471.7
11/12/2014 PetroVietnam Camau Fertilizer JSC 247.7 12,251 303.4
12/12/2014 Seaprodex 58.5 10,100 59.1
*: Possible be acquired by BIDV (BID: HOSE)
Source: HNX, HOSE
Expected IPOs in 2015:
Ministry of Transportation: Airport Corporation of Vietnam (who owns all the key airports in Vietnam), Vinalines
(the troubled shipping giants), Saigon Port
Ministry of Construction: FICO (construction material), VICEM (cement), HUD, CC1, LILAMA, Song Da, IDICO,
COMA (all construction and real-estate related)
Ministry of Health: Vinapharm, some vaccine producers
Ministry of Industry and Trade: Vimico (Vinacomin mining), Vinacomin Power, VVMI (Viet Bac Mining
Industrial), Vinapaco (Vietnam paper corp), MIE, VEAM (equipment)
Ministry of Agriculture and Rural Development: Vigecam, Vinafor (forestry), VRG (Vietnam Rubber Group, but
only its subsidiaries in Phu Rieng, Binh Long, Loc Ninh), …
In order to facilitate faster SOEs restructuring and infrastructure development, the Ministry of
Transportation announced that it will scale back public investment, while adopting measures to induce
private investment. The Minister of Transportation announced that more priority should be given to the private
sector participation in infrastructure projects. Therefore, the mega Lach Huyen deep-water port should be the final
project funded by the government, and the government’s focus will be shifted to unappealing or national security –
related projects.
In Jan 2015, the list of marine infrastructure projects for private investors was announced (41 projects, with a price
tag of approximately USD 2 bn, in 2015-2020, with 19 seaport projects). 3 projects will be implemented for 2015-
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2016 and several listed companies will participate, for example, MPC for the port in Hau Giang, and VIC for the
luxury cruise ship terminal in Duong Dong, Phu Quoc. Similarly, Vinalines will also sell a number of its ports to
private and foreign investors, and it has sought for the government’s approval to fully divest from Quang Ninh Port
(possibly to T&T group, which owns SHB: HNX). Recently, the government announced plans to sell expressway
toll fee collection rights to the private sector. Vietnam Expressway Corporation (VEC) is proposing to sell a portion
of its portfolios, including 5 expressways (Cau Gie – Ninh Binh, Noi Bai – Lao Cai, TPHCM – Long Thanh – Dau
Giay, Da Nang – Quang Ngai and Ben Luc – Long Thanh – total 570 km), with total investment of nearly USD 6 bn
(57% from the state budget). Back in October 2014, and the government sold 49% stake of Ha Noi – Hai Phong
expressway to IL & FS (India, with quite favorable conditions, i.e the 49% profit from toll fee collection in the next
31 years must be paid by 2018, or 29 years in advance). Judging by recent announcements, it’s safe to assume
that SOEs restructuring has caught a new wind, and the same can be said for public investment restructuring,
which indicates that the government has adopted a market mechanism and increase privatization will come to
fruition in 2015.
5. 2015 is also the deadline for the 1st
phase of banking restructuring:
With the assumption that 2015 will be the deadline for the 1st phase of banking restructuring, specifically cleaning
up bad debts, we believe that Vietnam banking sector will likely to bottom out in 2015.
Upside: Credit growth might be higher provided that consumer demand increases thanks to lower oil price
and interest rate remains low. Consumer lending is now the focal point of many banks and its growth rate
has been remarkable (banks such as VCB, BID, ACB, STB and MBB all enjoyed high retail loan growth in
2014, i.e. VCB’s retail loan growth was 38%, higher than the average loan growth of 17.8%; BID’s retail
growth was 36% compared with its average loan growth of 13.4% in 2014). Service fee will continue to
enjoy robust growth thanks to strong import and export activities. Other income from collecting bad debts
which were written off may contribute more to banks’ earnings when banks accelerate bad debt collection
and the property market gradually improves.
Downside: On the other hand, we are more convinced that banks’ NIM may continue to slightly decline in
2015 (banks’ NIM have continuously declined since its peak in 2011) in the context of low interest rate,
fiercer competition among banks to attract good customers and the SBV’s direction of lowering medium
and long-term loans’ lending interest rates. Deleverage might continue in 2015 but will dissipate as
interest rate remains shallow. In 2014, banks earned significant gains from bond trading which we think will
be hard to repeat in 2015.
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Loan to Deposit ratio of Vietnam banking system
Source: SSI Research
Listed banks’ NIM and Fee growth, 9M2014
Source: Banks’ FS
However, the largest downside factor for the banking sector in 2015 remains the system’s NPLs and we
expect banks still need to book substantial provisions in 2015. Technically, the deadline for the 1st phase of
banking restructuring implies that the reported NPLs of the banking sector have to be lowered to less than 3%
which suggests higher provision and M&A among banks will accelerate, especially in 1H2015. As of 30 Sep 2014,
banks reported NPL ratio of 3.88%, however, it could be 5.43% as estimated by the SBV (the SBV added portion
of the restructured loans and re-classified loans with the information from the Credit Information Centre – an
agency of the SBV). In the first 3 quarters of 2014, listed banks on average wrote off only around 0.2% of total
80%
85%
90%
95%
100%
105%
110%
115%
120%
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outstanding loans (except for MBB 1.25% and BID 0.82%) and the average provision coverage ratio as of 30 Sep
2014 was 78%. Circular 09 (originally Circular 02) taking effect in February 2015 is positive for the sector as it
demands that all banks report a more accurate picture of NPLs with the information from CIC. Therefore, apart
from selling bad debts to VAMC, in order to reduce reported NPL ratio to 3% by 2015 year-end, we believe that
banks still have to use a significant amount of their PPoP to book provision expense and write off bad debts in
2015.
Vietnam banks’ NPL
Source: SBV, SSI Research
The role of VAMC is more significant than ever: The Vietnam Asset Management Company (VAMC)
purchased bad debts worth ~ VND 96 trillion in 2014 (2013: VND 39,337 bn; 1H14: VND 11,414 billion), increasing
total bad debts purchased to VND 135 trillion from 38/38 credit institutions. This amount accounted for around
3.4% of total outstanding loans. It also plans to purchase an additional VND 100 trillion worth of bad debts in 2015
which represents around 2.5% of total outstanding loans. With the strong participation of VAMC, we believe that
reported NPLs of the banking system can decrease to 3% by 2015 year-end. However, banks still need to book
provision expense for bad debts that they sell to VAMC. Under existing regulations, the banking system will have
to book around VND 37.6 trillion worth of provision expense a year which accounts for nearly half of the banking
system’s PPoP in our estimate.
The sales of bad debt by VAMC will be the focus of the 2nd
phase of banking restructuring after 2015. One of the
deadlocks for resolving bad debt through the Vietnam Asset Management Company (VAMC) is the lack of
regulation framework, not only for foreign ownership, but also how to protect participants from being violated by the
existing laws. The National Assembly has raised a number of laws and ordinances on resolving bad debt, as the
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current regulation, is unsatisfactory. We believe a secondary debt market needs to be created, with market
makers, allowing investment funds to purchase and sell bad debts (which is not available at the moment). It is
believed that the most important feature for such a regulation to be passed, is to refrain from tapping into the state
budget. In essence, the funding needs to come from government borrowings (i.e the government to buy the VAMC
bond), or in a more effective way, VAMC bond is guaranteed by the government, therefore instilling private
investors with more confidence in the bad debt resolution process. We’re still a long shot away from completing all
the regulations needed, as expectation is that 2016 might be the year that the VAMC divests its debt portfolio.
Listed banks’ NPL before and after VAMC
Source: Banks’ FS, SSI Research estimate
In short, we believe that banks’ earnings will not witness significant upside in 2015. However, if banks aggressively
resolve bad debts in 2015 as required under existing regulations, their earnings in 2016 will improve on a low base.
Apart from earnings, we are likely to see increase M&A activities in the banking sector, especially the marriage
between the strong and weak banks. Although M&A activities will benefit the overall banking sector in the long
term, the immediate effect could be detrimental to stronger banks that will acquire weaker banks as acquisitions
could result in additional expenses for the strong banks, couple with additional bad debts to resolve and dilution
risk when banks have to increase their charter capital to comply with international standards (i.e. Basel II). Most
of the transactions are expected to be non-cash (i.e. new shares issuances to swap with the weak banks’ shares)
which will increase the dilution risk for existing shareholders of strong banks.
However, the conventional idiom on the stock market advises that we can buy when a stock is bottoming out. The
full effectiveness of both Circular 09 on NPLs calculation and Circular 36 on cross-ownership in February 2015 will
be the most critical stress test for all the banks and require them to strictly conform to risk management practice
and enhance corporate governance. Fundamentally, we do believe the sector is bottoming out. Additionally, there
are technical factors that we need to monitor with banking stocks. In line with tumbling oil price, oil & gas stocks
have declined significantly and their weight in the VN Index has decreased. In contrast, the weight of banking
stocks has increased considerably as CTG lists its State’s shares (which will raise the weight of CTG in the VN
Index from 2% to 5.5%) and several large listed banks will increase their charter capital in order to acquire other
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banks in 1H15. Rumors that certain banks may be acquired or sell their stake to their strategic investors at a price
higher than market price, have altogether boosted both institutional and retail investors’ sentiment on banking
stocks. Given the evidences, we are watching for the right timing to Upgrade our view to Neutral on the banking
sector in 2015.
Vietnam banks’ ROE & ROA
Variable factors in 2015
1. Oil and gas price will remain volatile despite a sharp decline in 4Q2014.
Contrary to popular belief, Vietnam could in fact be a beneficiary of weak oil and gas prices, because of weak
refinery capacity and reliance on oil-related inputs for production. However, the biggest concern is on the state
budget balance. From the government’s perspective, in a meeting on 22nd
of January, they expressed
determination at 2015 plan for both GDP growth and the state budget collection, with no target revision needed
(although in details, there should be revisions, i.e lower contribution from the oil and gas sector, higher collection
from domestic and foreign trade collections, rigid surveillance on price transfer, tax avoidance and overdue tax
collection).
2. Vietnam will see its fair share of free trade agreements (FTA) this year, specifically ASEAN FTAs from
2015-2018)
(including ATIGA – ASEAN Trade In Goods Agreement and the ASEAN FTAs with its partners, i.e China, South
Korea, Australia and New Zealand, India), but also FTAs between Vietnam and EU, Custom Union (Russia,
Belarus and Kazakhstan), South Korea in the begin of 2015, plus the highly-anticipated Trans Pacific Partnership
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agreement. Consumers will become first hand beneficiaries of these upcoming FTAs but enterprises will definitely
face more competition as a result of lower import tax. The impact will vary among different sectors.
3. Fiscal discipline is the risk to our forecast:
Fiscal discipline is imperative in a year like 2015 as the structure of the state budget has been unprecedentedly
altered due to declining oil price coupled with public debt standing on the brink of reaching the Laws of Public Debt
management threshold. In essence, without a low budget deficit, lowering public debt is impossible.
It’s important to shed light on Vietnam state budget deficit number. Previously, in the Ministry of Finance’s report on
the state budget, two numbers were issued, one in Vietnamese standard (2013: 5.45% GDP, 2014: 5.3% GDP) and
one conformed with GFSM (Government Finance Statistics Manual, by the IMF), and this is normally lower than
its Vietnamese counterpart (2013: 3.9% GDP, reported in the MoF website, but might be revised up to 4.25%
GDP, and 2014: 4.1% GDP). In fact, even the GFS data calculated by the MoF still failed to satisfy the IMF
standard, as an IMF staff noted that GFS 2001 presentation is different from the authorities’ presentation, mainly
reflecting the inclusion of off-budget capital expenditure and the exclusion of principal repayments above the line.
Therefore, IMF-standard budget deficit should be higher than the Vietnamese-standard one, contrary to common
belief. The IMF-recalculated deficit would be 5.5% of GDP in 2013, and 6.6% of GDP in 2014. We do not believe
that the current high budget deficit is healthy, and the government needs to take stern action to mitigate this issue in
2015. The good news is the MoF is determined to maintain the budget deficit at 4.5% of GDP – Vietnamese
standard, although the National Assembly’s target is 5% of GDP. The Prime Minister has identified all the
underlining factors behind weak state budget structure, and all that is needed now is actual implementation for fiscal
discipline in 2015.
Conclusion: We anticipate that 2015 might start out as an ordinary stone, but as time elapses, and with
precise polishing, it will transform into a distinctive gem. We believe 2015 will see healthier GDP growth,
incited by improve private consumption, stable interest rate, tamed inflation, manageable local currency,
and increase participation of the private sector in public investment. The government (pressed by the
election in 2016) will throw all the available kitchen tools at baking restructuring in order to achieve 2015
deadline (rather than introducing new measures or targets), and in doing so, a radiant economic climate
would secure another sovereign credit rating upgrade, possibly launching Vietnam a notch closer to
investment grade.
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VIETNAM MACROECONOMIC DATA IN SUMMARY
2007 2008 2009 2010 2011 2012 2013 2014 2015F
GDP growth (%- 2010p) 7.13 5.66 5.4 6.42 6.24 5.25 5.42 5.98 6.2
Agriculture (%) 3.96 4.69 1.91 3.29 4.02 2.68 2.67 3.49 3.5
Industry & Construction (%) 7.36 4.13 5.98 7.17 6.68 5.75 5.43 7.14 7.2
Construction (%) n/a n/a n/a 10.06 -0.62 3.25 5.4 7.07 6.6
Manufacturing (%) n/a n/a n/a 8.38 11 5.8 7.44 8.45 9.1
Service (%) 8.54 7.55 6.55 7.19 6.83 5.9 6.56 5.96 6.3
Retail Sale (%) 22.9 30.9 18.5 24.96 22 16 12.6 13 14
Industrial Production Index (%) n/a 7.4 7.1 10.7 6.8 4.8 5.9 6.5 7
CPI (%) 12.6 19.9 4.35 11.09 18.13 6.81 6.03 1.86 4
PPI (Agriculture) (%) 17.46 0 -4.56 13.81 31.8 6.2 0.57 4.3 4.3
PPI (Industrial) (%) 7.44 25.79 2.38 13.44 18.3 10.1 5.25 7 7
Exports (USD bn) 43.69 58.01 51.33 72.20 96.90 114.60 132.20 150.00 177.50
Imports (USD bn) 54.53 74.82 62.28 84.80 106.70 113.80 131.30 148.00 172.60
Trade Balance (USD bn) -10.84 -16.81 -10.95 -12.60 -9.80 0.80 0.90 2.00 4.80
% of Export 24.82% 28.98% 21.32% -17.45% 10.11% 0.70% 0.68% 1.33% 2.70%
Exchange rate (USD/VND) 15950 17483 18479 18932 21250 20900 21250 21250 21500
Current Account Balance (USD bn) -6.9 -10.8 -6.6 -4.3 -0.6 7 8.8 8.1 9
Foreign reserve (USD bn) 23.74 24.17 14.1 12.4 13.5 25.4 32 36 40
Foreign reserve/imports (weeks) 22.64 16.80 11.77 7.60 6.58 11.61 12.67 12.65 12.05
Credit growth (%) 52.42 25.43 37.73 29.81 14.41 8.91 12.5 14.16 13
Deposit rate (VND %)
14.71 8.61 11.89 16.66 8 8 6 6
Source: GSO, SSI Research
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2015 Market Outlook
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VN Index 2014
Vietnam stock market in 2014 was on a wild roller coaster ride as the foundation for a solid recovery
wasn’t cemented. The VN Index began the year riding the momentum in the first 2 months of 2014 (+20.3%),
driven by excitement over evidences of macro stability and the expectation of FOL extension until the East Sea
dispute abruptly sparked fear among retailed investors in May and contagion ensued (the VN Index forfeited
12.4% within May). 2014 can be defined by a chain of seismic events: it began when the East Sea dispute
discouraged investors for a solid month in May, and just when the market was beginning to heal its wound, the
collapse of oil and gas stocks in 3Q14, coupled with the introduction of Circular 36 which caps commercial
banks’ lending to the brokerage industry at 5% of their chartered capital, and the news of the arrest of a
prominent banker completely exhausted retailed investors. By end of 2014, the VN Index was up by only 8.15%.
Foreign investors’ were still in a net buy position of USD 135 mil during the year, with a clear pattern, net buying
in 1H and net selling in 2H, however, returned to net buy in December. In fact, foreign investors trading value
accounted for roughly 12.5% of total trading volume in the market.
Interestingly, the leading mover of the market was actually Joint Stock Commercial Bank for Foreign Trade of
Vietnam (VCB: HOSE), while the lagging mover was also another state owned bank, Bank for Investment and
Development of Vietnam (BID: HOSE). As discussed above, the banking sector was faced and had to overcome
many obstacles. However, when shopping for a prominent stock in the banking sector, VCB was the apparent
choice for many investors. This explains why VCB’s stock performance exceeded its fundamentals. In terms of
sector, consumer discretionary was the best performer in 2014 thanks to MWG and DRC. Many would consider
MWG as a growth stock and its plan to list at a relatively low price coupled with poor liquidity helped enhance the
stock performance significantly. On the other hand, DRC was the beneficiary of low oil price and the limit on
maximum weight in truck transportation. Despite the strong performance of VCB, the banking sector still
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underperformed the VN Index with 5.8% upside, only higher than the worst performing sector being consumer staple
with 0.56% upside due to the weak performance of VNM.
We concur with the overall consensus that the market is moving towards the right direction and we
remain our bullish stance on the market given the recent macro development. We understand that
volatility is a prerequisite during a transformation period. Our positive stance is supported by earnings estimate
and market valuation. According to our estimates of 67 companies under coverage, sales and net profit are
projected to grow by 11.68% and 10.5% % respectively in 2015. Notably, median EPS growth in 2015 is
estimated at 8.55% as compared with -0.01% in 2014 and 4.66% in 2013, which legitimize the assumption that
turn-around stocks will be more conspicuous in 2015.
All stocks
Revenue Growth (%) Net Profit Growth (%) Median EPS Growth (%) Dividend Yield (%)
2013 2014 2015 2013 2014 2015 2013 2014 2015 2013 2014 2015
9.87% 12.60% 11.68% 19% -2.13% 10.49% 4.66% -0.01% 8.55% 4.86% 4.90% 5.01%
Exclude Oil & Gas
Revenue Growth (%) Net Profit Growth (%) Median EPS Growth (%) Dividend Yield (%)
2013 2014 2015 2013 2014 2015 2013 2014 2015 2013 2014 2015
13.44% 18.34% 14.66% 18% 0.00% 14.95% 2.59% -0.01% 9.80% 4.88% 4.96% 5.08%
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Our bullish view on the stock market in 2015 is predicated on the bet that GDP growth in 2015 will
exceed expectation while macro stability remains unblemished. As discussed above, we believe that
consumption, the engine for growth, will have added horsepower in 2015 at least on the low base of 2014 couple
with the support of low commodity prices. We maintain our bullish view on the consumer and industrial sectors.
The consumer sector will benefit from macro improvement and margin expansion while the industrial sector will
continue to benefit from increase infrastructure investments.
Source: SSI Research, Bloomberg
The property sector will remain on its uphill climb, but with increasing liquidity and more turn around
companies, the property sector will attract well-deserved attention. It should be noted that within the sector,
VIC accounts for 58% of the sector’s weight while the remaining stocks are mid and small caps.
The banking sector will undergo critical transformations in 2015 and will most likely bottom out soon.
This could serve as an opportunity to consider investing in banking stocks. However, we believe that investors
should adopt a long-time approach when looking at banks. Otherwise, short-term speculation will only add
volatility to the bullish trend. Technically, as the weight of the banking sector increases, the sector will attract
more investors. The momentum for banking stocks will reach its peak in 1H15 as many catalysts such as banks’
M&A activities are expected to transpire during this stretch.
One of the biggest impediments for Vietnam stock market is its relatively low “investibility”
characteristic in terms of market cap, liquidity and foreign ownership limit. Foreign investors are limited in
choices when it comes to big caps and blue chips because of foreign ownership limit. However, the deadline for
IPO and divestment of SOEs and new listing requirements will flood the market with more supply in the next 2
years.
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Our Top Picks for 2015 include VNM, NT2 and REE. Additionally, we also like VCB, FPT, MBB, ACB, DHG,
DRC, BMP, PNJ, HDG, DBC, VSC, BCC, KDH, PET, FCN, TDH, LCG, BCI. Mid and small caps with turn-
around stories will bring a distinct style back to the market in 2015.
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SECTOR IN FOCUS
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CONSUMER DISCRETIONARY
TIRE: OVERWEIGHT (Last year call: Neutral)
Key call: DRC
Kien Tran Nguyen, +84 4 3936 6321 ext. 679, [email protected]
Tires industry performance in 2014
Source: Bloomberg
Source: Bloomberg
What transpired in 2014?
Industry performance
Strongly outperformed the VN Index: The tire industry gained
44%, in comparison with 8.15% of the VN Index. Best-performing
stocks were SRC (+ 91%), DRC (+51%) and CSM (+23%).
Key highlight on sector/key companies
Average natural rubber price declined approx. 30% YoY in 2014
which was provoked by global oversupply.
Positive implication of load limit regulation for the tire industry:
Circular 6/2014 issued by the Ministry of Transportation regulates
load limit and other conditions of road transport vehicles took
effective in April 2014. A common fact is that road transport vehicles
are illegally 1.5 or 2 times overloaded compare with their official
limits in order to maximize profits. The Circular aims to eliminate
this pandemic issue, and its subsequent consequences on road
transportation companies. Concerned companies will require
additional transport vehicles to ensure sufficient volume of
transported goods and profits, and safety the requirements listed in
the Circular.
In 2014, DRC and CSM both benefited from significant declines in
natural rubber prices. However, the two companies incurred high
depreciation and uncapitalized interest expense from radial tire
plants while production and sales volume of radial tires were still
under their respective breakeven points.
DRC and CSM’s 2014 revenue are estimated at approx. VND
50%
70%
90%
110%
130%
150%
170%
190%
Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14
Vn Index
Consumer Discretionary
Tires
0
500
1,000
1,500
2,000
2,500
3,000
3,500
SVR10 SVR20
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3,168bn (+13% YoY), and VND 3,352bn (+7% YoY). Pretax profits
are expected at VND 425bn (- 15% YoY), and VND 420bn (- 13%
YoY) respectively in 2014, translating to an EPS of VND 3,989 and
VND 4,874. in July 2014 which created an advantage for DRC as it
benefited from being the first mover.
2015 Expectation
Possible change in fundamentals
Natural rubber and crude oil prices are expected to remain
weak in 2015 given increasing supply and sluggish demand.
New planted area during 2005 – 2012 has gradually come into
tapping since 2012 and will increase supply of NR from 2013 to
2020. On the other hand, demand for natural rubber (NR) in tandem
with global economic growth (refer to figure 2). Slow global
economic growth was forecasted by the IMF in Oct 2014, especially
in China, and EU zone, which consume over 50% of world natural
rubber consumption. World economic growth was revised down
0.1% compared with the forecast in July 2014 by IMF, reaching
3.3% for 2014, and global economic growth was revised down 0.2%
compared with the forecast in July 2014 to 3.8% for 2015.
Aggressive actions from the government in terms of load limit
control will boost the demand for commercial vehicles – on Jan
1st 2015, the government raised financial penalty for transport
vehicles (loading capacity over 5 tons) which are illegally 2x
overloaded compared with official limit.
Increasing demand for radial tires – rapid replacement progress
of radial heavy truck tires to bias heavy truck tires – in regards
to the heavy truck tires segment, structure of radial and bias heavy
truck tires has changed rapidly in which proportion of radial tire in
the total number of heavy truck tires has increased significantly
during the last 5 years.
Currently, radial and bias heavy truck tires account for 65% and
35% of total heavy truck tires used in Vietnam
From 2009 – 2013: radial and bias heavy truck tires accounted
-1
0
1
2
3
4
5
6
8000
8500
9000
9500
10000
10500
11000
11500
NR Demand World economic growth
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for 50% and 50% of total heavy truck tires
Before 2009: radial and bias heavy truck tires accounted for 30%
and 70% of total heavy truck tires
Issues and risks
Unfair competition field affecting pricing power of tires
producers. It is worth noting that trade fraud relating to imported
radial tires from China has recently adversely affected pricing power
and generated an unfair competition in the radial tire segment.
Prices used for custom procedures of imported tires from China are
typically recorded at 30% - 50% lower than actual prices, therefore,
traders can evade approx. 50% of import tax and VAT.
