INVESTMENT OUTLOOK Third Quarter 2017

Transcription

1 INVESTMENT OUTLOOK Third Quarter 2017 MACRO HIGHLIGHTS EQUITY MARKET TANH TRAN Research Analyst : (84.28) M: (84) : tanh.tv@shinhan.com tanhtran109gl@gmail.com 1

2 CONTENTS MACRO MARKET AT A GLANCE... 3 Theme 1: Retail sector- a fertile market that catches big investors attention Theme 2: Manufacturing: undeniable pillar of the economy... 6 Theme 3: Mobilization vs. Disbursement a Big Gap... 7 Theme 4: Trade surplus: boost GDP growth and stabilize currency... 9 Theme 5: Easing monetary policy inflation and currency exchange pressure EQUITY MARKET VN-Index performance Factors that boosted the market Factors that dragged the market Sectors performance Net foreigner s accumulation Top foreigner s net buy/sell Market Capitalization per GDP Valuation: VN-Index revised up above 820 points this year PE of VN-Index Market Momentum: maintaining an uptrend Recommended sectors and stocks Banking Retails, Food& Beverage Aviation IT & Telecom Risks to consider

3 MACRO MARKET AT A GLANCE Tanh Tran (84.28) M: (84) Research Analyst tanh.tv@shinhan.com tanhtran109gl@gmail.com GDP growth accelerates in the third quarter, with 7.46% Credit growth limit rises to 21-22% to spur GDP growth PM asks to cut lending rates and delay tax hike in this year Manufacturing picks up in Sept. with PMI at 53.3 vs in Aug. CPI rises 0.59%MoM mainly due to higher tuition fees and fuel prices Stable Vietnam dong helps boost economic growth Trade surplus eases the currency exchange pressure High chance to reach GDP growth target of 6.7%, but a warning sign of unstainable growth GDP growth target of 6.7% is likely to achieve. Pushing up credit growth to 21-22% to speed up the economy. Nearly VND550 tn will be pumped to the economy to reach GDP growth target of 21%. Vietnam economy has shifted to a higher gear in the third quarter backed by strong improvement in manufacturing sector. PMI index surged to 53.3 in September, up from 51.8 in August, with faster rises in output, new orders and employment rate on the back of buoyant customer demand. Strong manufacturing helped offset the drag from ongoing contraction in mining and quarrying sectors. Also, the rebounding of agriculture-forestryfisheries sector with an increase of 2.78% YoY boosted the GDP growth. Fisheries group posted the largest gain with 5.42% YoY, followed by forestry group with 5% and agriculture with 1.96%. In addition, accelerating GDP growth in the 3Q also supported by retail sales and services, which surged substantially with the growth of 9.2% YoY (excluding price factors). To achieve GDP target growth of 6.7%, the Government has stimulated the economy with variety of favorable polices. State Bank raised the credit growth limit to 21-22%, up from the initial target of 18%. Prime Minister urged banks to cut lending interest rates by 50 basis points to support businesses. He also directed not to hike all tax, fees and charges in a bid to support exports and the economy. All efforts are underway to speed up the divestment of public investment capital. In order to achieve the target, GDP growth in the fourth quarter must be at 7.31%, which is quite high. Having said that, with strong pick-up in the third quarter and policy support from the Government, Vietnam economy is likely to meet the target of 6.7% in this year. Growth will remain robust in the Q4 on the back of increases in manufacturing, tourism, FDI, and agriculture. The Trade-offs: high credit growth vs. asset quality Momentum for GDP growth for the rest of 2017 will largely count on credit growth. Higher credit growth means a large amount of capital will be injected to the economy. About ten year ago, 1% credit growth was equivalent to a small amount of capital as the total credit outstanding loans of the economy at that time was only VND2,300 tn in However, it amounted to about VND5,500 tn in 2016 and higher in 2017 (about VND6,600 tn), and with 1% credit growth will be equivalent a whopping amount of capital injecting to the economy. In the first nine months, total outstanding loans of VND606 tn was injected to the economy, equivalent to a credit growth of 11.02%. In order to meet the credit growth target of 21%, banks have to pump about VND549 tn to the economy in the next three months, equivalent to VND183 tn a month on average. In sum, outstanding loans in the economy will be raised by VND1,155 tn in 2017, sending the total outstanding loans to about VND6,600 tn as of the end of The concerns are that the whopping amount of cash will cause high inflation and asset quality issue, which is the huge current problem of the economy. At the moment, Vietnam focuses on restructuring the banking system by issuing Resolution 42/2017/QH2014 to address non-performing loans (NPLs), which will take long time and huge effort due to the considerable implementation challenges. While banks have to deal with bad debts, they are now directed to provide more loans to support businesses. Rising credit growth to meet 3

4 GDP target can add risk of rise in NPLs and trigger another wave of defaults if it is not controlled properly. Accelerating credit growth might cause concern about asset quality. Even though the Government can meet the growth target but in a forced way, which is not a sustainable growth. On the investor s perspective, they might concern more about growth quality and the stability of the economy. We think the Government should also pay attention to external factors such as foreign currency exchange rates and U.S. president Donald Trump s Asia policies. Rising credit growth can cause higher credit risk, which may increase demand for the dollar instead of the dong. This, along with China s deleveraging policy and tightening program of the Fed may suggest a weaker dong in the coming time. GDP growth by sectors (%) Total GDP growth Agriculture-forestry-fisheries Industrials & construction Services Source: General Statistics Office (GSO) Q Q Q VIETNAM ECONOMY DATA Year M.2017 Population (million) GDP Per Capita (USD) 1,754 1,894 2,029 2,034 2,111 GDP (USD bn) GDP growth rate (%) Unemployment rate (%) Fiscal balance (% of GDP) Public debt (% of GDP) CPI (%) Current account (% of GDP) Current account balance (USD bn) Trade balance (USD bn) Foreign currency reserves (USD bn) Foreign reserves to cover imports (months) Moody s credit rating B1 S&P credit rating BB- Fitch credit rating BB- Source: focus-economics.com & estimates 4

