macquarie vietnam strategy 270813

8/11/2019 Macquarie Vietnam Strategy 270813

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Macquarie Research Vietnam Strategy

27 August 2013 2

Reality may force some changesMany of the themes highlighted in last years note The moment of awful clarity remain valid,

albeit progress is slowly but steadily being made.

1) Further economic stability has been achieved, but at the expense of continued low and

below trend GDP growth.

2) As inflation has fallen dramatically, policy rates have been slashed by 800bps in the last

18 months alone. This has resulted in only a tepid return of credit growth (selective

sectors and at 5.6% for 1H13 - YTD), as banks essentially remain largely unwilling to

lend out new money. Curing the Zombie-like banking system will require liberalisation of

restrictive share ownership rules and squarely facing up to NPL realities.

3) Some big ticket FDI projects have been announced, to tackle much needed economic

value add, and more immediately, some high profile manufacturing led FDI

disbursements are clearly underway.

4) Liberalisation of foreign limits in public companies has now been proposed. But specifics

remain elusive. The PMs office has been asked to sign off on raising the limits to 60% in

non-restricted sectors and 49% in restricted sectors. One big question is what happensto the current restrictive limits imposed on commercial banks. Recapitalisation cant

efficiently take place without changes here.

Politically, policy makers still seem to be grasping with multiple govt mandated economic

deliverables, but for reasons we will highlight later on, seem unwilling or may well be justly

afraid to make hard sacrifices to achieve them. This is especially true when it comes to large

scale liquidations of real estate (and related NPLs) or focussing on loose monetary policy to

achieve growth at any cost.

The policy goals are broadly defined as follows: Real GDP growth of 6.0% (at a minimum), 7-

8% inflation, an accommodative (but not liberal) credit growth and to a lesser degree a

crawling peg exchange rate policy to help the GDP numbers along. The SBV devalued the

VND by 1.0% in July this year, ostensibly to boost exports, fx reserves and aid GDP growth.Where we would be putting our money

The VNIndex has returned 26.5% since Sept-12. Of the 105 points it gained, 73.0 of them

came from VNM (+108.6% YoY) and GAS (+69.1% YoY). On the downside, Banks have

been predictably relative laggards along with some conglomerates and real estate stocks. But

in general negative contributions were pretty minor (sub 10pts in aggregate).

Fig 1 VNIndex return chart Fig 2 VinaSecurities key stocks summary

Ticker RatingFY13EPER(x)

FY14EPER(x)

FY15EPER(x)

FY13EP/B(x)

FY13EDiv

Yield(%)

DPM O 6.8 7.6 9.0 1.6 7.2%FPT O 8.4 7.3 6.5 1.7 3.2%HAG N 29.3 16.1 9.6 0.9 0.0%HPG O 9.9 6.6 5.2 1.6 6.1%PVD O 7.1 6.3 5.9 1.4 1.5%VNM O 17.1 14.0 11.5 6.1 2.7%VNINDEX 11.5 9.9 n.a 1.6 3.1%

Note: O=Outperform; N=Neutral; U=Underperform

Source: Bloomberg, Macquarie Research, Vina Securities, August 2013 Source: Macquarie Research, August 2013; priced as of 22 August 2013

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Ho Chi Minh Stock Exchange (HoSE) (VNINDEX)

Price Close MAV10 MAV50

Source: Bloomberg

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23-08-12 24-10-12 25-12-12 25-02-13 26-04-13 27-06-13

Volbn


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27 August 2013 3

Like last year, we continue to believe the market and Vietnamese economy face strong

fundamental headwinds almost exclusively related to the weak banking and real estate

sectors. Stock picking continues to be key, but the easy choices (i.e. VNM and GAS) are no

longer the bargains they were. Significant dilution in the banking sector is a foregone

conclusion, its just a matter of time and we would still avoid the sector as a consequence.

On VNM, while its 30% higher than the PER valuation of the VN30, its still 29.5% cheaperthan regional peers Stocks we still like a lot include: FPT, HPG, PVD and DPM. All have: i)

single-digit PE ratios, ii) good growth potential and iii) in DPMs and HPGs case, solid

dividend yields that are twice as high as the broader markets.


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27 August 2013 4

Macro updateIs the jar half full or half empty?

In its recently completed 2013 Article IV consultation with Vietnam, the IMFs executive board

broadly concluded:

Vietnam regained macroeconomic stability over the past year, but the economy is

progressing at two speeds. The export sector is performing well - especially foreign-

invested enterprises - but the domestic sector, though improving, has yet to find a solid

footing because of several factors, including low productivity, structure of resource

allocation, impaired bank balance sheets and inefficiency in several state-owned

enterprises (SOEs).

Slow domestic demand, low credit & GDP growthlow inflation.

Against the above assessment, Vietnams below trend GDP growth has persisted now for

almost six quarters and semi-official public commentaries suggest that the official 6.0% GDP

growth target for 2013 is almost unreachable. Inflation has been almost unseasonably low,

averaging only 0.1% per month over 2Q13, but looks to come in around 7.2% for the year,

when seasonal factors and core pressures recur later over the second half of this year.

Fig 3 Real GDP Growth (% -YoY) Fig 4 Historical & Inflation outlook

Source: SBV, Macquarie Research, Vina Securities, August 2013 Source: GSO, Macquarie Research, Vina Securities, Aug 2013

The sluggish GDP is despite the fact that in the last 12 months, the SBVs key refinancing

rate has been cut by a further 200bps, over and above the 600bps of cuts in early 2012.

Whilst policy cuts will affect the economy with a lag, we think the loosening effects should

have been felt by now. Credit expansion is only at 5.6% (as of July) and the SBV has a 12%

target for the year. Clearly, something other than interest rates is at play in the system.

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27 August 2013 5

Fig 5 12M Changes key rates and Bond yields Fig 6 VND/USD Fx rate and 3M+ , 6M+ CDS

Source: SBV, Macquarie Research, Vina Securities, August 2013 Source: Bloomberg, Macquarie Research, Vina Securities August 2013

Anecdotally, we also see hints of slower consumer demand, particularity in the consumer

discretionary sectors and non-staple food sectors. As the table below shows, revenues in

these listed consumer stocks is sluggish, while pre-tax profitability has been slowing in

tandem as costs and SG&A expenses rise.

Most notable amongst these is FPT trading/retail, who distributes a wide range of consumer

electronics, including Apple, Nokia, Dell, Toshiba and others. Jewellery retailer PNJ is also

facing demand led issues (even as Gold prices have fallen). YoY, in consumer foodstuff

segments confectionary (KDC), coffee (VCF), and fish sauces and noodles (MSCa

subsidiary of listed MSN), YoY growth is essentially flat in real terms, coming in at low-single-

digit growth levels.

Fig 7 Consumer demand indicators from listed stocks

YoY growth HoH growthRevenue 1H11 2H11 1H12 2H12 1H13 1H12 2H12 1H13 1H12 2H12 1H13

FPT trading/retail 8,117.6 8,191.4 6,730.1 7,606.8 7,452.8 -17.1% -7.1% 10.7% -17.8% 13.0% -2.0%PET 4,695.2 5,625.5 5,206.3 4,947.5 5,461.2 10.9% -12.1% 4.9% -7.5% -5.0% 10.4%KDC 1,512.7 2,734.1 1,549.5 2,736.3 1,705.9 2.4% 0.1% 10.1% -43.3% 76.6% -37.7%MSC N/A N/A 4,061.9 6,327.5 4,270.1 N/A N/A 5.1% N/A 55.8% -32.5%MSC excl. VCF N/A N/A 3,239.8 5,090.0 3,426.8 N/A N/A 5.8% N/A 57.1% -32.7%VCF 721.8 863.7 837.0 1,277.7 843.3 16.0% 47.9% 0.7% -3.1% 52.6% -34.0%PNJ excl gold export,gold bar trading

2,234.4 2,122.8 2,208.2 1,899.7 2,116.4 -1.2% -10.5% -4.2% 4.0% -14.0% 11.4%

Pretax profit 1H11 2H11 1H12 2H12 1H13 1H12 2H12 1H13 1H12 2H12 1H13

FPT trading/retail 279.6 241.0 268.1 129.4 209.4 -4.1% -46.3% -21.9% 11.2% -51.7% 61.8%PET 234.7 172.0 151.3 154.6 154.2 -35.5% -10.1% 1.9% -12.0% 2.1% -0.2%KDC 51.9 297.3 27.2 462.7 131.3 -47.5% 55.6% 382.1% -90.8% 1598.6% -71.6%MSC N/A N/A 1,299.7 2,019.9 1,181.7 N/A N/A -9.1% N/A 55.4% -41.5%MSC excl. VCF N/A N/A 1,186.9 1,919.3 1,124.2 N/A N/A -5.3% N/A 61.7% -41.4%VCF 135.6 97.8 112.8 213.4 57.5 -16.8% 118.1% -49.0% 15.3% 89.1% -73.1%PNJ excl gold export 184.5 133.7 160.8 149.3 111.5 -12.8% 11.7% -30.7% 20.3% -7.2% -25.3%

Source: Company Data, VinaSecurities, Macquarie Research August 2013

Official retail sales data tells a similar story, with both the nominal and inflation adjusted

growth data trending downwards in recent months. Overall, the data supports the view that

domestic demand is weak, underpinned by weak credit growth and below trend GDP growth.

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VNDUSD Spot VND 3M CDS VND 6M CDS


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27 August 2013 6

Fig 8 Retail sales growth (real terms) Fig 9 Nominal retail sales & avg. real growth rates

Source: GSO, Macquarie Research, Vina Securities, August 2013 Source: GSO, Macquarie Research, Vina Securities, August 2013

Exports growing, foreign reserves, FDI & Portfolio flows are rising

Monthly non-oil exports continue to grow strongly YoY (as of July 2013) as annual growth

was 15.7%, with non-oil and total exports reaching US$10.6bn and US$11.2bn, respectively.

Export growth is strongest in the electronics and footwear categories rising at 41.2% and

26.6%, respectively. These two sectors accounted for US$1.72bn, and along with general

manufacturing (textiles and others) accounted for in excess of 85% of non-oil exports.

Registered FDI data since 2012 also lends credibility to a positive outlook for manufacturing

and FDI. Notably, in the last 18 months, virtually all approved and registered FDI has gone

into manufacturing, with real estate in fact contracting as projects have been abandoned.