Nevertheless, the General Department of Custom has requested the
Custom Department in provinces and cities to inspect imported
automobile tires (code 4011) in order to prevent trade fraud relating
to those items. In addition, the General Department of Custom also
requested the Custom Department in provinces and cities to gather
information and analyze them to determine taxable value; and
establish reference prices for automobile tires.
Our Investment stance: Overweight
DRC and CSM are highly likely to benefit from (1) weak natural
rubber and crude oil prices, (2) increasing demand for radial tires,
and (3) load limit regulation. In addition, average selling prices are
expected to remain stable as the two companies had just reduced
prices by 2% on average in 2H14.
In 2015, DRC plans to produce approx. 220,000 radial tires (+43%
YoY) while sales volume is expected at approx. 240,000 units
(+105% YoY) which will reduce cost per unit produced in radial
segment, and will begin to generate profit starting in 2015 given that
average selling prices will remain stable. DRC’s 2015 revenue and
pretax profit are forecasted at approx. VND 3,543bn (+ 12% YoY),
and VND 506bn (+ 19% YoY) respectively, translating to an EPS of
VND 4,750.
In 2015, CSM’s radial sales volume is expected at 150,000 units
compared with roughly 30,000 units in 2014 which is still below
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breakeven point. CSM’s 2015 revenue and pretax profit are
expected at VND 3,841 bn (+14% YoY), and VND 401 bn (-5%
YoY), translating to an EPS of VND 4,652. It should be noted that
CSM’s 2015 pretax profit includes approx. VND 60bn from property
divestment which was delayed from 2014. If subtracting earnings
from property, CSM’s PBT would decline by 19% YoY.
At the price of VND 56,000/share and VND 43,000/share for DRC
and CSM respectively, the stocks are being traded at 2015PE of
11.8x and 9.2x respectively. DRC and CSM’s 1-year target prices
are derived at VND 69,000/share, and VND 39,900/share, an upside
of + 23.6% and – 7% compared with the current prices.
DRC and CSM (31/12/2014)
Stock
Price (VND)
Market cap (mil USD)
PER PBR EV/EBITDA Dividend yield EPS (VND) EPS Growth Sales growth Net profit growth
2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E
DRC 56,000 219 14.04 11.79 2.98 2.65 709,470 806,811 3% 4% 3,989 4,750 -12% 19% 13% 12% -12% 19%
CSM 43,000 136 8.82 9.24 2.02 1.78 642,231 634,808 3% 3% 4,874 4,652 -9% -5% 7% 15% -9% -5%
Source: SSI Research
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JEWELRIES: OVERWEIGHT (Last year call: N/A)
Key call: PNJ
Thu Le, +84 838242897 ext. 2137, [email protected]
Jewelries industry performance in 2014
Source: Bloomberg
What transpired in 2014?
Industry performance
Outperformed the VN Index: The jewelries industry gained 45.04%
in 2014, compared with 8.15% of the VN Index. The best performing
and the only stock in the sector was PNJ which finished 2014 at
45.04% higher than 2013.
Key highlight on sector/key companies
Circular 22 benefits large reputable jewelers: Circular 22 was
announced in September 2013 and came into effect in June 2014. It
requires gold jewelers to follow a set of strict rules regarding the
quality (gold content, purity, etc.) and the labeling of their gold
products. According to Vietnam Gold Business Association, 70% of
the 3,000 gold jewelry enterprises in Ho Chi Minh City have closed
in 2014. Circular 22 benefits both consumers (because most gold
jewelers previously misled consumers about the gold content of their
products to stay competitive in the market) and reputable companies
such as PNJ. Despite a 7% YoY decline in Vietnam gold jewelry
demand, the company posted a 20% YoY increase in gold jewelry
sales in 9M14. Retail sales increased 34% YoY while wholesales
increased 12% YoY thanks to growing selling volumes.
2014 witnessed PNJ’s aggressive expansion in the retail
segment which led to higher gross margin. Gold jewelry sales
reached VND 5,100 bn (22% YoY), in which retail sales increased
42% YoY. This figure is much higher than the growth of Vietnam’s
gold jewelry market, which according to the World Gold Council,
rose by only 4% YoY in 2014. According to PNJ, same store sales
grew 35% YoY. The remaining sales growth derived from new gold
stores. In 2014, PNJ opened 20 new gold stores and closed 2 old
ones, thereby the number of gold stores reached 81 as at 31
50%
70%
90%
110%
130%
150%
170%
Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14
Vn Index
Consumer Staples
Jelweries
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December 2014. In addition to growing selling volume, the company
sold more high value products (e.g. products with both gold and
gemstones) which accelerated sales. According to PNJ, the average
price of a piece of gold jewelry sold in 2014 was 13-15% higher than
in 2013. This also explains for a healthier gross margin of gold
jewelry segment which reached 13.2% in 2014 compared to 11.7%
in 2013. Store expansion will continue in 2015 with a focus on
smaller cities and provinces. PNJ aims to double its retail space and
market share in 2017.
2015 Expectation
Possible change in fundamentals
The introduction of Circular 22 not only eliminated mendacious
businesses but also raised consumer awareness. Its effects, in our
opinion, will be long lasting rather than temporary. We believe PNJ’s
retail expansion arrives at a ripe time when consumers are inclined
to purchase from trusted brands. As the company penetrates the
market further in both large and small cities, it will be able to seize
market share from smaller competitors. As retail sales and its share
in total sales increase, we expect sales and gross margin to
continue growing in 2015.
Issues and risks
Policy risk: The gold jewelry market is strictly regulated by the State
Bank of Vietnam hence any changes in policy can affect PNJ’s
business.
Our Investment stance: Overweight
Given encouraging sales growth in 2014, we believe gold jewelry
sales will advance by 18.5% YoY in 2015, in which retail sales will
grow 30%, attributed by a 25% increase from same store sales and
5% from new openings. In 2016, we forecast gold jewelry sales will
increase 15% YoY. Gross margin of gold jewelry will likely to
improve compared to 2014 thanks to i) the rising proportion of retail
sales and ii) PNJ’s emphasis on selling high value products.
We expect the silver jewelry segment will continue to benefit from
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brand innovation. Silver sales will grow 20% YoY in both 2015 and
2016 and gross margin will remain stable at around 62.5%.
In 2015, we forecast sales to reach VND 8,270 bn (15% YoY) and
sales exc. gold bar to reach VND 6,251 bn (18.5% YoY). Net income
is anticipated to reach VND 298 bn (16% YoY – ignoring the income
from the divestment of SFC and Que Huong Liberty Hotel, net
income will increase 33% YoY) translating into an EPS of VND
3,945.
In 2016, we forecast sales to reach VND 9,136 bn (10.5% YoY) and
sales exc. gold bar to reach VND 7,118 bn (14% YoY). Net income
is anticipated to reach VND 366 bn (23% YoY) translating into an
EPS of VND 4,841.
PNJ is trading at 2015 PER of 10.1x and 2016 PER of 8.2x. Our 1Y
target price for PNJ is VND 47,100/share, indicating a 26% upside
from the current market price. We recommend to BUY PNJ based
on the following reasons:
As a reputable brand, PNJ will continue to benefit from Circular
22.
PNJ has an extensive retail network: PNJ has 77 gold stores in
43 out of 54 cities and provinces in Vietnam. Its main
competitors Doji and SJC have 40 and 60 exclusive stores
respectively.
PNJ has the facilities, workforce and design expertise to expand
production. The Company has 800 goldsmiths and trains 150-
200 new goldsmiths each year.
Low valuation compared to region peers: Based on stock price
on 31 December 2014, 2015 PER is expected at 10.1 (vs. China
average of 40x, Indonesia average of 20x, Malaysia average of
14x and India average of 13x).
The stock, however, is very illiquid as foreign room is full at 49% and
management and staff hold 45%.
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PNJ (31/12/2014)
Stock
Price (VND)
Market cap (mil USD)
PER PBR EV/EBITDA Dividend yield EPS (VND) EPS Growth Sales growth Net profit growth
2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E
PNJ 39,900 143.6 11.9 10.1 2.4 2.2 9.6 6.0 5.8% 5.0% 3,349 3,945 39% 18% -5% 15% 41% 16%
Source: SSI Research
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TEXTILE & GARMENT: OVERWEIGHT (Last year call: Overweight)
Key call: TCM
Thu Le, +84 8 3824 2897 ext. 2137, [email protected]
Textile and garment industry performance in 2014
Source: Bloomberg
Source: Customs Statistics
What transpired in 2014?
Industry performance
Outperformed the VN Index: The textile & garment industry
gained 33.62% in 2014 in comparison to 8.15% of the VN Index.
Except for EVE (-6%), most major textile and garment stocks
outperformed the VN Index: TNG (178%), TCM (66%), GIL (43%),
GMC (42%) and KMR (12%).
Key highlight on sector/key companies
Textile & garment export achieved better-than-expected result:
According to Customs Statistics, textile & garment export reached
USD 18.97 bn in 11M14 (+17% YoY). The Vietnam Textile &
Apparel Association (Vitas) forecasts that for FY 2014, Vietnam will
achieve USD 24.5 bn in textile & garment export, an increase of
16% YoY which is higher than the initial forecast of 12% YoY.
Exports to all major destinations increased: the United States
(12.6% YoY), the European Union (16.9% YoY), Japan (8.8% YoY)
and Korea (26.6% YoY). In the US, which represented 47% of
export value in 11M14, Vietnam has gained market share from
competitors who achieved lower growth such as China (<1%),
India (6%) and others (negative growth).
50%
70%
90%
110%
130%
150%
170%
190%
Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14
Vn Index
Consumer Discretionary
Texttile & garment
47%
16%
12%
10%
15%
Textile and garment export in 11M14
US EU Japan Korea Others
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FDI capital flow: In 2014, there are approx. 20 new FDI projects in
textile & garment sector. These projects cover all stages in the
textile supply chain including spinning (e.g. Huafa Hong Kong in
Long An province, Bros Eastern in Tay Ninh province, etc.),
weaving and knitting (e.g. Thien Nam – Sunrise joint venture in
Nam Dinh province, Yulun Taiwan in Ha Nam province, etc.),
dyeing (e.g. Global Dyeing Korea in Tay Ninh province, etc.) and
sewing (e.g. Hannes-Brands in Hung Yen province, etc.).
The remarkable growth and upbeat FDI movement can be linked to:
i) The expectation that important Free Trade Agreements (FTAs),
including the Trans-Pacific Partnership Agreement (TPP) and the
Vietnam-EU FTA, will conclude soon and ii) A diversion of orders
from China, where labor cost is higher, and Bangladesh and
Cambodia, where worker safety and living conditions are subpar to
Vietnam.
Most textile & garment companies posted encouraging
financial results in 9M14 and are expected to either reach (e.g.
TCM) or exceed 2014 target (e.g. TNG and GMC)
9M14 GIL TNG TCM GMC KMR EVE
Sales growth 28% 9% 1% 24% 14% -3%
Net profit growth 143% 120% 37% 21% 18% -33%
Source: Company data
Vinatex posted VND 14,983 bn in consolidated sales (31% YoY)
and VND 432 bn in consolidated net profit (32% YoY). For 2015,
Vinatex targets VND 19,575 bn in consolidated sales (31% YoY)
and VND 572 bn in consolidated net profit (32% YoY).
TCM announced that the company achieves VND 2,543 bn in sales
(similar to 2013) and VND 164 bn in net profit (+33% YoY) in 2014.
Although the yarn segment underperformed TCM’s expectation in
terms of profit, the fabric and garment segment performed well
thanks to improved operational efficiency and additional
fashionable orders. For 2015, TCM targets VND 2,781 bn in sales
(9% YoY) and VND 170 bn in net profit (4% YoY).
TNG: 2014 was a good year for TNG when sales increased 48%
YoY and 17% YoY in 4Q14 and FY 2014 respectively thanks to
Date: 13.02.2015 Institutional Research & Investment Advisory
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increasing orders. Coupled with a 16% decrease in interest
expense attributed to lower interest rate amid low demand for bank
lending, net income arrived at VND 53 in 2014 (279% YoY).
Accordingly, the company has surpassed its sales target by 10%
and its net income target by 6.5% in 2014.
2015 Expectation
Possible change in fundamentals
Several FTAs are expected to finalize in 2015 including the
Vietnam-Korea FTA, Vietnam-EU FTA and TPP (the US, the EU,
Japan and Korea are Vietnam’s 4 largest export markets). The
textile & garment industry is expected to benefit from the
elimination of import duty to these markets. Vietnam aims to
achieve USD 28-28.5 bn in textile & garment export in 2015 (14%-
16% YoY), in which export to the US and the EU are forecasted at
USD 11 bn (12% YoY) and USD 4 bn (18% YoY) respectively.
Issues and risks
Vietnam imports raw materials from non-TPP countries:
According to the Ministry of Industry and Trade (MoIT), Vietnam
has to import 88% of textile & garment material. Import value of
cotton, yarn, fabric and textile component increased 28% YoY, 3%
YoY, 14% YoY and 25% YoY respectively in 2014. Vietnam’s
largest partner is China who accounted for 36% of Vietnam’s yarn
import, 49% of fabric import and 33% of textile component import in
11M14. Since China is not a participating TPP member, Vietnam’s
textile & garment companies will find it difficult to satisfy the ‘yarn
forward’ requirement.
Increasing competition from FDI companies: In 11M14, two
thirds of the textile & garment export value derived from FDI
enterprises. This proportion will likely to increase as more
international corporations invest in Vietnam to take advantage of
coming FTAs.
Date: 13.02.2015 Institutional Research & Investment Advisory
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Our Investment stance: Overweight
We are positive of the long-term outlook of Vietnam’s textile &
garment industry thanks to its competitiveness against rivals and
the assumption that the mentioned FTAs will soon be settled.
Among textile & garment stocks, we favor TCM because the
company has a vertically integrated supply chain which qualifies for
the ‘yarn forward’ requirement. Despite an unfavorable outlook on
its yarn business as a consequence of pessimistic cotton price, we
remain positive of TCM’s fabric and garment businesses which are
projected to expand by 20% and 17% respectively in terms of sales
in 2015. As sewing capacity increases, the percentage of yarn used
internally will increase and the percentage of yarn sold externally
will decrease. Consequently, the contribution of yarn in total sales
will decrease and overall GPM will likely to improve (yarn has the
lowest GPM out of the 3 business segments). For 2015, we expect
TCM to earn VND 190 bn (16% YoY) in net profit translating to an
EPS of VND 3,874 and a PER of 8.3x. We recommend to BUY
TCM at VND 38,700/share.
TCM (31/12/2014)
Stock
Price (VND)
Market cap (mil USD)
PER PBR EV/EBITDA Dividend yield EPS (VND) EPS Growth Sales growth Net profit growth
2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E
TCM 32,000 74.8 9.6 8.3 1.96 1.77 7.3 6.2 4.7% 4.7% 3,332 3,874 32% 16% 0% 11% 32% 16%
Source: SSI Research
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ICT RETAIL: NEUTRAL (Last year call: Overweight)
Key call: PET, MWG
Kien Nguyen, +84 4 3936 6321 ext. 510, [email protected]
Industry performance in 2014
Source: Bloomberg
What transpired in 2014?
Industry performance: MWG as a new star
Strongly outperformed the VN Index: The sector increased
82.51%, strongly outperforming the VN Index. MWG, a new listed
stock, advanced 113% since its listing in July 2014. Low listing price
and high earnings growth are key stimulants behind the excellent
performance.
Mobile market boom: In 2014, according to GFK, value of the
mobile market advance by 35% to VND 45,000bn. Although the
volume increase only 1-2%, value increased significantly as users
switch from low price featured phones to high value smart ones.
Revenue of MWG increased by 62% YoY in 2014 thanks to market
growth and aggressive expansion. In 2014, MWG opened 120 news
shops increasing total number of shops to more than 330 shops by
the end of 2014, covering 27% of the mobile phone market in
Vietnam.
2015 Expectation
Unwavering high growth: As Vietnamese mobile phone users
continue to switch from featured phones to smart phones, the
market is expected to expand by more than 20% YoY in 2015.
Issues and risks
Increasing competition: FPT Retail and FTG are direct
competitors of MWG and PET in terms of retail and distribution of
mobile handsets and ICT products. As FRT expanded its chain to
150 shops in 2014 and targets to open new 50 shops in 2015, which
is a half of MWG’s number of shops, we expect that competition
50%
70%
90%
110%
130%
150%
170%
190%
Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14
Vn Index
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landscape will become fiercer. Both MWG and FRT are quite
aggressive in expanding their market shares while the growth of the
market is declining. The increasing coverage might help gain market
share and sales in short and mid-term but efficiency of each shop
will decline and in long term, when the market becomes saturated,
certain shops will fail to generate profit. In the distribution segment,
Digiworld, the third largest distributor, whose revenue is
approximately VND 5,000bn, will be listed in 1Q15.
Our Investment stance: Neutral
Except for PSD, and PET, which we anticipate slight increases in
sales and PBT in 2015 as their market share can no longer increase
due to a switch from distribution channel to retail chain by providers,
MWG is expected to experience high growth in 2015. Sales and net
profit of MWG are expected to grow by 47% and 29% YoY
respectively in 2015. MWG is trading at 2015 PER of 14.3x, which is
quite high. We recommend HOLD for MWG at 1Y target price of
VND 107,000/share and maintain a neutral view for the sector
mostly due to their fair value rather than their earnings outlook.
MWG, PET (31/12/2014)
Stock
Price
(VND)
Market cap
(mil USD)
PER PBR EV/EBITDA Dividend yield EPS (VND) EPS Growth Sales growth Net profit growth
2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E
MWG 107,000 529 17.36 14.15 7.85 5.28 6.81 5.25 0.0% 0.0% 6,164 7,563 154.8% 28.8% 62.8% 46.9% 154.8% 28.8%
PET 20,700 67 7.42 6.56 1.10 1.02 3.46 3.99 8.2% 8.2% 2,792 3,153 22.1% 13.0% 6.5% 11.4% 22.1% 13.0%
Source: SSI Research
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CONSUMER STAPLES
SUGAR: NEUTRAL (Last year call: Underweight)
Key call: None
Kien Tran Nguyen, +84 4 3936 6321 ext. 679, [email protected]
Sugar industry performance in 2014
Source: Bloomberg
What transpired in 2014?
Industry performance
Underperformed the VN Index: The sugar industry gained 1.27%,
in comparison with 8.2% of the VN Index. Best-performing stocks
were SBT (+ 9%), BHS (- 1%), and LSS (- 6.3%)
Key highlight on sector/key companies
Oversupply and smuggled sugar wreaked havoc on the
industry:
In 2013 – 2014 season, total domestic sales volume of the
industry reached approx. 1.45mn tons of sugar (+ 12% YoY)
while total supply during this period reached approx. 1.98mn
tons which included: (1) beginning stock of 315,000 tons, (2)
imported of 72,308 tons (WTO’s import quota), and (3)
production of 1.59mn tons. It is worth noting that the upstream
figure did not include smuggled sugar which is estimated at
approx. 0.4mn tons of sugar in 2014
Smuggled sugar which is mainly smuggled from Thailand
through Cambodia continues to be the biggest impediment
facing the Vietnamese sugar industry. In 2013 – 2014 season,
global sugar industry saw a surplus in sugar supply and
Thailand’s sugar production volume reached a record of approx.
11.6mn tons (+ 12.6% YoY) while domestic consumption is
forecasted at roughly 2.6mn tons per year. As a result, we saw
increases in smuggled sugar to Vietnam in 2014 given the
surplus in the global markets.
50%
60%
70%
80%
90%
100%
110%
120%
130%
140%
Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14
Vn Index Consumer Staples Sugar
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Average selling prices of RE and RS sugar declined approx.
10% YoY and 15% YoY respectively by the end of 2014 -
Although sales volume of the industry indicated a significant
increase of 12% YoY, the gap between supply and demand reached
0.53mn tons of sugar in 2013 – 2014 season (not including
smuggled sugar), an increase of 11% YoY which affected sugar
price performances during this period.
Grow through M&A: in 2014, Ninh Hoa Sugar JSC (NHS: HOSE)
was merged into Bien Hoa Sugar (BHS: HOSE). In 2015, SEC will
be merged into SBT. The M&A entities in the industry typically are
Thanh Thanh Cong Group’s associates. Given the difficulties in the
industry, M&A would help players to operate more efficient.
SBT was a victim of oversupply - in FY2014 SBT achieved VND
2,311bn (+ 36% YoY), and VND 245bn (- 17% YoY) in revenue and
pretax profit respectively.
Nevertheless, SBT’s stock price recently improved by 10% which
was supported by the expectation on significant growth through
M&A, and reversion of a provision in FY2015.
2015 Expectation
Possible change in fundamentals
Oversupply persists in 2014 – 2015. According to Vietnam
Sugarcane and Sugar Association, sugar production volume is
estimated to reach 1.6mn tons of sugar (+ 1.2% YoY) which is
based on the estimate of crashed sugarcane volume of 16.8mn tons
(+ 5% YoY), and average CCS of 9.8 (- 1.3% YoY). Total plating
area is expected at 300,000 ha (- 3% YoY) in which contracted
planting area is estimated at 271,683 ha (+ 2% YoY) Total domestic
sugar supply will also include: (1) 2014’s sugar import quota of
approx. 77,300 tons; and (2) ending stock by 15th Aug 2014 was
0.37mn tons which will result in a total supply volume of approx.
2.05mn tons of sugar, compared with expected total demand of
1.6mn tons.
Smuggled sugar remains an impediment for the Vietnamese
sugar industry - As stated above, smuggled sugar which is mainly
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smuggled from Thailand through Cambodia continues to be the
biggest impediment wreaking havoc on the Vietnamese sugar
industry. Sugar smuggled into Vietnam evades two types of
Vietnamese taxes including 5% VAT, and 5% import tax from
AFTA’s members which creates an unfair playing field for local sugar
producers.
Oversupply and difficulties in controlling smuggled sugar will
continue to inhibit average selling prices in 2015.
Issues and risks
High sugar production cost: In terms of sugarcane production, the
most significant factor for the sugar industry is fragmented and
dispersed sugarcane planting area. On average, a sugarcane farmer
owns approximately 0.5 to 1 ha. Therefore, in order to maintain
10,000 ha of sugar cane cultivation area, a company has to contract
with approximately 13,000 farmers. This feature has prompted
difficulties for sugar enterprises in maintaining and developing sugar
cane cultivation areas. More importantly, due to the fragmented and
dispersed cultivation area, sugar producers have not been able to
industrialize and mechanize the planting and harvesting processes
resulting in high production cost of sugar cane for farmers and
consequently high sugarcane purchasing price for sugar producers.
ASEAN Trade in Goods Agreement (ATIGA) – According to the
trade agreement (ATIGA), Member States will eliminate tariffs on all
products in trade relations between the Member States in 2010 for
the ASEAN 6 (Brunei Darussalam, Indonesia, Malaysia, Philippines,
Singapore and Thailand) and 2015 with flexibility to 2018 for the
CLMV members (Cambodia, Laos, Myanmar, and Vietnam). In
regards to rice and sugar products, on 29th Oct 2010 Vietnam and
other 9 members of AFTA signed a protocol to provide special
consideration for rice and sugar. Accordingly, Member States are
allowed to maintain tariff barrier of 5% for imported sugar from other
members after 2018, and create or intensify quantitative restrictions
or other measures limiting imports of rice and sugar products when
imports of rice and sugar products cause or threaten to cause
serious injury to sectors producing like or directly competitive
products in the importing Member States, the importing Member
States may, to the extent and for such time as may be necessary to
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prevent or to remedy such injury. This can be seen as a protective
factor for Vietnamese sugar industry in the coming years given the
weaknesses of the industry compared with other members.
As an agriculture-based company, sugarcane diseases, and
unfavorable weather conditions will negatively affect SBT’s
sugarcane plantations areas, sugarcane yield and CCS which will
affect SBT’s profit margins.
Our Investment stance: Neutral
Thanh Thanh Cong Tay Ninh JSC (SBT: HOSE): Negatively
affected by the difficulties in the industry. SBT’s FY2015
earnings growth will derive from M&A activities.
In FY2015, SBT’s planting area is expected to decline to approx.
13,440ha (- 12% YoY) due to competition from other plants in Tay
Ninh Province while average sugarcane yield and CCS of sugarcane
are expected to increase approx. 12% and 1% respectively. In
regards to sugar ASP, ASP is expected to decline approx. 6.5% YoY
given the bitter outlook of the sugar industry in FY2015, and average
purchasing price of sugarcane is expected to remain unchanged
compared with 2013 – 2014 season. We forecast that SBT’s
revenue and pretax profit would reach VND 1,993bn (-14% YoY),
and VND 202bn (-18% YoY) respectively in 2015 which is mainly
contributed by a decline of 9% YoY in sales volume and 6.5% YoY
in ASP, translating to a diluted EPS of VND 1,238.