5 Theme 1: Retail sector- a fertile market that catches big investors attention is the main engine boosting the GDP growth. Retail sales maintain positive momentum with 10.5% YoY in the first 9M. Consumer confidence is high and ranked at the 5 th place in the world. Retail Sales (% YoY) (% YoY) Vietnam s retail market is in the top three destinations in attracting investors beside China and Indonesia. FDI capital keeps flowing into wholesale & retail sector with US$1.58 bn in the first 9 months, and the sector is the main catalyst to boost GDP growth instead of agriculture sector. Recently, famous retailers from all over the world has jumped in Vietnam market, such as 7-Eleven, Zara, H&M, Aeon Mall, Lotte. In domestic, well-known retailers such as Vinmart, Coop Mart, Mobile World Group, Satra have also expanded their businesses to capture potential growth in this sector. There is more room for convenient stores to develop. In Vietnam, every 69,00 people will have one convenient store on average, while that of in the Philippines is 37,000, China is 21,000, and Korea is 1,800. M&A in retail sector will be the trend in the following years, which will expand Vietnam s retail market and contribute significant to the GDP growth. In the first 9 months, services sector contributed 2.8 basis points to the total GDP growth, of which, whole sale and retails contributed 0.75 basis points. Retail sales growth surged 10.5% YoY in the first 9M Retail sales and services continued its strong uptrend. Many mall, supermarkets offered promotions to speed up purchasing power in September. Total retail and services sales reached VND337 tn (+1.8%MoM and 12.1%YoY) in September. Of which, retail sales posted VND251 tn (+1.2%MoM and 12%YoY). For the first nine months, total retail and services sales recorded VND2,918 tn (+10.5%YoY) and 9.2%YoY (if excluding price appreciation factors). Of which, retail sales accelerated to VND2,186 tn (+10.5%YoY), accounting for 74.9% of the total. Consumer confidence hits 5-year record high Vietnam consumer confidence continued to surge to 117 points in the second quarter, the record high level within the last 5 years and standing at the 5th place globally, according to Consumer Confidence Report published by Nielsen. People have paid more attention to their health, creating a favorable condition for pharmaceutical, health insurance companies and retailers in this field such as DHG, BVH, and MWG (plan to participate in selling healthcare products) to capture the opportunities Retails has showed a strong improvement and consumer confidence feel exuberant on the economy. Consumer Confidence Index Q2.16 Q3.16 Q4.16 Q Source: Nielsen Unemployment rate declines in recent quarters 0 Phillipines Indonesia Vietnam Thailand Myanmar Singapore Unemployment fell to 2.21% in the third quarter compared to 2.26% in the second quarter and 2.3% in the first quarter. For the first nine months, unemployment rate is estimated at 2.26%, mainly in the urban area with 3.19%, followed by rural area with 1.79%. Increasing FDI capital investment and the acceleration of the economy will create more jobs and reduce the unemployment rate. 5

6 Unemployment rate (%) 4.00% Total Urban Suburban 3.50% 3.00% 3.37% 3.40% 3.37% 3.18% 3.19% PMI accelerated in September, with 53.3 compared to 51.8 in August. 2.50% 2.00% 1.50% 1.00% Source: GSO 2.18% 1.82% 1.49% 2.10% 2.33% 2.30% Theme 2: Manufacturing and processing: undeniable pillar of the economy High GDP growth in the third quarter was backed by industrial and construction sector, with 7.17% YoY growth rate contributing 2.45 basis points to the total GDP growth. Index of industrial production increased 7.9% YoY, up from 7.1%YoY in the same period last year. Manufacturing PMI accelerates to 53.3 in September 2.26% 1.82% 1.86% 1.79% FY13 FY14 FY15 FY16 Q3.17 Vietnam's manufacturing picked up in September with purchasing managers' index (PMI) stood at 53.3, up from 51.8 in August. A reading above 50 indicates economic expansion. PMI surged with faster rises in output, new orders and employment rate on the back of buoyant customer demand. Meanwhile, the rate of input cost inflation increased to the highest level in more than six years amid pressure on the supply of raw materials. Manufacturers remained optimistic that output will increase backed by positive sentiment on new orders and business expansion plan. In the survey of enterprises in the manufacturing and processing sector, 52.6% of the survey are optimistic about the business condition in the fourth quarter, 36.4% are neutral, while only 11% are pessimistic. PMI stays strong - far above the break-even level of 50 - new orders, and employment have also increased positively. This proves that manufacturing is growing steadily and the economy along with it. Purchasing Managers Index (PMI) (Index = 50) 56 PMI Index of Industrial Production (IIP) (%YoY) (%, YoY) M.17 Source: GSO 6