Fig 10 Monthly non-oil exports (USDm) Fig 11 Recent trends in Approved FDI (US$m)

Registered Capital

Cumulative to

Dec-12Dec-12 to

dateCumltv

ShareIncrementa

l ShareManufacturing andProcessing 103,524 12,919 52.9% 104.7%Real Estate 49,724 (1,465) 21.9% -11.9%

Accomodations and food 10,606 92 4.9% 0.7%Construction 9,917 (37) 4.5% -0.3%Electricity, Gas, Water,Production & Distrib. 7,486 15 3.4% 0.1%Information andcommunications 3,938 91 1.8% 0.7%

Arts and Entertainment 3,675 (10) 1.7% -0.1%Transport and Storage 3,476 43 1.6% 0.3%

Agriculture, forestry,fisheries 3,344 (40) 1.5% -0.3%

Mining 3,177 20 1.5% 0.2%Wholesale, retail, repair 2,814 312 1.4% 2.5%Finance, banking,insurance 1,322 1 0.6% 0.0%Health and Social

Assistance 1,219 85 0.6% 0.7%Water Supply, WasteTreatment 1,234 51 0.6% 0.4%Professional Specialties,Science and Tech. 1,087 74 0.5% 0.6%

Other Services 733 8 0.3% 0.1%

Education and Training 458 191 0.3% 1.5%Administrative and SupportServices 201 (8) 0.1% -0.1%

Total 207,936 12,342 100% 100%

Source: SBV, Macquarie Research, Vina Securities, August 2013 Source: MPI, VinaSecurities, Macquarie Research August 2013

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27 August 2013 7

Summing it up

On balance, Vietnams stubbornly below trend GDP growth (4.9% - 2Q13), for the most part,

remains largely self-inflicted. In part, as Vietnam has allowed the banking systems hangover

from the 20062010 credit and real-estate boom to persist. Perhaps because of a lack of

political will or perhaps inexperience in handling its first modern NPL crisis, the country has

been somewhat slow to react. Recent stepped-up activities, however, are encouraging, and inaddition, what appears to be a recent willingness to liberalise barriers to new investment into

the stock market and restricted FDI sectors is a welcome development.

If true, and if ownership liberalisation and improved FDI is followed by a pick-up in the

substance and pace of SOE reform, then GDP growth of 6%+ for Vietnam is likely to resume

from 2015 and beyond.

Fig 12 Summary Macro forecasts

Key Indicators 2008A 2009A 2010A 2011A 2012A 2013E 2014E

Real GDP Growth 6.2% 5.3% 6.8% 5.9% 5.5% 5.4% 5.6%Inflation (YoY) 19.9% 6.5% 11.8% 18.1% 7.7% 7.2% 6.3%

Inflation (avg) 23.0% 7.0% 9.2% 18.6% 8.6% 8.3% 8.0%VND/USD rate (Interbank) 17,486 18,500 19,498 21,034 20,843 21,300 21,800Fx Reserves (USDbn) 23.9 15.2 12.7 13.5 25.4 32.3 38.5Exports (USDbn) 62.9 56.6 71.6 96.2 114.6 137.7 158.3Imports (USDbn) 80.4 68.8 84.0 105.8 114.3 142.2 163.9Import Cover (months) 3.6 2.7 1.8 1.5 2.7 2.7 2.8Trade Deficit (USDbn) -17.5 -12.2 -12.4 -9.6 0.3 -4.5 -5.6FDI Commitment (USDbn) 71.7 22.6 18.6 15.6 16.3 17.0 19.0FDI Disbursed (USDbn) 11.5 10 11.0 11 10.5 11.5 13.0Credit Expansion 30.0% 37.7% 27.7% 16.0% 7.0% 10.0% 14.0%Budget Deficit/GDP 4.6% 4.8% 6.2% 5.0% 4.8% 4.5% 4.5%Public Debt/GDP 42.9% 52.6% 56.6% 57.5% 48.8% 48.9% 50.0%

Source: IMF, GDO, Macquarie Research, Vina Securities, August 2013


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27 August 2013 8

Theme 1: Bank reform still slow, liquidityholds upNPL problem is further quantified by Circular 2

The magnitude of Vietnams NPL reality was quantified by the 1 year delay in implementationof Circular 2/2013/TT-NHNN to 1 July 2014. Circular 2 aimed to tighten risk management and

enforce more consistent and uniform standards on the treatment of debt, collateral, and

NPLs. The SBV and SOCB banks have acknowledged that Circular 2 would have brought to

light an additional VND270tn (~US$13bn) in NPLs for the system. This would have meant an

NPL ratio of approximately 16.0% based upon the SBVs latest NPLs estimate.

Against that sanguine back drop, the SBVs latest (February) estimate has NPLs at 6.0%,

down from earlier September and December 2012 estimates of 8.8% and 7.8%, respectively.

One the other hand, independent outsiders have since gradually raised their estimates, with

Fitch Ratings increasing its upper range to as high as 20% as recently as 9 July 2013. Finally,

this week, the SBV stated on its website it had recently completed a review to bad debt in the

banking system (to international standards) but declined to give further comments.

Fig 13 NPL RatiosFig 14 Real Estate and landed property as apercentage of loan collateral

Source: SBV, Macquarie Research, Vina Securities, August 2013Source: Company Data, Macquarie Research, VinaSecurities August2013

Reinforcing the NPL issue is that a substantial majority of loans in Vietnam use real-estate,

landed property and immovable assets as collateral. Just for the major listed banks, collateral

exposure ranges from just under 50% to approximately 72% of total collateral. Clearly, any

significant impairment in real estate collateral values would result in further NPLs.

The discrepancies between outsider, SBV, and bank NPL estimates highlight the ongoing

short-comings of the current accounting and reporting standards. As mentioned in prior notes,

we believe banks may be relying on several accounting strategies to mask bad debts in their

loan books, these included: buying corporate bonds issued by bad customers, issuing new

funds to repay older overdue loansi.e. ever greening; lending to customersrelated parties

to pay off bad debts.

The magnitude of Circular 2s VND270tn bite comes, in part, from its specific address of

some of these accounting strategies. Circular 2 expanded the definition of debt to include

unlisted bonds, credit cards loans, and deposits at other credit institutions. Defining unlisted

bonds as debt limits a banks ability to mask debt by replacing borrower loans with purchased

bonds issued by the same bad borrower. The circular also supplanted an earlier SBV

decision which gave banks the flexibility to maintain and not increase a debts risk grouping

despite being rescheduled more than once.

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True system NPLsremain dangerously

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27 August 2013 9

Consequently, the delay in Circular 2 affords banks continued flexibility in managing (or

exposing) their real NPL situation until at least mid-2014. But given the delay, the circulars

impact is almost impossible to measure across individual banks. Only a handful of banks

claim either compliance or near limited additional NPL exposure to Circular 2.

By example, Military Bank (MBB VN) tells investors it was fully compliant with Circular 2 in its

FY12A results, while Vietcombank (VCB VN) has stated that its incremental exposure toCircular 2 was VND6.0tn (US$283mn) of the VND270tn. For the others, we are left to glean

hints from notes in their audit reports and from media reports.

For example, from disclosures and notes from Sacombanks latest annual report, the auditor

highlighted VND9.02tn in real estate refinancing loans (approximately 9.5% of the banks total

customer loan book) that were made in apparent breach of lending rules. While the bank has

classified these loans as Group 1 (Current), Circular 2 introduces several additional criteria

for assessing the risks for such loans.

In particular, debts that violate regulations on credit extension could warrant a Group

3 (Sub-standard) classification, requiring additional specific provisioning of 20% of the

risk weighted asset.

In this case, (Fig 8.0) related parties were extended credit exceeding that allowed by stateregulations. The pledged collateral of VND8,657.0bn also is largely comprised of real estate

which is risk weighted by a factor of 50% for CAR calculation purposes under SBV guidelines.

Fig 15 STBs 2012 Audit report An Emphasis of Matter & Note 8.3 (*)

Source: STB 2012 Audit report, VinaSecurities, Macquarie Research, August 2013

Under Circular 2, for Sacombank, we estimated a Group 3 provision charge (on just this item,

and before any other Circular 2 effects) could have totalled VND960bn, or 96% of STBs 2012net profits. More importantly, it could have meant a 7.0% hit to the banks Tier 1 capital and

pushed STBs CAR to 8.9% (below the 9.0% requirement) and BVPS down 7% to

VND13,091/sh.

A significant provisioning charge may await Asia Commercial Bank (ACB) surrounding its

exposure to Vinalines, the unprofitable SOE shipbuilder which collapsed after racking up

more VND43tn (USD2.1bn) in debts, more than four times its equity. Of this total,

approximately VND854bn in loans and VND88bn in investments in Vinalines bonds are

owned by the bank. Based upon 2012 financial disclosures, ACB classified these loans to

Vinalines as Group 2Special mention, which saves the bank from reporting the debts as

NPLs under Vietnam Accounting Standards (VAS) and VAS.


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27 August 2013 10

As the Govt works to implement Vinalines restructuring plan withvarious stakeholders, ACB

will very likely have to book significant provisioning charges, as it begins reclassifying these

loans to NPL status and begins to take on for significant provisioning for the Vinalines bonds.

For just these loans, assuming a Group 5Bad loan classification with 20% recoveries, we

estimate incremental provision charges of VND683bn. This would have pushedACBs 2012

NPL ratio from 2.46% to 3.12%, above the SBVs 3% compulsory rate for NPL sales to the

VAMC.

We note ACB has indicated its interest in possibly selling up to half, or VND1.5tn (US$70mn),

of its reported NPLs to the AMC. ACB has one of the highest exposures to real estate in its

collateral portfolio. But it is classified as a Tier 1 bank on the SBVs liquidity-based ranking

framework.

In the backgroundIMF/World Bank Financial Stability AssessmentProgram was undertaken and results are pending

In 2011, the government of Vietnam agreed to undertake jointly with the SBV, IMF and the

World Bank, a Financial Stability Assessment Program (FSAP). The FSAP spurpose is to

provide a comprehensive and in-depth analysis of a countrys financial sector, through a

comprehensive analytical framework.

According to the IMF, in developing and emerging market countries, FSAPs are conducted

jointly with the World Bank and include two components: a financial stability assessment,

(undertaken by the IMF), and a financial development assessment, (undertaken by the World

Bank). Each individual countrys FSAP concludes with the preparation of a Financial System

Stability Assessment (FSSA) report. Publication of the report is not mandatory.

For Vietnam the FSSA we understand has been completed and in its recent Article 4

consultations the IMF Board of Directors encouraged Vietnam to implement the steps

recommended in the program To return the banking system to health. The FSSA report has

yet to be made public, but we understand that the Government of Vietnam is considering the

IMFs and World Banks suggestion to publish it.

Revisiting our CAR stress tests for listed banksWe updated our previously published CAR and ABVPS sensitivity analysis with FY12A

results to gauge the circulars potential implementation risk for the six listed banks. Half the

list quickly falls below the 9% regulatory CAR minimum with only a moderate 5% increase in

NPLs. Anecdotally, the above disclosures suggest STB as precariously situated and will

quickly need additional paid-in capital due to even minor adverse charges; VCB could tolerate

incremental provisions of VND18tn (3.1x its incremental NPL exposure) before even having to

go to shareholders. Outside of SOEs MBB even at a lower CAR of 11.1% may well be the

best of the bunch given claims of very prudent and Circular 2 compliant provisioning.