In FY2015, Gia Lai Cane Sugar – Thermoelectricity JSC (SEC:
HOSE) will merge with SBT through swapping stocks with the ratio
of 1:1.05 (01 SBT share for 1.05 SEC shares). Accordingly, SBT will
need to issue approx. 37mn shares to swap 39mn outstanding
shares of SEC. Total outstanding shares of SBT after the merger is
estimated at 180mn shares. The merger will benefit SBT and SEC
through sales volume increase and margin gains.
Sales volume increase: after the merge, SBT and SEC will be able
to access to the customers base of each other. Currently, part of
SBT’s industrial customers demand for RS sugar which SEC will be
able to fill this blank. On the other hands, SEC has considered to
upgrade its sugar plant to produce RE sugar. In such case, SEC
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located in middle of the country will supply RE sugar to SBT’s
customers located in central and northern Vietnam which will save
transportation cost to SBT.
Margin gains: SEC has benefit from favorable soil and weather
conditions in Central Vietnam. SEC’s average yield and CCS of
sugarcane are higher than that of SBT generating cost competitive
advantage for SEC. According to SEC, average cost of goods sold
of its RS sugar reaches VND 10,000/kg compare to industry average
of VND 12,000/kg. If SBT uses SEC’s RS sugar to refine and
convert into RE sugar, this RE sugar product will have approx. 4%
lower in CoGS per kg compared with RE sugar originally refined
from sugarcane.
After the merger, SBT’s FY2015 revenue and net profit are expected
approx. VND 3,000bn (+30% YoY), and VND 360bn (+69.5% YoY)
respectively, translating to an EPS of VND 1,956 (+58% YoY). In
FY2015, SEC’s revenue and pretax profit are planned at VND 987bn
(+ % 47YoY), and VND 40bn (identical to the previous year)
respectively.
At the price of VND 12,900/share, the stock is being traded at
2015PE of 6.5x which is higher than its 5-year average of 5.7x.
SBT’s 1-year target price is derived at VND 13,500/share, equivalent
to a target PE of 6.9x.
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ANIMAL FEED: OVERWEIGHT (Last year call: Overweight)
Key call: DBC
Kien Tran Nguyen, +84 4 3936 6321 ext. 679, [email protected]
Animal feed industry performance in 2013
Source: Bloomberg
Source: Bloomberg
What transpired in 2014?
Industry performance (benchmark with VNIndex)
Strongly outperformed the VN Index: The feed industry gained
67.5%, compared with 8.2% of the VN Index. Best-performing
stocks were VTF (+ 96.6%) and DBC (+ 51.3%).
Key highlight on sector/key companies
Declines in major feed ingredients prices in 2014: Average corn
price in 2014 declined approx. 18% YoY while average soybean
meal price increased roughly 1% YoY. Corn and soybean meal
typically accounts for approx. 40% and 20% in 1kg of industrial feed.
Declining input costs have significant effects on profit margins of
animal feed producers in the industry.
Demand for industrial feed increased by 10% YoY – Total
production volume of animal feed reached approx. 14.7mn tons
(+10% YoY) which was supported by the improvement in the
livestock industry. In 2014, pig and poultry herds increased by 1.5%
YoY, and 3.1% YoY respectively, causing total pork meat (living
weight) and poultry meat to increase by 2.1% YoY and 4.9%
respectively.
DBC - unexpected low 3Q14’s earnings results: Gross margin
declined YoY despite favorable movement of input price: DBC’s
3Q14 gross profit margin settled at 10.8% compared with 9.7% in
2Q14, and 12.5% in 3Q13. According to the company, changes in
animal feed product structure led to a decline in gross margin of
animal feed business and a decline of 22% in 3Q14 net profit.
However, given significant declines in major feed ingredients in
9M14, and stable average selling price of animal feed, we believe
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DBC’s 3Q14 bottom line would be 60% higher than the actual result,
and therefore, it is likely that 3Q14’s earnings have not been fully
recorded.
9M14’s earnings results remained flat: Accumulated 9M14’s
revenue and net profit totaled VND 3,684bn (+ 8.6% YoY), and VND
92bn (- 3% YoY). Animal feed and husbandry segments contributed
59% and 20% to total revenue respectively. 9M14’s gross margin
settled at 12% compared with 13% in 9M13. However, as stated
above, it is likely that 3Q14’s earnings have not been fully recorded.
With 9M14’s earnings results, DBC has completed 64% and 50% of
yearly revenue and net profit plans.
2015 Expectation
Possible change in fundamentals
Major feed ingredients prices are expected to remain weak in
2015 – According to USDA’s Dec report, in 2014 – 2015 season,
global corn and soybean meal ending stocks are projected to
increase 11% YoY and 7.5% YoY which will be driven by:
Total production of corn in America, accounting for 37% of
global production is forecasted to reach approx. 366 mn tons
(+3.4% YoY). However as the corn output outside US also
increases, the US’s corn export volume is projected to decline
by 8.7% YoY.
Total production in major corn imported countries is forecasted
to increase 8.5% YoY while total domestic demand in those
countries is projected to increase only 2.7% YoY, leading to a
decline in the need for corn import from the US.
Global SBM supply is projected to increase at a higher pace
than the growth in demand for SBM. SBM production major
producers is expected at approx. 66mn tons (+4.6%) while total
demand for SBM in major importing countries is expected at
approx. 49mn tons (+ 4.3% YoY).
Increase in demand for livestock products: – According to
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MARD, in 2015, demand for pork and poultry meats are expected to
increase by 2.6% and 6.7% YoY respectively which will support the
demand for animal feed. Animal feed production is expected to
reach 15.6 mn tons (+ 6.2% YoY) in 2015.
Issues and risks:
Low input costs might give rise to increase competition relating
to trade discount rates, and/or decline in average selling price in
2105.
As an agriculture-based company, local animal diseases, and
weather conditions in major feed grains producing countries will
affect DBC’s business performance. Animal diseases would
impede demand for livestock products and adversely affect
demand for industrial feed as a consequence.
In addition, unfavorable weather conditions in major feed grains
producing countries would affect total supply of feed grains and
generate a long-term upward trend in feed grain prices. This
feature would adversely affect DBC’s feed business margin.
Our Investment stance: Overweight
Dabaco Group JSC (DBC: HNX) – a beneficiary of brighter
outlook in the animal feed industry given (1) expected weak
prices of major feed ingredients, and (2) increase demand for
animal feed in 2015.
DBC’s 2015 revenue and pretax profit are expected at VND
5,489bn (+6.5% YoY), and VND 292bn (+ 15% YoY)
respectively, translating to an EPS of VND 3,778. The estimates
are based on the assumptions that (1) animal feed sales volume
growth is expected to reach 6.2% YoY, and (2) average selling
price of animal feed will decline by 1.5% YoY.
At the price of VND 29,000/share, the stock is being traded at
2015PE of 7.68x which is quite attractive compared with the
overall market and given the positive outlook for animal feed
industry in 2015. DBC’s 1-year target price is derived from PE
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multiple at VND 32,500/share, equivalent to a target PE of 8.5x.
DBC (31/12/2014)
Stock
Price (VND)
Market cap (mil USD)
PER PBR EV/EBITDA Dividend yield EPS (VND) EPS Growth Sales growth Net profit growth
2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E
DBC 27500 81 8.92 7.07 0.96 0.89 434,699 501,827 5% 5% 3,085 3,892 -2% 26% 10% 7% 1% 26%
Source: SSI Research
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FISHERY: NEUTRAL (Last year call: Neutral)
Key call: HVG
Minh Dinh, +84 8 3824 2897 ext. 2148, [email protected]
Fishery industry performance in 2014
Source: Bloomberg
What transpired in 2014?
Industry performance
The fishery industry gained 153.28%, compared with 8.15% of the
VN Index. The outperformance was driven by all three stocks in the
industry: MPC (+386.69%), VHC (+148.52%), and HVG (+29.52%).
MPC (+386.69%): Share repurchase and high earnings growth
In Jan 2014, shareholders approved the delisting plan of MPC.
During that time, market share price was around VND
25,000/share. MPC announced that it would purchase treasury
shares from minority shareholders at up to VND 30,000/share.
Then the repurchase price was raised to VND 40,000/share in
April, and VND 100,000/share in September. In 31 Dec 2014,
MPC closed at VND 105,000/share.
Thanks to increases in both shrimp export volume and price,
MPC attained high earnings growth in 2014. 9M2014 revenue
reached VND 10,798 bn, a 47.3% YoY increase. Net profit
reached VND 698 bn, a 336% YoY increase.
VHC (+148.52%): Sales of Vinh Hoan Feed and zero anti-
dumping duty in the US
VHC’s 9M14 revenue reached VND 4,304 bn, a 16% YoY
increase. Pretax profit reached VND 500 bn, a 149% YoY
increase, of which VND 183 bn was the gain in sales of Vinh
Hoan Feed to Pilmico International Pte. Ltd. Excluding that
extraordinary income, pretax profit would have only reach VND
317 bn, a 57% YoY increase.
VHC is one of four companies that were not levied with anti-
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Vn Index
Consumer Staples
Fisheries
Date: 13.02.2015 Institutional Research & Investment Advisory
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dumping duty in the US. Most companies, including major
exporters such as HVG, Agifish (AGF: HOSE), Anvifish (AVF:
HOSE)..., have to pay anti-dumping duty of USD 0.58-2.39/kg
(preliminary results, POR10, from 1 Aug 2012 to 31 Jul 2013),
and USD 0.42-2.11/kg (POR9).
In Nov 2014, VHC offered investors a 2:1 bonus share.
HVG (+29.52%): Expectation about export to Russian market
At present, only HVG and three other companies in Vietnam are
permitted to sell pangasius to Russia. The country does not
allow import from other companies due to hygienic standards.
Due to disputes between Russian and Western countries
regarding the conflict in Ukraine, Russia has banned food
imports from the US, EU, Norway, Australia and Canada.
According to Reuters, in 2013, the countries under sanction
exported USD 1.4 bn of fish products to Russia. As a result,
Russia has to find a substitute supply of fish products. With
export price of approximately USD 2.5/kg, pangasius is among
the cheapest variety of fishes and will be preferred by Russian
consumers.
Source: VASEP
Key highlights on the sector
According to Vietnam Association of Seafood Exporters and
Producers (VASEP), Vietnam’s fishery export is estimated to reach
USD 7.85 bn in 2014, a 16.7% YoY increase. Two major products
are shrimp and pangasius.
Shrimp export attained high growth, however, the pangasius
industry has not recovered
Vietnam shrimp export attained high growth in 2014 because of
global supply shortage, prompted by the shrimp early mortality
syndrome (EMS) in Thailand, the largest shrimp exporting country.
Vietnam shrimp export was estimated to reach USD 3.95 bn in 2014,
a 29.2% YoY increase, prompted by an approximately 17.6% YoY
increase in volume and 9.8% YoY increase in average export price.
Contrary to shrimp export, pangasius export did not improve in 2014
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Date: 13.02.2015 Institutional Research & Investment Advisory
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due to fierce competition and low export price. Export was estimated
to reach USD 1.75 bn in 2014, a 0.6% YoY increase, prompted by
1.1% increase in average export price and 0.5% decline in volume.
High anti-dumping duty in the US imposed on both pangasius
and shrimp
Regarding pangasius export, as we mentioned above, most
companies, except VHC and three other minor exporters, have to
pay anti-dumping duty of USD 0.58-2.39/kg (preliminary results,
POR10), and USD 0.42-2.11/kg (POR9) when selling pangasius
fillets to the US.
For anti-dumping duty on shrimp in POR8 (from 1 Feb 2012 to 31
Jan 2013), MPC, the largest shrimp exporter in Vietnam is subject to
a duty of 4.98%, which is the lowest rate. Sao Ta Foods JSC (FMC:
HOSE) and most other shrimp exporters are subject to a duty of
6.37%. There was no duty on POR7.
Decree 36/2014/ND-CP regarding pangasius farming,
processing and exporting
Decree 36/2014/ND-CP was promulgated by the Government on 29
Apr 2014 and took effect from 20 June 2014. Three months after
that, on 29 July 2014, the Ministry of Agriculture and Rural
Development (MARD) issued Circular No. 23/2014/TT-BNNPTNT,
which provided guidelines for Decree No. 36/2014/ND-CP. The
Circular took effect from 12 Sep 2014. Decree 36 and Circular 23
require more stringent quality control, registration of farming area
and export.
In general, we expect that the regulation over pangasius export
quality (water content ≤ 83%, glazing ratio ≤ 10%, restrictions on
usage of chemicals and additives) will create positive impacts on the
industry. Vietnamese exporters can improve the product quality and
sell at higher prices.
Nevertheless, several pangasius exporters argue that some
regulations are unreasonable. For example, customers usually order
pangasius fillets with higher water content and glazing ratio than
stipulated in the Decree. In addition, export registration with Vietnam
Date: 13.02.2015 Institutional Research & Investment Advisory
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Pangasius Association may delay shipments.
Source: Bloomberg
2015 Expectation
Possible changes in fundamentals
Pangasius farming cost will decline
Soybean meal is the main material for producing pangasius feed. It
accounts for 50% of feed production cost and 30% of pangasius fillet
cost. Soybean meal price has declined by 17% since the beginning
of 2014. Average price of soybean meal in 2H14 was 16% lower
than in 1H14.
A decline in soybean meal price will lower pangasius farming cost.
Assuming soybean meal price declines by 15%, we estimate that
cost of pangasius fillet will decline by 5%. It takes 8-9 months for a
pangasius harvest, so we expect to see a positive impact of soybean
meal price decline on business results of pangasius companies from
2Q15.
VAT exemption on feeds
According to the Amended Tax Law No. 71/2014/QH13, effective
from 1 Jan 2015, the VAT imposed on feed will be reduced from 5%
to zero.
VAT exemption will not directly impact profit of fishery exporters as
exports are entitled to VAT refund. Nevertheless, VAT exemption will
reduce cost of pangasius and shrimps raised by farmers.
Consequently, fishery companies can choose between purchasing
fish/shrimp from farmers or raising fish/shrimp on its own farms,
whichever is cheaper.
Decree 36/2014/ND-CP may alleviate competition within the
pangasius industry
Pangasius export price has declined since early 2012 due to
competition among pangasius exporters.
As we have mentioned above, Decree 36 and Circular 23, which
took effect from June and Sep 2014, require more stringent quality
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Date: 13.02.2015 Institutional Research & Investment Advisory
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Source: Ministry of Industry and Trade
control and registration of farming area and export. The supervision
of quality, farming area, number of processing plants can improve
product quality and prevent supply surplus and unhealthy
competition. As a result, we expect that the number of pangasius
exporters will be reduced and export price can increase.
Source: Ministry of Industry and Trade
Issues and risks
Earnings of shrimp companies may decline
Earnings of shrimp companies peaked in 2014 thanks to increasing
price, prompted by global supply shortage. It is estimated that global
supply has declined by 15% due to the EMS, which occurred most
severely in Thailand, the largest shrimp exporter in the world.
It is likely that Thailand can remedy the shrimp EMS in 2015. If
Thailand’s shrimp industry recovers and shrimp export price
subsides, profits of shrimp companies will decline.
High-anti dumping duty in the US
According to preliminary results of POR10, Vietnam pangasius
companies, except VHC and three other smaller exporters, have to
pay anti-dumping duty of USD 0.58-2.39/kg. With such high duty, it
will be impossible for those companies to export to the US.
Although anti-dumping duty on shrimp is lower (from 4.98% to
6.37% in POR8), when it is combined with decline in export price,
we are concerned that earnings of shrimp exporters will be
negatively impacted.
Our Investment stance: Neutral
Taking all factors into consideration, we expect that pangasius
companies can attain decent earnings growth in 2015, while shrimp
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Date: 13.02.2015 Institutional Research & Investment Advisory
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companies may face certain difficulties. We think that the decline in
soybean meal price will be the most critical factor in driving earnings
growth.
Stocks that we expect to outperform in 2015
HVG
The largest Vietnamese pangasius exporter, one of the few fully
integrated fisheries company covering the entire value chain
from hatchery, farming, manufacturing of fish feed, processing,
production of frozen fish and cold storage warehousing.
With vertically integrated production, HVG will benefit the most
from soybean meal price decline.
The company is expanding to shrimp business by increasing
stake in Sao Ta Foods Processing from 39.3% to over 51% and
cooperating with Faquimex in raising shrimp in Ben Tre
province. In 2014, HVG earned VND 30 bn in profit from
cooperated business with Faquimex.
Net income attributable to shareholders will increase: By the end
of 2013, HVG held a 55.6% and 51.4% in Viet Thang Feeds
(VTF: HOSE), Agifish (AGF: HOSE). At present, stake in VTF
and AGF has been increased to 80.74% and 74.9%.
We expect 2015 revenue to reach VND 18,375 bn, a 28.7% YoY
increase, and net income attributable to shareholders to reach
VND 535 bn, a 12.1% YoY increase, translating to an EPS of
VND 4,052. HVG is trading at 6.7x 2015 EPS, which is rather
attractive.
Risks of investment: Receivables from Russian customers
may increase following the Ruble depreciation.
HVG (31/12/2014)
Stock
Price (VND)
Market cap (mil USD)
PER PBR EV/EBITDA Dividend yield EPS (VND) EPS Growth Sales growth Net profit growth
2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E
HVG 27,200 167.8 7.5 6.7 1.4 1.1 7.6 6.8 3.7% 5.5% 3,614 4,052 73.9% 12.1% 29.3% 28.7% 100.4% 4.8%
Source: SSI Research
Date: 13.02.2015 Institutional Research & Investment Advisory
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DAIRY: OVERWEIGHT (Last year call: Neutral)
Key call: VNM
Trang Pham, +84 439366321 ext. 537, [email protected]
Dairy industry performance in 2014
Source: Bloomberg
What transpired in 2014?
The dairy sector decreased by 12.44% in 2014, underperforming the
VN Index (+8.15%). Underperformance of the sector was driven by
negative earnings growth of VNM in 2014.
Key highlight on sector/companies
International dairy market: From March 2014, impaired demand
from China, the world’s largest milk consumption country and from
Russia-the world’s third largest dairy consumption market since
August when it banned milk import from Western countries sent
global dairy prices in a whirlwind. International dairy price at 2014-
end retreated 54% YTD, and average milk powder price was 25%
lower YoY.
Weak demand: In the domestic market, consumers continued to be
frugal on FMCG consumption, especially dairy products. According
to Kantarworld Pannel, milk consumption growth was very weak in
9M14, to an extent where it did not increase in 3Q14. Due to
tightened disposal income, consumers either considered cheaper
products or reduced dairy consumption.
Date: 13.02.2015 Institutional Research & Investment Advisory
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Policy: On May 23, the Ministry of Finance issued Decision
1079/QĐ-BTC that regulates price caps on powder milk products for
children under age of 6. Accordingly, all powder milk brands
wholesale prices were slashed by 10-30%, causing margin
contraction for dairy producers. In a different manner, this Decision
encouraged milk consumption in the context that formula products
became more affordable, especially for rural consumers.
Rising competition: 2014 witnessed saw fierecer competition
amongst dairy brands than ever before across all product segments.
Almost all industry players placed heavy emphasis on cow farm
development. TH Milk currently has 45k cows and targets 137k cows
by 2017. Vinamilk has designated farm development as a top
priority, in which it plans to increase its cow herd to 130k cows by
2017 from the current 9k cows. Nutifood co-operated with HAGL to
raise a cow farm of 120k cows by 2017. Meanwhile, Friesland
Campina also invested in a new farm in Northern Vietnam in July
2014. Judging by two M&A transactions, the industry remains
attractive. 70% stake of IDP was acquired by a group of financial
institutions including Vinacapital and Daiwa Partners; TH Milk
purchased 51% stake in Dalat Milk.
Company: VNM is the longstanding leader in the sector, holding an
overall market share of more than 50%. 2014 was a difficult year for
the company in which many external influences adversely affected
earnings: weak domestic demand, uncertain export market,
unfavorable policy and rising competition. 2014 marks the first time
in history that the company experienced negative profit growth which
is estimated at -9% YoY. During 3Q13 to 1Q14, VNM even forfeited
market share. However, despite of fragile demand, VNM’s domestic
sales improved in 2Q14, outpacing the overall industry. Its market
shares also improved in key segments: drinking milk (from 48.7% by
2013-end to 51% by July 2014), and powder milk (from 25.6% in Jan
2014 to ~30% by 2014-end (source: Nielsen Vietnam). We are
convinced that VNM has initially achieved some success in
weathering both weak consumption and rising competition.
Contribution from a new subsidiary (Driftwood Dairy) has offset
reduction in export sales (mostly from Iraq). Negative earnings
growth and concerns over challenging outlook in the coming time
corroded investors’ sentiment. Thus, as a typical defensive stock,
Date: 13.02.2015 Institutional Research & Investment Advisory
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VNM underperformed the VN Index in 2014.
Quarterly domestic sales growth by value and volume (YoY)
Source: VNM, SSI estimates
Dairy consumption growth (volume) YoY
Source: Kantar World Panel
2015 Expectation: Back to winning ways
Possible change in fundamentals
VNM will undergo key fundamental changes in 2015 that would
foster encouraging results:
Margin improvement on lower material price: In the global
dairy market, milk powder price prolonged its downtrend, closing
at USD 2,270/ton on December 16, 2014, a decrease of 54%
YTD. Accordingly, we assume that average milk powder price for
VNM’s production at USD 2,750/ton (down 35% YoY), elevating
16.2%
22.9% 23.5%
21.3%
28.2%
15.2%
7.2%
16.7%
4.0%
13.8%
19.4%
9.6%
16.0% 16.5%
14.4%
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YoY Quarterly sales growth
YoY quarterly sales volume growth
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1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14
Urban Rural VNM
Date: 13.02.2015 Institutional Research & Investment Advisory
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estimated gross margin for VNM in 2015 to 38.5% (vs. ~36% in
2014), which is supposedly the peak since 2006. Thanks to its
leading market position, we believe that VNM are not obligated
to cut selling price despite of lower input cost. However, we
forecast that the company will maintain promotion activities in
order to safeguard sales. Hence, we have conservatively
increased estimated selling expense to sales ratio to 15%. Net
margin, hence, will edge to 18.8% from ~17% in 2014.
Healthier demand: We expect that FMCG consumption will
improve next year on 2014’s low base. Looking at a bigger
picture, lower fuel price is a big support to consumers’ wallets,
and with increasing disposal income, dairy products will find their
way back to households’ dinner tables.
Issues and risks
Policy risk: As dairy products are under a price stabilization
program, companies will face policy risk as they did in 2014 from
price capping regulation.
Fresh milk would be more favored by consumers, especially in
urban areas. Thus, there is a possibility that consumers will
switch from liquid milk (produced from milk powder) to fresh milk.
If so, VNM’s drinking milk segment would be adversely affected,
as 70% of its liquid milk volume is produced from milk powder.
Concern over food safety in the industry has been heightened
on increasing awareness of consumers.
Rising competition: The dairy industry is still attractive, as
evident by increased investments by dairy companies, via M&A
transactions or upstream developments. In 2015, we believe the
competitive nature between industry players will intensify, and
it’s still too early to predict a winner. Companies will have to
discover new innovative strategies to grow while providing
consumers with better products at more reasonable prices.
Our Investment stance: Overweight
VNM’s top line and bottom line are estimated to obtain YoY growth
Date: 13.02.2015 Institutional Research & Investment Advisory
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rates of 10% and 23.3% respectively in 2015. In 2014-2018, we
estimate VNM’s top line and bottom line CAGR at 10.3% and 14.3%.
At the current market price of VND 94,000/share, the stock is bring
traded at 2015 PER of 13.3x, which is fairly cheap in our view.
We recommend to BUY VNM.
VNM (31/12/2014)
Stock
Price (VND)
Market cap (mil USD)
PER PBR EV/EBITDA Dividend yield EPS (VND) EPS Growth Sales growth Net profit growth
2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E
VNM 95,500 4,466 16.2 13.3 4.7 4.2 9.3 7.7 3% 4% 5,881 7,192 -10% 22% 12% 10% -10% 22%
Source: SSI Research
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CONFECTIONARY: NEUTRAL (Last year call: Neutral)
Key call: NONE
Trang Pham, +84 4 3936 6321 ext. 537, [email protected]
Confectionary industry performance in 2014
Source: Bloomberg
FMCG consumption growth by volume
Source: Kantar
What transpired in 2014?