7 Theme 3: Government Capital Management: Mobilization vs. Disbursement a Big Gap Capital mobilization through G-bond issuance in the first 9 months was really successful, collecting VND147,000 bn, equivalent to 80% of the full-year plan; However, capital disbursement during the period was disappointed. Only VND2,460 bn from G-bond issuance was disbursed, equivalent to only 4.9% of the annual plan. Due to sluggish in public investment disbursement, State Treasury has to put about VND160,000 bn into saving account at commercial banks, which is very inefficient. Capital disbursement was inefficient and slow, dragging down the economy. This is the reason that the Government has to find an alternative source of capital to support the economy, which is capital from commercial banks. State Bank raised the credit growth limit to 21-22% for In an effort to ramp up capital disbursement, Prime Minister urged authorities to take drastic measures to speed up the disbursement of public capital according to Resolution No.70/NQ-CP, which unties the bottleneck in national economic growth and reduces public debt. Mobilization outpaced disbursement; thus, the State Treasury is not likely to issue bonds drastically in the coming months until capital disbursement is untied. Halting over-issuing bonds will also help reduce public debt and unnecessary interest payment pressures. Public debt nearly hits the ceiling Government-guaranteed loans are high, creating burden on public debt payment. Public debt has increased quickly and nearly reached the Congress s target of 65%. As of 2016, public debt was estimated at 64.7% of the GDP, a significant increase from 54.9% in 2011 and 61% in Notably, loans from domestic sources have increased while limiting foreign capital sources. In 2011, Vietnam borrowed US$20 bn from domestic, but it then shot up to US$54 bn in However, government-guaranteed loans posted at about US$21 bn in 2015, which is nearly double that of in 2011 (US$13 bn). Most of those loans were funded by foreign sources, which creates more burden on public debt payment. G-Bond yields Bond yields are declining for both short-term and longterm. Government bond yields will maintain at low level as the State Treasury has nearly met its full-year bond issuance target. As of August, mobilization through G-bond issuance reached VND147,000 bn, equivalent to 80% of the full-year s plan. Also, demand for issuing more bonds is low as capital disbursement for public investment was really low and inefficient. The slope is upward, showing a normal yield curve. Investors expect higher yields for longerterm bonds to compensate for higher risks in the long-term ventures. While they accept lower yields for shorter-term bonds with lower investment risks. This is commonly associated with positive economic growth. 10-year Government Bond Yields (%) vs. 10-year CDS Index G-Bond Yields (%) 6.5 VIETNM CDS USD SR 10Y (RHS) /2 2/2 3/2 4/2 5/2 6/2 7/2 8/2 9/2 10/2 GGVB10YR VBMA Index (LHS). 280 Yield Curve (%)

8 Government Policies: Promote economic growth Derivatives market officially launched Covered warrants will be launched in November. Short-term capitals for medium-to-long term loans will be reduced to 45% instead of 40%. Congress passed new Resolution to speed up bad debts handling process. Future contract based on VN30-Index, which includes 30 largest companies by market value and liquidity of VN-Index, was officially launched on August 10th. Covered warrants will be introduced this November. Vietnam launched equity market in 2000, and bond market in Now, with the introduction of derivatives market, this marks the third significant event of Vietnam stock market. Vietnam stock market currently accounts for about 80% of GDP, of which, equity market represents about 61% of GDP and bond market takes 24% of GDP. Capital mobilization through stock market accounts for about 23% of the total investment capital of the whole country. Derivatives market, including future and upcoming product like option, is expected to expand the size of Vietnam stock market. Revised circular 36 to support banks State Bank has just revised Circular 36/2014/TT-NHNN. Accordingly, banks are allowed to use short-term capitals for medium-to-long term loans at the ratio of 45% in 2018 and reduce to 40% in Previously, Circular 36 required banks to use only 40% of short-term capitals for mediumto-long term loans in The current ratio is at 50%. This revision will allow banks to provide more medium-to-long term loans to enterprises. Banks profit is also expected to be higher with higher yields from long-term loans, and enterprises will have more capital to develop their businesses which will boost GDP growth. State-run banks are allowed to raise credit growth limit State Bank allows state-run banks, Vietcombank (VCB) and Vietinbank (CTG) to increase credit growth limit to 18% from 16%. Other big banks like Asian Commercial Bank (ACB) and Saigon Commercial Bank (SCB) are also allowed to raise credit growth limit to 20% from 16% and 14%, respectively. Central bank may consider to raise credit growth limit to other banks that hit the approved limit for the rest of the year. This decision will help banks to increase banks net interest income by providing more loans to customers. Prime Minister directs not to increase tax rate in 2017 Previously, the Government agreed with the Ministry of Finance's suggestion to increase value added tax (VAT) from 10% to 12% and special consumption tax rate for certain commodities and products. However, Prime Minister directed not to hike tax rates and fees in 2017 to support businesses to boost GDP growth. Also, the Government also required State Bank to reduce lending rate by 0.5% from now till the end of the year and boost credit growth up to 21%. Clearly, the Government is doing its best to achieve its GDP growth target of 6.7% in this year. Congress passes Resolution 42/2017/QH14 in handling bad debts On June 21st, with 86.35% vote, National Assembly passed the Resolution in resolving nonperforming loans (NPLs). The Resolution is in force for 5 years and it aims to help banks handle bad loans more efficiently in order to maintain the NPLs ratio of below 3%. The Resolution gives some positive signals. Firstly, it simplifies the procedure for disputes over the obligation to deliver collateral assets and the right of banks to handle those collateral assets. Secondly, debt holders can liquidate bad debts at market prices. Last but not least, the Resolution expands participants in bad debts market to other organization beside VAMC and even to individuals. 8