Fig 16 Stress testing listed banks CARs

Source: Company Data, VinaSecurities, Macquarie Research, August 2013

Banks Items Reported +3% NPLs +5% NPLs +7% NPLs +9% NPLs +11% NPLs +13% NPLs

CAR 13.5% 11.1% 9.5% 7.8% 6.0% 4.1% 2.2%

ABVPS 13,463 10,174 7,981 5,788 3,595 1,402 (791)

CAR 14.8% 12.6% 11.0% 9.4% 7.7% 5.9% 4.1%

ABVPS 17,996 14,874 12,793 10,712 8,630 6,549 4,468

CAR 11.1% 9.4% 8.2% 6.9% 5.7% 4.4% 3.0%

ABVPS 13,530 11,295 9,806 8,316 6,827 5,337 3,848

CAR 9.5% 7.7% 6.4% 5.1% 3.7% 2.3% 0.9%

ABVPS 14,076 11,109 9,131 7,153 5,174 3,196 1,218

CAR 16.4% 14.4% 13.0% 11.6% 10.1% 8.6% 7.0%

ABVPS 12,798 10,979 9,766 8,553 7,340 6,128 4,915

CAR 10.3% 7.5% 5.5% 3.4% 1.2% -1.1% -3.4%

ABVPS 12,743 8,928 6,385 3,842 1,299 (1,244) (3,787)CTG

ACB

VCB

MBB

STB

EIB


11/33


27 August 2013 11

Several reports suggest both the business and banking communities pressed the SBV for the

delay in implementing Circular 2, raising concerns over the possibility the Circular could

precipitate a vicious cycle - by increasing NPLs, banks would further tighten credit, causing

more business bankruptcies, and in-turn creating more NPLs.

While any cure should not be worse than the disease, we continue to believe that any viable

long-term solution, that doesnt provide significant amounts of new capital to Banks,mayresult in significant short-term costs and disruptions to the risk appetite for the new credit in

the system.


12/33


27 August 2013 12

The Tool of ChoiceVietnam Asset Management Company

Following the decision to defer the NPL, the SBVs choice to utilize a bad bank vehicle to

handle NPLs was not really controversial. Similar models have been utilised in China and

Japan (both were set up around 2000). Even before its official launch, however, the VAMC

was already working to temper and recalibrate market expectations.

Described as miniscule by the World Bank, the VAMCs VND500bn (US$24mn) initialcapitalization precludes the vehicle from absorbing any appreciable amounts of bad debt

loses. The VAMC did report, however, that foreign investors have expressed interest in

working with the VAMC to provide additional private capital for loan purchases. Private

capital involvement is not unprecedented and would follow other AMC models, including the

Resolution Trust Company in the US and Cinda AMC in China. We view the possibility of

strategic private capital involvement as an encouraging sign for the VAMC and a critical factor

to its overall effectiveness.

The VAMCs most immediate impact will be to provide indirect liquidity support to the system.

The SBV has mandated that banks (over time) with NPLs greater than 3% to sell portions of

their bad debts to the VAMC until NPL ra tios fall below the 3% target.

In return, banks receive face-value equivalent amounts of special 5-YR, 0% coupon VAMCbonds, which can then be pledged as collateral at the SBVs discount window for proceeds

(currently fixed at 5.5%). We expect banks to take this opportunity to off-load their most

problematic NPLs. As such, banks are required to book 20% annual provisions over the life

of their bonds (i.e. 100% provisioned at maturity).

Without explicit decree, the SBV expects banks to use their added liquidity for new prudent

customer lending. The SBV currently maintains a 12% credit growth target for the year; its

July YTD estimate, however, was at only 5.2%. Considering the low credit demand in the

economy, some banks may simply consider buying 5-YR, 8.4% government bonds (the most

liquid) to secure a low risk 290 bps spread. Higher spreads could be earned if the Govt offers

more long dated treasuries in auction.

Due to the lack of tangible bank reforms to date, and the corresponding dilution to controlling

shareholders, some banks may also be tempted to revert to their earlier risky lending

practices or expand into new, even higher-risk ventures in hopes of recouping earlier loan

losses. We plan to watch carefully how banks decide to deploy any new found liquidity.

On paper, the VAMC wields significant authority, including powers to recover and restructure

debts, participate in borrower restructuring, sell loans and auction collateral, request state and

law enforcement resources in support of its actions, and inspect banks. Given the current

legal and regulatory ambiguities surrounding bankruptcy laws and asset seizures, we suspect

it will take some months before the VAMC can effectively organize and begin auctioning

significant asset amounts.

While the VAMC would be the entitled owners of the NPLs, as a practical matter, we

understand that the banks themselves will retain the responsibility for bad debt recoveries.

Considering the VAMCs size and limited institutional experience with asset recovery, auction,and seizure, we view this arrangement as more than just a convenience for the VAMC.

Within days of its launch, the VAMC announced it was preparing to buy up to VND10tn

(US$474mn) in NPLs from about 10 banks. The list may include ACB, which earlier indicated

its interest in possibly selling up to half, or VND1.5tn (US$70mn), of its reported NPLs. ACB

has one of the highest exposures to real estate in its collateral portfolio. The VAMC expects

to buy VND40tn-70tn in NPLs by the end of 2012.

In addition to the immediate liquidity, we also see the VAMC providing two other benefits: 1) it

gives both banks and the SBV time to develop and implement more substantial restructuring

and reform policies, 2) in contrast to Circular 2, the VAMC provides a softer inducement for

banks to bring forth and disclose underreported NPLs, an issue that continues to hinder the

market.


13/33


27 August 2013 13

Recently, a more aggressive SBV

As the SBV works and learns its way through its first modern NPL crisis, its approach could

be best described as slow and incremental. Its call for voluntary restructuring and

consolidation within the system, followed by the delay of Circular 2, appears to mostly be a

somewhat tepid initial approach.

In early August, however, this encouragement became forceful with Decision 48/2013, whichempowers the SBV to either purchase direct stakes in weak banks or order banks it deems

healthy to purchase stakes in weak banks. We do not know which banks the SBV may

designate as purchasing banks. Considering their ownership, we would not be surprised to

see an SOCB or two (as subsidiaries of the SBV) as likely designates. Such actions will

certainly begin to dilute the shareholders of existing weak banks.

For any direct SBV investments, we suspect, again, the source to be a combination of base

money or conversion of liquidity support into equity in the targeted banks. In the case, of

SOCBs, unsecured interbank loans from SOCBs to weak banks could also be converted into

equity. Finally, to support designated purchasing banks with their investments, the SBV could

assist through the discount window or the Ministry of Finance could offer tax incentives.

Depending upon the form and level of SBV assistance, the impact on healthy banks and theirshareholders remains unclear. Questions regarding investment levels, governance and

management oversight, cross-ownership and ownership limitations, exit strategies and

investment time horizons also remain open.

Finally the Prime Minister just approved the enabling Decision 48/2013/QD-TTg on banks

under special supervision. According to decision, when a bank that is under special

supervision, doesn't fulfil requests to increase chartered capital, undergo restructuring or

M&A activities, the State Bank of Vietnam (SBV) will have the right to assign other banks to

buy shares of weaker banks. The decision will take effect on September 20th 2013.

Next shoe to dropraising single shareholder and foreign limits

The SBV has suggested amendments to the Govt for Decree 69 by proposing a special

exemption to the 20% strategic shareholder limit, with the approval of the Prime MinistersOffice, but then only for weak banks (presumably those in bottom quartile of the SBVs

liquidity based ranking). Since then, there has yet to be a significant recapitalisation of a

weak bank under these proposals.

By and large, single shareholder limits in Vietnamese Joint stock banks, still stand at 15% (or

20% with SBV approval). Foreign ownership remains capped at an aggregate 30% and

recent updates to regulations have extended these rules to capture the potential effects of

convertible instruments on a fully diluted basis amongst other administrative measures.

Against that background, Brett Krausethe head of the Banking Group of the Vietnam

Business Forummooted the associations view in June this year that current shareholder

and foreign limits are insufficient to allow for an adequate recapitalisation of Vietnams

banking system, through new investment. The VBF called for a roadmap to majority foreignownership to allow rapid rehabilitation of the sector.

The IMFs resident representative for Vietnam noted Its in the interest of the overall financial

system. At the end of the day, some money should be put in, in part because you don t want

to prolong the problem.

The choices facing policymakers are now clear 1) refloat the system with base money (and

risk a return of high inflation), 2) liberalise ownership rules (allowing effective or outright

majority control) and allow significant recapitalisation to take place on market terms and by

definition, accept necessary dilution of founding shareholders or 3) to continue to restrict

ownership at the expense of potentially slower recovery in the sector and likely a continuation

of weak credit appetite by lenders.


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27 August 2013 14

Theme 2: FDI may surge, TPP anopportunity for VNOn the back of several factors, but most importantly; a strong Govt. push to attract higher

value-added manufacturing to Vietnam, along with the ongoing emphasis on inflation control

and macro stability, and finally, what appears to be a strong political push to conclude the

Trans Pacific Partnership Agreement this year, Vietnam looks to be earning some early

dividends.

On top of Samsung Electronics ongoing US$2.0bn investment for its largest mobile phone

plant outside of Korea to date in the Northern Thai Nguyen province. Samsung Electro-

Mechanics Co will now invest US$1.2 billion in a plant to manufacture chips and electronic

components at the same site. Construction is expected to start in October 2013 and begin

operations in August 2014. According to several widely available media reports, inclusive of

this plant, Samsungs total investment in Vietnam will reach at US$5.7bn and be its third

facility in the country.

Fig 17 Vietnam Exports (USDm) Fig 18 Vietnam Imports (USDm)

TPP Countries 2010 2011 2012Australia 2,704 2,519 3,209Brunei n.a. n.a. n.a.Canada 802 969 1,157Chile 94 138 169Japan 7,728 10,781 13,065Malaysia 2,093 2,832 4,500Mexico 489 590 683New Zealand 123 151 184Peru 38 n.a. n.a.Singapore 2,121 2,286 2,368United States 14,238 16,928 19,665Total 30,430 37,194 44,998China 7,743 11,125 12,388

TPP Countries 2010 2011 2012Australia 1,444 2,123 1,772Brunei n.a. n.a. n.a.Canada 349 342 456Chile 291 336 370Japan 9,016 10,400 11,602Malaysia 3,413 3,920 3,412Mexico 89 91 112New Zealand 353 384 385Peru 69 90 n.a.Singapore 4,101 6,391 6,691United States 3,767 4,529 4,827Total 22,893 28,606 29,627China 20,204 24,594 28,785

Source: MPI, Macquarie Research, Vina Securities, August 2013 Source: MPI, Macquarie Research, Vina Securities, August 2013

In the recent state visit to Washington DC by Vietnamese President Trung Tan Sang,

Vietnam and the USA reaffirmed their intentions to conclude a comprehensive, high-standard

Trans-Pacific Partnership (TPP) agreement this year. The opportunity the TPP presents to

Vietnam is clear and broadly summed up as follows:

Joining the TPP, and positive, robust implementation of the commitments could

increase bilateral trade between Vietnam and the U.S. to about US$61.3 billion by

2020. And Vietnams apparel exports to the U.S. could increase to US$22 billion by

2020. Already, South Korean, Chinese, Japanese and other companies have

announced over US$1 billion FDI in Vietnam to provide the supporting textiles

industries, yarn-spinning and fabric-weaving, so that Vietnams apparel exports will beable to benefit from zero import duties in TPP markets .