The confectionary sector gained 22.7%, outperforming the VN Index
(up 8.15%). Although KDC’s earnings growth is expected at only 6%
YoY in 2014, the comprehensive restructuring of the confectionery
giant, including acquiring Vocarimex, expanding to instant noodle
and transferring confectionery business fostered positive sentiment
for investors.
Key highlight on sector/companies
Declining key material prices: According to the Food and
Agriculture Organization’s (FAO), sugar, vegetable oil and cereal
average price indexes decreased by 3%, 5.2% and 12.2% YoY
respectively. Despite of lower key ingredients costs, confectionery
consumption was very weak in 2014 as consumers reduced
consumption of confectionery- which they viewed as a discretionary
good - when tightening their spending budget. According to the
General Statistics Organization (GSO), retail sales growth totaled
10.5% in 2014, vs. 12.6% in 2013. Additionally, a report from Kantar
World Panel stated that FMCG consumption growth continued to be
dormant in 9M14, even negative in urban areas in 3Q14.
Company: KDC had an eventful year brimming with M&A activities.
Its ultimate goal is to become a holding company in the consumer
sector, via M&A transactions thanks to plentiful cash accumulation.
At first, it raised charter capital via a private placement to local
investors to: (1) fund upcoming M&A activities and (2) create
available room for foreign investors. After successfully raising
charter capital, KDC purchased 24% stake of Vocarimex in its IPO
(and will increase ownership to 51% in 2015). Subsequently, KDC
entered the instant noodle business by co-operating with Saigon
Vewong. In December 2014, KDC announced that it has sold 80%
stake of its confectionery business to Mondelez in exchanged for
0%
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KDC Vn Index
-2%
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1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14
Urban Rural
Date: 13.02.2015 Institutional Research & Investment Advisory
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USD 372 mn. KDC will continue to pursue M&A activities as the
company plans to purchase a beverage company and a wheat flour
company. In terms of business performance, KDC’s top line and
bottom line are expected to achieve growth rates of 8.7% and 6.8%
YoY respectively in 2014, which are moderate, however, still
encouraging albeit weak demand as we have outlined above.
BBC gained 88.6% in 2014 thanks to both fundamental and
technical reasons. In terms of earnings, BBC posted strong earnings
growth in 2014 (9M14: 135% YoY) thanks to largely improved
margin (from 29.2% in 9M13 to 33.45% in 9M14) on lower material
prices and improved sales of products with higher margins (layer
cakes, Chocolate Pie). In addition, due to low liquidity, the stock
price effortlessly increased on purchasing power, especially from
large shareholders.
2015 Expectation: Consumption to pick up
Possible change in fundamentals
In terms of the industry, there are elements that suggest healthier
growth in 2015:
Commodities including cereal, milk, vegetable oil, sugar are
expected to remain at favorable prices in 2015. Hence,
confectionery companies would be able to further increase gross
margin.
We expect that FMCG consumption will improve next year on
2014’s low base. Looking at a bigger picture, lower fuel price is a
big support to consumers’ wallets, and with increasing disposal
income, consumers will not think twice when purchasing
confectionary goods. Confectionery consumption stands to
benefit from increasing FMCG consumption trend.
For KDC, the largest player in the industry, 2015 will be a transitional
year. It will only book earnings from confectionery business in the
first half as the transaction with Mondelez is expected to be
completed by 2Q15-end. While earnings from edible oil and instant
noodle could not offset the lack of confectionery earnings in the
short-term, it is expected that KDC will record significant
Date: 13.02.2015 Institutional Research & Investment Advisory
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extraordinary income from the deal with Monelez.
Issues and risks
Confectionery products in Vietnam are viewed as
discretionary goods rather than staple ones. Thus, if
economic conditions do not improve, consumers spending
habit on discretionary products will remain frugal.
Increase commodity prices should commodities supply
become tightened on adverse weather.
Our Investment stance: Neutral
We maintain our NEUTRAL investment view over this sector. In our
opinion, in 2015, although demand might improve, valuations of
confectionery stocks such as KDC and BBC are already high in
terms of PER.
2015 would be a transitional year, in which net profit would
significantly increase. According to our estimates, net profit from
selling 80% of BKD could reach ~VND 5,100 bn, which will be
recognized in 2015. KDC’s estimated 2015 net profit would reach
VND 5,527bn, in which core profit would be VND 334bn, down 18%
YoY.
KDC’s long-term strategy is to engage in the F&B sector, increasing
its addressable markets via adding more FMCG products into its
platform. Specifically, in addition to instant noodles and edible oil, it
is seeking for more M&A opportunities in the F&B segment. After
instant noodle, edible oil, there have been rumors that KDC will
enter wheat flour, fast food and beer businesses. The company is
confident that it could leverage its operation capabilities, industry
expertise to obtain future growth on the back of rich cash position,
especially once the deal with Mondelez finalizes. KDC’s growth
picture seems to be unclear to investors at the moment, and surely it
would take a long time (i.e 2-3 years) for those who are waiting for
the transformation story to achieve success.
At the current market price of VND 49,800/share, 2015 PER of
KDC’s core business is 29.6x, which is significantly higher compared
Date: 13.02.2015 Institutional Research & Investment Advisory
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to its historical PER and the overall market. However, as KDC’s
book value will increase sharply this year (by 66% in our estimate),
2015 PBR will decrease to 1.12x, much lower than other consumer
companies in Vietnam (VNM: 5x, MSN: 3.5x). Once the deal with
Mondelez finalizes, KDC’s cash per share would reach ~VND
41,500/share, which is very high.
As we have discussed previously, in the short term, with high
retained earnings and a rich cash balance, KDC could either opt for
a cash dividend payment to investors or attain high interest income.
In the longer term, KDC management is keen on transforming itself
into a consumer conglomerate. The acquisition of Vocarimex only
marks the beginning. Vocarimex is the largest player in the edible oil
in Vietnam (over 70% market share) and chances are high that it will
achieve much better operational efficiency.
KDC (31/12/2014)
Stock
Price (VND)
Market cap (mil USD)
PER PBR EV/EBITDA Dividend yield EPS (VND) EPS Growth Sales growth Net profit growth
2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E
KDC 49,900 555.76 17.9 2.3 1.9 1.1 9.9 12.8 3.73% 2.99% 2,794 21,340 12% 76% -20% 664% 9% 909%
Source: SSI Research
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OTHER F&B: OVERWEIGHT (Last year call: Neutral)
Key call: VCF
Trang Pham, +84 4 3936 6321 ext. 537, [email protected]
Confectionary industry performance in 2014
Source: Bloomberg
Source: Bloomberg
What transpired in 2014?
MSN gained only 1.22%, underperforming the VN Index on negative
earnings growth in 9M14 (-69% YoY). VCF advanced 25.5%,
outperforming the VN Index thanks to strong growth in 2014
(expected ~54% YoY).
Key highlight on sector/companies
Corresponding with weak FMCG consumption in 2014, growth of
packaged foods was shallow in 1H14 (5-6% by volume, according to
Kantar World Pannel). In 3Q14, growth diverged, with negative
growth in urban area (-1% YoY) while urban area saw an increase of
8% YoY in terms of volume.
In our estimates, Masan Foods sales (including sales of instant
noodles and seasonings) decreased by 9% in 3Q14, but still added
15% YoY in 9M14. Due to saturated demand for existing
products/brands, MSN as well as its competitors such as Vina
Acecook, Asia Foods, Hung Thinh Co, and Trung Thanh Co, all
continued to administer product developments, with new initiatives
both in terms of packaging and ingredients in order to expand their
addressable markets. KDC’s recent penetration into the instant
noodles business continues to cluster an already congested
industry.
In the coffee segment, VCF increased its market share from ~38%
last year-end to ~41-42% in 2014 according to our estimates. This
can be linked to capacity expansion and aggressive product
developments and marketing activities by MSN which have yielded
dividends.
Company: MSN underperformed the VN Index as the consolidation
of mining business (with significantly high depreciation and interest
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Date: 13.02.2015 Institutional Research & Investment Advisory
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expense) from March 2014 generated losses in 1H14.In 3Q14, net
profit totaled VND 233 bn and this has led us to assume that much
higher profit can be attained in the coming quarters. Net income
contributed to the parent shareholder totaled VND 28 bn in 3Q14
(accumulated loss at VND 305 bn in 9M14). For 2014, we estimate
MSN’s revenue and net earnings (attributed to shareholders) will
grow at 43.9% and 53.5% YoY.
2015 Expectation: Positive
Possible change in fundamentals
We see encouraging elements that may foster better growth for the
industry in 2015:
Commodities including cereal, milk, vegetable oil, sugar are
expected to remain at favorable prices in 2015. As such, MSN
and VCF are able to further increase gross margin.
We expect that FMCG consumption will improve next year on
2014’s low base. Looking at a bigger picture, lower fuel price is a
big support to consumers’ wallers, and with increasing disposal
income, consumption will inevitably increase.
In 2015, we anticipate MSN will achieve growth rates of 38.5% YoY
for sales growth and 120.4% YoY for net income. Strong growth in
bottom line will derive from fully booking revenue for the whole year
of Nui Phao Mine with higher profitability. Estimated net income
attributed to the parent shareholder is VND 2,057 bn, up 205% YoY,
translating to 2015EPS of VND 2766. 2015PER would be
significantly lower, coming at 29.3x (pro-forma: 25.7x) at market
price on December 31, 2014 of VND 83,000/share, a high premium
compared with the overall market.
Issues and risks
Weak demand: If economic conditions do not improve,
consumers spending habits on discretionary products will remain
frugal.
Increase commodity prices should commodities supply become
Date: 13.02.2015 Institutional Research & Investment Advisory
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tightened on adverse weather
Our Investment stance: Overweight
Investment view:
MSN (Overweight): Fair value of a MSN share arrives at VND
89,456/share, an upside of 7.8% compared to the market price on
December 31. As the mine has started to generate profit and
shareholders stopped incurring losses in 3Q14, we believe that MSN
has withstood adversities. In the long term, while the consumer
business is expected to remain stable, the mining business will
require additional time to achieve the desire potential. We suggest
investors to consider the stock at price weakness on expected
strong growth in 2015.
VCF (BUY): We expect the company will continue to enjoy high
growths in topline (27.2% YoY) and bottom line (22.2% YoY) as new
capacity has only started to be fully utilized since May 2014. At the
market price as of December 31, 2014, VCF is traded at 2015PER
of only 10.7x, which is attractive in our view. However, please note
that low liquidity remains a perennial issue for the stock.
MSN, VCF (31/12/2014)
Stock
Price (VND)
Market cap (mil USD)
PER PBR EV/EBITDA Dividend yield EPS (VND) EPS Growth Sales growth Net profit growth
2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E
MSN 83,000 3,009 88.77 29.29 4.04 3.55 14.68 10.58 0% 0% 912 2,766 47.7% 203.1% 45.8% 38.5% 8.6% 120.4%
VCF 173,000 218 13.12 10.74 3.10 2.40 10.77 8.83 0% 0% 13,184 16,110 34.6% 22.2% 33.3% 27.2% 34.6% 22.2%
Source: SSI Research
Date: 13.02.2015 Institutional Research & Investment Advisory
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ENERGY
OIL & GAS: UNDERWEIGHT (Last year call: Overweight)
Key call: None
Trang Pham, +84 4 3936 6321 ext. 537, [email protected]
Oil & gas industry performance in 2014
Source: Bloomberg
Source: Bloomberg
What transpired in 2014?
Oil & Gas stocks recorded most of their gains in 9M14, jumping 94%
(GAS), 97% (PVD), and 131% (PVS) YTD, before painfully
correcting following oil price movements. They ended 2014 with
meager returns: 13% (GAS), 19% (PVD) and 37% (PVS). Judging
by the year end collapse, it is safe to assume that the oil & gas
sector was the most volatile in 2014.
Key highlight on sector/companies
Declining oil prices heightened anxieties:
At the beginning of 2014, Brent oil price was approx. USD
108/barrel, following three years of prices higher than USD
100/barrel. However, in addition to rising political tension, weary
demand from China and excess supply, mostly from the US, exerted
heavy downward pressure on oil prices, starting from June. Beside a
decrease of 40% in oil price, the tripling in implied volatility in oil
prices is a worth paying attention to as it signals more uncertainty
about future prices.
PetroVietnam’s key business performances:
In 2014, PVN total exploited crude oil reached 17.39 mn tons, up
4.1% YoY and natural gas volume totaled 10.2 bn m3, adding 4.6%
YoY. The Group’s revenue totaled VND 745.5 trillion and
contribution to the State Budget was more than VND 178 trillion,
accounting for 21% of total State Budget in 2014. Total capex
reached VND 81 trillion. The Group has exploited 8 new oil & gas
fields.
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Vn Index Energy
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CBOE crude oil price volatility
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2014 high earnings growth across the sectors:
GAS: Net profit of parent company increased by 16.8 %YoY, mainly
thanks to one-off earnings on EVN’s payment (VND 3,898 bn) for
previous AToP contract. Excluding one-off earnings, sales added
6.8% YoY while core profit was flat YoY. Sales growth was driven by
4.6% advancement in dry gas volume and slight margin
improvement on higher selling price.
PVD: Strong growths of 29% in topline and 22% in bottom line
thanks to (1) increased day rate of PVD’s owned rigs since 3Q13
with an average rate of 15%; (2) growth in revenue from leased rigs
(57% YoY), well services and other services (~25-30%), and (3)
higher profit contribution from JV (mainly from Baker Huges).
PVS: Although earnings is flat YoY, the stock was re-rated during
2014, after an extended period being undervalued.
Apart from strong fundamentals, frequent rumors of stock bonuses,
PVN’s divestment from GAS, etc., created short-term catalysts for
these stocks.
Stock prices plunged in the last two months
Often time declining oil prices will spark an immediate domino effect
which initially begins with oil producers then ultimately equipment
and services providers that work with them. In the stock market,
institutional money which had continously flowed into oil &gas stocks
for most of the year, started to flow out in the last quarter as oil
stocks tumbled, and in the process created a massive sell-off.
In alignment with global oil & gas stocks, from their peaks in August
and September 2014, Vietnam oil & gas stocks painfully stumbled,
siphoning off most of their accumulated gains from the beginning of
the year.
2015 Expectation: Possible negative growth
Possible change in fundamentals
Theoretically, if oil price continues to drop or remains at the current
level, the effects of an oil price change on oil & gas companies are
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indisputable, but it extends beyond the ramifications on revenues
and earnings in the near term as equity values of oil and gas
companies would be hindered.
According to PVN, Vietnam’s average break-even cost per barrel is
from USD 30-35, implying that the group could still enjoy profitability
at current oil price level. In 2015, PVN targets at production volume
of 16.8 million tons crude oil, a slight decrease of 500k tons
compared to 2014. This volume cut would be from oil fields with
break-even cost higher than USD 60/bbl.
The Group views the current weak oil price as a short-term anomaly,
and it will not terminate but may slow down Capex disbursement for
under-going E&P projects. PVEP might cut USD 500 mn out of
planned investment of USD 1.6 bn in 2015 if oil price falls to USD
50/bbl. In addition, in order to save cost, PVN targets at 20-30%
spending for outside services in 2015.
On the positive side, the current predicament presents PVN with
opportunities to acquire oil fields at discounted prices as well as re-
assess overseas ventures.
Due to different characteristics of each company, we see that their
performances will diverge in 2015:
GAS: Will bear the most adversities from declining oil price, in
the context that low FO price will eliminate benefit from market
price mechanism for Above Take or Pay gas volume sold to
electricity plants while low LPG price will erode most of the profit
of LPG segment.
PVD: 2015 outlook is ensured thanks to mostly fixed contracts
for its owned rigs and growth driver from 1 new JU rig
commencing in 3Q15, given the stable E&P activities as we
have mentioned above. However, looking forward to 2016,
PVD’s top line and bottom line will decrease if oil price maintains
at USD 60/barrel or lower.
PVS: Most business segments will be more or less impacted by
lower oil price and the investment cut, especically
marine/specialized ship services, O&M and ROV segments. A
plan to move M&C business from offshore market to onshore
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market will help to ensure revenue, but profit may be lower.
Basically, FSO/FPSO segment is sheltered from declining oil
price thanks to 10-yr contracts and would still enjoy growth YoY
as FPSO Lam Son just fully commenced operation from May
2014.
PGD, PGS: Because they predominantly engage in gas/LPG
distribution and trading, the impact of low oil price is less severe
than upstream companies. We learn that instead of fixed ( but
increasing) input price mechanism decided by GAS and PVN,in
2015 PGD and PGS (CNG) will apply a floating input gas price
formula which links to domestic FO/LPG prices. This new pricing
schedule will help to proportionally ensure profits for those
midstream companies. In any events, we expect that distribution
and trading margins might become thinner if natural gas/LPG
price continuous to decline.
Issues and risks
It should be noted that the sustainability of earnings of gas
companies in the future is solely dependent on the pricing schedule,
which is proposed by GAS but the final decision is contingent to the
Government’s decision. In our current forecast for GAS and other
related companies (DPM, PGD, PGS, CNG), we assume that the
market price mechanism with the announced formula would be
applied by GAS starting from 2015. This implies that our forecasts
and views on GAS and related companies may change accordingly
if there is any deviation in the pricing schedule.
Risk of E&P activities shutdown/delay/investment strong cut in the
long-term if oil price remains weak or further drops. As we have
outlined above, lower oil price hinders equity value of oil & gas
stocks.
Our Investment stance: Underweight
Although we are not oil watchers, we still hold our own viewpoints on
oil prices and apply different investment strategies:
If oil price continues to fall, we definitely suggest investors to
Date: 13.02.2015 Institutional Research & Investment Advisory
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reduce or eliminate exposure to oil-related stocks
If oil price stabilizes at USD 60/barrel (i.e our base case), we
suggest investors to avoid negative earnings growth companies
(GAS, PGD)
GAS, PVD, PVS, PGS, PGD (31/12/2014)
Stock
Price (VND)
Market cap (mil USD)
PER PBR EV/EBITDA Dividend yield EPS (VND) EPS Growth Sales growth Net profit growth
2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E
GAS 70,500 6,951 9.74 14.30 3.33 3.15 5.62 7.08 3.2% 3.2% 7,326 5,860 13.5% -20% 13.6% -10.8% 16.8% -20%
PVD 64,500 842.5 11.54 11.96 5.09 1.95 6.98 5.97 1.6% 1.6% 7,972 7,689 0.0% 0.0% 25.9% 1.7% 27.4% -1.1%
PVS 26,900 570 10.21 11.77 1.79 1.67 4.06 4.32 3.3% 3.3% 3,565 3,091 3.0% -13.3% 15.1% -5.3% 3.0% -13.3%
PGS 26,900 48 7.09 8.12 1.05 0.98 1.26 1.30 4.5% 4.5% 3,795 3,313 -19.4% -12.7% 3.5% -24.3% -10.9% -3.2%
PGD 30,700 82.7 10.01 12.36 1.41 1.39 3.09 3.54 6.5% 6.5% 3,068 2,484 -14.8% -19.0% 2.2% 9.5% -12.0% -19.0%
Source: SSI Research
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FINANCIALS
PROPERTY (COMMERCIAL DEVELOPERS): OVERWEIGHT
(Last year call: Neutral)
Key call: KDH, BCI, LCG
Anh Dinh, +84 4 3936 6321 ext. 670, [email protected]
Minh Dinh, +84 8 3824 2897 ext. 2148, [email protected]
Sector performance in 2014
Source: Bloomberg
Sub-sector performance in 2014
Source: Bloomberg
What transpired in 2014?
Industry performance: OUTPERFORMED
The commercial real estate developer sector advanced 9.79%,
slightly outperforming 8.15% of the VN Index in 2014.
In 2014, several large and mid-caps including FLC, SJS, KDH, BCI,
NBB, DIG, HDG, etc.... strongly outperformed the whole market.
However, VIC, the largest market cap in the sector with 63.6%,
underperformed the VN Index with a gain of only 4.24%; as a result,
depleting the sector’s performance.
HDG was the best performer in the commercial real estate
developer sector with a gain of 161.3% in 2014. HDG was mainly
favored by foreign investors thanks to its stable business
performance with relatively healthy financial status and attractive
sizable land bank with promising long term prospects. However,
poor trading liquidity remains an issue for HDG.
Key highlight on sector: The worst is over
Recovered liquidity vs. lowered inventories
According to a report published by the Ministry of Construction
(MoC), in 2014, 11,450 successful transactions transpired in
Hanoi, doubled that of 2013 and 10,350 in Ho Chi Minh City
(+35%YoY) in which the majority was in the affordable housing
segment, especially small-sized apartments. Completed or
close-to-completed projects with average construction density
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Outstanding stock performance in 2014
Source: Bloomberg
and good construction progress, located in established location
with adequate infrastructure and developed by reputable
developers, had more competitive advantages and saw better
sales performances.
Improved liquidity helped reduce market inventories by 21.8%
compared to that in December 2013 and totaled approximately
VND 73.9 trillion in which apartments accounted for 32% and the
remaining were in landed properties.
While it is still untimely to assert that the market has fully
recovered, it appears that the property market has exhibited
positive indicators.
Stabilized selling prices
After a long-hauled correction to become more affordable than
the 2010 and 2011 peak, returning to 2006’s level, selling prices
in 2014 have stabilized in both primary and secondary markets,
especially in projects with convenient location and good
amenities. Downward selling prices across all segments ceased
and there were even slight increases in certain projects which
were completed or nearly completed with proven quality and
convenient access.
Meanwhile, we also witnessed that rental yield has increased
from approximately 4%-5% to 7%-8% in projects with convenient
access and established amenities; this might also be an
additional driver that helped enhance the market liquidity in
2014.
Higher credit growth in the property sector
By September 2014, according to the SBV, credit growth rate by
the end of September, 2014 was 7.26% compared with 2013-
end. Total real estate industry loan growth reached 12% by
September-end, therefore, confirming increasing real estate
demand in the low interest rate context. In fact, banks
proactively cooperated with developers to offer interest subsidy
programs with preferential interest rates fixed for up to one year
to purchasers taking mortgages. Higher loan-to-value ratio and
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longer loan tenures were also offered to attract customers.
In regards to the VND 30 tn preferential package, up to 30% of
the total amount was disbursed by September-end. In order to
accelerate the disbursement progress, a joint resolution was
issued in August 2014 which loosened lending rules of the
package. Specifically, the loan terms was extended from 10 to
15 years, loan objects were expanded, price/sqm limit of VND 15
million was also replaced by price/unit limit of VND 1.05 billion
and more commercial banks were added.
2015 Expectation
Possible change in fundamentals
Property Ownership Rights for foreigners allowed
In an attempt to attract foreign capital flows into the property market,
the Revised Housing Law which offers relaxed conditions for
foreigners to own properties in Vietnam was passed by the National
Assembly in November 2014 and will become effective in July, 2015.
In summary, it allows all foreigners who are granted a valid visa and
all foreign investment funds, banks, Vietnamese branches and
representative offices of overseas companies to lease or own a
maximum of 30% of an apartment building or up to a maximum of
250 villas or townhouses in one particular administrative (or the
equivalent of) ward. This also effectively provides a registered 50
year leasehold title with renewal possibility upon expiration.
With this new regulation, foreigners now have an enforceable title, at
the same time ushering in a more profound purchasing pace. Once it
becomes effective, we expect that it may add more liquidity to the
residential market that is currently exhibiting signs of a modest
recovery mostly in the low to mid-end segment whereas a majority of
high-end residences remain empty. More importantly, it may also
help Vietnam property market which has been historically dominated
by local players partly due to the foreign ownership limit issue,
become more competitive within the region; thus, in turn will help
support economic growth. Nevertheless, home mortgage for
foreigners which has yet to be comprehensively addressed and the
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50 years ownership limitation remains an issue.
Small sized properties spearhead the recovery
Since affordable housing is the segment that is considered to meet
the real demand and suits the financial capability of most buyers in
the market, it will continue to spearhead the property market. We
expect that supply in this segment would increase in 2015 in order to
capture growing demand.
Cheaper funding drives players’ confidence
Source: SBV
Given the downward trend of interest rates over the past periods and
low inflation, we expect that banks might continue reducing their
lending interest rates thanks to low funding cost, thus, may rivive
confidence of both developers and buyers when making decisions to
invest in properties.