9 With this resolution, bad debts are expected to be resolved more efficiently, and banking system will be more stable and credit ratings of banks are likely to be upgraded. This will boost the stock market in the medium-to-long term. Theme 4: Strong exports and trade surplus: a significant boosting to GDP growth and help stabilize currency Trade turns positive in the first 9 months Trade balance turns positive in the first 9 months. In the first 9 months, Vietnam posted trade surplus of US$0.33 bn, after a significant deficit of US$2.7 in the first half of the year. If a country has trade deficit of above 5% of GDP, this may pose an exchange crisis for that country s currency which is not a case for Vietnam at the moment. Exports value reached US$154.3 bn (+20% YoY), of which phones and parts posted US$31 bn (+21.4% YoY), followed by garment US$19.3 bn (+8.6%), electronic devices US$18.5 bn (+40.8% YoY), footwear US$10.6 bn (+12.7% YoY), machineries & equipment US$9.3 bn (+30.1% YoY), and fisheries US$6 bn (+19.2% YoY). While imports value reached US$153.9 bn (+22.7% YoY). Imports for manufacturing activities such as machineries & parts posted US$27 bn (+32.9% YoY), electronic components US$25.8 bn (+28.3% YoY), phones & parts US$10.7 bn (+41.3%), steels US$6.8 bn (+16.1% YoY). However, imports for machineries and parts declined 8.6% compared to the previous month, and steels decreased 9.4%MoM. Positive trade balance helps reduce currency exchange pressure. Trade balance turned positive because imports of machineries and related parts had decreased 8.6%MoM in September and steels declined 9.4%MoM. Trade surplus helps reduce pressure on the foreign currency exchange in the short-term. However, imports demand tends to increase significantly by the year-end. In particular, from the beginning of 2018, import tax for automobiles from ASEAN countries will be reduced to 0%, which will create a higher demand for automobiles import. Trade balance (US$ bn) 200 Export (LHS) Import (LHS) Trade balance (RHS) (3.6) M.2017 Source: GSO Agriculture sector: shed a new light thanks to the restructuring progress Rice exports increased sharply thanks to strong demand. According to Ministry of Agriculture and Rural Development (MARD), total rice exports in the first 8 months posted 3.96 million tons (+19.8% YoY), totaling US$1.75 bn (+17.5% YoY). In particular, demand from Malaysia increased 2.08 times in quantity and 78.3% in exports value compared to the same period last year. Total rice exports this year is estimated at million tons even though the area of rice cultivation is expected to reduce from 3.81 million hectares to 3.76 million hectares in the period , a 1.5 million tons higher than last year and 1 million tons higher than the initial plan. Also, Vietnam is the first country that is granted license to exports dragon fruit into Australia after 9 years negotiation. Dragon fruit exports value was US$895 mn in 2016, representing 50.3% of fresh fruit exports and 36.1% of total fruit and vegetable exports of Vietnam. 9

10 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 Nov-18 Dec-18 In addition, star apple of Vietnam is officially approved to export to the U.S. market, besides dragon fruit, lychee, and longan. Extending crude oil supply cuts put some hope on oil prices EIA forecasts OPEC crude oil production to average 32.3 million b/d in 2017 and 32.8 million b/d in 2018, 0.2 million b/d and 0.4 million b/d, respectively, lower than previously forecast. OPEC met on May 25 th to agree upon reducing crude oil production to 32.5 million barrels per day (b/d) until the end of the first quarter Non-OPEC country, Russia also agreed to extend cuts. Global liquid fuels inventories are at high level compared to their five-year average level. The inventories in the OECD countries remains 257 million barrels higher than the five-year average. Voluntary oil production cuts from OPEC and non-opec countries are partially offset by production growth in other countries. U.S. Energy Information Administration (EIA) forecasts that OPEC crude oil production will fall by 0.2 million b/d and 0.4 million b/d in 2017 and 2018, respectively compared to the previously forecast. EIA expects global oil inventories will fall by 0.2 million b/d in 2017, and the biggest draws are expected to be in the third quarter of Increasing crude oil supply from Brazil, OPEC, and especially the U.S. in 2018 will build up global oil inventories by about 0.1 million b/d. EIA forecast U.S. production to average 9.3 million b/d in 2017 and 10 million b/d in Oil-directed rigs in the U.S. has increased more than double from 336 in May 2016 to more 733 in June. Outlook for WTI oil prices in the short term (until 2018) is neutral, with trading price range from US$50 to US$55 per barrel. WTI Price forecast Historical spot price dollars per barrel 32 NYMEX futures price dollars per barrel 95% NYMEX futures upper confidence interval dollars per barrel Short-term price forecast dollars per barrel 95% NYMEX futures lower confidence interval dollars per barrel Source: Short-term Energy Outlook, June 2017 Theme 5: inflation pressure is down the road due to easing monetary policy. Currency exchange faces upward pressure by year-end as increasing imports and the Fed s rate hike. Inflation is under pressure for the rest of the year CPI increased 3.79%YoY in the first 9 months, still below the target of 4%. September s CPI increased slightly 0.59% MoM due to higher tuition fees according to Decree 86/2015/ND-CP and the upward adjustment of gasoline prices. Education group jumped by 5% and transport group rose 1.51%. Total September s CPI rose 1.83% compared to December last year and 3.4% compared to the same period last year. Having said that, some factors that helped curb inflation, such as food price index fell 2.32% YoY, in which port prices continued to plummet due to glut supply while demand for pork from China declined. Inflation is expected to increase by the end of the year due to credit growth acceleration, the recovery of oil prices and higher consumption demand in the Lunar New Year holiday. 10

