Vietnam Outlook Update Q4 2016

Long Tran Head of research

Please feel free to contact me at

E Longtt@bsc.com.vn

P +84 4 39352722 (118)

M +84 906 959 034

S rongbeo

BSC

Content List

• Investment themes 03

• Economy backdrop 04

• Global factors 06

• Domestic factors 09

• Stock market outlook 12

• Performance and liquidity 16

• Fearless forecast 2016 -2018 19

• Sector outlook 23

• Case to consider 24

• New kids on the block 29

Investment themes

3

Real Estate

push

building

material

FDI benefit

but caution

with TPP (may

false) with new

US President

Rerate on

the rise

Upcom, Hnx,

low P/E

Largecap

Privatization

& FOL will

dominate in

2016 – 2017.

New Kids on

the block

Local grow

oriented.

Low Beta

and high

dividend

yield

1 2 3 4 5

Economy backdropChallenging 30 years since “Doi Moi”

4

Key take away points

• Eventful Q4 2016: US President election 2016 (8th Nov), FOMC meeting (02nd Nov, 14th Dec) and Opec meeting (30th Nov) will be on the spotlight (all on Q4 2016)

• What happen if TPP false ?

• Vietnam fall short of GDP target (6.7%) while there is only 3 months left

• Liquidity is great, foreign reserve climb to USD 40 billion

• New PM want to support growth and push privatization, prove that he is more Pro-business. Party leader’s anti corruption campaign.

• Pros: strong FDI, stable interest rate, liquidity, positive export

• Cons: State own enterprise restructuring, Banking system and fiscal deficit,

You don’t want to be any where else

Source: BSC, Blackrock

Emerging economies

• China Slowdown

• BRIC slow down

• Commodities price recovery

Developed economies

• FED hike

• Election year and anti TPP

•Brexit & EU

Geopolitical risks

• Conflict and violence

(Russia, East Sea, IS)

• Cyber Security

Vietnam

• USD/VND

• Fiscal Policies

• FTA & investment (TPP)

BSC’s relevant reports: Brexit before & after, Lanina, Oil, commodity

Major risks from Fed hike and US President ElectionFOMC meeting on 02nd Nov and 14th Dec: The probability of a hike by December jumps to 61 percent. Commodities to recover further more until then.

US President election on 08th Nov: Clinton vs Trump. Hillary Clinton is well-aware of the dynamics of the South China Sea dispute while Donald Trump has spoken against free trade agreements (he hate TPP)

What it mean for Vietnam:

• Clinton is better, Trump is so uncertainty

• A hike is not a big problem as everyone expect it happen in Dec.

Source: Project forecast

BSC’s relevant reports: FED hike & How long how low

If TPP false, we still have 16 other FTAs

• The possible failure of TPP if Mr. Obama can not push Congress to pass TPP in the two-month Nov 2016 to Jan 2017.

• The main affected sectors are textiles, garments and footwear which accounted for 21.6% of exports but less than 10% of FDI.

• What it mean for Vietnam:

• If No TPP, stay away from textiles, garments and footwear (direct benefit from TPP)

• Anyway, FDI trends still very strong and good news is we still have 16 other FTAs.Indirect sector still have positive grow.

Source: Bloomberg

BSC’s relevant reports: TPP and sectors

GDP grow in 2016 & 2017• 2015: GDP 6.68% ranked 4th in EM, thanks

to strong FDI and private sector recovery. Bad new is VN’s GDP always slowdown after election years (2005, 2010)

• 2016 : With stable interest rate, Strong FDI, FTAs, We expect:

• GDP: 6.1% - 6.3% (Q4 need min 6.4%)

• FDI: USD 13.5 to 17 billion ( USD 12 billion ytd)

• CPI: ~ 3.5 % (3.14% ytd)

• Budget deficit: 6%

• export grow ~7% (net export USD 2.8 billion ytd, export rise 6.5% ytd)