Issues and risks
High future supply
Although it is anticipated that market demand will increase, we
believe that future supply would also increment and this trend may
prevent the market from reaching its maximum potential.
Inventory sale progress may decelerate
Although inventory level has reduced over the last periods with
increasing successful transactions, we believe that the progress of
inventory sale may decelerate in the coming time since the majority
of unsold stocks are large-sized properties or located in distant local
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with underdeveloped infrastructure.
Delay in guideline issuance for Revised Laws
Though the Revised Housing Law will take effect from July 1, 2015,
we do not exclude the possibility that there may be delay in issuing
detailed guidelines to instruct the application for property ownership
for foreigners. Thus, it might take time for this Revised Laws to really
make impact to the physical property market.
Our Investment stance: OVERWEIGHT
Investment view:
After a prolonged correction with deep adjustments in pricing and
product allocation so as to enhance market liquidity, 2015 is
expected to be a brighter year for real estate developers with greater
confidence of market players including buyers and banks, especially
for those with sound reputation and potential land bank targeting
niche product ranges. Stronger supportive policies from the
Government coupled with low interest rate are also expected to
enhance business performances in 2015. Thus, we upgrade our
Neutral investment view to Overweight on the whole sector for 2015.
Among listed companies, we believe that KDH, BCI, HDG, DXG,
and TDH may experience promising results in 2015 given their
current attractive project pipelines and business strategies.
Therefore, we recommend investors to monitor these stocks’ price
movement to capture investment opportunities.
Stocks that we expect to outperform in 2015
KDH
A turnaround stock: In 2012 and 2013, KDH experienced a loss
of VND 57 bn and VND 137 bn because its products were not
suitable for market demand
9M14 net profit reached VND 61 bn as KDC launched Mega
Residence, which are townhouses with reasonable prices. KDH
expects to earn VND 100 bn in net profit in 2014.
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All of KDC projects are situated in District 9, along the Ring
Road 2. The road connecting the surrounding area to HCMC
center will be completed this January. Upon completing, it will
only take 20 minutes to travel from KDH’s projects to HCMC
center.
KDH's land bank currently reaches 65 ha, sufficient for building
3,000 house in 3 years. The company will acquire more land in
the coming months.
Risks of investment: Once the Ring Road 2 is completed, it
may be congested with container trucks, which may discourage
home buyers.
BCI
Over 500 ha of land bank in the Southwest of HCMC, suitable
for long-term investment.
2015 earnings will be generated by Phong Phu 4 project in Binh
Chanh District, HCMC, with approximately 450 land plots. In
addition, unearned revenue of VND 378 bn remains on the
balance sheet.
BCI has stable earnings sources from Le Minh Xuan IP and Big
C Joint Venture, which generate approximately VND 80 bn in
gross profit annually.
Significant catalysts can be expected in 2016 as large projects
such as An Lac Plaza (463 apartments), Nhat Lan 5 Apartments
(312 apartments), and Expanded Le Minh Xuan Industrial Park
(109 ha) will be completed and revenue will be recorded.
The progress of Tan Tao Residential Area (300 ha) and Green
Villa (133 ha) project will generate positive catalysts in the long
term.
Risks of investments: Progress of projects may be slower than
expected.
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LCG
A turn-around stock: LCG experienced a loss of VND 308 bn in
2013 due to declining revenue and provision for investments. In
9M14, net profit reached VND 18.5 bn thanks to revenue from
Formosa project and other smaller construction contracts.
Revenue from Formosa project is expected to reach VND 1,060
bn in 2014-2015. LCG may win more contracts from phase 2 of
Formosa project in 2015-2016.
National Road 38 Project may generate revenue of over VND
500 bn in 2015-2016.
Over 200 ha of land bank in Nhon Trach District. The road
connecting Nhon Trach and HCMC and the Ben Luc – Long
Thanh – Dau Giay expressway will be built in 2015, which will
increase the value of LCG's land.
Possible reversal of provision for the investment in Phuong Dong
Biofuel Company: The company produces ethanol, which is the
material for E5 gasoline. LCG holds 22% stake in Phuong Dong.
In 2013, LCG had to book a loss provision of VND 98 bn
because there was no market for E5 gasoline and ethanol.
Nevertheless, the government requested that E5 gasoline must
be sold from 1 Dec 2014 in 7 big cities and from Dec 2015
nationwide. As a result, Phuong Dong Biofuel Company can
generate earnings in 2015.
Investment risks: Future earnings subsequent to Formosa
project and National Road 38 are uncertain. Construction
progress of the roads connecting Nhon Trach District may be
delayed.
KDH, BCI, LCG (31/12/2014)
Stock
Price (VND)
Market cap (mil USD)
PER PBR EV/EBITDA Dividend yield EPS (VND) EPS Growth Sales growth Net profit growth
2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E
KDH 20,200 70.5 15.0 13.0 1.0 0.9 15.0 13.5 0% 0% 1,333 1,468 - 10.1% 158% 57% - 85%
BCI 21,900 74.0 15.4 12.2 0.9 0.9 15.2 10.2 4.6% 4.6% 1,425 1,795 7.2% 26% 1.7% 30.7% 8.7% 26%
LCG 8,500 30.7 20 - 0.7 - 15.2 10.2 - - 430 - - - 348% - - -
Source: SSI Research
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PROPERTY (INDUSTRIAL PARK DEVELOPERS): OVERWEIGHT
(Last year call: Neutral)
Key call: KBC
Anh Dinh, +84 4 936 6321 ext. 670, [email protected]
Sector performance in 2014
Source: Bloomberg
Industrial park developers performance in 2014
Source: Bloomberg
What transpired in 2014?
Industry performance: STRONGLY OUTPERFORMED
Industrial Park Developers (IPDs) stocks saw strong performances
with a gain of 39.71% compared with 8.15% of the VN Index. It also
outperformed the real estate sector (+13.03%). As IPD business is
greatly influenced by FDI, IPD stock performances have also
parallel with growth in FDI trend during 2014.
Among IPD stocks, KBC was the best – performing stock with a
gain of 62% thanks to resilient improvement in its business
performance, especially in Trang Due Industrial Park after the
presence of LGE.
Key highlight on sector
FDI cemented its influence on IPDs’ business performance
According to the Ministry of Planning and Investment’s Foreign
Investment Agency (MPI’s FIA), total FDI registered in Vietnam
topped USD 20.2 billion in 2014 (-6.3% YoY) but exceeded the
annual target of USD 17 billion by 19%. However, FDI
disbursement saw encouraging growth of 7.4% YoY to reach USD
12.4 billion thanks to a number of big projects from multinational
giants.
Processing and manufacturing sector absorbed the lion’s share of
FDI with 774 newly registered projects and total amount of newly
registered and expanded capital reached USD 14.5 billion,
accounting for 71.6% of total FDI in 2014 to Vietnam. The sector
was significantly influential to IPDs since it normally requires large
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Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14
Vn IndexReal EstateReal Estate (IP Developer)
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Outstanding stock performance in 2014
Source: Bloomberg
FDI commitment and disbursement (2004-2014)
Source: GSO
land areas or factories located in well-developed and managed IPs.
Among the 60 countries and territories investing in Vietnam, Korea
led with total newly registered and expanded capital of USD 7.3
billion, accounting for 36.2% of total FDI in Vietnam in 2014 with
684 projects in which major projects included Samsung Electronics
Thai Nguyen (USD 3 billion), Samsung CE Complex (HCMC, USD
1.4 billion), and Samsung Display Bac Ninh (USD 1 billion).
According to the the MPI, by 9M14 – end, IPs attracted USD 79.4
bn of registered FDI capital with 5,325 projects or 80% of total FDI
investment in the industrial field. Annually, IPs are also said to
attract approximately 40% - 45% of newly registered FDI
nationwide. Currently, throughout the country, there are 461
industrial parks (IP) registered but only 208 IPs are functioning with
an average occupancy of approximately 67%. However, IPs with
adequate infrastructure and professional operation management
maintain their competitive advantages, thus, attracting more
investors and achieving higher occupancy rate.
Collective efforts to attract foreign investment
With a strong determination to foster a friendly investment
environment for foreign investors, Vietnam has implemented
several supporting measures including reforming and streamlining
administrative procedures for investors, offering a preferential
corporate income tax, especially for the hi-tech sector. As a result,
more and more big manufacturers have relocated their production
bases from China to Vietnam, several massive production projects
are being invested by world leading firms like Samsung, LG, Nokia,
Intel and Canon, etc…
Additionally, in order to lessen the required period for investors to
establish their manufacturing bases, the Government and provincial
agencies also proactively supported investors in procedural
process, employment and environment solutions; helped IPDs in
land clearance, planning and building infrastructure. Ensuring
synchronous development of transportation, power, water supply,
telecommunication systems and worker accommodation is also
another priority of provincial agencies to attract FDI.
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2015 Expectation
Possible change in fundamentals
Promising FDI acceleration with deeper international
integration
In addition commitments to the WTO and existing FTAs, Vietnam is
simultaneously negotiating several other FTAs with leading
economies and pursuing the Trans – Pacific Partnership (TPP)
Agreement, the Regional Comprehensive Economic Partnership
(RCEP) Agreement and the Vietnam – EU FTA. The combination of
synergized effects of these agreements and gradual global
economic recovery will engender practical benefits to businesses
and the economy, especially with respect to expanding export
markets, attracting foreign investment, enhancing transparency and
improving the investment climate which we believe would
dramatically influence FDI attraction into Vietnam; thus, also
generating promising opportunities for IPDs’ business.
Concentrated regulation reform continues in focus:
It is expected that public administration reforms will also be
expedited to capture more foreign investment capital with
improvement in regulatory system and investment policies aiming
to achieve higher consistency, transparency and investor
friendliness. Besides, Law on Investment and Law on Enterprises
which is considered to be the legal basis for several changes in
process, procedures and State administration will also be adopted
soon. Moreover, central and local authorities will actively involve
further in compensating damages, preparing clean land bank with
synchronized and modernized infrastructure. With these constant
efforts by the Government, we expect that the FDI to Vietnam will
be further improved thanks to more favorable and transparent
environment for foreign investors.
However, with the Government’s strategy of focusing on high
technology and eco-friendly projects or higher quality investors, it
will also be more challenging for investors to apply for adequate
investment licenses. Therefore, IPDs that provide sufficient and
well-managed infrastructure and have extensive experiences in
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investment application process would stand to attract FDI inflow. As
FDI is expected to increase, so will the requirements from
investors, and it can only be satisfied by reputable IPDs. Thus, we
expect that IPDs with professional operation and management
would benefit from increasing FDI trend in the coming time.
Issues and risks
Delay in land clearance and complicated administrative procedures
remain hindrances the disbursement process, thus, impeding IPD’s
ability to handover sites, recognize earnings and manage cash
flow.
Our Investment stance: Overweight
Earnings outlook & sector valuation
Taking all factors into consideration, we expect that high-profile
IPDs with established IP with cleared land and well-built
warehouses will reap great benefits from this promising FDI trend
and take charge in attracting multinational giants. Additionally, once
an IPD is able to secure FDI investors to a particular IP, it can also
benefit from auxiliary companies. Therefore, we maintain our
enthusiasm in KBC, who has succeeded in attracting LG to their
Trang Due IP in Hai Phong.
Kinh Bac City Group (KBC: HOSE)
KBC was established in 2002 specializing in industrial park
development. In the past 12 years, KBC has been very successful
in both acquiring land bank and attracting foreign direct investment.
Currently, KBC is managing several IPs with vast land bank of
approximately 15,000 ha across the country including its
associates. This ensures enough land bank for the firm to maintain
development in the next 10-20 years. 80% of KBC’s customers are
foreign investors; therefore, FDI has a direct impact on the firm’s
business performance.
Following the first deal with LGE in Trang Due IP in 2013, in 2014.
KBC exhibited further improvement in attracting investments into
their IPs by securing deals with LGE’s auxiliary partners; thus,
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enhancing their performance in core business of industrial park
development. In FY2014, we expect that KBC will see resilient
earnings growth compared with previous years and would probably
double yearly profit target by completing the 2nd
deal with LGE to
expand their site in Trang Due IP – Phase 2.
Following the impressive results in 2014, we expect that KBC would
experience a promising growth in 2015 as well. We believe that
KBC will further reap benefit from the upward trend of FDI and
Phase 2 – Trang Due IP would remain a key earnings driver for
KBC thanks to the presence of LG, followed by Expanded Que Vo
IP (Bac Ninh), Tan Phu Trung IP (HCMC), etc…
KBC (31/12/2014)
Stock
Price (VND)
Market cap (mil USD)
PER PBR EV/EBITDA Dividend yield EPS (VND) EPS Growth Sales growth Net profit growth
2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E
KBC 15,900 295.1 18.8 14.2 1.05 0.96 13.4 11.2 - - 846 1120 255% 32% 48% 46% 311% 32%
Source: SSI Research
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BANKING: UNDERWEIGHT (Last year call: Underweight)
Key call: MBB
Phat Cao, +84 8 3824 2897 ext. 2154, [email protected]
Banking industry performance in 2014
Source: Bloomberg
Banking industry LDR
Source: SBV
What transpired in 2014?
Industry performance
Underperformed the VN Index: The banking sector delivered an
increase of 6.14% in comparison to 8.15% of the VN Index. The best
performing stock was VCB with a sharp increase of 43.12%. This
advancement might be predicated on the bank’s sound financial
position, such as (i) the bank’s robust loan growth of 10.2% YTD vs.
industry’s average of 7.3% in 9M14, (ii) diversified sources of
income, (iii) efficiency in terms of cost-to-income ratio, profit per
number of staffs and branches, and ROA, and (iv) conservative in
classifying impaired assets and aggressive provision booking policy.
On the other hand, the slump in oil & gas stocks and the expectation
on the banking sector to turn-around also encouraged investors to
allocate their capital to other stocks having good fundamental,
including VCB.
Key highlights on the sector
Banking industry experienced further stable liquidity: The
overall loan-to-deposit ratio (LDR) of the banking sector decelerated
further to approximately 83% in September 2014 compared to 85%
in 2013 and 89% in 2012. Meanwhile, the overnight interbank
interest rate stood at low of around 2.0 – 2.5% pa on average
against 3.0 – 3.5% pa in the previous year.
This improvement was primarily thanks to deposit growth outpacing
loan growth (15.76% YTD vs. 12.62% YTD as of Dec 22). In fact, the
Dong maintained its strength against the greenback, and nationwide
inflation finished at a record low of 1.84% YoY. As such, real VND
deposit rates stood at high of around 2% pa in 2014 against 1.6% in
2013, thus continually attracting depositors.
80%
90%
100%
110%
120%
130%
Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14
Vn Index
Financials (Excluding Real Estate)
Banking
60%
70%
80%
90%
100%
110%
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Banks’ net interest margin (NIM) contracted moderately: As
noted above, banks’ growth in deposits outpaced loan growth;
consequently, they had to allocate more capital to G-bonds and CB-
Bills, which offered lower yields. Besides, banks cut their lending
rates at a higher pace than deposit rates in an attempt to stimulate
credit growth. As such, the combination of these factors dragged
down listed banks’ NIM slightly to 2.94% on average in 9M14 in
comparison to 3.0% in 2013.
Profitability of the banking industry remains weak: Banking
sector’ ROE and ROA touched 5.49% and 0.51% respectively in
3Q14 in comparison to 5.56% and 0.50% in 2013 and 3.97% and
0.48% in 2012. The modest reduction in banks’ 3Q14 profitability
might stem from partial implementation of Circular 02, thus
augmenting banks’ provision expenses following higher
nonperforming loan (NPL) ratio recognition. For instance, we
calculated that listed banks’ 9M14 pre-provision operating profit
(PPOP) decreased 0.3% YoY, but their profit before tax (PBT)
retreated at higher pace of 6.2% YoY.
Banking industry’s asset quality improves, but remains under
pressure: We estimated listed banks’ provision charges ticked up
~4% YoY in 9M14, and their provision coverage ratio expanded to
78.2% in Sep 2014 against 67.3% at the end of 2013. Besides,
banks geared up their impaired asset selling to the Vietnam Asset
Management Company (VAMC).
The VAMC Chairman addressed that VAMC bought more than VND
135 tn worth of bad debts at price of VND 107 tn, and issued
approximately VND 98 tn worth of VAMC special bonds by the end
of 2014. Consequently, reported NPL ratio of the banking sector
decelerated to ~ 3.9% in Oct 2014 from the high of 4.2% in Jun
2014.
2015 Expectation
Possible changes in fundamentals
Credit growth will likely accelerate in 2015: The country’s
economic growth trended higher on the back of stronger
consumption and manufacturing. In particular, final consumption
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List banks’ NIM vs. lending rate
Source: Banks’ FS, & SBV
increased 6.20% YoY in 2014 compared with 5.36% YoY in 2013;
meanwhile, growth in manufacturing expanded to 7.15% YoY in
2014 against 5.35% YoY in 2013. As such, this improvement will
likely invigorate demand for capital in 2015, thus propelling credit
growth. Moreover, given record low inflation, we learnt that some
banks cut their deposit rates further; consequently, banks might also
reduce their lending rates thanks to lower funding cost, encouraging
household and enterprises’ borrowing.
On the other hand, the SBV provided assistance to the banking
sector as the Circular 36, which is set to come into effect in Feb 1st,
2015, supports (i) higher medium and long-term loans, and (ii)
increased capital for securities and real estate sectors thanks to
lower risk ratio for loans to these two sectors (from 250% to 150%).
Indeed, we predict that credit growth will increase further with most
focus centering on (i) consumer lending, (ii) loans to infrastructure
sector, and (iii) loans to encouraged sectors.
Banks’ NIM might decrease further, but the magnitude will be
modest: Banks’ NIM might continue to be constrained in 2015 as
we believe that banks’ lending rate will likely decelerate further on
the back of lower funding cost. Additionally, we understand that
competition among banks have intensified as they attempt to expand
their loan books and market share. As such, contraction of lending
rates is essential for them to attract creditworthy borrowers in order
to increase their market share, but not threaten their asset quality.
Moreover, yields on G-bonds already stand at low levels, and
available room for further decrease will be limited in 2015 following
increased bond supply, thus scaling down banks’ profit from G-bond
investment.
The VAMC might provide more assistance to banking system’s
clean-up process: The VAMC purchased more than VND 95 tn
worth of illiquid assets in 2014, thus surpassing its 2014 target of
VND 70 tn worth of bad debts. In 2015, this company targeted to buy
around VND 70 – 100 tn worth of bad debts, which is equivalent to
approximately 1.5 – 2.2% of projected outstanding loans. In fact, the
VAMC will probably accomplish its target given that Circular 02 will
be fully implemented in 2015, thus sending banks’ reported NPL
ratio toward its actual figure and encouraging banks to sell their bad
0%
5%
10%
15%
20%
25%
2%
3%
4%
5%
6%
7%
Average NIM of listed banks (LHS)
Lending rate (RHS)
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debts.
Issues and risks
Earnings of banks might decline further on full implementation
of Circular 02: We expect that expansion of loan book will offset
moderate decrease in banks’ NIM; accordingly, growth in banks’
interest income might remain in positive territory in 2015.
Additionally, their non-interest income is expected to maintain
resilient growth rate thanks to better credit growth. The combination
of these earning streams leads to our belief that banks’ PPOP will
trend higher; however, the growth in PPOP might not be enough to
offset the acceleration of provision charge, threatening earnings
outlook of banking system. For instance, we anticipate that provision
charge of listed banks will increase 10 – 20% YoY on average in
2015, but the picture might be worse for unlisted banks, which
understated their NPL ratio. At the end of 2015, total bad debts that
VAMC will purchase is estimated at VND 235 trillion. With the strong
participation of VAMC, we believe that reported NPLs of the banking
system can decrease to 3% by 2015 year-end. However, banks still
need to book provision expense for bad debts that they sell to
VAMC. Under existing regulations, banking system will have to book
around VND 37.6 trillion worth of provision expense a year which
accounts for nearly half of the banking system’s PPoP.
As of 30 Sep 2014, listed banks wrote off only around 0.2% of total
outstanding shares on average (except for MBB 1.25% and BID
0.82%). Therefore, besides selling bad debts to VAMC, in order to
reduce reported NPL ratio to 3% by 2015 year-end, we believe that
banks still have to use a significant amount of their PPoP to book
provision expense including writing off bad debts in 2015.
Dilution risk is imminent: It is apparent that Vietnam’s banking
system is not well capitalized, especially for State-owned
Commercial Banks (SOCBs). According to the SBV’s latest data, the
capital adequacy ratio (CAR) of the whole system approached
13.22% in Oct 2014; meanwhile, this figure for SOCBs stood at only
9.89%, which is near the threshold of 9%. As such, they will need to
raise more capital in the coming time if they want to increase loan
book as well as partially satisfy Basel II requirements. On the other
hand, shareholders of banks also have to lower their stake in banks
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in order to meet cross-holding limit stipulated by the Circular 36.
Our Investment stance: Underweight
Taking into consideration the above mentioned factors, we anticipate
that Vietnam’s banking sector will continue to face challenging in
2015 in order to completely resolve its obstacles. Even though
liquidity at banks strengthened, worries on their profitability and
asset quality still linger, thus constraining our enthusiasm in the
outlook of this industry. In fact, the current valuation of banks seems
to be fair as their P/B kept hovering around 1.1x at end-2014. On the
other hand, there are some technical oriented catalysts might
increase the weight of banking sector. For instance, foreign
investors put more emphasis on banking stocks after sharp
divestments from oil & gas shares, thus invigorating banking stocks
further. Besides, Vietinbank (CTG: HOSE) will list its State’s shares,
and increase its weight in the VN-Index to 5.5% from 2% and
several large listed banks will increase their charter capital in order
to acquire other banks in 1H15
Stocks that we expect to outperform in 2015
ACB: The outlook of ACB became brighter, and we gained more
confidence in the bank as:
The bank’s pace of clean-up process was faster than
anticipated with exposure to Group 6 companies declining to
around VND 5.5tn by the end of Sep 14.
The bank has a leading position in retail banking, strong risk
management, and high efficiency.
On the other hand, uncertainty about the future of relationship
between ACB and its valuable strategic partner, namely StanChart,
will likely affect the prospect of ACB. Indeed, we recommend HOLD
ACB with 1Y target price of VND 15,600/share, 1.3% upside from
market price of VND 15,400/share on 31 Dec 2014.
MBB: We favor MBB given the following reasons:
More precise picture of asset quality stems from its qualitative
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credit rating system.
The bank delivered high profitability among listed banks (2013
ROE: 16.32%) thanks to low funding cost.
The bank possesses high efficiency (i.e. profit per staff and
branch), but has reasonable valuation (2014 P/B: ~0.9x against
sector average of 1.1x).
However, limited available room for foreign investors and uncertain
capital raising plan have somewhat curbed our enthusiasm for this
stock. As such, we recommend to HOLD MBB with 1Y target price of
VND 14,046/share, 7.2% upside from market price of VND
13,100/share on 31 Dec 2014.
VCB: We favor VCB among other banking stocks given the following
reasons:
Diversified sources of income. Its non-interest income accounted
for 30.5% of total operating profit in 2013, much higher than the
average figure of 21% among the top 12 banks. More
importantly, 34% and 30% of its non-interest income is recurring
and stable fees from offering banking services such as
payments and foreign currency trading;
One of the most efficient bank in terms of cost-to-income ratio,
profit/number of staffs/branches and ROA;
Conservative in classifying bad debts and aggressive provision
booking policy of VCB in the past has prompted us to believe
that VCB will be the first bank to turn-around. In the last three
years, VCB has commonly used 22-23% of its operating profit
before operating expense and provision expense to book
provision expense. The Bank also used 1.3% on average of its
outstanding loans to write-off bad debts from 2011 to 2013. This
suggests that the Bank has restituted for the past actions. Along
with aggressive provision booking policy, its internal qualitative
credit rating system paints a more accurate picture of its asset
quality than other commercial joint stock banks. We believe that
the difference between VCB’s current NPL ratio and NPL ratio
under full application of Circular No.2 will be of the smallest gap.
Its provision coverage ratio at present is quite high, at 106% in
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3Q14. Therefore, provision expense required for additional
booking will be minimal.
However, because of these advantages mentioned above along with
VCB’s heavyweight in the VNIndex and ETFs’ indexes, VCB has
always been trading at a premium compared with the market and the
banking sector. At the market price of VND 31,900/share on 31 Dec
2014, VCB was trading at current PB of 2.0x, compared with the
industry average of around 1.1x.