-Herb Cochran, Executive Director of AmCham Vietnam in HCMC.

One of the key issues in the TPP is the yarn-forward rule, which means yarn and fabric must

be manufactured and assembled in the free-trade partner country in order to enter U.S.

markets tariff-free. Dropping this has been contentious, as more than 160 Members of

Congress have signed a letter to the U.S. trade representative, asking to maintain the yarn-

forward rule, which has reportedly been included in every major U.S. free trade deal for the

last 25 years.

We note that Garment companies in Vietnam heavily rely on fabric imports as the domestic

textile industry cannot supply high-quality fabric. Currently, Vietnam imports raw materials

used in garment manufacturing, including 75 per cent of fabric, 90 per cent of cotton and all

polyester filament and fibre requirements. The demand for fibre was high and local firms had

to import 150,000 tonnes each year, according to a press statement by the Vietnam National

Textile Garment Group.

FDI into

manufactur ing isnow sign i f icant .

TPP is generat ing

sign if icant FDI

Interest in Text i les

and garments


15/33


27 August 2013 15

As we have noted last year, the trade deficit with China is a significant source of opportunity

cost to Vietnam. In 2012, Vietnam ran a US$16.4bn trade deficit with China and in the first

half of this year, it reportedly stood at US$11.4bn.

There has been press commentary that yarn-forward and trans-shipment provisions will

result in a slower rate of textile FDI in Vietnam relative to if the rule was included. However,

we believe that the countrys proximity to China along with TPP benefits will drive a growingtrend of intermediate manufacturing investment in Vietnam, a necessary step if Vietnam

hopes to increase productivity, and become less dependent on wage advantages over time.

Chinas Texhong textile group may have already seen this likely outcome, it has already

invested $200 million in a plant in Dong Nai Province, and in April 2012 the company said it

would invest $300 million to build a new yarn factory in Quang Ninh. When fully complete,

Texhong will be able to produce110,000 tonnes of yarn in Vietnam. As noted in its 1H13

interim reports:

At present, the first phase of the northern Vietnam project of about 170,000 spindles

and 30 sets of open-end spinning machines was successfully put into full production in

July 2013 at high efficiency. Our newly expanded capacity in other places including

Vietnam and China of about 600,000 spindles in aggregate is expected to be put into

full operation on a gradual basis in the third quarter of 2013.

For the expansion plan in 2014, it is expected that production facilities equivalent to

about 520,000 spindles will be built and are expected to be completed in the second

half of 2014. The total investment will be about RMB1.35 billion. This will include the

second phase of our northern Vietnam project with about 230,000 spindles.

Fig 19 Selected Big Ticket FDI projects

Project - 2013 Province Industry Investor CountryNew Capital

(USD mn)Total Capital

(USD mn)

PTT Nhon Hoi Refinery Binh Dinh Refining (Feasibility Study) Thailand 28,700 28,700Formosa Plastics Group Ha Tinh Steel / PetroChemiclas Taiwan 17,100 27,000

Nghi Son Oil Refinery Thanh Hoa Refining Japan, Kuwait 2,800 6,740Long Son Petrochemical

ComplexBa Ria Petrochemicals Thailand, Qatar 4,500 4,500

Samsung Electronics Co., Ltd Thai Nguyen Electronics Korea, Singapore 2,000 3,200Samsung Electronics Co., Ltd Bac Ninh Electronics Korea 1,000 2,500Bus Industrial Center Co., Ltd Binh Dinh Manufacturing & Processing Russia 1,000 1,000VSIP Dung Quat Quang Ngai Industrial Parks Singapore 338 338VSIP Binh Hoa Binh Duong Industrial Parks Singapore 200 200

Project - 2012 Province Industry Investor CountryNew Capital

(USD mn)Total Capital

(USD mn)

Samsung Electronics Co., Ltd Bac Ninh Electronics Korea 830 1,500Tokyu Binh Duong Garden City Binh Duong Real Estate / Industrial parks Japan 1,200 1,200Wintek Vietnam Co., Ltd. Bac Giang Electronics Taiwan 870 1,120Shimizu Group Hanoi Real Estate / Industrial parks Japan 1,000 1,000Bridgestone Tire Vietnam Hai Phong Manufacturing and Processing Japan 575 575

LIXIL Vietnam Dong Nai Manufacturing and Processing Japan 441 441Oshima Shipbuilding Khanh Hoa Transport and Storage Japan 180 180

Source: MPI, Macquarie Research, Vina Securities, August 2013


16/33


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27 August 2013 17

Theme 3: Facing realitySteady changeRaising foreign ownership limits

The Ministry of Finance, following a review by the State Securities Commission submitted a

plan on liberalisation of foreign limits to the Prime Ministers office for approval. Details remain

sketchy, but the plan would raise limits to 60% from 49% for what was termed nonconditional industries. Restricted industries limits would remain at 49%, with an additional

quota of 10% in non-voting shares. No disclosures on which industries will be restricted were

mentioned, but we expect Energy, Telecom, Utilities and Resources to lead the list. But an

open question remains; will policy makers allow foreign control of Commercial Bank (i.e. will

foreign limits in banks go from 30% currently to 49% or perhaps 60%)?

An increase in foreign limits from 49% to 60% and the creation of a 10% non-voting tranche in

restricted sectors would open up another US$4.5 in foreign quota over and above the existing

available room of US$2.1bn. This would also be only for stocks listed in the VN30 Index. A

sizable increase in quota would also make up significant room in the small cap stocks or

stocks with low free floats that are not captured by the VN30.

The two industry groups that would see the largest increase in foreign availability (in absoluteterms) would be Commercial Banks followed Food Products. The later is largely driven by

increased room in MSN and VNM, whilst the former from the six listed banks.

Fig 20 Estimating the invest-ability effects of higher foreign limits

GICS Industry Group (USD mn) Mkt Cap Avail. Quota Assumed New Limit Non Voting Shares Increased Quota

Energy Equipment & Services $602.7 $72.1 49% 10% $132.4Chemicals $758.2 $158.2 60% 0% $241.7Metals & Mining $842.3 $72.1 49% 10% $156.3Transportation Infrastructure $242.1 $43.8 60% 0% $70.4Construction & Engineering $157.2 $51.7 60% 0% $69.0Consumer Discretionary $366.8 $0.0 60% 0% $40.4

Auto Components $273.3 $85.1 60% 0% $115.1

Food Products $9,325.8 $547.3 60% 0% $1,573.2Commercial Banks $8,366.2 $419.8 60% 0% $2,929.7Real Estate Management & Devel $2,761.0 $247.9 60% 0% $551.6Insurance $1,374.2 $341.3 60% 0% $492.5Capital Markets $476.6 $29.3 60% 0% $81.7Diversified Financial Services $873.3 $29.3 60% 0% $125.3Electronic Equip., Instruments $614.3 $0.0 60% 0% $67.6Electric Utilities $136.9 $28.4 49% 10% $42.1Gas Utilities $62.6 $0.0 49% 10% $6.3Total $27,233.5 $2,126.3 $6,695.3

Additional Quota $4,568.8

Source: Macquarie Research, Vina Securities, August 2013

Next steps, executing on SOE reforms

The governments SOE reform plan has been progressing slowly and haphazardly. Officially,SOEs will be required to divest non-core assets, streamline operations, and improve internal

controls and financial reporting lines. About 1,200 SOEs are planned to be restructured.

However, the reform strategy for the 20112015 periods focuses on retaining full ownership

of approximately half of the SOEs that operate in public service areas or are of strategic

value, some of which have significant monopoly power (i.e. EVN). The balance of the SOEs

are to be equitized, restructured, sold, or ultimately be liquidated.

Implementation on SOE reform so far has been haphazard, a few large SOEs (PetroVietnam,

VinaChem) have put broadly defined plans on paper, but very few sizable transactions in

restructuring have been executed.

One of the problems with SOEs is the contingent liabilities they reportedly possess. There

has been comments that public/debt to GDP is closer to 100% once SOE loans are addedinto the equation. In what sounds like a familiar reason for delaying circular 2. Too aggressive

reform could lead to uncomfortable liquidations of collateral and further NPL visibility. As

such, as the VAMC begins to deal with the bad debt in the system, it may well herald or open

the door to acceleration in SOE reform.

Long-awaited

chang es to FII l imits

have beenproposed.

Incrementa l room if

US$4.6bn c ould be

created.


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27 August 2013 18

Appendices Demographics, FDI & wages

Fig 21 Vietnam Population Pyramid (2015E) Fig 22 Vietnam Population Pyramid (2030E)

Source: World Bank, Macquarie Research, Vina Securities, Aug 2013 Source: World Bank, Macquarie Research, Vina Securities, Aug 2013

Fig 23 Vietnam Work ing age Population (1960-2050E)

Fig 24 Vietnam Dependency Ratio (1960-2050E)

Source: World Bank, Macquarie Research, Vina Securities, Aug 2013 Source: World Bank, Macquarie Research, Vina Securities, Aug 2013

Fig 25 Cumulative FDI (US$m)

Registered Capital Jun-09 Jan-11 Jun-11 Dec-11 Jun-12 Sep-12 Dec-12 Mar-13 Jul-13

Manufacturing and Processing 87,401 95,155 98,480 93,053 97,922 100,791 103,524 111,470 116,443Real Estate 33,929 48,004 48,198 47,002 49,358 49,732 49,724 47,920 48,259

Accomodations and food 10,938 11,383 11,748 11,830 10,539 10,540 10,606 10,606 10,698

Construction 9,118 11,596 11,739 12,500 10,385 10,245 9,917 10,063 9,880Electricity, Gas, Water,Production & Distrib.