11 Money Supply M2 As of June 2017, money supply increased 15.5% compared to the same period last year, Total money supply was VND7,617 tn, in which saving from financial institutions was VND2,580 tn (+13.1% YoY) and saving from households and individuals was VND3,849 tn (+14.7% YoY). M2 has increased in terms of value from the beginning of the year, but at slower year-on-year growth rates. CPI (% YoY) Money Supply (M2) (VND tn) 25.00% 23.0% 8,000 M2 YoY growth (%) 25% 20.00% 18.6% 7, % 10.00% 5.00% 7.5% 8.3% 6.9% 9.2% 9.2% 6.6% 4.7% 3.8% 4.1% 0.6% 7,000 6,500 6,000 5, % 20.0% 19.9% 18.4% 17.7% 15.5% 20% 15% 0.00% Source: GSO M.17 Credit growth is expanded to a new level of 21-22%. This means about VND550 tn will be pumped to the economy in the Q4. Maximum ST lending interest rate will be reduced to 6.5% from current 7%. Mobilization growth was lower than credit growth, causing more upward pressure on the interest rate. 5,000 Source: SBV Interest rate: easing pressure on cutting rate as the economy accelerated in the third quarter Previously, State Bank decided to cut its operating interest rates for the first time since March Accordingly, from July 10th, State Bank will reduce 0.25% per year for all operating interest rates, including refinancing rates, rediscount rate, and overnight interest rate "in electronic payments between banks and loans to offset capital shortfall in clearing payments between State Bank and commercial banks. Specifically, the refinancing rate will be reduced from 6.5%/year to 6.25%/year, rediscount rate from 4.5%/year to 4.25%/year, and overnight rate from 7.5%/year to 7.25%/year. State Bank also decided to cut annual ceiling short-term interest rate for Vietnam dong loans by 0.5 percentage points to prioritized sectors (including agriculture, export, auxiliary sectors, small-and medium enterprises (SMEs), and high-tech firms). Accordingly, enterprises in those prioritized sectors could borrow from commercial banks at the maximum short-term interest rate of 6.5 percent per year, instead of 7 percent. Low interest rate and high credit growth have boosted the economy in the Q3. Rosy economic growth in the third quarter will help reduce the burden on the Government and the State Bank in applying further economic stimulus measures that could exacerbate the challenges for the economy. Credit growth in the first 9 months increased 11.02% while mobilization rate was only at 10.08% growth. Meanwhile, credit growth is targeted at 21-22%, which is higher than the initial target of 18% set in the beginning of the year. Therefore, banks might have to mobilize more capital to meet high credit growth target, pushing more upward pressure on the interest rate. Also, high credit growth might cause high inflation, which depreciates the dong value. As a result, banks will have to raise the deposit rate in VND or at least maintain at the current level to attract depositors. Thus, it is not likely that the State Bank will announce another rate cut for the rest of the year. Foreign currency reserves: expanding the size 03/16 06/16 09/16 12/16 03/17 06/17 After ten years, Vietnam has increased foreign currency reserves more than double in absolute value from nearly US$20 bn in 2008 to above US$40 in Despite the sharp increase in the foreign reserves, Vietnam has not yet become a dollar billionaire according to the international standard as well as Southeast Asia (just above Myanmar, Cambodia, Brunei, and Laos). According to the international standard, foreign currency reserves of a country must meet at least 12 to 16 weeks of imports on average to be considered dollar billionaire. Currently, Vietnam s foreign currency reserves has still not met the comfort level of 12 weeks (or 3 months) for nearly 10 years. 10% 11

12 Foreign Currency Reserves Foreign currency reserve (US$ bn) (LHS) Import value per months (US$ bn) on average (LHS) Foreign reserves enough to cover imports value (months) 37.0 (RHS) E 1.0 FDI & FII surged 34.3% YoY to reach US$25.4bn in the first 9M. Source: Asian Development Bank (ADB) & General Statistics Office (GSO) Foreign capital soars to US$25.4 bn in the first 9 months From January to September period, Vietnam attracted US$21.3 bn in foreign direct investment (FDI) capital. There was 1,844 new FDI projects had been approved with total registered capital of US$14.5 bn (+30.4% YoY) and 878 existing projects had injected an extra of US$6.7 bn (+28.3% YoY). Foreign indirect investment (FII) capital of over 3,700 deals of capital contributions and mergers & acquisitions (M&A) had surged to US$4.1 bn, a whopping increase of 64% YoY. In total, FDI and FII capital injected into Vietnam jumped to US$25.4 bn (+34.3% YoY). The manufacturing sector continued to take the lead with US$12.64 bn (representing 49.6% of the total), followed by electricity, gas, air conditioning with US$5.37 bn (accounting for 21% of the total), and wholesale & retail with US$1.58 bn (representing 6.2%). Foreign investors still strongly believe in Vietnam economy, especially manufacturing. Growing FDI capital will help stabilize currency exchange. Interbank Offered rate (%) FDI Capital by sectors (USD bn) in the first 9M Overnight 1-week 1-month % FDI capital (USD bn) LHS Proportion (%) RHS 21.0% 60.00% 50.00% 40.00% 30.00% 20.00% % 10.00% 0.4 3/1 4/1 5/1 6/1 7/1 8/1 9/1 10/1 Source: State Bank of Vietnam (SBV) Remittances are expected to increase by year end. 0 Source: GSO Manufacturing & processing Electricity, gas, air conditioning Wholesale & retails The Vietnam dong is quite stable but under pressure by year-end 0.00% Vietnam dong has remained quite stable since March thanks to ample foreign currencies in the economy. Three main sources of Vietnam's foreign capital come from exports, disbursed foreign direct investment and remittances. Exports posted US$154 billion (+19.8% YoY) in the first 9M, disbursed FDI capital reached US$12.5 billion (+13.4% YoY). Remittances to Ho Chi Minh City, where accounted for 60% of the total inflows last year, increased 6%YoY to US$3.4 billion in the first 9 months, and it forecasts to increase to US$5.8 bn for the whole year. Total foreign reserve in the banking system hits the record high level at about US$42 billion, equivalent to about 2.8 months of imports. Remittances are expected to increase at the end of the year as people tends to send money home in the Lunar New Year holiday. The dong is one of the most stable currencies among ASEAN countries this year. While the Thai baht and the Malaysian ringgit have jumped and the Philippine peso was devalued. Stable currency has helped the central bank to focus on promoting economic growth. 12