Stock pick (31/12/2014)
Stock
Price (VND)
Market cap (mil USD)
PER PBR EV/EBITDA Dividend yield EPS (VND) EPS Growth Sales growth Net profit growth
2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E
VCB 31,900 4,048 23.2x 21.8x 1.94x 1.86x N.a N.a 3.1% 3.8% 1,376 1,460 0 % 6.1% N.a N.a 4.9% 4.9%
MBB 13,100 723 6.3x 7.9x 0.94x 0.97x N.a N.a 7.6% 7.6% 2,089 1,656 -2.6% -20.7% N.a N.a 2.1% 6.0%
ACB 15,400 667 15.6x 13.3x 1.10x 1.08x N.a N.a 5.2% 5.2% 985 1,162 13% 18% N.a N.a 15% 18%
Source: SSI Research
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INSURANCE: UNDERWEIGHT (Last year call: Neutral)
Key call: BVH
Tran Huong Ly, +84 4 3936 6321 ext. 545, [email protected]
Insurance industry performance in 2014
Source: Bloomberg
Source: Bloomberg
What transpired in 2014?
Industry performance
Strongly underperformed the VN Index: The insurance sector
gained 3.8%, compared with 8.15% of the VN Index.
The best performer was VNR (+40%) despite the low growth in
9M14. We think this can be traced to (1) Price of VNR has a sharp
increase of 32.2% in 1Q14 thanks to the positive 2013 released
earnings results and (2) positive reaction to investment increasing of
BVH in VNR (from 9.08% to 9.18%) and maintained long-term
investment of SCIC at VNR, and (3) positive reaction to 30% bonus
stocks and 10% cash dividend.
The worst performer was BVH (-12%) against the positive net
income growth of 14.7% YoY in 9M14. The main reason is negative
reaction to the key personnel changes of BVH. On 23rd
April 14,
three former senior officials at BVH were prosecuted for
"irresponsible actions resulting in serious consequences”, and on
24th Dec 14, BVH announced sudden BOD member changes, of
which, four key positions of BOD (chairman, deputy chairman, CIO
and CFO) were changed.
Key highlight on sector/key companies
Improved growth in direct premium: According to Insurance
Supervisory Authority (Ministry of Finance), in 2014, the insurance
sector direct premium is estimated to reach VND 52,680 bn (+14.2%
YoY, compared to 14% YoY in 2013 and 12.8% YoY in 2012),
thanks to (1) more active economy, (2) strong growth of life
insurance sector, especial the investment insurance product in the
context of low deposit rate, and (3) further development of
80%
90%
100%
110%
120%
130%
140%
Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14
Vn Index Financials Insurance
0%
20%
40%
60%
80%
100%
120%
140%
160%
Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14
BVH
BVH Vn Index
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Source: Bloomberg
Source: Association of VN Insurers of the MoF
bancassurance channel.
Non – Life segment: Higher premium growth than 2013
Premium Growth: In 9M14, premium growth rate of Non-life segment
(+10.8% YoY, higher than the growth of 7% YoY in 2013, but lower
than growth of 10.5% YoY in 2012 and 17.5% YoY in 2011) was
mainly driven by Motor Vehicle insurance with the largest proportion
in terms of premium (+10.8% YoY, ~27.4% of total premium),
followed by Health and Personal insurance (+18.4% YoY, ~20.6%),
since insurance companies focused on the retail segment (because
although the economy became healthier, demand of enterprises for
insurance products still decreased) as well as enhancing customer
services.
Market positions: PVI reached No. 1 position, followed by Bao Viet
Non-Life, BMI, PJICO and PTI.
Claim loss ratio & gross insurance profit: The total direct claim loss
ratio in 9M14 was 38% (a slight decrease compared to 41% in
9M13), partially thanks to efforts of insurance companies in risk
control right from the application level. However, this ratio still
remained high compared to the ratio of 37.3% in 9M12 due to
sudden insured events of great losses in value such as accidents in
Dong Nai, Binh Duong and Ha Tinh provinces, of which, 27/29 non –
life insurance companies participated in the compensation with an
estimated damage of VND 2,500 bn (accounting for ~24% of total
direct non-life insurance claims in 2014) (according to ISA of the
MoF). PVI was the hardest hit because it had the largest market
share in terms of P&C Insurance premium (55% market share in
6M14), and as a result, caused negative gross insurance profit
growth in 9M14 (-67% YoY) much lower than its peers (PTI: -19%
YoY, BVH Non-life: -13% YoY, BIC: -4% YoY and PGI: +8% YoY)
Life Segment: Negative profit despite strong premium growth
In 9M14, market premium growth rate of the life segment was
+25.79% YoY (compared to 20.6% YoY in 9M13 and 13.4% YoY in
9M12) thanks to the fact that life insurance products seemed to be
more attractive to customers (specially the Investment - Insurance
product) in the context of lower deposit interest rate. (3M deposit
0%
20%
40%
60%
80%
100%
120%
140%
160%
Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14
VNR
VNR Vn Index
23%
21%
10% 7% 6%
33%
Non-Life Insurance Premium Market Share in 9M14
PVI
BVH
BMI
PJICO
PTI
Others
32%
29%
12%
9%
9% 10%
Life Insurance Premium Market Share in 9M14
Prudential
BVH
Manulife
Dai-ichi
AIA
Others
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interest rate decreased to 5.8% in 2014 from 6.8% in 2013)
In terms of new business premium, BVH exceeded Prudential
(24.16%) with proportion of 25.1% after many years, thanks to
(1) BVH life insurance contract fee remained at a low level
(compared to its competitors such as Prudential and Dai-ichi
Life)
(2) BVH’s efforts in increasing the number of insurance agents to
gain market share. In 6M14, BVH ranked No.2 position (after
Prudential) in terms of number of agents with 42,360 agents
(+28% YoY, while the agent number of Prudential decreased
11% YoY).
Despite of this premium growth, BVH’s profit from life insurance
operation was negative VND 694 bn mainly due to an increase in
mathematical reserves (+80% YoY) (partially due to lower technical
interest rate used in calculation reserves).
Supportive Policies: Resolution No. 63/NQ-CP on change to tax
calculation method encouraged enterprises to purchase pension
insurance for employees (in which, the maximum deductible welfare
expenses used in calculating CIT increased to VND 3
mn/person/month from current VND 1 mn/person/month). This
resolution was issued at 26th June, 2014, taking effect from 15
th Aug,
2014).
Reinsurance: Rising competition
VNR’s reinsurance inward premium growth of 5.8% YoY (VND 1,175
bn) in 9M14 was much lower than the total market direct premium
growth of 17.8% YoY. We think this can be traced to (1) Rising
competition from PVI Re (established in 2011, and in 2014, PVI Re’s
estimated reinsurance inward premium of VND 1,646 bn, +23%
YoY), and (2) Many insurance companies tried to find foreign
strategic shareholders and partners, therefore they did not only cede
in the domestic market but also in the foreign market. In 6M14, there
were 27/29 non-life ins companies participated in overseas
reinsurance ceding, with the overseas reinsurance premium
accounted for 23% of total direct insurance premium (+8% YoY).
Recently, BVH has signed cooperation agreement with Dhipaya
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Insurance company (Thailand) and ENC Plus Insurance Brokers
Co., Ltd (Korea-based) for insurance services both in Vietnam,
Thailand & Korea.
2015 Expectation
Possible change in fundamentals
Positive growth in total premium: We believe that premium
growth will maintain at 15% level in 2015 (higher than the growth of
14.2% in 2014) thanks to:
GDP 2015 is expected to reach 6.5% (SSI estimate) or 6.2%
(the government’s target) compared to 5.9% in 2014. Which
underpins the premium growth of motor vehicle insurance
(accounted for 27.4% of 9M14 total insurance premium),
Property & Casualty Ins (22.4%), Health Ins (20.6%) and Cargo
Ins (9.1%)
Bancassurance distribution will play a more important role in
supporting premium growth since the insurance companies
could take advantage of potential customer lists and good
reputation of banks.
Slight increase expected in Motor and Vehicle fee level: In late
2014, insurance companies agreed to submit new rules, terms and
fee schedule of motor vehicle insurance to the MoF to be approved
because of continuous losses in this segment. This fee schedule is
expected to be approved in 2015 and will help non-life insurance
premium increase slightly.
Issues and risks
Issues and risks: Premium and earnings growth of listed insurance
companies would decrease slightly due to:
Rapid competition from foreign insurance companies. Relating to
insurance services in FTA EU – Vietnam, EU requested Vietnam
to facilitate EU insurance companies to provide insurance
services across borders; insurance companies invested by EU to
provide health insurance services; and insurance companies
based in EU to sell inland transport insurance contracts across
Date: 13.02.2015 Institutional Research & Investment Advisory
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borders. In 2014, BIDV Metlife Insurance company was
established (joint venture between BIDV and Metlife - one of the
largest life insurance companies in the world, with charter capital
of VND 1,000 bn, ranked 6th among 17 life insurance
companies). These foreign invested companies will intensely
compete for market share, resulting in decrease in premium
growth of listed insurance companies.
Further claims from Dong Nai, Binh Duong and Ha Tinh
provinces accidents (damaged value is estimated at VND 2,500
bn (according to ISA of the MoF), of which, only VND 268 bn
was insured in 2014.
Lower interest rate context would adversely affect earnings since
financial profit plays a significant role in insurance companies’
earnings results. According to estimates of MoF, government bond
accounted for 50% life insurance companies investment portfolio
and bank deposit accounted for 70% of non-life insurance
companies investment portfolio. Therefore, non-life insurance sector
would be affected by lower deposit interest rate more than life
insurance sector.
Our Investment stance: Underweight
Earnings outlook
Despite the positive premium growth estimated in 2015, we think
that insurance sector earning results would be significantly affected
by intensely rising competition, further claim loss from Dong Nai,
Binh Duong and Ha Tinh provinces accidents, as long as lower
interest rate context.
On 31 Dec 14, current valuation of listed insurance companies
(average PE of 15.4x) is higher than overall market (PE of 12.3x),
therefore, we hold underweight view on the whole sector on 2015.
Favorite Stock:
BVH: We like this stock because
(1) Solid fundamentals with large market share (2nd
in both life
Date: 13.02.2015 Institutional Research & Investment Advisory
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and non – life insurance). In non-life segment, proportions of
revenue from retail is equivalent to revenue from wholesale,
this would underpin stable growth in the next few years.
(2) High reputation compared to other insurance companies
(very important factor as consumers’ awareness and trust in
insurance products remains low).
(3) In 2015, BVH continues to improve non-life insurance
sector, via (1) completing data base software system as
they did with life insurance sector for better risk control &
management and (2) promoting retail segment by utilizing
potential client list of life-insurance agents which have good
relationship with individual customer. Furthermore, BVH is
planning 7% stake private placement to foreign investor,
which could increase BVH’s retained premium.
However, valuation of BVH is very demanding and is quite high
compared to the whole market. On 31 Dec 2014, BVH is being
traded at current PE of 17.4x, higher than market PE of 12.3x
Therefore, investors should consider buying on price weakness.
BVH (31/12/2014)
Stock
Price (VND)
Market cap (mil USD)
PER PBR EV/EBITDA Dividend yield EPS (VND) EPS Growth Sales growth Net profit growth
2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E
BVH 32,200 1018.7 17.4, na 1.8 na 1.4 6.2 4.7% na 1,839 Na 9.9% na 14.5% na 9.5% na
Source: SSI Research
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HEALTHCARE
PHAMARCEUTICALS: OVERWEIGHT (Last year call: Overweight)
Key call: DHG
Thu Le, +84 8 3824 2897 ext. 2137, [email protected]
Healthcare sector performance in 2014
Source: Bloomberg
What transpired in 2014?
Industry performance (benchmark with VN Index)
Outperformed the VN Index: The healthcare sector gained
12.19% in 2014 compared to 8.15% of the VN Index. DHG, which
represents more than 50% of the sector weight, advanced 14.03%
while the performances of smaller tickers were dispersed. Other
outperformed stocks included IMP (+72.73%), DMC (+23.80%) and
DCL (114.75%) while underperformers included SPM (+1.44%),
TRA (-14.13%), JVC (+6.82%), OPC (-4.84%) and PMC (+2.74%).
The best performing stock was IMP while the worst performer was
TRA.
Key highlight on sector/key companies
Despite no significant amendments to Circular 01, most
pharmaceutical companies posted positive net income growth
in 9M14.
(VND bn) DHG TRA DMC IMP OPC SPM PMC JVC DCL
Net sale 2,601 1,134 1,102 591 479 399 265 618 510
YoY 9% -11% 10% -3% 17% 26% 3% 78% 4%
Net income 414 118 95 63 47 42 46 107 34
YoY -8% -14% 27% 5% -2% 45% 16% 349% 13%
12M Trailing P/E
15.1 11.8 8.7 17.2 13.6 12.2 6.6 8.3 12.5
Source: Company data
DHG: Core business remained sound. For FY 2014, net sales
increased 11% YoY to VND 3,913 bn and net profit declined 10.6%
YoY to VND 530 bn. Negative earnings growth in 2014 was due to
i) a one-off allocation of VND 36 bn to R&D fund in 2013, and ii) a
one-off income of VND 127 bn from transferring Eugica brand in
80%
85%
90%
95%
100%
105%
110%
115%
120%
125%
130%
Vn Index Health Care
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2013. Ignoring these events, net income advanced 5.6% YoY in
2014.
IMP: For FY 2014, net sales increased 6.6% YoY to VND 897 bn
and net income increased 41% YoY to VND 85 bn. It is worth noting
that in 2013, marketing expense exceeded 10% of total expense
and IMP’s PBT used for tax calculation was adjusted by an
additional VND 45 bn. Ignoring this one-off event, net income
increased 19% YoY in 2014. In addition to encouraging earnings
result, IMP stock performance (+72.73%) was influenced by news
of share issuance plan which comprised of a bonus share (1 bonus
share for every 2 existing shares), an ESOP and an issuance to a
strategic partner.
TRA: 2014 marked a significant transformation in TRA’s selling
policy in which it aims to sell directly to more retail stores, hence,
eliminating middlemen and stabilizes retail prices for end users.
The new policy costs TRA some of its wholesales clients but the
company acquired more retail clients in return. However, because
orders from wholesales clients are more significant than that from
retail clients, TRA’s sales and net income declined 11% YoY and
13% YoY respectively in 9M14. TRA also expects its sales force to
advance by 20% YoY as the total number of clients increased from
10,000 at the beginning of 2014 to more than 18,000 at the end of
2014.
Source: Business Monitor International (BMI)
2015 Expectation
Possible change in fundamentals
According to BMI, Vietnam pharmaceutical industry will remain
robust in the next few years thanks to i) low level of per capita
drug expenditure: The Ministry of Health (MoH) revealed that on
average each Vietnamese spent USD 31 on medicine in 2014
compared to Thai (USD 60), Chinese (USD 100) and Korean (USD
300), ii) increasing health awareness, and iii) growing access to
pharmaceuticals. BMI forecasts that the industry will expand with a
CAGR of 15% during the period 2015-2018. For 2015, in particular
sales will increase 16% compared to 2014.
Marketing and promotion expense is no longer limited to 15%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
-
20,000
40,000
60,000
80,000
100,000
120,000
140,000
160,000
Pharmaceutical sales (VND bn)
YoY growth (%)
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of total expense starting 01 January 2015. The removal of this
ceiling will most likely benefit pharmaceutical companies in 2 ways:
i) improved OTC sales: Most major companies now seek growth in
the OTC channel amid gloomy ETC sales as a result of Circular 01,
and ii) increase domestic companies’ competitiveness against
foreign players: Domestic companies will have more room to
promote their brands and boost consumers’ awareness.
Key developments in notable companies:
DHG: The beta-lactam factory with a designed capacity of 1 billion
units per year will likely commence operation in 1Q15. 2015 marks
the beginning of the tax subsidy period for the new factory which
will last for 15 years and will save DHG approx. VND 1,000 bn in
tax expense in total. Earnings growth will be supported by
significantly lower corporate income tax rate.
IMP: Phano Pharmacy, IMP’s new strategic partner, is believed to
help the company grow its distribution network and OTC sales.
Phano Pharmacy has retail stores in major cities (Ho Chi Minh city,
Can Tho, Da Nang, etc.) and plans to expand its retail space in
2015. Although no detailed plan is announced, we believe IMP will
benefit from this collaboration. Stock price will likely to rally on news
of extended foreign ownership room.
Issues and risks
Non-diverse and low-value products: According to the MoH,
domestic companies produce 12,000 types of medicine from 520
active ingredients while foreign companies produce 11,000 types of
medicine from 1,000 active ingredients. In addition, local players
lack specialized and high value drugs. As a result, only 13% of
medicines used in central hospitals are domestically produced.
Reliance on imported raw materials: According to BMI, 90% of
pharmaceutical raw materials are imported.
Our Investment stance: Overweight
Earnings outlook (positive/negative with comparison with last
year etc.) & sector valuation
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We hold an Overweight position for the sector based on its long-
term positive outlook and earnings upside of major stocks.
For DHG, we believe growing production capacity will support net
sales which are estimated at VND 4,647 bn in 2015 (19% YoY).
Assuming a 14% CIT rate, our forecast for 2015 net income is VND
746 bn (33% YoY), equivalent to an EPS of VND 8,490 and 2015
PER of 11.3x. Our target price for DHG is VND 121,000/share.
Stocks that we expect to outperform in 2015
DHG (31/12/2014)
Stock
Price (VND)
Market cap (mil USD)
PER PBR EV/EBITDA Dividend yield EPS (VND) EPS Growth Sales growth Net profit growth
2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E
DHG 96,000 398.42 15.0 11.3 3.7 3.2 9.2 7.8 2.6% 3.1% 6,390 8,490 -5.4% 32.9% 10.5% 19.2% -5.4% 32.9%
Source: SSI Research
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INDUSTRIALS
PORTS: NEUTRAL (Last year call: Neutral)
Key call: VSC
Huong Vu, +84 4 3936 6321 ext. 624, [email protected]
Port industry performance in 2014
Source: Bloomberg
What transpired in 2014?
Industry performance
The port industry gained 17.9% in comparison with 8.15% of the VN
Index. Although most failed to approximate to their performances in
2013, stocks such as DVP (18.11%), VSC (15.22%) did enjoyed
upbeat performances
Key highlight on sector/key companies
VSC and DVP achieved encouraging sales compared to end-2013.
In 11M14, DVP achieved VND 532bn in sales, equaling to 102% of
2013’s result. For VSC, ending 9M14, the Company fulfilled around
80% of the year end target, representing a 12% YoY growth.
Coupled with positive business performances, high cash and stock
dividend payments helped boost stock performances during the
year.
In 2014, the through put volume of all Vietnam’s marine ports
reached 370.3 mil tons (14% YoY), of which container volume
achieved 10.24 mil TEUs (20.1% YoY). According to Vietnam
Maritime Administration (VMA), the through put volume of Ports
Group 1 (including Hai Phong Port) achieved 120,3 mil tons (13%
YoY) and covered 33% of total goods transported nationwide.
In particular, during 11M14, through put volume in the Hai Phong
area reached 55.52 mil tons, a 16% YoY growth. In terms of
container volume, Hai Phong Port area received 3.36 mil tons
(20.3% YoY). For 2015, Hai Phong targets through-put volume to
reach 65 mil tons.
Ports in Cai Mep-Thi Vai area (Group 5) recorded positive
70%
80%
90%
100%
110%
120%
130%
140%
150%
Vn Index Industrials Port
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development with 59.3 mil tons in 2014, a 20% YoY growth.
Containers through put also recorded positive growth rate of 27%
with 1.15 mil tons.
However, Ha Tinh Port area saw the biggest growth in 2014 with
4.09 mil tons, 33% YoY growth. This can be explained by the
behemoth FDI port-steel Formosa project.
According to the plan of Vietnam Marinetime Association, expected
through put volume up to the year of 2015 is 410 mil tons, 2014 has
already achieved 90% of the pathway with 370.3 mil tons. As the
target for through put volume in 2015 is 410 mil tons, 2014’s result
achieved 90% of the plan. For 2015, VMA targets a 10% yearly
growth with 407 mil tons and 11.5 mil TEU for container, a 13% YoY
growth.
VSC (15.22%): New Green VIP Port will help stay afloat
2014 saw a substantial change to VSC with the acquisition of a new
port. The JV with VIP, in which VSC holds 65%, is said to be a
critical growth catalyst for VSC in the near future. In the context of
fierce competition and dormant growth from current capacity, port
expansion is critical for VSC.
Ending 9M14, VSC’s revenue and net profit reached VND 647bn
(12% YoY) and VND 162bn (0.5% YoY) respectively, achieving 84%
and 86% of the yearly plan respectively.
DVP (18.11%): Geographical advantage
With the exisiting advantage of geographical location as well as port
infrastructure, DVP is on track to achieve its yearly target of VND
500bn in revenue and VND 195bn in net profit. However, DVP is not
immune to the competition among ports in Dinh Vu area, DVP had to
lower its handling freight fee given the introduction of the new Nam
Hai Dinh Vu Port of GMD. Because Lach Huyen deep water port is
not expected to come into operation until the near future, DVP would
be able to maintain its relative advantage for a certain number of
years to come.
Ending 9M14, DVP’s revenue and net profit reached VND 402bn
(7% YoY) and VND 172bn (12% YoY) respectively, achieving 80%
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and 88% of yearly target.
2015 Expectation
Possible change in fundamentals
In theory, plummeting oil price would encourage more seaborne
trading, therefore, port services companies will benefit from more
ships docking. As a result, ports companies' top line is expected to
benefit from the situation.
In order to maintain growth, ports either need to upgrade logistics
capacity, to exploit the current limited capacity and eventually
increase capacity or, acquire and build new ports. We believe the
future belongs to those who are capable of expanding.
Issues and risk
Although seaborne trading may see better result in the coming year,
the economy has yet to blossom. Together with that, fierce
competition between ports to attract shipping clients is expected to
persist. Oversupply is a matter that remains unsolved to ports
industry. Ports situated good locations with advanced logistic
equipment have a better chance to stay competitively fit.
Our Investment stance: Neutral
Earnings outlook
Taking into consideration all the factors, we expect that the industry
will not see any significant changes in 2015. Fierce competition
among ports will persist. However, because listed port companies
are all operating at maximum capacity, we expect to see meager
growth in 2015.
Stocks that we expect to outperform in 2015: VSC
VSC: Short term pain for long term gain
VSC mostly operates in the Hai Phong area with past intention to
expand to different regions of Da Nang and Ho Chi Minh City.
However, we believe VSC made the right decision to channel of its
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efforts into the new port in Dinh Vu-Hai Phong area. The new port,
named VIP Green Port is a JV between VSC and VIP in which VSC
holds 65% and is expected to be the key contributor of the port
opeartion. The construction is divided into 2 phases in which the first
phase is expected to be completed by end 2015. Once the first
phase is completed, VSC will double its current capacity of 350k
TEU.
However, until the new port commences operation, the Company
would undergo a period of capital expenditure with meager financial
income, no immediate revenue growth, increasing debt interest, and
contracting cash dividend. 2015 is expected to be a preparation year
for VSC’s sustainable growth
We expect 2015’s revenue and net profit to reach VND 953bn (7%
YoY) and VND 275bn (11% YoY) respectively, translating into EPS
of VND 7,964. VSC is trading at 6.8x PER, which is quite attractive
for a fundamentally sound company with foreseable significant
growth.
VSC (31/12/2014)
Stock
Price (VND)
Market cap (mil USD)
PER PBR EV/EBITDA Dividend yield EPS (VND) EPS Growth Sales growth Net profit growth
2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E
VSC 50,000 82.32 7.0, 6.3 1.6 1.2 3.6 3.3 4% 0% 7,182 7,964 -13.9% 10.8% 11.8% 11.2% 4.0% 11.0%
Source: SSI Research
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SHIPPING: OVERWEIGHT (Last year call: Neutral)
Key call: VOS, PVT
Huong Vu, +84 4 3936 6321 ext. 624, [email protected]
Shipping industry performance in 2014
Source: Bloomberg
Source: Bloomberg
What transpired in 2014?
Industry performance
The shipping sub sector gained 16.7% in comparison with. 8.15% of
the VN Index. Although the sub sector failed to match 2013’s
performance of 99%, VOS and VIP did enjoyed encouraging
performances of 44% and 56%, respectively.