• USD/VND: up to +2% (-0.8% ytd)

• Credit growth: 16%-18% (10% ytd)

• Interest rate: flat and fall slightly

Source: Bloomberg

8.4

5.32

6.78

5.03

6.36.5

6.68

4

4.5

5

5.5

6

6.5

7

7.5

8

8.5

9

Actual Historical Median Forward High Low

Stock market OutlookAlpha seeking rather than Beta

12

Key take away points

• Vietnam is look a lot like a turnaround stock with new leaders, restructuring plan and receiving huge foreign investment (start slow but improve fast)

• What if Vnindex can grow at the same speed as Asean stock indexes from 2009 to 2012 ? 2016 market up +16.8% thanks to abundant liquidity.

• Valuation multiples is higher than 5 years average but still attractive compare to Asian peers. Q4, P/E is high (16.2) and need a correction.

• Market earning which can be similar to 2015 (due to slower than expect GDP and earning in big stocks does not increase fast enough)

• In medium term, Stock market will have new kids on the block thanks to IPO, divestment and listing process is pushed; market cap and liquidity will increase

• In short term, Q4 is full of events such as OPEC, FOMC, US president election, high profile corruption trial in Vietnam … which can create fluctuation.

VN-

Index,

8.5%

MXEF,

9.5%

MXFM, 1.4%

MXWO,

4.0%

(4.00)

(2.00)

-

2.00

4.00

6.00

8.00

10.00

12.00

6/30/16 7/31/16 8/31/16

MXWO Index MXFM Index MXEF Index VNINDEX Index

FM & EM suffer a hard year opening

• 2015: Vnindex in the greenzone while FM and EM close in dark red.

• Vnindex outperform the EM, FM and world index first half 2016 (+8.3%), Q3 (+8.5%) despite 2 major incidents:

• China slowdown

• Brexit

• Vietnam stock market look like China 2014 when the stock market about to rocket or Asean 5 in 2009. USA election 2016 will be the main risk in Q4

• Lead us to conclude “you don’t want to be any where else”.

Source: Bloomberg

Valuation and market size

Source: Bloomberg, BSC Research

As of 30 Sep 2016

56.20

7.28

4.96

Index market cap (billion USD)

VN-Index (306

members)

HNX-Index (383

members)

UPCOM-Index

(306 members)

P/E ratio of Asian stock Index

Lead us to investment theme number 3 Re-rate: buy bluechip in HNX, Upcom and wait for a rerate when HNX joint HSX. Listed market cap will rise (Decision No 51) Upcom should not be overlooked. Vnallshare will be announced on 24th Nov 2016 (208 Vnindex + 180 Hnindex)

• HSX: ~ 1/3 stocks have current P/E less than 10, P/B less than 1.0

• HNX: ~ 2/3 stocks have current P/E less than 10, P/B less than 1.0

10.89

16.40

0

5

10

15

20

25

30

Foreign Investors net sell strongly in Q3

9M2016: foreign investor net sell (mostly VIC, VNM) and ETF cash out.

• Top buy Q3: NT2, PVT, SSI, GAS, DRC, BVH, CTG, CTI, EVE,

• Top Sell Q3 : FIT, VNM, VIC, VCB, PVD, HBC, HPG,

• Market still up +16% thanks to abundant liquidity in VND lead to high and cheap margin lending

• If foreign investor don’t turn net buyer, it wont be good for the market

Source: Bloomberg

Country Net transaction

September

Net transaction

Q3

2016

India 917 4069 7025

Indonesia -279 1611 2596

Japan (6759) (14212) (65860)

Phillipine (274) 110 571

Korea 1325 6065 9414

Sri Lanka 5 21.7 (20.3)

Taiwan 231 8017 14262

Thailand 510 2764 3802

Pakistan (33) (30) (71)

Vietnam (123) (152) (230)

BSC’s relevant reports: Pnote 1 & Pnote 2

Liquidity improved9M2016 : Liquidity is slightly higher than in 2015 around USD 150 million.