2,107 4,870 5,136 7,398 7,404 7,408 7,486 7,489 7,501

Information andcommunications

4,644 4,789 4,829 5,697 5,721 6,115 3,938 3,952 4,030

Arts and Entertainment 3,662 3,461 3,621 3,636 3,699 3,680 3,675 3,629 3,665Transport and Storage 2,125 3,180 3,218 3,262 3,446 3,463 3,476 3,496 3,519

Agriculture, forestry, fisheries 2,960 3,094 3,161 3,218 3,284 3,290 3,344 3,262 3,304Mining 3,078 2,940 2,975 2,975 3,020 3,020 3,177 3,182 3,197Wholesale, retail, repair 1,006 1,609 1,814 2,067 2,321 2,530 2,814 2,984 3,126Finance, banking, insurance 1,182 1,321 1,322 1,322 1,322 1,322 1,322 1,322 1,322Health and Social Assistance 952 988 1,037 1,015 1,166 1,166 1,219 1,302 1,305Water Supply, WasteTreatment

48 64 387 710 2,410 2,402 1,234 1,239 1,285

Professional Specialties,Science and Tech.

508 717 786 983 1,004 1,060 1,087 1,113 1,161

Other Services 600 646 644 716 713 728 733 740 741Education and Training 244 380 345 355 429 433 458 463 648

Admin and Support Services 177 183 183 188 189 192 201 201 194

Total 164,680 194,380 199,625 197,927 204,332 208,115 207,936 214,434 220,278

Source: World Bank, Macquarie Research, Vina Securities, August 2013

6.0% 4.0% 2.0% 0.0% 2.0% 4.0% 6.0%

0-4

5-9

15-19

20-24

25-29

30-34

35-39

40-44

45-49

50-54

55-59

60-64

65-69

70-74

Male (%) Female (%)

6.0% 4.0% 2.0% 0.0% 2.0% 4.0% 6.0%

0-4

5-9

15-19

20-24

25-29

30-34

35-39

40-44

45-49

50-54

55-59

60-64

65-69

70-74

Male (%) Female (%)


19/33


27 August 2013 19

Fig 26 Share of FDI buy 5 largest industr iesFig 27 Wage differentials Vietnam vs. China (Avgtextile worker salary US$ month)

Source: World Bank, Macquarie Research, Vina Securities, Aug 2013 Source: Macquarie Research, Vina Securities, August 2013

Fig 28 Coastal vs. in-country population density

Source: Columbia University, Macquarie Research, Vina Securities, August 2013

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

%o

fCumulativeRegisteredCapital

Manufacturing and Processing

Real Estate

Accomodations and food

ConstructionElectri city, Gas, Water, Air Conditioning Production & Distrib.

0

100

200

300

400

500

600

2008 2009 2010 2011 2012

Indonesia Cambodia

Vietnam China

Philippines


20/33


27 August 2013 20

VIETNAM

FPT VN Outperform

Price (at 06:52, 23 Aug 2013 GMT) VND45,400

Valuation VND 49,100- PER12-month target VND 49,100

Upside/Downside % +8.1

12-month TSR % +12.1

Volatility Index Low

GICS sectorTechnology Hardware & Equipment

Market cap VNDbn 12,490

Market cap US$m 592

Free float % 70

30-day avg turnover US$m 0.0

Number shares on issue m 275.1

Investment fundamentalsYear end 31 Dec 2012A 2013E 2014E 2015E

Revenue bn 24,594 26,342 29,278 32,668EBIT bn 2,232 2,279 2,592 2,964EBIT growth % -12.9 2.1 13.7 14.3Reported profit bn 1,540 1,546 1,759 1,976EPS rep VND 5,665 5,648 6,392 7,184EPS rep growth % 12.8 -0.3 13.2 12.4PER rep x 8.0 8.0 7.1 6.3Total DPS VND 3,635 1,508 1,500 2,501Total div yield % 8.0 3.3 3.3 5.5ROA % 15.3 15.3 15.5 15.6ROE % 25.4 22.3 22.0 21.2EV/EBITDA x 4.9 4.7 4.1 3.5Net debt/equity % 11.8 2.9 -5.6 -12.5P/BV x 2.0 1.7 1.4 1.3

FPT VN rel Vietnam Ho Chi Minh

performance, & rec history

Note: Recommendation timeline - if not a continuous line, then there was noMacquarie coverage at the time or there was an embargo period.

Source: FactSet, Macquarie Research, August 2013

(all figures in VND unless noted)

Analyst(s)Jeff Su+886 2 2734 7512 [email protected] SecuritiesGigi Nguyen+848 3821 9316 [email protected]

27 August 2013Macquarie Capital Securities Limited,Taiwan Branch

FPT Corp.Vietnams infocomm leaderThe company

FPT is a proxy on Vietnams fast-growing Info-Communications (ICT) market.

It has a leading market share in sales in each segment in which it operates:

software outsourcing (1st), systems integration (1st), IT products distribution

(1st) and broadband telecommunication services (3rd).

Founded by 13 partners in 1988, FPT Corporation (FPT) became a public

company in Mar-02 and listed on the Ho Chi Minh stock exchange (HoSE) in

Dec-06. Over the last 25 years, the group has established its reputation in

Vietnams information and communication technology (ICT) sector with

market-leading positions in software outsourcing (1st), systems integration

(1st), IT and mobile product distribution (1st) and broadband service (3rd).

The group employs nearly 15,000 staff and operates under five main

divisions: FPT IS, FPT Software, FPT Telecom, FPT Trading and FPT Edu.Recent results & key drivers

Pre-tax profit for the first seven months of FY13 totaled VND1.4tn (+5.7%

YoY), or 57.6% of our FY13 estimate. This was underpinned by FPT Telecom

(+8.5% YoY), which contributed 42.3% to blended profit, and the software

outsourcing division (+60% YoY). IT and mobile distribution remain a drag on

the bottom line, with segment pre-tax profit down 29.8% YoY.

We believe that Vietnams core ICT market (which includes broadband,

software outsourcing and systems integration) will continue to grow, driven by

1) Competitive advantages in software outsourcing on lower wages and

comparable skills, 2) broadband penetration rising off a low base and the

introduction of value-added services such as IP TV and 3) improved

performance in the systems integration division as e-Govt and other bankingtenders grow.

FPT is in exclusive negotiations to acquire the states 50.2% stake in FPT

Telecom. We expect any transaction to be largely funded by stock issuance

and to be concluded late this year. On our estimates, VND592.3bn719.8bn

in FPT Tel profits will accrue to the State Capital Investment Corporation

(SCIC) in the next two years.

Earnings and target price revision

No change.

Price catalyst

12-month price target: VND49,100 based on a PER methodology.

Catalyst: Strong growth in software business, recovery in the IS segment and

ongoing negotiations to consolidate FPT Telecom.

Action and recommendation

We maintain our OP rating and value the stock at VND49,100, for a 12.1%

TSR. We note that FPT trades at a significant discount to peers, but given our

forecast for EPS growth of 13.2% for FY14 and a full foreign limit, we believe

a valuation re-rating will likely come with full consolidation of FPT Tel and

more visibility on consolidated EPS growth. Our target price reflects the

simple average of FY13E and FY14E fair values for FPT based on a target

PER of 8.7x.


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27 August 2013 23

Hoa Phat Group JSC (HPG VN, Outperform, Target Price: VND34,000)Interim Results 2H/12A 1H/13E 2H/13E 1H/14E Profit & Loss 2012A 2013E 2014E 2015E

Revenue bn 8,192.9 8,398.2 10,264.4 9,910.2 Revenue bn 16,826.9 18,662.6 22,022.6 25,993.1Gross Profit bn 1,550.4 1,596.1 1,950.8 2,175.7 Gross Profit bn 3,081.5 3,546.9 4,834.9 5,605.3Cost of Goods Sold bn 6,642.5 6,802.1 8,313.6 7,734.4 Cost of Goods Sold bn 13,745.4 15,115.7 17,187.7 20,387.8EBITDA bn 957.9 1,182.9 1,445.8 1,701.5 EBITDA bn 2,220.5 2,628.8 3,781.2 4,446.4Depreciation bn 293.3 306.5 374.6 384.1 Depreciation bn 596.2 681.1 853.6 861.1

Amortisation of Goodwill bn 0.0 0.0 0.0 0.0 Amortisation of Goodwill bn 0.0 0.0 0.0 0.0Other Amortisation bn 0.0 0.0 0.0 0.0 Other Amortisation bn 0.0 0.0 0.0 0.0EBIT bn 664.6 876.5 1,071.2 1,317.4 EBIT bn 1,624.2 1,947.7 2,927.6 3,585.3Net Interest Income bn -189.9 -121.2 -148.2 -147.4 Net Interest Income bn -457.8 -269.4 -327.6 -243.1

Associates bn -0.2 -0.3 -0.3 -0.3 Associates bn -0.5 -0.6 -0.6 -0.6Exceptionals bn 24.5 47.7 58.2 0.0 Exceptionals bn 14.9 105.9 0.0 0.0Forex Gains / Losses bn 41.5 -26.4 -32.2 -30.7 Forex Gains / Losses bn -5.3 -58.6 -68.1 -78.0Other Pre-Tax Income bn 42.7 0.0 0.0 0.0 Other Pre-Tax Income bn 42.7 0.0 0.0 0.0Pre-Tax Profit bn 583.1 776.3 948.8 1,139.1 Pre-Tax Profit bn 1,218.2 1,725.0 2,531.3 3,263.6Tax Expense bn -76.2 -93.2 -113.9 -170.9 Tax Expense bn -187.7 -207.2 -379.7 -554.8Net Profit bn 506.9 683.0 834.8 968.2 Net Profit bn 1,030.6 1,517.9 2,151.6 2,708.8Minority Interests bn -53.0 -8.0 -9.8 -18.6 Minority Interests bn -36.5 -17.9 -41.4 -72.8

Reported Earnings bn 453.9 675.0 825.0 949.6 Reported Earnings bn 994.1 1,500.0 2,110.2 2,636.0Adjusted Earnings bn 429.5 627.3 766.8 949.6 Adjusted Earnings bn 979.1 1,394.1 2,110.2 2,636.0

EPS (rep) VND 1,083 1,611 1,969 2,266 EPS (rep) VND 2,157 3,580 5,036 6,290

PE (rep) x 9.7 9.0 6.4 5.1

EBITDA Margin % 11.7 14.1 14.1 17.2 Total DPS ho 791.4 2,000 2,000 2,000

EBIT Margin % 8.1 10.4 10.4 13.3 Total Div Yield % 3.8 6.2 6.2 6.2Earnings Split % 43.9 45.0 55.0 45.0 Weighted Average Shares m 461 419 419 419Revenue Growth % -4.7 -2.7 25.3 18.0 Period End Shares m 419 419 419 419EBIT Growth % -10.7 -8.7 61.2 50.3

Profit and Loss Ratios 2012A 2013E 2014E 2015E Cashflow Analysis 2012A 2013E 2014E 2015E