13 The Vietnamese dong was one of the most stable currency among ASEAN countries. From mid-june until now, the dong remained flat even when the dollar index declined steeply in June to mid-september then increased after that. This proves that the dong was unaffected by the volatility of the dollar and the U.S. s economic policies thanks to sufficient foreign currency supplies in the system. However, things that need to watch out are the next Fed s rate hike decision, which is likely to happen in December this year, and the volatility of the Chinese Yuan. The Fed also decided to shrink its balance sheet starting from October this year. Dollar index (DXY) has recovered significantly from around 91 to above 93, which might pose pressure to the dong. The official VNDUSD rate had increased by VND22 in the last three days of September. Moreover, dollar demand will be high as imports tend to increase by the end of the year. Credit growth in foreign currency increased 12.9% YoY, a significant higher than that of last year at 5.4% YoY, which boosted more demand for foreign currencies. VND/USD Spot Rate vs. Dollar Index 22,900 22,850 USDVND Spot Rate (LHS) 22,800 22,750 22,700 22,650 22,600 22,550 22,500 Dollar Index (DXY) (RHS) , /2 2/2 3/2 4/2 5/2 6/2 7/2 8/2 9/2 10/2 13

14 EQUITY MARKET Positive performance in the first 9 months VN-Index surged nearly 19.8% and HN-Index jumped 32% in the first 9 months. Accelerating economic growth in the third quarter supported the stock market. Supported policies from the government, such as higher credit growth limit from 18% to 21-22% Catalysts for the rest of the year VN-Index is targeted at above 820 point this year; in a bullish case it can reach 870 points. PE ratio is still low compared to other countries in the region. EPS is expected to increase slightly to VND51. Rosy business results of companies will be published by the end of October. APEC Summit will be held in Vietnam in November this year, with the participation of top leaders, including the U.S. president, which will promote the economy and the stock market. Catalysts for the rest of the year: Upcoming IPOs/listings of big corporations, such as PVOil, BSR and state divestments of Sabeco, Habeco, and Vinamilk. The launch of covered warrants in November. Easing monetary policy will continue to boost stock market. Prospect sectors: banking, retails, F&B, IT, aviation VN-Index vs. HN-Index Performance VNINDEX (LHS) HNX Index (RHS) /29 3/29 5/29 7/29 9/29 Four Stages of an Investment Cycles Vietnam stock market is in a mark-up stage Source: Investopedia 14

15 VN-Index performance HNX-Index outperformed VN-Index in the first 9M. VN-Index (+19.8% YoY); HNX-Index (+32% YoY). VN-Index advanced 19.8% and HN-Index surged 32% in the 9 months of the year. VN- Index surpassed a record high of 10 years to reach more than 800 points. Trading volume increased from July to August but slightly decrease in September and below the average trading volume. Liquidity on VN-Index has improved since the beginning of the year with an average transaction value of VND3,295 bn, maintaining the highest average value since The index jumped up in volume and value in mid-august, but it then decreased at the end of August and moved side-way in September. VN-Index s Performance (points 850 Volume (RHS) Last Price (LHS) (,000 shares) 300, Average trading volume: 170 million shares 250, , , , ,000 1/29 3/29 5/29 7/29 9/29 VN-INDEX Daily Traded Value & Volume (VND bn) 5,100 4,100 3,100 2,100 1,100 Daily Volume (thousand) (RHS) Daily Value (VND bn) (LHS) 350, , , , , ,000 1/29 3/29 5/29 7/29 9/29 Factors that boosted the market Credit growth limit increased to 21-22% from 18%. PM urges banks to cut lending rates to support businesses. Stable currency helps boost economic growth. The economy accelerated in the third quarter with GDP growth of 7.46%. PM directed not to hike tax rate this year to support enterprises. Revised circular 36 to allow banks to use short-terms borrowings for medium-to-long terms loans at the ratio of 45% in 2018 instead of 40% as previously. CDS index of Vietnam was on the downtrend, supporting the investor s confidence on Vietnam market. The chart below shows an inverse relationship between VN-Index and CDS index, whenever CDS declines, VN-Index increases. 15