• Stable interest rate and exchange rate,

• FOL rise in number of stocks,

• T+2 applied

• High beta stocks have drier liquidity (FLC, KLF, TSC…)

• Margin lending rise in more FA stocks

• VN start to allow day trading (buy and sell stock at the same time),

Q4 2016: Liquidity stable

• T+0, index future (2017).

• Stable interest rate, liquiditySource: Bloomberg

BSC’s relevant reports: Upcom Premium & Upcom Top 30

2,613

2,646 2,973

-

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

Average Turnover 3 per.Mov.Avg

Bil.VND

Privatization & divestment to be pushed

• Privatization process will be pushed due to fiscal budget after 9 month of slow IPO (only 40/120 planned).

• Divestment in Sabeco, Habeco, FPT, FPT telecom, VNR, BMI, BMP, NTP, HGM, SGC, VIID in 2016 - 2017

• Number of state own companies to be IPO and divest is around 1100(2016 to 2020)

• Market cap will increase vastly thanks to new stocks

• Lead us to Investment themes number 4 “Privatization & FOL”. Big divestments and hidden gems are expected (Blue chips & mid cap), so be prepared.

Source: Chinh Phu

109

180

0

100

200

300

400

500

600

700

800

900

DNNN CPH

752.03621.88

699.31

880.58

400

500

600

700

800

900

1000

1100

1200

01/15 07/15 01/16 07/16 01/17 07/17 01/18 07/18

Bear Bull Average

Fearless forecast 2016 -2018• Vnindex is the biggest loser compare to

Asean stock markets. Vnindex broke 8 year high of 680 points.

• Since 2009, Asean stock market passed 2007’s top by a huge percentage.

• Indonesian index has increased the most, while Singapore performed the least.

• What if Vnindex can recover at the same speed as Asean indexes 2009 - 2012

• Let your imagination go wild:

• Vnindex 699 at the end of 2016

• Vnindex 752 to 880 at the end of 2017Source: BSC

10.33

16.18

9.13

15.21

12.17

14.01

5

10

15

20

1/4/10 1/4/11 1/4/12 1/4/13 1/4/14 1/4/15 1/4/16

Vnindex P/E Avg -1.65Sdtv Avg +1.65Sdtv

Avg Avg -1Sdtv Avg +1Sdtv

Fearless forecast 2016 -2018: Valuation

• PE index broke the downtrend since 2014 and above the +1.65 SD (@ 15.21).

• Short term correction or accumulation are likely to happen when P/E index move toward + 1 SD (14) or +1.65 SD (15.2).

• Long term view, Vietnam market is still deeply discounted compare to peers in Asean.

• 2016-2017: The multiple is likely to be flat at 14 if USD/VND and VND interest rate stable.

• Bull case: P/E 15.21 (+1.65 SD)

• Base case: P/E 14.01 (+1 Sdtv)

• Bear case: P/E 12.17 (5 years average)Source: BSC

Fearless forecast 2016 -2018: growth

• 2015: Market trailing EPS has been improving steadily in the last 4 years. Market is driven by earning more than multiples.

• 2016 : We expect EPS ~ in 2015 due to:

• Lower GDP growth 6.1% to 6.2%

• Lower Credit growth

• Commodities price recover sooner

• World economy is weaker than expected

• Elnino have strong effect to agriculture

• Vnindex can vary from :

• Bull case: 699

• Base case: 644Source: BSC

46.1845.96

42.05

30

35

40

45

50

55

60

01/10 01/11 01/12 01/13 01/14 01/15 01/16

TRAIL_12M_EPS Predict EPS (+) Predict EPS (-)

What make the market feeling hope and fear• New big stock will be listed

• ETF Foreigner inflow season (yes or no)

• Earning season and shareholder meeting and promising (4th Quarter)

• Foreign Ownership limitation list (more stocks to applied)