Revenue Growth % -5.7 10.9 18.0 18.0 EBITDA bn 2,220.5 2,628.8 3,781.2 4,446.4EBITDA Growth % -20.6 18.4 43.8 17.6 Tax Paid bn -187.7 -207.2 -379.7 -554.8EBIT Growth % -27.9 19.9 50.3 22.5 Chgs in Working Cap bn -1,311.8 -1,498.2 -246.8 446.1Gross Profit Margin % 18.3 19.0 22.0 21.6 Net Interest Paid bn 0.0 0.0 0.0 0.0EBITDA Margin % 13.2 14.1 17.2 17.1 Other bn 1,548.4 -911.2 266.4 302.7EBIT Margin % 9.7 10.4 13.3 13.8 Operating Cashflow bn 2,269.4 12.2 3,421.1 4,640.3Net Profit Margin % 6.1 8.1 9.8 10.4 Acquisitions bn 0.0 0.0 0.0 0.0Payout Ratio % 37.4 60.1 39.7 31.8 Capex bn -1,828.1 -2,238.3 -100.0 -100.0EV/EBITDA x 6.2 7.0 4.9 4.2 Asset Sales bn 0.0 0.0 0.0 0.0EV/EBIT x 8.5 9.5 6.3 5.2 Other bn 168.4 -0.6 -0.6 -0.6

Investing Cashflow bn -1,659.7 -2,238.9 -100.6 -100.6Balance Sheet Ratios Dividend (Ordinary) bn -361.8 -838.1 -838.1 -838.1ROE % 12.7 16.6 22.5 24.1 Equity Raised bn 0.0 0.0 0.0 0.0

ROA % 8.9 9.5 13.2 16.3 Debt Movements bn -118.9 2,848.2 -1,476.7 -2,651.4ROIC % 10.3 12.6 14.3 18.3 Other bn 101.1 -58.6 -68.1 -78.0Net Debt/Equity % 58.4 87.9 54.1 16.9 Financing Cashflow bn -379.6 1,951.6 -2,383.0 -3,567.5Interest Cover x 3.5 7.2 8.9 14.7Price/Book x 1.1 1.5 1.3 1.1 Net Chg in Cash/Debt bn 230.2 -275.1 937.5 972.2Book Value per Share 19,293.8 20,873.4 23,909.1 28,199.4

Free Cashflow bn 441.3 -2,226.1 3,321.1 4,540.3

Balance Sheet 2012A 2013E 2014E 2015E

Cash bn 1,294.5 1,019.4 1,956.9 2,929.2Receivables bn 1,150.5 1,191.4 1,384.2 1,566.5Inventories bn 3,884.2 5,543.9 6,395.1 7,430.0Investments bn 240.4 240.4 240.4 240.4Fixed Assets bn 6,840.9 8,420.7 7,689.7 6,951.2Intangibles bn 1,084.8 1,062.2 1,039.7 1,017.1Other Assets bn 4,520.5 4,691.9 3,597.7 1,661.5Total Assets bn 19,015.7 22,169.9 22,303.6 21,795.8Payables bn 1,520.6 1,674.9 1,912.9 2,253.0Short Term Debt bn 4,850.2 5,633.4 5,106.5 2,540.7

Long Term Debt bn 1,455.7 3,520.8 2,571.0 2,485.4Provisions bn 209.9 209.9 209.9 209.9Other Liabilit ies bn 2,401.7 1,873.5 1,932.5 1,865.3Total Liabilities bn 10,438.2 12,912.6 11,732.8 9,354.4Shareholders' Funds bn 7,790.6 8,452.5 9,724.6 11,522.5Minority Interests bn 492.4 510.3 551.6 624.4Other bn 294.5 294.5 294.5 294.5Total S/H Equity bn 8,577.5 9,257.3 10,570.8 12,441.5Total Liab & S/H Funds bn 19,015.7 22,169.9 22,303.6 21,795.8

All figures in VND unless noted.Source: Company data, Macquarie Research, August 2013


24/33


27 August 2013 24

VIETNAM

PVD VN Outperform


Valuation VND 69,100.00- EV/EBITDA12-month target VND 69,100.00



Volatility Index Medium

GICS sector Energy


Market cap US$m 588

Free float % 50




Revenue m 572.8 650.6 656.6 723.2EBIT m 90.9 112.5 119.8 140.2EBIT growth % 26.7 23.8 6.5 17.0Reported profit m 62.6 84.9 88.2 97.8EPS rep 29.9 37.1 35.5 39.4EPS rep growth % 18.3 24.2 -4.3 10.9PER rep x 9.4 7.5 7.9 7.1Total DPS 0.4 0.4 0.4 0.4Total div yield % 0.1 0.1 0.1 0.1ROA % 10.1 11.9 11.5 12.3ROE % 19.1 20.3 17.1 15.9EV/EBITDA x 5.3 5.1 4.8 4.2Net debt/equity % 78.2 36.0 35.6 11.1P/BV x 1.7 1.5 1.3 1.0

PVD VN rel Vietnam Ho Chi Minhperformance, & rec history



(all figures in USD unless noted)

Analyst(s)James Hubbard, CFA+852 3922 1226 [email protected] Securities

Duong Dinh+848 3821 9316 [email protected]

27 August 2013Macquarie Capital Securities Limited

PetroVietnam Drilling andWell Services

Placement finished successfullyEvent

We reiterate our OP rating for PVD, increase our TP by 19.9% to VND69,100

(+17.1% upside). This is due to the decline in net debt given USD68.5mn in

private placements proceeds, a delay in raising loans for a high-spec jack-up

and increased FY13E profits of USD2.9mn.

Placement finished: PVD was able to sell a total 38.0mn shares at an avg.

price of VND38,262/sh (19.6% higher than our trailing BVPS assumption).

PVD has indicated they will now not invest in a new build highspec jack-up

(to be completed in late 2013) with Falcon Energy. Instead, PetroVietnam

Drilling Overseas (PVDO)a joint venture between PVD (55% stake), Falcon

(10% stake) and Joy PrideKeppel (35% stake) has ordered an USD210mn,

400 ft WD jack-up from Keppel FELS (scheduled for delivery in 1Q15).

1H13A results: USD313.4mn in Rev (+30.9% YoY) and USD41.5mn in NP

(+41.2% YoY). These account for 50.1% and 50.1% of our previous FY13Es

forecasts respectively. Finally, another leased-in rig was secured, Key

Gibraltar (1+1 year contract), for PVEP. PVD now has 6 leased-in rigs.

Impact

With approximately USD68.5mn proceeds from the placement, PVDs net

gearing ratio should drop to 36.7% by FY13E from the 82.1% at FY12A.

We are lowering our FY14E NP estimates to USD88.2mn vs. USD92.8mngiven the decision not to invest in the new build rig. We now estimate 3.9% in

FY14E NP growth, but a 4.3% contraction in EPS growth given dilution.

We like the participation of Keppel in PVDO as this will ensure timely delivery.

The 400ft WD rig will help PVD achieve double digit EPS growth again of

10.9% and 22.4% for FY15/16E on our estimates.


We raise our FY13E revenue forecast to US$650.6mn from US$624.5mn and

our net profit by 3.5% to US$84.9mn from US$82.0mn respectively, on the

back of strong margin. Our TP jumps by 19.9% to VND69,100.

Price catalyst 12-month price target: VND69,100.00 based on an EV/EBITDA methodology.

Catalyst: Progress of the high-spec jack-up project, and a rising dayrate trend.


Regional jack-up dayrates look to remain robust averaging over

USD160,000/day. At 6.3x our FY14E EBITDA forecast of US$153.1mn, PVD

trades at a 32.5% discount to its peer group, and at a prospective FY14E PER

of 7.8x EPS and PB of 1.2x BVPS respectively.


25/33


27 August 2013 25

Valuation

We revise up our target price by 19.9% from VND57,600 to VND69,100/sh. Our estimated equity

value has increased to USD747.9mn (+46.5% vs previous forecast) and USD830.3mn (+2.2% vs.

previous forecast) respectively for FY13E & 14E. These are due to the decline in net debt (with the

placements proceeds and delay in raising new debt for high-spec jack-up project) as well as more

EBITDA expected for FY13E. The increase in EBITDA is mainly due to higher gross margin and onemore leased rig, Key Gibraltar with 1+1 year contract for PVEP.

PVD finally and successfully closed its long running private placement, receiving proceeds of

USD68.5mn. In particular, 20.1mn shares were sold at VND31,758 to PetroVietnam (with a three

year lock-up), 17.8mn shares (with a one year lock-up) were sold at average of VND45,605 to PYN

fund management Ltd, PENM PartnersPrivate Equity New Market II & VOFVietnam Investment

Property Holding Ltd. The proceeds have helped PVD to lower the net debt to equity to 36.7% at

FY13E from 82.1% as of FY12E.

As of the end of FY13E, we estimate PVDs target price of VND69,100, implying upside of 17.1%.

Going forward to FY14E, our fair value rises further to VND73,389 (+24.4% upside).

Fig 1 Valuationear Ended FY13E FY14E FY15E

Reported EBITDA 163.3 172.1 197.0Less Minority EBITDA from TAD rig (19.2) (19.0) (34.1)PVD's Proportionate EBITDA 144.1 153.1 163.0

Net debt 175.6 204.4 110.4Less Minority Net Debt in TAD (15.7) (70.2) (55.4)PVD's proportionate Net Debt 159.9 134.2 55.0

Target EV @ 6.3x 907.8 964.5 1,026.7Less proportionate net debt (159.9) (134.2) (55.0)Equity Value 747.9 830.3 971.7Outstanding shares after issuance 247.6 247.6 247.6Equity Value/Sh (US$) 3.02 3.35 3.92

VND/US$ Fx rate 21,453 21,882 22,976Equity Value/Sh (VND) 64,810 73,389 90,179Target price (VND/sh) 69,100Upside 17.1% 24.4% 52.8%Share price 59,000 59,000 59,000

Source: Company data, Macquarie Research, Vina Securities March 2013


26/33


27 August 2013 26

PetroVietnam Drilling and Well Services (PVD VN, Outperform, Target Price: VND69,100.00)Interim Results 1H/13A 2H/13E 1H/14E 2H/14E Profit & Loss 2012A 2013E 2014E 2015E

Revenue m 313 337 309 348 Revenue m 573 651 657 723Gross Profit m 102 104 101 114 Gross Profit m 178 206 215 245Cost of Goods Sold m 211 233 207 234 Cost of Goods Sold m 395 445 441 479EBITDA m 83 80 81 91 EBITDA m 140 163 172 197Depreciation m 25 26 25 28 Depreciation m 49 51 52 57

Amortisation of Goodwill m 0 0 0 0 Amortisation of Goodwill m 0 0 0 0Other Amortisation m 0 0 0 0 Other Amortisation m 0 0 0 0EBIT m 58 54 56 63 EBIT m 91 112 120 140Net Interest Income m -5 -8 -4 -5 Net Interest Income m -13 -13 -9 -12