16 CDS 10-year vs. VN-Index 850 VNINDEX (LHS) 10-year CDS (RHS) /2 2/2 3/2 4/2 5/2 6/2 7/2 8/2 9/2 Factors that dragged the market Fraud related to Ocean bank and PetroVietnam Corp. Geopolitical tension climbs between the U.S. and North Korea. Volatility index increased from July to August quite significantly, and the VN-Index fluctuated during August. Fed starts shrinking its balance sheet. SOEs equitizations and divestments processes have been slowdown. Volatility Index vs. VN-Index 850 VNINDEX 60-day Volatility 120-day Volatility Healthcare and financial sectors led the market in the first half of 2017, while energy sector was the laggard due to low oi prices /4 2/4 3/4 4/4 5/4 6/4 7/4 8/4 9/4 10/4 Sectors performance In the first 9M, VN-Index gained 19.8% and most sectors outperformed VN-Index. In particular, healthcare sector returned a whopping 46.8%YoY (a significant decrease from 58.9% YoY in the first 6 months), followed by consumer discretionary (+36.8% YoY), financial (+30.2% YoY), basic material (+27% YoY), real estate (+26.9% YoY), industrial (+22.8% YoY), IT (+22.2% YoY), and consumer staple (+20.4% YoY). This shows that the market is in a bullish trend. Healthcare sector was the leader but the trend was down significantly compared to the first 6 months. Financial sector continued to lead the market with the expectations on bad debt resolving. Banks have been actively in resolving bad debts. Vietnam Asset Management Company (VAMC) has bought thousands of billions of bad debts from commercial banks to speed up bad debt resolving progress. Recently, Sacombank (STB) has transferred VND2,850 bn of non-performing loans (NPLs), that has lasted for 7 years, to VAMC. Sacombank aims to reduce NPLs by VND15,000-20,000 bn from now to the end of the year. Asia Commercial Bank (ACB) has been on track in clearing all bad debts at six companies related to the fraud case of the former Vice Chairman Nguyen Duc Kien. 16

17 Consumer confidence hit 5-year record high and retail sales posted strong growth of 10.5% YoY in the first 9 months. Consumer discretionary sector recorded a healthy growth of 36.8% YoY. On the other hand, energy sector was the only sector that suffered a negative return of % but slightly improve compared to the first 6 months thanks to the slight recovery of oil prices. In the recent EIA petroleum status report, crude oil inventories in the U.S. fell significantly by a larger-than-expected 6.0 million barrels in the September 29 th week to 465 million, 0.9% lower compared to a year ago. This was anticipated as refineries come back into operations after the Hurricane Harvey. Outlook for WTI oil prices in the short term (until 2018) is neutral, with trading price range from US$50 to US$55 per barrel. Sectors Performance 70.00% 50.00% 30.00% VN-Index VNCONS Index VNIND Index VNENE Index VNIT Index VNUTI Index VNREAL Index VNFIN Index VNCOND Index VNHEAL Index VNMAT Index 10.00% % Foreign investors are more confident on Vietnam market % 1/3 2/3 3/3 4/3 5/3 6/3 7/3 8/3 9/3 10/3 Net foreigner s accumulation Foreign investors have increased their buying position into Vietnam stock market since the beginning of the year. From the beginning of the year to early October, foreigners bought net of about US$520 million, equivalent to nearly VND11,800 bn, which is the highest level within the last 10 years. Net Foreigner Cumulative Investment in Equity (US$ bn) 600 Net bought/sold (RHS) Net Cumulative Investment (LHS) /5 2/5 3/5 4/5 5/5 6/5 7/5 8/5 9/

18 Top foreigner s net buy/sell Top 10 foreigner s net buy/sell stocks as of 10/10/2017 (VND bn) ,616 Source: cophieu68.vn 1,708 1,426 1, (696) (497) (406) (378) (355) (294) (282) (249) (241) (241) VNM HPG PLX PGD ROS VCI CTD GAS VHC SAB PVD MSN SSI HT1 BMP DXG VCB SKG QCG FIT Vietnam equity market is still cheap. Market Capitalization per GDP Market cap of Vietnam equity market has increased significantly from the beginning of the year, and it reached 55% in the second quarter and jumped to nearly 60% as of September. Vietnam stock market seems to be still cheap as the market cap per GDP is still low (about 60%) compared to average level of other countries in the region (about 85%), according to the data statistics on Bloomberg. Market Cap as a percentage of GDP (%) Market valuation is still cheap compared to regional countries Valuation: VN-Index revised up 820 point this year PE of VN-Index Average level: 85% VN-Index advanced about 19.8% for the first nine months, and PE ratio is at about 16.1x, which is relative fair value. However, it is still below the average of other countries in the region (about 17.9x). We think that Vietnam stock market value is still cheap and has room to increase. 80 Vietnam Thailand Indonesia Malaysia Phillipines Pakistan Singapore China India

19 VN-Index s PER VN-Index can reach above 820 points this year, up from 800 points in the previous forecast Current PER Current median PE: Average PE Vietnam Indonesia Singapore Phillipines Thailand Shanghai MSCI Emerging Index Based on data from Bloomberg, 12M forward diluted EPS is expected to increase to 51.1 compared to the current level of about While the average PE of the countries in the region is about 17.3x, we think VN-Index can maintain PE at about 16x in a conservative case (below the region s average PE). Based on PE valuation, we believe that VN- Index can reach about 820 point this year. In the bullish case, VN-Index can reach 870 points, with PE at 17x (median PE of the region) and EPS at VND VNINDEX s PER (x) /07 09/08 09/09 09/10 09/11 09/12 09/13 09/14 09/15 09/16 09/17 VNINDEX s Diluted EPS /12 04/13 10/13 04/14 10/14 04/15 10/15 04/16 10/16 04/17 10/17 19