Key highlight on sector/key companies
2014 was a year which saw great volatility for the Baltic Dry Index
(BDI). The BDI concluded the year down 60% YTD. Although the
BDI had surged in March and October, it dramatically dropped in
November which coincided with declining oil price. Slumping BDI in
the few last months of the year is normal due to dormant demand
during the long holiday’s season. 2014 was distinctive as declining
oil price drove down freight rates as a way to share difficulties
between shipping companies and their clients. However, because
BDI comprises of different types of ship sizes and is heavily affected
by the highest weight size, which is Capesize, BDI did not truly
reflect the situation in Vietnam which mainly comprises of small
ships. In terms of BDI for handisize and Supramax, there was little
improvement during the year. Both sub-indices remained shallow
during the year amidst little improvement in August and September.
Because most of the dry bulk fleets in Vietnam comprise of
Handisize and Supramax, little improvement in the sub-indices
implied meager changes in freight rates. As a consequence, dry
bulk shipping companies such as VOS experienced minimal rates
growth and sales growth during the year.
On the other hand, liquid shipping companies continued to benefit
from their customers that are also their parent companies with
guaranteed rates and demand such as VIP, VTO with Petrolimex,
70%
80%
90%
100%
110%
120%
130%
140%
150%
Vn Index Industrials Shipping
0
20
40
60
80
100
120
0
500
1000
1500
2000
2500
Ja
n-1
4
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14
Apr-
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May-1
4
Ju
n-1
4
Ju
l-14
Aug
-14
Sep
-14
Oct-
14
No
v-1
4
De
c-1
4
Ja
n-1
5
2014 BDI vs. WTI
BDIY Index (R2) CL1 Comdty (R1)
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PVT with Petro Vietnam. During 2014, total carriage volume by
Vietnam shipping companies reached 98.5 mn tons, a slight
increase of 0.13% vs.2013. Vietnam shipping companies only cover
10-12% of Vietnam total import and export carriage.
Although domestic marine shipping is covered 100% by local
shipping companies, marine shipping only covers 19% of cargo
shipping volume of all transportation types. In terms of international
shipping activities, Vietnamese shipping liners only played a minor
role in Vietnam import-export cargo shipping. In 2014, nationwide,
local shipping liners held only 10-12% market share, according to
VMA.
VIP (56%):
VIP enjoyed an eventful year that resulted in a 56% gain of the stock
price. In November, VIP announced its sales of VIPCO Dinh Vu
container port to VSC and the establishment of VIPCO Green Port, a
JV between VIP and VSC. VIP received VND 350bn from VSC but
contributed VND 135bn to VIP Green Port (actual receipt of VND
215bn). VIP currently holds 30% of the JV. Moreover, in December,
VIP announced its 25% cash dividend which significantly propelled
VIP’s stock performance. Closing the year, VIP’ share price
enhanced 56% vs. the beginning of the year.
Ending 9M14, VIP’s revenue and net profit reached VND 528bn (-
14% YoY) and VND 29.6bn (-78% YoY) respectively.
VOS (44%):
VOS is a possible turn around stock. Ending 9M14, VOS’s revenue
and net profit reached VND 1,575bn (-2.4% YoY) and VND -22.1bn
(-86.8% yoY). However, with the sales of Diamond Star in
December, it is expected that VOS would enjoy a noticeable growth
in its bottom line in 2014. The Diamond Star was announced to be
priced at USD 5.46mn and was fully depreciated. After two years of
losses (2012: VND -34.690bn and 2013: VND -193.751bn), a
positive net profit in 2014 would help VOS to maintain listing on the
Ho Chi Minh City Stock Exchange. VOS’s stock price advanced 44%
on the expectation that it would remain listed.
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2015 Expectation
Possible change in fundamentals
The recent oil price slump has reduced fuel cost for shipping
companies. As fuel accounts for around 50% of cost of goods sold,
fuel plays an important role in contributing to gross margin of
shipping companies. Nevertheless, declining oil price affects
shipping companies differently. For dry bulk shipper with
international voyages, declining oil price would obviously result in
lower cost of goods sold. Companies with time charter shipping
fleets, oil price effect would be reduced as the freight rate would be
somehow fixed regardless of rapid movement of freight rate and fuel
price changes.
Apart from favorable fuel price, it is safe to assume that declining oil
price may also lead to increasing demand for shipping. More
seaborne trading activities would help enhance top line of shipping
companies.
Issues and risks
Liquid shipping companies may have to share difficulties with their
customers, who are also their parent companies during this tough
time for oil and gas companies. Although they are in time charter
contracts, it is believed that freight rates would be adjusted to
partially reflect low crude oil price.
Low BDI and single digit growth rate of China indicates the global
economy has yet to fully recuperate. Therefore, seaborne trading is
not expected to experience extraordinary growth next year.
Our Investment stance: Neutral
Earnings outlook
Taking into consideration all the factors, we expect that shipping
companies will have better business performance in 2015. The main
contributor to margin expansion and revenue growth is low oil price.
Although each company would benefit differently, the consensus is
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that industry players will all benefit.
Stocks that we expect to outperform in 2015: VOS and PVT
VOS:
As a dry bulk shipping company, VOS is benefiting from low oil price
via favorable bunker price. Although bunker price is expected to
have a less steeper decline that crude oil, given that bunker oil
makes up 50% of cost of goods sold, VOS expects to see more cost
saving for 2015. Additionally, in case freight rates do not decline
significantly, VOS may enjoy margin expansion.
In addition to favorable bunker rates, VOS expects to restructure its
debt situation in 2015. This will greatly mitigate existing burden on
VOS’ income statement during 2014-2016. We also expect that VOS
would sell one or two dry bulk ships during 2015. The ships are said
to be fully depreciated.
We expect 2015 revenue and net profit would reach VND 1,993bn (-
4.2% YoY_ and VND 24,394bn (110% YoY), translating to an EPS
of VND 154 and BVPS of VND 8,965. VOS is trading at 0.7FPBR in
2015, which is attractive given its turn around characteristic.
PVT:
Low oil price has caused weak price performances of PVN-related
companies including GAS, PVD, PVS, PGD, PGS, PVT and PET. As
a service provider company rather than a trading company with
direct business linked to oil price, PVT’s core business is somewhat
sheltered from low oil price. However, it should be noted that the
largest transportation expense is oil, therefore, low oil price will
benefit PVT as oil price reduces, partially counterbalancing the
decline of freight rate.
For the FSO/FPSO segment, we expect that declining oil price will
not play a significant role as their contracts are 10Y long and already
signed. In addition, new FSO commencing operation in April 2015
will be a new long term driver for growth. The new FSO is expected
to contribute an additional USD 10mn revenue/year, increasing the
segment’s revenue by 30% in 2015 and 15% onwards.
Also, we expect that coal transportation will help PVT”s revenue to
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increase.
With all the positive news surrounding fuel cost and core business,
we forecast PVT’s revenue and net profit will reach VND 6,333bn
(17.4% YoY) and VND 364bn (6.1% YoY) respectively, resulting in
an EPS of VND 1,093 (6.2% yoy) in 2015.
VOS, PVT (31/12/2014)
Stock
Price (VND)
Market cap (mil USD)
PER PBR EV/EBITDA Dividend yield EPS (VND) EPS Growth Sales growth Net profit growth
2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E
VOS 6,200 41.33 98.9 42.7 0.77 0.75 6.95 7.81 0% 0% 68 154 -104.8% 127.6% -6.0% -4.2% -106.1% 109.9%
PVT 14,000 170.57 14.6 13.7 1.24 1.23 5.3 4.7 6.7% 6.7% 1,029 1,093 1.6% 6.2% 8.5% 17.4% 11.8% 6.2%
Source: SSI Research
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PLASTICS PIPE: OVERWEIGHT (Last year call: Neutral)
Key call: BMP
Kien Nguyen, +84 4 936 6321 ext510, [email protected]
Industry performance in 2014
Source: Bloomberg
What transpired in 2014?
Slightly outperformed the VN Index: The sector gained 11.17% in
comparison with 8.3% of the VN Index even though constituents
including BMP and NTP exhibited minimal improvement in earnings
performance.
Despite output increasing by 13-15% YoY in 2014, gross profit
margin of the sector declined as key players increased sales to
projects at lower prices. In addition, BMP and NTP both increased
their selling/sales ratio by 1-2% to increase their competitiveness,
leading to a decline in profit for NTP and slight profit growth for BMP
in 2014.
PVC price increased slightly by 1.2% YoY in 9M14 and as a result,
hindered gross profit margin of the sector.
2015 Expectation
Benefit from low resin price:
Since Nov 2014, following declining oil price, PVC resin price
declined significantly by 20% from USD 1,000/ton to only USD
800/ton. Resin price in 4Q14 declined by 8.6% compared to 9M14.
As oil price is expected to remain low in 2015, we expect that
average resin price in 2015 will be 10% lower than that in 2014, and
this will theoretically increase the gross profit margins of NTP and
BMP by approximately 5% as both companies must lower the selling
prices accordingly.
Increasing discount will lower PBT margin: In the past BMP and
NTP both had relative monopoly in the South and the North where
they both controlled market prices and benefited from resin price
decline. As the competition landscape has changed in which private
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Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14
Vn Index
Industrials
Pipe plastic
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PVC HDPE
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companies have increased their presence and competed directly
with the two behemoths, BMP and NTP must increase their
discounts to agents and to project managers to retain and gain
additional market share. We expect they will increase their selling
expense/sales ratio by 1% in 2015.
Issues and risks
Price war remains an inherent risk: Because producers have
increased discount to agents, it is very difficult for BMP and NTP to
lower their discount when resin price recovers. In addition, both
companies tend to increase their discount to retain their market
shares.
Our Investment stance: Overweight
We expect that output will advance by 5-7% YoY in 2015 thanks to
increasing demand for construction activities and water system.
However, revenue growth will be neutralized by lower prices.
Although selling discount might continue to increase, we cannot
deny that plastic pipe’s PBT margin must increase as the resin price
has declined significantly. We expect that profit before tax of the two
companies in the sector will increase more than 15% YoY in 2015.
We favor BMP thanks to its good corporate governance, high margin
and better cost control. We expect revenue and PBT of BMP might
increase by 3.8% and 18% YoY in 2015 to VND 2,473bn and VND
600.5bn, resulting in EPS of 10,300. BMP is trading at 2015 PER of
7.3x, which is very attractive.
BMP (31/12/2014)
Stock
Price (VND)
Market cap (mil USD)
PER PBR EV/EBITDA Dividend yield EPS (VND) EPS Growth Sales growth Net profit growth
2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E
BMP 73,000 154 8.4 7.1 2.1 1.7 4.7 4 4.10% 4.10% 8728 10298 7% 18% 14.10% 3.80% 7% 18%
Source: SSI Research
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CONSTRUCTION: OVERWEIGHT (Last year call: Overweight)
Key call: FCN
Kien Nguyen, +84 4 936 6321 ext. 510, [email protected]
Industry performance in 2014
Source: Bloomberg
What transpired in 2014?
Outperformed the VN Index: The construction sector gained
29.85% in comparison with 8.15% of the VN Index. The sector’s
upbeat performance was mostly attributed to turnaround stocks that
were exposed to the infrastructure industry including HUT and LCG.
Construction companies’ performances failed to approximate that of
infrastructure companies but still managed to outperform the VN
Index. Project delay and provision booking are main risks facing the
sector.
While VCG and CTD experienced strong earnings growth in 2014,
FCN and HBC experienced modest earnings growth and even
decline due to project’s delay and high provision for bad debt.
In 2014, total construction value reached VND 6,76 trillion,
increasing by approximately 7.6%, highest since 2011, mostly in
residential construction.
2015 Expectation
The construction industry is expected to flourish at a higher rate than
in 2014 thanks to improvement in the property segment, especially
in the low income housing segment.
Increasing industrial construction: Industrial construction is expected
to flourish at a faster pace than residential construction thanks to
continuous FDI investment and aggressive investment in industrial
projects including thermal power plants, and oil refineries. Gross
profit margin for industrial projects is usually twice as much as
residential ones.
Issues and Risks:
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Vn Index
Industrials
Construction
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Delay and bad debt provision are two inherent risks of the sector.
Failure to deliver project on time might eat up thin profit margin.
Our Investment stance: Overweight
Because earnings are contingent on provision, we conservatively
assume that most construction companies will not experience high
earnings growth in 2015 except for FCN, as large projects including
Long Son Refinery, Vinh Tan 4 Thermal Power Plant, and the Metro
line will be implemented in 2015. CII is another favored stock as it
provides wide range of products from BOT toll collection and
property development, construction and water services. All of CII’s
services are profitable and stable.
FCN’s revenue and PBT are expected to grow by 22.3% and 30.5%
YoY in 2015, resulting in EPS of 3,293. FCN is trading at 2015 PER
of 6.2x, which is quite low.
CII’s revenue and net profit to parent are expect to grow by 33% and
24% YoY in 2015, resulting in diluted EPS of 2,246/share (after 70%
CB converted). CII is trading at PER of 8.4x, which is quite low.
FCN (31/12/2014)
Stock
Price (VND)
Market cap (mil USD)
PER PBR EV/EBITDA Dividend yield EPS (VND) EPS Growth Sales growth Net profit growth
2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E
FCN 20,700 44 7.39 6.28 1.29 1.14 4.47 3.35 7.2% 7.2% 2,801 3,297 25.2% 30.5% 16.6% 22.3% 25.2% 30.5%
Source: SSI Research
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INFORMATION TECHNOLOGY
IT: OVERWEIGHT (Last year call: Overweight)
Key call: FPT
Kien Nguyen, +84 4 3936 6321 ext. 510, [email protected]
IT industry performance in 2014
Source: Bloomberg
What transpired in 2014?
Industry performance
Outperformed the VN Index: Two of the biggest IT stocks
including FPT and CMG both performed exceptionally in 2014.
Although FPT, the biggest constituent in the sector experienced
meager earnings growth in 2014, the sector is likely to enjoy rerating
as a defensive sector.
FPT advanced substantially when it signaled high cash and stock
dividend payments before AGM and actual payments in mid-2014.
Key highlights on the sector:
According to GFK, Vietnam’s mobile market increased by 18% in
volume and 35% in value in 2014, resulted from switch from featured
phones to smart phones. Phone Distribution and retail companies
are benefiting from the booming of the market. Total internet
subscribers increased by 15%. On the other hand, IT hardware and
notebook import decline by 7% and 12% respectively.
FPT is expected to grow by 16% in sales and 5% in net profit, mainly
thanks to growth of software outsourcing, Retail and Distribution
segments.
2015 Expectation
Integration System: Increasing demand for software solutions
rather than hardware will reduce the size of IS projects.
Additionally, margin of the segment is expected to decline due to
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Vn Index
Information Technology
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competition from small IT companies with no VAT or CIT.
Retail and distribution: Vietnam’s mobile market is expected to
enjoy double digits growth in terms of sales in 2015. Because of
the revenue of large IT companies still derive from this segment,
revenue of IT companies are expected to grow at more than
10% YoY in 2015.
Telecom: The telecom landscape will become increasingly
competitive after Viettel Telecom and Mobifone, which will
separate from VNPT, boost investments in fiber optics and
recapture market shares from FPT Telecom. Although revenue
will continue to advance thanks to increasing subscribers, profit
might remain flat due to heavy investments in fiber optics.
Software outsourcing: Vietnam continues to become a
China+1 for software outsourcing market. The segment holds
great potential in the long term thanks to low labor cost and
highly skilled workers. The sector is expected to experience 30%
YoY sales growth in 2015.
Issues and risks
Low ICT spending: Low ICT spending by banks and governmental
related agencies.
High competition in the mobile retailing and distribution
businesses: Mobile World Group is the largest retail player, whose
number of shops is double that of FRT. In 2015, the third largest
mobile distributor, Digiworld is expected to be listed. PSD and
Digiworld are gaining market share from FTG.
JPY depreciation: Software outsourcing’s revenue is partially
affected by JPY’s weakness.
Global risk: As IT companies increase their exposure to
international projects, they are subjected to risks relating to the
countries they implement their projects.
Our Investment stance: OW
Although ICT spending will not increase, mobile market growth and
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software export and outsourcing will continue to help ICT companies
maintain their 10-15% profit growth. We maintain a positive view on
the leading company in the sector, which is FPT
Stocks that we expect to outperform in 2015: FPT
In 2015, we expect that FPT”s revenue and PBT might reach VND
37,326bn (+ 14.6%YoY) and VND 2,779bn (+ 9.2% YoY) thanks to
strong growth of FRT. Net profit to the parent company and EPS are
expected to reach VND 1,913bn (+ 12.5% YoY) and VND 5,533.
At the year-end price of VND 48,000/share, FPT is trading at 2014
and 2015 PER of 9.7x and 8.6x, which is quite low. We recommend
BUY FPT at 1Ytarget price of VND 58,600/share (22.6% upside).
FPT (31/12/2014)
Stock
Price
(VND)
Market cap
(mil USD)
PER PBR EV/EBITDA Dividend yield EPS (VND) EPS Growth Sales growth Net profit growth
2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E
FPT 48000 772 9.8 8.7 1.6 1.4 5.3 4.7 4.20% 4.20% 4921 5535 5.80% 12.50% 16% 14.60% 5.80% 12.50%
Source: SSI Research
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MATERIALS
STEEL AND CEMENT: OVERWEIGHT (Last year call: Neutral)
Key call: HSG, BCC
Minh Dinh, +84 8 3824 2897 ext. 2148, [email protected]
Kien Tran Nguyen, +84 4 3936 6321 ext. 679, [email protected]
Steel industry performance in 2014
Source: Bloomberg
What transpired in 2014?
Steel industry performance
The steel industry gained 44.25% in comparison with 8.15% of the
VN Index and 21% of the material sector. The outperformance was
driven by HPG (+52.42%) and HSG (+20.14%).
HPG (+52.42%): Impressive earnings growth
Thanks to Phase 2 of the Integrated Steel Complex, for the first
time in history, HPG’s construction steel sales volume reached 1
mil tons, a 43% YoY increase. With such sales volume, HPG’s
construction steel market share advanced to 19% in 2014 from
15.2% in 2013.
In 2014, Mandarin Garden Apartment Project contributed over
VND 3,100 bn in revenue and VND 670 bn in net profit.
Earnings results exceeded all expectations: Thanks to high steel
sales volume and Mandarin Garden Project, 9M14 revenue and
net profit reached VND 18,944 bn, a 51.9% YoY increase, and VND
2,755 bn, a 81.2% YoY increase.
HSG (+20.14%): Overcoming a difficult period when HRC price
declined
In 4Q13, net profit declined to VND 46 bn, a 42.5% YoY and
75.2% QoQ decrease, because the company purchased HRC
when price was peak. Nevertheless, earnings recovered in four
subsequent quarters with average quarterly net profit reaching
60%
80%
100%
120%
140%
160%
180%
200%
Vn Index Materials Steel
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VND 103 bn.
The two new cold-rolling lines, each has a production capacity of
200,000 tpa, commenced operation in June and Aug 2014,
enhanced profit margin because HSG no longer had to purchase
CRC from external suppliers.
Cement industry performance in 2014
Source: Bloomberg
Cement industry performance
The cement industry gained 83.88%, compared with 8.15% of the
VN Index and 21% of the material sector. The outperformance was
driven by HT1 (+228.3%) and BCC (+166.67%).
HT1’s 9M14 revenue reached VND 4,905 bn, a 6.6% YoY
increase. 9M14 net profit reached VND 91 bn, compared with a
loss of VND 70 bn in 9M13. HT1 gained VND 170 bn from FX,
and interest expense declined from VND 605 bn in 9M13 to VND
403 bn in 9M14.
BCC’s 9M14 revenue and pretax profit reached approx. VND
3,118bn (+16% YoY), and VND 66bn (+81% YoY) respectively.
Increase in revenue was mainly driven by an increase in sales
volume of approx. 15% YoY. Additionally, in 9M14, BCC gained
approx. VND 55bn from FX, and interest expense declined
approx. 16% YoY due to low interest rates.
Source: VSA
Key highlights on the steel industry
Steel demand exhibited clear signal of improvement
For the first time since 2010, construction steel sales volume
attained encouraging growth. In 2011 and 2012, sales volume
decline by 1.6% and 6.7% YoY, then slightly increase by 2.1% in
2013. In 2014, it is estimated that construction steel sales volume
advanced by 12% YoY, reaching 5.12 mil tons.
Steel sheet and pipe sales volume maintained high growth in 2014,
with estimated growth rates of 21% and 44% YoY respectively,
contributed by both domestic sales and exports.
Overcapacity remained in the industry
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Vn Index Materials Cement
4,7
96
967
633
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650
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0
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5,000
6,000
Constructionsteel
Steel sheet Steel pipe
Steel sales volume of total industry (1,000 tons)
2011 2012 2013 2014E
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At present, production capacity of Vietnam steel industry reached
8.5 mil tons for construction steel, 3.3 mil tons for coated steel
sheet, and 2.1 mil tons for steel pipe. Consequently, utilization rate
only reached 60% for construction steel, 58% for coated steel sheet,
and 52% for steel pipe.
Overcapacity has dampened profit margins of steel makers.
Therefore, few companies can benefit from the growth in steel
demand. Of the 9 listed steel companies, 7/9 companies saw sales
growth in 9M14, but only 5/9 companies attained profit growth. Only
HPG and HSG has gross profit margin of over 10%, and only HPG,
HSG and TLH has net profit margin of over 2%.
That is to say there is a large divergence among steel companies.
Only companies which are competitive in production cost and have
high market share can be attractive enough for investment.
9M14 business results of listed steel companies
(VND bn) DNY DTL HPG HSG NKG POM TLH VGS VIS
Net sales 1,435.8 1,398.5 18,943.6 11,691.9 4,378.4 8,089.0 2,590.2 1,927.9 2,684.2
YoY growth -17.7% -4.4% 51.9% 29.0% 38.2% 5.0% 19.1% 8.9% 11.5%
Gross profit 76.9 127.2 4,152.2 1,340.2 236.1 326.5 158.4 80.3 178.0
Margin 5.4% 9.1% 21.9% 11.5% 5.4% 4.0% 6.1% 4.2% 6.6%
Net profit 4.8 15.3 2,670.6 307.6 58.8 -20.2 63.6 19.9 15.8
YoY growth -57.5% 46.8% 82.3% -32.5% 39.4% n.a. -55.0% 188.2% n.a.
Margin 0.3% 1.1% 14.1% 2.6% 1.3% -0.2% 2.5% 1.0% 0.6%
Source: Financial statements of steel companies
Steel sheet makers confronted with counterfeit products
Low-quality coated steel sheets have become omnipresent in the
market. Retailers purchase low-quality steel sheets, perhaps from
China, and print well-known brands on the sheets. In addition, they
defraud customers by declaring that the sheets have a higher
thickness. In 10M14, domestic steel sheet sales volume only
advanced by 11.4% YoY, compared with 28.3% YoY in 10M13.
In Nov 2014, leading steel sheet makers initiated several reports on
the media in an attempt to combat against counterfeit products. We
expect that consumers will become more aware of fraudulent and
will not purchase from untrustworthy retailers. In addition, the State
authorities will supervise the steel sheet market more strictly and
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penalize frauds.
Key highlights on the cement industry
The industry’s production capacity is estimated at 81.6mn tons by
the end of 2014, up from 73.5mn tons in 2013, 62.6mn tons in 2010,
and 39.5mn tons in 2008. In 2014, total produced volume is
estimated at approx. 55mn tons of cement (+14% YoY and 67% of
designed capacity).
However, growth in domestic demand has yet to parallel that of
supply. Domestic cement consumption is estimated at 50.6mn tons
in 2014 (+10% YoY). Export is only a temporary solution to combat
oversupply as profit from exporting is negligible. In 2014, the
industry is estimated to export approx. 6.8mn tons of cement and
12.9mn tons of clinker.
2015 Expectation
Possible changes in fundamentals
Higher GDP growth target in 2015
2014 GDP growth reached an encouraging 5.98%, compared with
5.42% in 2013 and 5.25% in 2012. Of which, growth of the
construction industry reached 7.07% in 2014, compared with 5.83%
in 2013 and 2.09% in 2012.
The National Assembly targets 2015 GDP growth at 6.2%, which is
a positive indicator for the construction material industry. Higher
economic growth target implies a higher total social investment
capital and construction investment value which will boost demand
for cement. Given 2015’s GDP target of 6.2%, total construction
investment value is forecast to achieve a growth of 6.8% YoY, and
growth in domestic demand for steel and cement is expected at 11%
and 10.9% in 2015.
