Vietnam’s equity market bull-charged its way to the top at the beginning of 2014 and emerged slightly battered from the heavy sell-off in May due to the South China Sea.
The current global sell off due to dwindling oil & gas has taken its toll on Vietnam’s oil & gas stocks, which are behemoths in terms of weight in the local indices. So the question remains whether this is the beginning of a down cycle or the start of another bull rush? From what we’ve been able to gather, we believe the current situation is ripe for a buying opportunity.
We’re seeing an improving macroeconomic climate. The government is confident that economic growth might finish above 5.8% YoY, and inflation will likely settle below 3% YoY in 2014, which is a historical low. 2015 economic plan also exhibit characteristics of growth: GDP growth at 6.2% YoY, CPI around 5% YoY, and export growth at 10% YoY with trade deficit capped at 5% of export.
Given the fact that foreign direct investment (FDI) continues to serve as a strong pillar for growth (Vietnam has become a manufacturing base for a number of conglomerates such as Samsung, LG, Intel, Microsoft, and Bridgestone), we believe that the plan is achievable.
It is important to note that, while in the short term declining oil prices might harm Vietnam’s oil and gas sector, in the longer-run it would help boost final consumption, which constantly accounts for 70% of Vietnam GDP over the past 5 years. Additionally, because Vietnam is both a crude oil exporter and petroleum product importer, falling oil prices’ impact should be minimal.
With an improving macroeconomic climate, we envision further upgrades for Vietnam’s sovereign credit rating in 2015, after the recent upgrades by Moody’s and Fitch, couple with more US dollar bond issuances from the Government after the successful issuance of $1b worth of 10Y bond at par on a semi-annual coupon of 4.8%, bid to cover ratio at 10.8x last November.
More specifically, economic restructuring, which kicked off in late 2011, has endured its initial painful stages and has manifested characteristics of growth and maturity.
In the past, the government was fixated on equitising only small and medium state owned enterprises (SOEs), and although the number of SOEs reduced from 1,406 by the end of 2009 to 857 in Sep, 2014, their contribution to GDP was not substantial (from 34.7% in 2009 to 32.2% in 2013).
Starting from 2014, we saw sizeable SOEs in the IPO pipeline, namely Viglacera, Vinatex and Vietnam Airlines. Together with the request for non-core divestment, and permitting the sales of state-assets under book value, we believe SOEs reform will continue to evolve.
In conjunction with economic and SOEs reforms, banking sector reforms also exhibited significant improvements:
Official bad debt ratio decreased mildly, to 3.88% as of Sep 2014 (end June 2014: 4.17%, July 2014: 4.11% and August 2014: 3.9%). Meanwhile, the State Bank of Vietnam (SBV) estimated that actual NPL ratio might stand at 5.4% by the end-September, and will likely decrease to 3.7-4.2% by the year-end in comparison to 17% in September, 2012. Reasons behind the significant reduction in actual NPL can be attributable to: (1) banks’ aggressive provision booking policies in the last 2-3 years, and (2) the Vietnam Asset Management Company (VAMC).
The VAMC purchased roughly $2.82b in 2014, nearly achieving its target of $3.28b. In addition to the amount purchased in 2013, the total value of bad debt sold to the VAMC currently stands at $4.46b. On the flip side, the VAMC has already sold $164.3m worth of bad debts (exceeding the target of $117.4m) in 2014.
The SBV issued Circular 36/2014/TT-NHNN dated Nov 20, 2014, addressing risk management practice of credit institutions. Many new regulations were introduced, including limiting interest groups’ influence, avoiding cross ownership or leveraged buy-out in the banking sector, related-party lending (with stringent definition on related parties), excessive exposure to securities-related risk (not only equity, but also bond issued by unlisted companies).The Basel II application in the banking system is also introduced, with the LCR (liquid coverage ratio) calculation at a 30 day interval and not 7 day as in the previous circular. On the other hand, the new Circular relaxed the weight of medium and long term credit using short term funding from 30% to 60%, and lowered the risk ratio for securities and real estate related loans (in calculating CAR) from 250% to 150%. This new Circular might have significant impact on banking stocks as well as margin lending in the coming time. Transition period is applied after the effective date of Feb 1st, 2015, which is very close to the deadline for the full implementation of Circular 09 on debt classification (March, 2015).
Regarding the property market, the new Housing law replaces the pilot scheme on foreign ownership of properties that expired in December 2013 and will take effect from July 1, 2015.
We believe that the new law is an expected attempt to attract foreign capital inflows into the property market, given the property price in Vietnam becoming much more reasonable due to prolonged correction period.
The equity market has experienced a similar growth pattern where market cap has increased to $55b with daily trading volume of $125m for both the Ho Chi Minh City Stock Exchange and the Hanoi Stock Exchange, which might be merged in 2015.
Total foreign ownership for listed stocks is approximately 21%-22%, and the Government is still working on extending the foreign ownership limit (FOL) through various methods from directly extending the current limit of 49% for non-banks to 60% or 100%, depending on the sector, or introducing non-voting depository receipt.
All the way down to a micro level, operating and net profit of the 65 companies under our coverage which cover over 90% of total market cap, are expected to increase 8.4% and 5.6% in 2015 respectively, and to that extent, a positive support for the equity market next year. It should be noted that M&A activities coupled with asset liquidation underwent significant progress in 2014 and 2015 and contributed to a substantial portion of earnings of some listed companies.
With a downgrade on the Oil & Gas sector, from Overweight to Neutral and Underweight view on banking sector, this suggests that any upward momentum of the VNIndex will be motivated by the peripheral sectors and more likely to be driven by groups of mid and small caps.
Head of Research, Saigon Securities Inc
Sai Gon Securities is the premier brokerage brand in Vietnam. We lead the market in terms of: i) market capitalisation, at nearly $500m; ii) foreign institutional accounts; iii) brokerage market share; and iv) branch network and locations. SSI also specialises in investment banking, asset management and treasury.
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