20 Market Momentum: maintaining an uptrend Market is in a clear uptrend The market is still on an uptrend with 50-SMA, 100-SMA, and 200-SMA are angling up. The VN-Index price is supported at 15-EMA, and all other indicators, such as slow stochastic, and RSI are signaling an uptrend in the short-term. In the medium term, the momentum is still strong based on strong fundamental: expected positive results of enterprises in Q3 and the rest of the year thanks to the acceleration of the economy and the easing monetary policy, along with upcoming SOEs equitizations, State divestments at big potential companies such as VNM, SAB, BHN, and especially the launch of the covered warrants in November. VN-Index s Momentum Recommended sectors and stocks Banking Business results outperformed in the third quarter thanks to high credit growth. Net profit of the whole system is expected at VND47,000 bn (+39% YoY). NIM is expected to improve slightly as State Bank decided to cut operating interest rates, which helps reduce input expenses for banks. In the first 9M, NIM is estimated at 2.8% compared to 2.7% in the same period last year. Banks will be benefited from easing monetary policy. Maximum short-term lending rate is also adjusted down to 6.5% from 7% for prioritised sectors, which increases capital demand from enterprises. Credit growth is expected to expand to 21-22% backed by SMEs and individual clients as consumption demand is increasing. Banks will have more time to prepare for Basel II as the deadline is postponed to Government passed bad debt resolution, helping banks to handle unresolved bad debts more efficiently to reduce bad debt ratio. Credit rating of the banking system is also likely to be upgraded. Prime Minister also allowed to loosen foreign room limit of banks to above 30%. Bad debt resolution and foreign room limit loosening are positive news for banks; however, they might take time to be realized. Thus, investors should be on the lookout for the progress of these events. Stocks to consider: ACB, VCB, MBB, BID Company Current price Target price Pre-tax profit (VND bn) DPS EPS BPS PE (x) PB (x) ROA (%) ROE (%) VCB 39,400 44,500 10,901, ,864 14, ACB 31,800 35,000 2,247,686 N/A 1,773 15, MBB 23,200 26,190 4,371, ,742 14, BID 20,100 25,000 8,125, ,450 14,

21 CAR of Commercial Banks (%) Names ACB BID CTG EIB MBB NCB SHB STB VCB Bank system Source:baomoi.com Retails, Food& Beverage Retail sales growth is strong, about 8-10% annually. Consumer confidence is high (ranked no.5 in the world), and GDP per capita has increased (more than US$2,210 per capita). Middle class has increased, with an average spending of about US$1,300 per year. Households with net income of US$5,000-10,000 per year accounts for nearly 20% of total households. High beer consumption demand potential growth with an average consumption per capita is 57 liter/person/year, while that of top 25 beer consumption countries is about 92 liter/person/year. State plans to divest at leading companies in food & beverage industry. Stocks to consider: VNM, MWG, BHN 2017F Current price Target price Sales (VND bn) OP (VND bn) EPS BPS PE (x) EV/EBITDA (x) ROA (%) ROE (%) VNM 148, ,200 53,222 10,524 5,831 16, MWG 118, ,000 66,686 1,992 4,974 15, BHN 135,000 N/A 10,746 1,087 3,236 24, N/A Aviation 2017F Current price Target price Air travel demand has surged significantly, with an average growth of 17-20% annually. Boosting tourism sector will push up travel demand by air. Tourism is the pillar sector of Vietnam economy, contributing about 10% of the total GDP growth. By 2020, Vietnam targets to attract international and 82 domestic tourists. Middle class has increased significantly. Households with net income of US$10,000 per year has increased gradually since 2010, accounting for about 4% of total households. It expects to increase to nearly 10% by Airport operations fees might increase in the fourth quarter of 2017 and the following year, which will be benefit for airport operation company like ACV. Stocks to consider: ACV, VJC Sales (VND bn) OP (VND bn) EPS BPS PE (x) EV/EBITDA (x) ROA (%) ROE (%) ACV 66,500 63,000 16,013 3,844 2,208 11, VJC 106, ,429 40,048 2,822 6,233 10, N/A HVN 28,100 N/A 70,089 4,142 1,685 12,

22 IT & Telecom Telecom service is expected to grow strongly in Vietnam. Industrial Revolution 4.0 will be the turning point for IT companies FPT is the leader in this field. The Company divested its retail and distribution this year to focus more on its core business - telecom & technology which brings higher profit margin than retail and distribution. Stocks to consider: FPT (target price: VND60,000 per share) FPT Sales (VND bn) OP (VND bn) EPS BPS PE (x) EV/EBITDA (x) ROA (%) ROE (%) ,531 3,049 3,413 18, F 44,026 3,590 4,382 23, F 40,583 3,960 5,059 26, Risks to consider VND/USD will face pressure as Fed is likely to hike rate and shrink its balance sheet this year. In addition, trade might return to deficit, especially by the end of the year. Credit growth in foreign currency surged significantly 12.9%YoY in the first 9 months compared to only 5.4%YoY in the same period last year. Inflation may rise as the Government choses easing monetary policy and gasoline prices have increased as government hikes the environmental tax. Easing monetary and expanding credit growth might cause concern about asset quality if not controlled properly. Global geopolitical tension between the U.S. and North Korea. Disclaimer This report has been prepared for informational purposes only and is not considered an advice on trade of any particular securities. Accordingly, the above forecasts (if any) may differ from the actual results. This document is not an official opinion and cannot be copied, or redistributed without our permission and cannot be used as evidence of liability. 22