Associates m 1 6 3 4 Associates m 3 7 7 8Exceptionals m -3 3 0 0 Exceptionals m 0 1 0 0Forex Gains / Losses m 0 0 0 0 Forex Gains / Losses m 0 0 0 0Other Pre-Tax Income m 0 0 0 0 Other Pre-Tax Income m 0 0 0 0Pre-Tax Profit m 51 56 55 62 Pre-Tax Profit m 81 107 117 136Tax Expense m -6 -7 -10 -11 Tax Expense m -12 -13 -21 -24Net Profit m 45 49 45 51 Net Profit m 69 93 97 112Minority Interests m -3 -5 -4 -5 Minority Interests m -6 -8 -9 -14

Reported Earnings m 42 43 41 47 Reported Earnings m 63 85 88 98Adjusted Earnings m 45 40 41 47 Adjusted Earnings m 63 84 88 98

EPS (rep) 0.20 0.17 0.17 0.19 EPS (rep) 0.30 0.37 0.35 0.39EPS (adj) 0.02 0.02 0.02 0.02 EPS (adj) 0.03 0.04 0.04 0.04EPS Growth yoy (adj) % 44.8 5.7 -21.4 17.1 EPS Growth (adj) % 18.3 24.9 -4.8 10.9

PE (rep) x 6.0 7.4 7.5 6.8PE (adj) x 60.3 73.2 75.2 67.8

EBITDA Margin % 26.6 23.7 26.2 26.2 Total DPS 0.00 0.00 0.00 0.00

EBIT Margin % 18.6 16.1 18.2 18.2 Total Div Yield % 0.2 0.1 0.2 0.2Earnings Split % 52.7 47.3 47.0 53.0 Weighted Average Shares m 210 229 249 249Revenue Growth % 30.7 1.3 -1.5 3.2 Period End Shares m 210 249 249 249EBIT Growth % 33.1 15.1 -3.2 17.0


Revenue Growth % 27.4 13.6 0.9 10.1 EBITDA m 140 163 172 197EBITDA Growth % 31.6 16.7 5.4 14.5 Tax Paid m -12 -13 -21 -24EBIT Growth % 26.7 23.8 6.5 17.0 Chgs in Working Cap m 71 15 -1 -34Gross Profit Margin % 31.1 31.7 32.8 33.8 Net Interest Paid m 0 0 0 0EBITDA Margin % 24.4 25.1 26.2 27.2 Other m -70 -52 -20 40EBIT Margin % 15.9 17.3 18.2 19.4 Operating Cashflow m 129 113 130 179Net Profit Margin % 12.0 14.4 14.7 15.5 Acquisitions m 0 0 0 0Payout Ratio % 13.9 10.9 11.5 10.4 Capex m -40 -40 -156 -51EV/EBITDA x 3.9 5.0 4.7 4.1 Asset Sales m 0 0 0 0EV/EBIT x 5.9 7.1 6.6 5.7 Other m -3 -31 7 8

Investing Cashflow m -42 -71 -149 -43Balance Sheet Ratios Dividend (Ordinary) m -9 -10 -10 -10ROE % 19.1 20.3 17.1 15.9 Equity Raised m 0 68 0 0

ROA % 10.1 11.9 11.5 12.3 Debt Movements m -52 -78 66 -81ROIC % 11.8 15.7 14.9 14.9 Other m -6 0 0 0Net Debt/Equity % 78.2 36.0 35.6 11.1 Financing Cashflow m -68 -20 56 -91Interest Cover x 6.9 8.5 12.8 11.9Price/Book x 1.1 1.4 1.2 1.0 Net Chg in Cash/Debt m 19 22 37 45Book Value per Share 1.7 1.9 2.2 2.7

Free Cashflow m 90 73 -26 128


Cash m 51 73 110 155Receivables m 144 147 148 163Inventories m 38 42 42 45Investments m 2 2 2 2Fixed Assets m 633 660 763 757Intangibles m 7 7 7 7Other Assets m 42 42 42 42Total Assets m 916 972 1,114 1,172Payables m 107 109 108 117Short Term Debt m 93 66 81 81

Long Term Debt m 234 182 234 153Provisions m 14 14 14 14Other Liabilities m 116 113 104 99Total Liabilities m 563 484 540 464Shareholders' Funds m 299 442 520 608Minority Interests m 1 10 18 33Other m 52 37 35 67Total S/H Equity m 353 488 574 707Total Liab & S/H Funds m 916 972 1,114 1,172

All figures in USD unless noted.Source: Company data, Macquarie Research, August 2013


27/33


27 August 2013 27

VIETNAM

DPM VN Outperform


Valuation VND 48,000.00- DCF12-month target VND 48,000.00



Volatility Index Low/Medium

GICS sector Materials


Market cap US$m 733

Free float % 39




Revenue bn 13,322 10,612 10,583 10,568EBIT bn 3,013 2,220 2,011 1,828EBIT growth % -0.9 -26.3 -9.4 -9.1Reported profit bn 3,002 2,335 2,101 1,775EPS rep VND 7,924 6,144 5,530 4,671EPS rep growth % -3.3 -22.5 -10.0 -15.5PER rep x 5.2 6.7 7.5 8.8Total DPS VND 4,500 3,000 3,000 1,500Total div yield % 8.5 7.3 7.3 3.6ROA % 30.3 20.5 17.5 15.1ROE % 34.9 25.0 20.9 16.7EV/EBITDA x 3.2 4.2 4.6 5.1Net debt/equity % -61.0 -59.4 -62.8 -64.8P/BV x 1.7 1.6 1.5 1.5

DPM VN rel Vietnam Ho Chi Minhperformance, & rec history




Analyst(s)James Hubbard, CFA+852 3922 1226 [email protected] Securities

Duong Dinh+848 3821 9316 [email protected]


PetroVietnam Fertilizer &Chemical

An agricultural cash cowThe company

PetroVietnam Fertilizer and Chemical Corp is the largest fertilizer producer

and distributor in Vietnam. The companys key product is prilled urea (gas

feedstock), marketed domestically gand regionally under the Phu My Urea

brand. The company, 60% owned by PetroVietnam Oil & Gas Group, has

several distribution and associate companies located throughout the country.

DPMs stock price has fallen sharply since March and although there is no

change to our fundamental view, with almost 24% upside to our target price,

we upgrade the stock from Neutral to Outperform.

Recent results & key drivers 1H13A results:Revenues fell 14.4% YoY to VND6.1tn with net profit falling

17.4% YoY to VND1.6tn. Gross margins, improved to 35.8% from 34.8%.

These results represent 59.7% and 69.7% of our FY13 forecasts. Part of the

revenue decline came from falling avg. urea prices as well as the absence of

revenues from Ca Mau urea, in which DPM no longer distributes. Net profits

were down, due to a 17.1% YoY increase in selling expenses and a 26.1%

decrease in interest income from lower rates.

Increased global urea production capacity and abundant natural gas

inventories continue to place downward pressure on urea global prices.

DPMs ASP for urea fell to about US$410/tonne in 1H13A.

Domestic supply:DPMs sister company (PVFCM) Ca Mau relied heavilyupon DPMs distribution network and will now need time to develop its own.

Vinachems Ninh Binh Nitrogenous Fertilizer Plant has experienced various

setbacks and inconsistent production since its launch in March 2012.

Longer-run,DPM still plans to invest in a JV for a USD900mn Ammonia plant

and is planning a USD63mn investment in a NPK facility for FY14. It will also

look to participate in the PVCFC (Ca Mau) equitization next year.

DPMs FY12A final dividend of VND2,000/sh brought dividend payments to

VND4,500/sh, (a T12M yield of 10.68%). With a growing cash position and no

major CAPEX projects underway this year, we believe DPM can easily raise

its payout ratio above our forecast 50% (equiv. to VND3,000/sh).


No change.

Price catalyst

12-month price target: VND48,000.00 based on a DCF methodology.

Catalyst: Higher DPS, treasury management, urea prices and competition


DPM trades at 6.7x FY13E EPS, with a prospective dividend yield of

VND4,348/sh and 7.3% (with upside potential). DPM is in a net cash position

and in the mid term is expected to invest FCF for expansion or acquisition.


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27 August 2013 28

PetroVietnam Fertilizer & Chemical (DPM VN, Outperform, Target Price: VND48,000.00)Interim Results 2H/12A 1H/13E 2H/13E 1H/14E Profit & Loss 2012A 2013E 2014E 2015E

Revenue m 6,232,830 5,147,021 5,465,393 5,132,863 Revenue m 13,321,853 10,612,414 10,583,223 10,568,135Gross Profit m 1,966,346 1,671,906 1,775,323 1,567,118 Gross Profit m 4,537,322 3,447,229 3,231,172 3,047,174Cost of Goods Sold m 4,266,484 3,475,114 3,690,070 3,565,745 Cost of Goods Sold m 8,784,531 7,165,184 7,352,051 7,520,961EBITDA m 1,200,442 1,181,654 1,254,746 1,080,253 EBITDA m 3,226,234 2,436,401 2,227,326 2,044,759Depreciation m 105,933 104,887 111,375 104,887 Depreciation m 212,835 216,262 216,262 216,262

Amortisation of Goodwill m 0 0 0 0 Amortisation of Goodwill m 0 0 0 0Other Amortisation m 0 0 0 0 Other Amortisation m 0 0 0 0EBIT m 1,094,509 1,076,767 1,143,372 975,366 EBIT m 3,013,399 2,220,139 2,011,064 1,828,497Net Interest Income m 258,296 224,021 237,878 199,514 Net Interest Income m 565,032 461,899 411,368 349,754

Associates m -41,741 -23,133 -24,563 -23,133 Associates m -47,696 -47,696 -47,696 -47,696Exceptionals m -1,897 0 0 0 Exceptionals m 0 0 0 0Forex Gains / Losses m -3,837 0 0 0 Forex Gains / Losses m -4,966 0 0 0Other Pre-Tax Income m 339 0 0 0 Other Pre-Tax Income m 1,279 0 0 0Pre-Tax Profit m 1,305,669 1,277,656 1,356,686 1,151,747 Pre-Tax Profit m 3,527,048 2,634,342 2,374,736 2,130,555Tax Expense m -221,751 -127,766 -135,669 -115,175 Tax Expense m -474,402 -263,434 -237,474 -319,583Net Profit m 1,083,918 1,149,890 1,221,018 1,036,572 Net Profit m 3,052,646 2,370,908 2,137,263 1,810,972Minority Interests m -21,617 -17,460 -18,540 -17,460 Minority Interests m -50,796 -36,000 -36,000 -36,000

Reported Earnings m 1,062,301 1,132,430 1,202,478 1,019,112 Reported Earnings m 3,001,850 2,334,908 2,101,263 1,774,972Adjusted Earnings m 1,064,198 1,132,430 1,202,478 1,019,112 Adjusted Earnings m 3,001,850 2,334,908 2,101,263 1,774,972