Higher housing demand in the near term will be supported by
favorable conditions in Vietnam, including (1) expected low interest
and inflation rates, (2) increasing income per capita, and (3) urban
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population rate of 33%, and is expected to grow at 2.3% p.a.
Tightening cement supply
Given the oversupply situation in the cement industry, the Ministry of
Construction (MoC) has conducted two significant adjustments to
the cement industry’s master plan. According to Decision 1488/QĐ-
TTg in 2011 which stipulates production capacity expansion of
Vietnam’s cement industry, total production capacity was planned to
reach 90.5mn and 94.3mn tons of cement by the end of 2014 and
2015 respectively. Nevertheless, two major adjustments have been
made to the plan.
In April 2013, MoC decided to eliminate 9 projects with designed
capacity of under 0.6mn tons of cement pa, and rescheduled 7
projects to start operation after 2015.
In Sep 2014, MoC eliminated an additional 5 projects from the
master plan.
By implementing these adjustments, no additional cement plants will
commence operation in 2015 and 2016. New production capacity by
the end of 2015 is planned at 82.6mn tons of cement, equivalent to
a reduction of 11.7mn tons. Judging by the action, this can be seen
as a supporting factor for the cement industry in the next few years.
Weak coal price may enhance profit margin of cement
producers
Coal, the main fuel in clinker production which accounts for approx.
50% of total clinker production cost, is under pressure from
oversupply. In 2014, average selling price of coal remained weak
due to oversupply in the domestic and global coal industry. Global
coal prices steadily declined in 2014 in response to supply increase
and weak demand in China – the biggest consumer of coal. Weak
coal prices are forecasted to persist in the next 3 years.
Issues and risks
Overcapacity and fierce competition in the steel industry
As we mentioned above, overcapacity in the steel industry is rather
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severe. In addition, there are threats from Formosa steel project,
Chinese steel, and in the longer term, Russia Steel.
The behemoth Formosa project in Ha Tinh province: The 1st
phase, which will commence operation in mid-2015, is invested
with USD 7.9 bn and will produce 7.5 mil tons of steel per annum.
In the 2nd
phase, an extra USD 20.1 bn will be invested to raise
production capacity to 22.5 mil tons p.a. Formosa’s major product
will be hot-rolled coil, which is not manufactured in Vietnam at
present. Nevertheless, whether Formosa will also manufacture
long steel and compete with local companies like HPG remains a
mystery.
Import of Chinese steel to Vietnam is increasing as importers
declare construction steel as alloyed steel to be granted with zero
import tax instead of 12-15%. It is estimated that Chinese steel
represents approximately 10% market share and there has been
no effective measure to prevent the trade frauds.
Russian steel: Because of the Free Trade Agreement with the
Customs Union of Russia – Belarus – Kazakhstan (VCUFTA),
which will take effect early this year, import duty on most steel
products from Russia will be reduced from the current 12-15% to
zero in a few year. However, when the import duty will be
reduced is still under negotiation because the Vietnam Steel
Association has appealed that the exemption of import duty steel
from Russia should be delayed.
Source: Bloomberg
Steel price is declining
Since the beginning of 2014, global iron ore price has declined from
approximately USD 135/ton to USD 70/ton. During the first three
quarters of 2014, domestic steel selling price did not decline
significantly. Nevertheless, steel price started to decline in
December 2014. There was an approximate 5% decline in
December 2014 and 3% in January 2015. In such circumstance,
profit of companies with low inventory turnover will be affected. For
HPG specifically, advantage of low production cost thanks to the
blast furnace technology and low domestic iron ore price will
diminish.
0
100
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300
400
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600
700
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900
Steel material price (USD/ton)
Hot rolled coil Steel scrapIron ore
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Coal price recovery
A recovery in coal price is regarded as the major risks for cement
producers. Cement producers profitability would be negatively
affected in cases of increases in coal prices. In others words, the
issue is highly corrosive to cement producers’ earnings.
Nevertheless, we see a low probability of a recovery in coal price to
materialize in the next 3 years given the increases in supply of coal
in China and Australia, and slow economic recovery in the Euro
zone forecasted by the IMF.
Our Investment stance: Overweight
We believe that increasing demand will be the critical factor in
driving earnings growth of construction material. In addition, cement
companies will benefit from decline in financial expense and gain
from FX.
Stocks that we expect to outperform in 2015
HSG
The largest steel sheet maker in Vietnam with 35.5% market
share, the 2nd
largest steel pipe maker with 18.6% market share.
The most profitable steel sheet maker.
The two new cold-rolling lines, each has a production capacity of
200,000 tpa, commenced operation in June and Aug 2014, will
enhance profit margins because HSG no longer has to purchase
CRC from external suppliers.
The company is constructing new plants in Nghe An and Binh
Dinh Province, which will ensure sales growth in coming years.
Investment risks: Current high inventory can impact profit
margin in the short-term; large CAPEX (an average of roughly
VND 1,200 bn each year in 2015-2017) will increase debt and
interest expense.
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BCC
Brighter outlook supported by (1) increasing demand for cement,
(2) debt and interest expense reduction, (3) FX loss allocation
completion, and (4) stable coal prices.
Given optimistic signs of demand for cement in the industry, and
production capacity of BCC, BCC’s sales volume is expected to
grow 8.5% and 8% in 2015 and 2016 respectively. While the
industry’s supply YoY is tightened, domestic demand for cement
is expected to improve which will support average selling prices
of cement.
From 7 Oct 2014, average selling prices of PCB30 at BCC’s
factories have increased 4% compared with the price in 9M14.
BCC is undergoing deleveraging. By the end of 1H14, long term
debt totaled approx. VND 2,521bn (including VND 620bn due
within 1 year) in which BCC’s EUR debt reached approx. EUR
64.6mn (~ VND 1,865bn). According to the repayment schedule
of EUR debt, BCC’s EUR debt will reduce to approx. EUR 55.6mn
by the end of 2014 (including EUR 18mn due within 1 year), and
will be fully repaid by Mar 2018. BCC’s debt to equity ratio
currently stands at 2.57x and is forecasted to decline to 1.8x and
1.16x by the end of 2015 and 2016 respectively.
In 2015, BCC’s revenue and pretax profit are forecasted at VND
4,570 bn (+6.5%YoY), and VND 332 bn (+137% YoY)
respectively, translating to an EPS of VND 2,707. The forecasts
are based on the assumptions that (1) cement sales volume will
increase 8.5%, and clinker sales volume will decline 46%, (2) 1%
increase in ASP, and (3) 14% decline in interest expense.
Valuation: At the price of VND 14,900/share, the stock is being
traded at 2014PE of 13x, 2015PE of 5.5x; and 2014EV/EBITDA
of 6.3x, 2015EV/EBITDA of 5.6x. BCC’s stock 1-year target price
is derived from an average of DCF, EV/EBITDA multiple, and PE
multiple at VND 22,600/share, an upside of 52% compared with
the current price.
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BCC (31/12/2014)
Stock Price
(VND) Market cap
(mil USD)
PER PBR EV/EBITDA Dividend yield EPS (VND) EPS Growth Sales growth Net profit growth
2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E
BCC 14,900 67 13.06 5.51 1.16 0.96 6.3 5.6 0% 0% 1,141 2,702 -605% 137% 16% 6% 293% 137%
HSG 47,500 213.8 10.3 8.7 1.8 1.7 9.2 7.5 2.3% 3.2% 4,260 5,498 -28.3% 29.1% 27.4% 7.2% -29.8% 29.1%
Source: SSI Research
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FERTILIZER: NEUTRAL (Last year call: Underweight)
Key call: DPM
Kien Tran Nguyen, +84 4 3936 6321 ext. 679, [email protected]
Fertilizer industry performance in 2014
Source: Bloomberg
Source: Bloomberg
What transpired in 2014?
Industry performance
Strongly underperformed the VN Index: The fertilizer industry lost
14%, compared with 8.2% of the VN Index. Best-performing stock
was LAS (+ 3.7%) and DPM (- 16.6%) was the worst performing
stock.
Key highlight on sector/key companies
In 2014, total demand for fertilizer is estimated at approx. 10.8mn
tons compared with approx. 10.4mn tons in 2013. Demand for NPK
fertilizer is estimated at 3.9mn tons in 2014 which is typically met by
local producers. In 2014, NPK imported volume declined by 70%
YoY, reaching 247,000 tons. In addition, smuggled NPK imported
into Vietnam had accelerated real total supply in the industry, and
asserted pressure on average selling prices.
Urea: Oversupply persists in both international and domestic
markets, exerting downward pressure on urea price: During
2013-2017 it is estimated by the International Fertilizer Association
that the world’s total urea capacity will increase by a net of 43 million
tons, to 236.3 million tons in 2017, implying a CAGR of 4.5%.
Meanwhile, demand for urea is forecasted at 195 million tons in
2017, representing a CAGR of only 3.2%. Therefore, over the next
several years, oversupply is expected to gradually increase with a
potential surplus of ~6%, thus, exerting additional downward
pressure on global urea price. In the local market, prior to 2012 and
starting from 2013, with the full operation of two new plants (Ca Mau
Fertilizer Plant- PVN and Ninh Binh Fertilizer plant – Vinachem)
total urea supply doubled. The situation shifted from under supply to
a meager over supply since then. Oversupply will intensify starting
from 2015 when Ha Bac Fertilizer Company (Vinachem) completes
60%
80%
100%
120%
140%
160%
Vn Index Materials Fertilizers
200
250
300
350
400
450
Urea price (USD/ton)
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its expansion.
According to information in recent investors bulletin of DPM, 2014
revenue and PBT are expected to reach VND 9975 bn (down 4.2%
YoY) and VND 1390 (down 43.7% YoY). Urea selling volume could
reach 840k tons (vs. 826k tons in 2013) while trading volume totaled
380k tons (vs 360k tons in 2013). On average, selling price reduced
13-14% in 2014. In our estimate, we suppose that the final profit
number could be slightly higher.
In 2014, LAS would record negative earnings growth. The additional
transportation tariff would be an unexpected burden for LAS this
year. We maintain our estimates for 2014 net income of VND 303 bn
(-32.2% YoY), translating to 2014 EPS of VND 3,896, reflective of
additional transportation tariff, the increase in sulfur price since
4Q13 and the decrease in average selling price (ASP).
2015 Expectation
Possible change in fundamentals
Recently, the Ministry of Finance issued Regulation 17709/BTC-
TCT, which categorizes fertilizer products under non-VAT bearing
goods. Under the new regulation, fertilizer producers could no longer
claim VAT return from input materials for their production.
Accordingly, Cost of goods sold of fertilizer companies will increase
in 2015. In the meantime, as the regulation will be applied to all
fertilizer producers, fertilizer producers might collaborate to increase
selling price in order to safeguard profit.
Oversupply and smuggled fertilizer continue to hinder in the
industry. In 2015, total demand for fertilizer is forecasted at approx.
11mn tons, in which demand for NPK fertilizer is estimated at 4mn
tons which is relatively balanced by local producers. However,
smuggled NPK remains the most significant threat facing the
industry.
Phosphate fertilizer also faces oversupply given the production
capacity of the segment of 2.4mn tons while total demand for
phosphate fertilizer (superphosphate and FMC) is expected at
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1.85mn tons in 2015.
While oversupply of urea will hinder growth and declining oil price
will exert pressure on urea price, we see positive catalysts that can
stimulate growth for DPM in 2015:
Input gas price would be lower thanks to oil price downturn
Urea import tax increased from 3% to 6%, which might help to
reduce China urea consumption.
Issues and risks
Smuggled fertilizer and increases in input prices (sulfur and SA)
remain the dominant risks for LAS in 2015.
A strong recovery in crude oil price, pushing up input gas price
Our Investment stance: Neutral
LAS: For 2015, it would be difficult for LAS to garner positive
earnings growth as the market is saturated and the regulation on
capacity and weight of container trucks would be a factor for the
entire year (instead of three quarters in 2014). Our estimates
revealed that 2015 net income would total VND 297 bn (-2% YoY),
translating to 2015 EPS of VND 3,821
Investment view: At the current price of VND 35,000/share, LAS is
being traded at 2014 and 2015 PE of 8.9x and 9.2x. Negative
earnings growth in 2014 has tainted the stock appeal for the time
being. We assume that 2014 dividend would be at least VND
2,000/share, translating to a dividend yield of at least 5.7%/year at
current price.. Our 1 year target price for LAS is VND 33,500/share
(based on DCF model and relative valuation), implying a HOLD
recommendation.
DPM:
2015 estimates & investment view: We believe that the new
regulation on VAT will partially hinder earnings upside derived from
lower input gas price. Accordingly, in our base case in which oil
price remains at USD 60/barrel, net profit of DPM is estimated to
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reach VND 1,371 bn in 2015, increasing 9.9% YoY (vs. 19.9% YoY
in our previous forecast). At yesterday market price of VND
30,600/share, DPM is being traded at 2015PER of 8.7x, which is a
slight discount to its fair value. Dividend yield of ~9% pa. is always
an added bonus for DPM. Our revised 1-yr TGP for DPM comes to
VND 33,500/share. We reiterate our HOLD recommendation.
We provide below 2015 earnings outlook of DPM at different oil price
scenarios:
Oil price (USD/barrel) 80 60 40
2015 EPS growth -36.70% 9.90% 38.50%
LAS, DPM (31/12/2014)
Stock Price
(VND) Market cap
(mil USD)
PER PBR EV/EBITDA Dividend yield EPS (VND) EPS Growth Sales growth Net profit growth
2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E
LAS 35,000 128 9.0 9.2 1.8 1.8 4.9 5.0 6% 9% 3,896 3,821 -32% -2% 0% 2% -32% -2%
DPM 30,800 537.4 9.6 8.7 1.3 1.3 3.5 3.1 10% 10% 3,207 3,524 -43% 10% -10% -4% -43% 10%
Source: SSI Research
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NATURAL RUBBER: UNDERWEIGHT (Last year call: Underweight)
Key call: HAG
Kien Tran Nguyen, +84 4 3936 6321 ext. 679, [email protected]
Natural rubber industry performance in 2014
Source: Bloomberg
What transpired in 2014?
Industry performance (benchmark with VNindex)
Underperformed the VN Index: The natural rubber industry
(including PHR, DPR, TRC and HRC) lost 12%, compared with a
gain of 8.2% of the VN Index. Best-performing stocks were PHR (-
7%), and DPR (- 10.8%).
Key highlight on sector/key companies
In 2014, global natural rubber production is estimated at approx.
12.3mn tons (+2% YoY) while natural rubber consumption is
estimated at approx. 11.9 mn tons (+ 4.5% YoY), adding approx.
0.4mn tons to 2.9mn tons of world ending stock by the end of 2014.
Vietnam natural rubber industry exported approx. 1.08mn tons of
rubber (+ 0.2% YoY) with a total value of USD 1.8bn (- 28% YoY).
PHR, DPR, TRC and HAG have been negatively affected by
worldwide oversupply. Natural rubber average selling prices of those
companies declined approx. 25% YoY.
2015 Expectation
Possible change in fundamentals
Oversupply persists - Production will outpace demand by 202,000
metric tons in 2015, down from 371,000 tons in 2014 and 650,000
tons in 2013. Global natural rubber production is forecasted at
approx. 12.5mn tons (+2.4% YoY) in 2015. On the other hand, world
natural rubber consumption is forecasted at approx. 12.3mn tons (+
4.2% YoY). The gap between supply and demand is then estimated
60%
80%
100%
120%
140%
160%
Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14
Vn Index Materials Natural Rubber
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at 0.2mn tons, adding up to 3.3mn tons ending stock.
Average selling prices are expected to remain weak in 2015 and
2016 given (1) increasing inventory, and (2) slow global economic
growth forecasted by the IMF in Oct 2014, especially in China, and
EU zone, which consume over 50% of the world natural rubber
production.
Our Investment stance: Underweight
Given worldwide oversupply situation, natural rubber companies’
average selling prices will be curbed. Natural rubber companies
expect ASP will decline approx. 7% YoY in 2015.
PHR, DPR, and TRC’s sales volume are expected to remain flat as
new planted areas in Cambodia of the three companies have yet to
be tapped in large scale, reaching approx. 30,000 tons, 19,000 tons,
and 13,600 tons of natural rubber. PHR, DPR, and TRC revenue are
expected at VND 1,434bn (- 7% YoY), VND 939bn (- 6% YoY), and
VND 578bn (- 5% YoY) respectively. However, pretax profit of PHR,
DPR, and TRC are expected to decline by 25%, 25%, and 26.6%
YoY, reaching VND 183bn, VND 204bn, and VND 95bn respectively
in 2015 due to margin contraction.
In 2015, HAG’s natural rubber tapping area will reach approx.
13,000ha (+ 92% YoY), yielding approx. 16,000 tons (+100% YoY).
Given the estimated ASP of VND 31mn/ton, HAG’s rubber revenue
and pretax profit are expected at VND 517bn (+ 80% YoY), and
VND 68bn (+22% YoY) respectively. Pretax profit margin is
expected to be contracted to 13% in 2015 from 19% in 2014.
In 2015, HAG’s business performance will welcome new earnings
sources including beef cattle, palm oil, Myanmar Complex, and
hydropower in Laos, which we anticipate will contribute approx.
19%, 4%, 12%, and 4% to HAG’s 2015 revenue respectively. HAG’s
2015 revenue and pretax profit (excluding one-off earnings from
selling stake in HAGL in 2014) are forecasted at approx. VND
3,715bn (+29% YoY), and VND 1,289bn (+ 15%%% YoY),
translating to an EPS of VND 1,583. If including the one-off earnings
from selling stake in HAGL in 2014, HAG’s 2015 PBT will reach
approx. VND2,579bn, increasing 36% YoY, translating to an EPS of
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VND 3,167.
HAG’s 1-year target price is derived from RNAV method at VND
27,500/share, an upside of 24%.
HAG, PHR, DPR, TRC (31/12/2014)
Stock
Price (VND)
Market cap (mil USD)
PER PBR EV/EBITDA Dividend yield EPS (VND) EPS Growth Sales growth Net profit growth
2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E
HAG 22,100 831 9.57 7.04 1.17 1.06 10.0 8.5 5% 6% 2,330 3,167 77% 36% 4% 29% 89% 36%
Source: SSI Research
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UTILITIES
ELECTRICITY: OVERWEIGHT (Last year call: Underweight)
Key call: NT2
Kien Nguyen, +84 4 936 6321 ext. 510, [email protected]
Industry performance in 2014
Source: Bloomberg
What transpired in 2014?
Industry performance
The utilities gained 30.1%, in comparison with 8.15% of the VN
Index. Key driver mainly derived from hydro power stocks including
SHP, CHP, TBC, TMP and SJD. SHP played as the best performer
with 114% advance in 2015
Key highlights on the sector
In the first 10 months of 2014, the sector consistently
underperformed the VN Index, reflecting our negative view on the
sector due to the regulation which requires Electricity of Vietnam
(EVN) to calculate selling prices based on power companies’ charter
capital at their IPO date minus accumulated depreciation. Applying
this regulation, profit of power companies declined YoY as
accumulated depreciation increased YoY. However, applying
Circular 41/2010/TT-BCTC, EVN and power companies signed long
term contracts, and therefore stabilized profit and eliminated price
decline risk. The sector outperformed the VN Index from Nov 2014
when the new pricing schedule was applied.
Hydropower continued to outperform thermal power ones as they
benefited more from higher portion of output sold to the market at
competitive prices.
2015 Expectation
Totally changed fundamental
According to Circular 41/2010/TT-BCT which provides guidelines on
60%
80%
100%
120%
140%
160%
180%
Vn Index Utilities
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power purchase agreement (PPA), Independent Power Plants (IPP)
and Electricity Vietnam (EVN) will apply the DCF method to
calculate yearly selling price, in which IPP will secure a pro-rata
profit after deducting all expenses including deprecation, labor cost,
estimated material cost, interest expense, and admin expense. In
the old annual PPA, when expenses decline, selling price will
decline accordingly. In the new DCF based PPA, prices will be fixed
for the contract’s life and when expenses decline, profit margin will
improve accordingly. The new PPA will eliminate the price decline
risk.
Increasing portion of output sold to the unregulated market
(contracted price versus market price):
According to the Roadmap VII to develop Vietnam Electricity Market
approved in 2011, by the end of 2014, Vietnam generation market
will be completely unregulated. However, up until now, only 10% of
total national output is sold at market price at the unregulated market
(the remaining is sold according to contracted price in the PPA). The
sales to unregulated market portion will increase gradually to 100%
in the next 3-5 years. Usually, hydro power and declining
depreciation thermal power companies will benefit most from the
unregulated market as they might offer competitive prices while
gaining additional profit besides pro-rata profit from PPA. VSH and
SHP are two cases where hydropower companies might offer price
which is 50%-100% higher than contracted price.
Issues and risks
FX loss risk: Most thermal power companies are exposed to foreign
currency debt, including JPY, EUR and KRW. Although USD is
strong compared to other currencies and payment schedules are
extended throughout several years, FX loss risk remains persistent.
Our Investment stance: Overweight
As power companies signed PPA, and expense (deprecation)
continues to decline, we expect most companies in the sector will
enjoy core business earnings growth in 2015.
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Stocks that we expect to outperform in 2015: NT2
NT2’s revenue and net profit are expected to advance by 5.1% and
8.4% YoY respectively in 2015 thanks to increase output, one-off
booking of 2010-2013 restorative profit. NT2 is trading at 2015 PER
of 5.2x (core PER of 6.8x) and EV/EBITDA of 6.6x which is very low
compared to the industry’s average of 10x and 7.5x, respectively.
NT2 (31/12/2014)
Stock
Price
(VND)
Market cap
(mil USD)
PER PBR EV/EBITDA Dividend yield EPS (VND) EPS Growth Sales growth Net profit growth
2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E 2014 2015E
Nt2 20,600 245.28 5.6 5.2 1.6 1.3 6.5 6.6 7.30% 7.30% 3647 3952 12250% 8% 9.20% 5.10% 12250% 8%
Source: SSI Research
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Within 12-month horizon, SSIResearch rates stocks as either BUY, HOLD or SELL determined by the stock’s expected return relative to the market required rate of return, which is 18% (*). A BUY rating is given when the security is expected to deliver absolute returns of 18% or greater. A SELL rating is given when the security is expected to deliver returns below or equal to negative 9%, while a HOLD rating implies returns between negative 9% and 18%.
Besides, SSIResearch also provides Short-term rating where stock price is expected to rise/reduce within three months because of a stock catalyst or event. Short-term rating may be different from 12-month rating.
Industry Rating: We provide the analyst’ industry rating as follows:
Overweight: The analyst expects the performance of the industry over the next 6-12 months to be attractive vs. the relevant broad market
Neutral: The analyst expects the performance of the industry over the next 6-12 months to be in line with the relevant broad market
Underweight: The analyst expects the performance of the industry over the next 6-12 months with caution vs. the relevant broad market.
*The market required rate of return is calculated based on 1-year Vietnam government bond yield and market risk premium derived from using Relative Equity Market Standard Deviations method. Our rating bands are subject to changes at the time of any significant changes in the above two constituents.
The information, statements, forecasts and projections contained herein, including any expression of opinion, are based upon sources believed to be reliable but their accuracy completeness or correctness are not guaranteed. Expressions of opinion herein were arrived at after due and careful consideration and they were based upon the best information then known to us, and in our opinion are fair and reasonable in the circumstances prevailing at the time. Expressions of opinion contained herein are subject to change without notice. This document is not, and should not be construed as, an offer or the solicitation of an offer to buy or sell any securities. SSI and other companies in the SSI and/or their officers, directors and employees may have positions and may affect transactions in securities of companies mentioned herein and may also perform or seek to perform investment banking services for these companies.
This document is for private circulation only and is not for publication in the press or elsewhere. SSI accepts no liability whatsoever for any direct or consequential loss arising from any use of this document or its content. The use of any information, statements forecasts and projections contained herein shall be at the sole discretion and risk of the user.
RATING
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Institutional Research & Investment Advisory
Phuong Hoang
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Estate 2148* [email protected]
Kien Nguyen Research Manager IT, Electricity,
Industrials 510 [email protected]
Trang Pham Senior Analyst Consumer Goods &
Services, Oil & Gas 537 [email protected]
Huong Vu Analyst Ports & Shipping 624 [email protected]
Anh Dinh Analyst Real Estate 670 [email protected]
Kien T Nguyen
Analyst Agriculture 679 [email protected]
Phat Cao Analyst Fixed Income,
banking 2154* [email protected]
Thu Le Analyst Pharmaceuticals 2173* [email protected]
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