• State divest good companies

• Market upgrade is long journey (Quatarneed 7 years)

• New policies: buy and sell at the same time, T+0, Future (2017)

• Commodities fall again

• China tension in East sea

• Foreigner net sell (ETF, Pnote) (Dec 2016)

• FED, PBOC and exchange rate (Dec 2016)

• Rising interest rate scare margin

• TPP false, new US President (NOV 2016)

• State divest too fast and too many

• Anti corruption trial

Sector OutlookAlpha Seeking

23

Key take away points

• Vnindex P/E is quite high (16.2) and need a correction to more attractive level in Q4 (or earning need massive rise which is not likely to happen)

• Top 10 and top 15 market caps looks quite expensive, mostly 22 to 40 time P/E (except MBB, CTG, BID, FPT, MWG and HPG)

• In Q4, low beta, seasonal, divestment or out-of-favor stocks/sectors can be interesting

• In 2017-2018, you will need new kids on the blocks (1/3 top 15 will be

replaced). Be prepared, don’t wait until they all show up in the listed exchange.

Cases to consider

Blue Chips: VNM, FPT, MBB, DPM, GMD, REE, BMP, MWG, FPT

Blue Chips for bottom

fishing:

HPG, HSG, PVS, VCG, SCR

Mid Caps: VSC, DXG, KDH, HBC, CMG, ITD, BFC, NT2, VNR,

VGC, VGG, CTI, DGC, DGL, RAL, BMI, NTP, VNS

Mid Caps for bottom

fishing:

LCG, PVG, PGI, BCC, SAM, PPC, PTI, TNG, PVT,

BHS, NCS, TCM, LAS

Small Caps: HDC, LIX, NET, CHP, SJD, VIP, PGS, ITC, CSV, PGC,

C32, SMC, BTP, PET, HAH, SHP

Penny: LIG, L10, SAV, TTC, VIT, HNM, TCR, VCA, AGM

Caution: HAG, HNG, FLC, HVG, MSR, DRH, ROS, TCH

• 9M2016: Most of previous stocks on our list is outperformed Vnindex.

• Out of favor stocks: REE, SAM, PPC, BCC, TRC, LAS, VGG, VNS can be interesting

• Low beta: PTI, PGI, BHS, BFC, CSV, NET, DGL, NCS

• Seasonal: CHP, SHP, SJD

• Divestment: VNM, FPT, VNR, BMI, NTP, BMP, VCG

• New kids on the block: Sabeco, ACV, Habeco, VEAM, Vinatex, Vietnam Airlines…

How news and macro policies affect sectors

Sectors

Ma

rin

e

tra

nsp

ort

Re

ale

sta

te

Co

nstr

ucti

o

n Ce

me

nt

Texti

le

Ele

ctr

icit

y

Ph

arm

ace

ut

ica

l

Pla

sti

c

Tir

e

Ba

nk

Ste

el

Aq

ua

cu

ltu

re

Su

ga

r

Oil

&g

as

Fe

rtiliz

er

Ru

bb

er

Ce

ram

ic

tile

s

IT Se

ap

ort

Au

tom

ob

ile

Insu

ran

ce

Milk

Material

recovery(+) (-) (-) (-) (-) (+) (+) (+) (+) (-) (-)

Fed hikes (+) (+) (-)

USD/VND (-) (+) (-) (-) (+) (-) (+) (-) (+)

Euro / Brexit (+) (-) (+) (-) (-)

Japan/ JPY (-) (+) (-) (-)

China / RMB (-) (-) (-) (-) (-) (-) (-) (-) (+)

Interest rate (-) (-) (-) (+) (-) (-) (+)

TPP Risk (-) (+) (-) (-) (+) (-) (+) (+) (-) (-)