EPS (rep) ho 2,804 2,980 3,164 2,682 EPS (rep) ho 7,924 6,144 5,530 4,671EPS (adj) ho 2,809 2,980 3,164 2,682 EPS (adj) ho 7,924 6,144 5,530 4,671EPS Growth yoy (adj) % -35.8 -41.7 12.6 -10.0 EPS Growth (adj) % -3.1 -22.5 -10.0 -15.5

PE (rep) x 5.2 6.7 7.5 8.8PE (adj) x 5.2 6.7 7.5 8.8

EBITDA Margin % 19.3 23.0 23.0 21.0 Total DPS ho 4,500 3,000 3,000 1,500

EBIT Margin % 17.6 20.9 20.9 19.0 Total Div Yield % 8.5 7.3 7.3 3.6Earnings Split % 35.5 48.5 51.5 48.5 Weighted Average Shares m 379 380 380 380Revenue Growth % 32.9 -27.4 -12.3 -0.3 Period End Shares m 379 380 380 380EBIT Growth % -31.8 -43.9 4.5 -9.4


Revenue Growth % 44.4 -20.3 -0.3 -0.1 EBITDA m 3,226,234 2,436,401 2,227,326 2,044,759EBITDA Growth % -0.1 -24.5 -8.6 -8.2 Tax Paid m -474,402 -263,434 -237,474 -319,583EBIT Growth % -0.9 -26.3 -9.4 -9.1 Chgs in Working Cap m 315,763 -496,228 -10,600 -7,668Gross Profit Margin % 34.1 32.5 30.5 28.8 Net Interest Paid m 0 0 0 0EBITDA Margin % 24.2 23.0 21.0 19.3 Other m 211,922 175,686 159,217 136,757EBIT Margin % 22.6 20.9 19.0 17.3 Operating Cashflow m 3,279,517 1,852,425 2,138,469 1,854,265Net Profit Margin % 22.9 22.3 20.2 17.1 Acquisitions m 0 0 0 0Payout Ratio % 44.3 48.8 54.3 32.1 Capex m -714,542 -200,000 -200,000 -200,000EV/EBITDA x 3.2 4.2 4.6 5.1 Asset Sales m 0 0 0 0EV/EBIT x 3.4 4.6 5.1 5.7 Other m 849,103 0 0 0

Investing Cashflow m 134,561 -200,000 -200,000 -200,000Balance Sheet Ratios Dividend (Ordinary) m -1,330,000 -1,140,000 -1,140,000 -570,000ROE % 34.9 25.0 20.9 16.7 Equity Raised m 0 0 0 0

ROA % 30.3 20.5 17.5 15.1 Debt Movements m 28,380 7,762 0 0ROIC % 59.9 55.9 45.1 39.2 Other m -553,500 -219,976 0 -570,000Net Debt/Equity % -61.0 -59.4 -62.8 -64.8 Financing Cashflow m -1,855,120 -1,352,214 -1,140,000 -1,140,000Interest Cover x nmf nmf nmf nmfPrice/Book x 1.7 1.6 1.5 1.5 Net Chg in Cash/Debt m 1,558,958 300,211 798,469 514,265Book Value per Share 23,663.9 25,497.6 27,363.7 28,474.1

Free Cashflow m 2,564,975 1,652,425 1,938,469 1,654,265


Cash m 5,629,403 5,929,614 6,728,083 7,242,348Receivables m 46,193 110,394 110,091 109,934Inventories m 1,171,462 1,427,139 1,448,804 1,466,674Investments m 62,077 62,077 62,077 62,077Fixed Assets m 1,896,165 1,928,165 1,960,165 1,992,165Intangibles m 770,898 722,636 674,374 626,112Other Assets m 1,004,337 936,465 888,552 840,743Total Assets m 10,580,535 11,116,490 11,872,146 12,340,054Payables m 398,388 317,363 316,490 316,038Short Term Debt m 27,737 50,000 50,000 50,000

Long Term Debt m 8,477 0 0 0Provisions m 124,031 124,031 124,031 124,031Other Liabilities m 851,974 730,449 741,867 752,251Total Liabilities m 1,410,607 1,221,843 1,232,387 1,242,320Shareholders' Funds m 5,775,353 6,266,581 6,765,566 7,010,044Minority Interests m 205,561 205,561 241,561 277,561Other m 3,189,014 3,422,505 3,632,631 3,810,128Total S/H Equity m 9,169,928 9,894,647 10,639,758 11,097,733Total Liab & S/H Funds m 10,580,535 11,116,490 11,872,146 12,340,054

All figures in VND unless noted.Source: Company data, Macquarie Research, August 2013


29/33


27 August 2013 29

VIETNAM

VNM VN Outperform

Price (at 13:00, 23 Aug 2013 GMT)VND136,000

Valuation VND 170,000- PER12-month target VND 170,000



Volatility Index Low/Medium

GICS sector Food, Beverage& Tobacco


Market cap US$m 5,360

Free float % 85




Revenue bn 26,562 32,779 40,316 49,059EBIT bn 6,206 7,765 9,445 11,335EBIT growth % 43.8 25.1 21.6 20.0Reported profit bn 5,819 6,831 8,313 10,190EPS rep VND 4,296 8,194 9,972 12,223EPS rep growth % 55.6 90.7 21.7 22.6PER rep x 31.7 16.6 13.6 11.1Total DPS VND 1,926 3,801 4,002 4,446Total div yield % 1.4 2.8 2.9 3.3ROA % 35.2 35.4 34.6 33.2ROE % 39.6 39.0 38.4 37.2EV/EBITDA x 16.6 13.2 10.8 9.0Net debt/equity % -8.1 -14.2 -27.7 -42.7P/BV x 7.3 5.9 4.7 3.7

VNM VN rel Vietnam Ho Chi Minh

performance, & rec history




Analyst(s)Gary Pinge+852 3922 3557 [email protected] SecuritiesGigi Nguyen+848 3821 9316 [email protected]


Vietnam Dairy ProductsMore milk for the masses

Event We upgrade VNM to Outperform from Neutral and raise our target price by

11.8% to VND170,000/sh. We see a TSR of 27.9%, inclusive of a 2.9% div

yield.

VNMs shares have fallen by 9.9% off their recent high of VND151,000 and

now trade at 13.6x and 4.7x our FY14E EPS and BVPS estimates,

respectively.

VNM ended 1H13 with net revenue of VND14,746.9bn (+14.4% YoY), EBIT of

VND3,833.5bn and NP of VND3,373.6bn (+21.5% YoY), which represents

45%, 49.4% and 49.4% of our full-year forecasts, respectively.

Impact

We think that VNMs fundamental growth story remains intact. Why?

1) Organic Growth:Dairy consumption in Vietnam stands at only 16kg per

capita (incl. butter), much lower than that of China and Thailand, which

consume nearly 23kg and 35kg per capita, respectively.

2) Sustainable gross margins:VNM typically holds close to three months of

raw material in inventory. This gives the company significant visibility on input

prices, allowing ex-factory pricing to be adjusted ahead of COGS pressure.

Management seeks to maintain gross margin in the 30%+ range.

3) Insulated from recent controversies:VNM was unaffected by the 2008

China melamine scandal and did not receive any of the contaminated whey

protein concentrate behind Fonterras (a VNM supplier) recent global recall.

All in, we believe that VNM gives the investor sustainable earnings growthabove 20%, strong FCFF of VND4.3tn in FY13E and a net cash position. The

company also produces one of the highest ROEs of any listed Vietnamese

firm. FY12s ROAE came inat 41.6% and we believe future ROEs will remain

over 35.0%, on our estimates.

Currently trading at 13.6x FY14E EPS and 4.7x FY14E BVPS, the stocks

approximate 30% PER premium relative to the VNINDEX does not look

unreasonable to us given the companyshigher profitability. In addition, we

note that VNM is currently trading at a significant 29.5% discount to its

regional dairy peers.


We raise our target price by 11.8% as we roll our valuation forward to FY14E.

No changes to our estimates.

Price catalyst

12-month price target: VND170,000 based on a PER methodology.

Catalyst: Higher sales volumes and high GMs may drive an earnings surprise.


We upgrade VNM to Outperform on strong fundamentals as we roll our

valuation forward to FY14E. In our view, the recent price correction offers

investors a good buying opportunity.


30/33


27 August 2013 30

Vietnam Dairy Products (VNM VN, Outperform, Target Price: VND170,000)Interim Results 2H/12A 1H/13E 2H/13E 1H/14E Profit & Loss 2012A 2013E 2014E 2015E

Revenue bn 13,674.3 14,746.9 18,032.0 19,910.7 Revenue bn 26,561.6 32,778.8 40,316.4 49,059.1Gross Profit bn 5,137.9 5,913.6 6,086.6 7,276.3 Gross Profit bn 9,608.2 12,000.2 14,733.6 17,688.7Cost of Goods Sold bn 8,536.4 8,833.3 11,945.3 12,634.4 Cost of Goods Sold bn 16,953.3 20,778.6 25,582.9 31,370.4EBITDA bn 3,558.0 4,168.6 4,299.4 5,136.3 EBITDA bn 6,737.3 8,468.0 10,400.3 12,427.3Depreciation bn 282.4 335.0 367.8 471.7 Depreciation bn 531.5 702.9 955.2 1,092.5

Amortisation of Goodwill bn 0.0 0.0 0.0 0.0 Amortisation of Goodwill bn 0.0 0.0 0.0 0.0Other Amortisation bn 0.0 0.0 0.0 0.0 Other Amortisation bn 0.0 0.0 0.0 0.0EBIT bn 3,275.5 3,833.5 3,931.6 4,664.6 EBIT bn 6,205.8 7,765.1 9,445.1 11,334.7Net Interest Income bn 114.9 191.9 46.5 278.4 Net Interest Income bn 281.7 238.4 563.6 1,085.5

Associates bn -0.8 12.3 0.0 0.0 Associates bn 12.5 12.3 0.0 0.0Exceptionals bn 154.3 73.2 0.0 0.0 Exceptionals bn 287.3 73.2 0.0 0.0Forex Gains / Losses bn 11.2 36.8 0.0 0.0 Forex Gains / Losses bn 41.8 36.8 0.0 0.0Other Pre-Tax Income bn 4.9 -32.8 39.2 0.0 Other Pre-Tax Income bn 100.5 6.5 6.5 6.5Pre-Tax Profit bn 3,559.9 4,114.9 4,017.3 4,942.9 Pre-Tax Profit bn 6,929.7 8,132.3 10,015.2 12,426.7Tax Expense bn -516.6 -740.9 -560.3 -840.8 Tax Expense bn -1,110.2 -1,301.2 -1,702.6 -2,236.8Net Pro

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