How discount P/E Vnindex vs Asean 4

56%54%

43%

39%

50%52%

45%

24%

14%

0%

10%

20%

30%

40%

50%

60%

0

10

20

30

40

50

60

Health care Consumer

Service

Technology Utility Industrials Oil & Gas Consumer

goods

Basic

materials

Financials

PE comparison by sectors

Regional PE PE of Vietnam Median Discount

Sector rating 2016No Sector Rating 2016 Buy Hold/tracking

1 Real Estate Outperform DXG, ITC KDH, SCR, VIC,

2 Construction Outperform CTI CTD, HBC, FCN

3 Tiles Outperform TLT, TTC, VGC VIT, CVT

4 Technology Outperform FPT, CMG, ITD ELC

5 Sea Port Outperform HAH, VSC GMD

6 Power Outperform SJD, CHP NT2, BTP, PPC

7 Steel Outperform HSG, HPG, NKG VIS, SMC

8 Dairy Market perform VNM, HNM, VLC

9 Textile Market perform TNG, VGG TCM, EVE

10 Fertilizer Market perform BFC, DPM, LAS

11 Cement Market perform BCC HT1, BTS

12 Automobile Market perform SVC, HTL, TMT

13 Insurance Market perform BMI PGI, VNR, PVI

14 Plastic Market perform NTP BMP, AAA

15 Sugar Market perform BHS SBT, LSS, SLS, KTS

16 Tire Market perform DRC, CSM

17 Banking Market perform MBB VCB, ACB

18 Pharmacy Market perform DHG, IMP, DMC

19 Rubber Market perform TRC DPR, PHR

20 Oil & Gas Market perform PGS, PGC CNG, PXS, PVD, GAS

21 Aquaculture Underperform HVG, VHC, FMC

22 Marine Transport Underperform VTO, PVT GSP

• OUTPERFORM: Real Estate, Construction, Building materials (tiles, plastic, cable), Technology, Sea Ports, Textile, Electric power.

• MARKET PERFORM: Plastic, Steel, Sugar, Tires, Cement, Automotive, Insurance and Banking, Pharmacy and Oil & Gasand Natural Rubber, Fertilizer, Dairy.

• UNDERPERFORM: Marine Transportation and Aquaculture

New kids on the block• If the IPO and listing process are push

hard enough, we will have USD 12 billion market cap increase .

• 2 New members in top 10

• 1/3 top 15 will be replaced

• What it mean for the market:

• ETF and index tracking fund will busy with rebalancing portfolio

• Index will be strongly affected (big cap with small floating shares)

• You should be hurry If you haven’t had few name in your portfolio,

Source: Bloomberg

No

Market Cap (bil USD)

Percentage

add Percentage Ticker

1 9,255 14,6

% 14,6%VNM

2 6,209 9,8% 24,5%VCB

3 6,122 9,7% 34,1%GAS

4 5,151 8,1% 42,3%VIC

5 2,941 4,7% 46,9%CTG

6 2,661 4,2% 51,1%BID

7 2,378 3,8% 54,9%MSN

8 2,248 3,6% 58,5%BVH

9 1,629 2,6% 61,0%HPG

10 1,090 1,7% 62,8%MBB

11 0,963 1,5% 64,3%FPT

12 0,898 1,4% 65,7%MWG

13 0,863 1,4% 67,1%ROS

14 0,779 1,2% 68,3%STB

15 0,570 0,9% 69,2%EIB

No CompanyMarket Cap

1Sabeco 3,00

2ACV 2,25

3BSR 1,58

4Vietnamairlines 1,12

5Petrolimex 1,02

6VEAM 0,85

7PV Power 0,64

8PV Oil 0,50

9Habeco 0,50

10Vissan 0,29

11Vinatex 0,25

12Vinafor 0,16

13Hancorp 0,06

14SCB 0,06

15Nhabeco 0,00

Thanks for your supports and confidence in us

Long Tran Head of research

Please feel free to contact me at

E Longtt@bsc.com.vn

P +84 4 39352722 (118)

M +84 906 959 034

S rongbeo

BSC