MENU 2017 OUTLOOK REPORT HIGHLIGHTS... 2

Transcription

1 2017 OUTLOOK

2 MENU HIGHLIGHTS... 2 MACROECONOMICS : Slowdown growth. 2017: Growth impacted by worldwide uncertainty; Government s orientation and administrative guideline shall pay important role Inflation under controlled... 7 Exchange rate is under global pressure in However, we expect the stability in exchange rate next year... 8 Deposit rates slightly increased in Although under pressure to rise in 2017, interest rates are expected to slightly fluctuate Global Economy STOCK MARKET Market Highlights Oil & Gas stocks finished 2016 with outstanding performance Foreign tended to withdrew fund after VN Index reached its peak of The fund withdrawal of two ETFs was pushed at the end of the year Outlook 2017: Opportunities still exist. More risks to take at the 2H PROSPECTS FOR INDUSTRIES/CORPORATIONS Banking Real Estate Construction Steel Rock Mining Facing brick Plastic Tire Power Industry Retail & Distribution of Consumer Electronics and Technology Products Seaport VCBS Research Department Page 1

3 HIGHLIGHTS Macro economy: 2016: Slowdown growth. 2017: Growth impacted by worldwide uncertainty; Government s orientation and administrative guideline shall pay important role. Indicators illustrated the Vietnamese economy deceleration in As aggregate demand and investment did not breakthrough, the growth motivation was resulted from the FDI group, natural resources exploitation and public investment. As a result, when the global market movements were unfavourable and the budget disbursement delayed, the economy decelerated. Regarding bright side, Vietnam is considered an attractive destination for capital flow which resulted from the expansionary monetary policies in many developed countries, especially Asian ones. Vietnam is famous for its stable politic environment and controllable inflation. However, there are some global events which may have negative impact on Vietnamese economic growth, including (1) Expected protectionism policies issued by the new US president, especially the his announcement about TPP, (2) the sharp fluctuation of major currencies value in response to FED s action and such irregular politic event as Brexit, (3) the deceleration of Chinese economy and related issues consisting of NPLs problem, real estate bubble, and weakened trade which may result in CNY depreciation. Under such circumstance, we come up with some forecast of macroeconomic indicators in 2017 It is challenging to achieve the target of 6.7% growth in GDP. The 2017 GDP is expected to grow by 6.3% - 6.5% yoy. The government is capable of controlling and regulating the inflation, preventing inflation from rising to 5%. The expected inflation rate is 4% - 4.5%. In 2017, despite being under pressure from global factor, the expected ample supply of foreign currencies may help SBV to manage the exchange rate in order to accomplish important targets. We believe that VND may depreciate by 2% - 4% against USD in The 2017 interest rate will be stable, slightly moving around end-2016 rate. The expected maximum rise in interest rate is 50 bps (0.5%). Stock Market: Opportunities still exist. More risks to take at the 2H The year of 2016 experienced shocking events, which derived from worldwide market, beyond investors expectation. Notably, two outstanding events of BREXIT and Donald Trump win US Presidential election. However, following the short-term effect, we concern about long-term impact which may cause unpredictable systematic risks. However, we believe that many central banks (except from FED) will have to maintain their loosening policy because of uncertainty events. Consequently, it is likely that Vietnam shall benefit from Asian countries such as China, Japan, Taiwan and Korea, etc. Therefore, in the context of good news and bad news it is important that investors keep up with market in order to scan opportunities for investors especially sectors: Growing stocks with fundamental factors, especially blue chips as investors taking risks in field such as Building materials, Construction, Retail sales, etc. Firms in individual cases, which may attract inflows such as newly listed ones, stocks moving to other stock exchanges, M&A case, and State divestment plan. Firms which benefit from commodities price change, which help to improve financial performance efficiently. Defensive tickers when indexes log into downward trend, notably the second-half of Beer and Air services sectors as we consider the fact that financial fund may devote some of their resources as newly listed large-cap tickers change the relative proportion among sectors. VCBS Research Department Page 2

4 6/ /2008 6/ /2009 6/ /2010 6/ /2011 6/ /2012 6/ /2013 6/ /2014 6/ /2015 6/ / OUTLOOK REPORT MACROECONOMICS 2016: Slowdown growth. 2017: Growth impacted by worldwide uncertainty; Government s orientation and administrative guideline shall pay important role. The growth of the economy was halted by Mining and Agriculture sector The growth of Agriculture was laggard due to unfavorable weather condition. As of mid- November, the whole country harvested thousand hectares of winter rice, accounting for 67.5% of the cultivated area and equaling 96.7% from the same period last year. The cultivated area of winter rice in the North reduced 14.7 thousand hectares compared with last year. According to the preliminary report, the productivity of winter rice this year in the Northern provinces was estimated to reach 4980 kilograms per hectare, down 30 kilograms per hectare from the same crop last year. As of mid-november 2016, provinces in the South sowed 388 thousand hectares of early winter-spring rice, equaling 95.9% from the same period last year. The winter was badly impacted by bad weather. 8% 7% 6% GDP growth (qoq) 12% 10% GDP growth by Industry 5% 4% 3% 2% 1% 8% 6% 4% 2% 0% Q1 Q2 Q3 Q4 0% -2% GDP Agriculture Industry and Construction Service Sources: CEIC, VCBS The situation was different from 2016 as instead of being a driver of growth, Mining industry shrank and consequently became the main factor to blame for economic slowdown. In detail, in November, this sector s index pulled back phenomenally 13.8%yoy. In the last 11 months, this sector decreases 6.3% yoy (10 months: pressed lower 5.5%yoy). Notably, regardless of plan to rise oil extracting oil output, the output sustain significant loss of 10% compared to the same period last year (10 months 2016: decreased 9.7%. To sum up, the weakness of Mining pulled back the whole industry approximately 1.3 percentage point. VCBS Research Department Page 3

5 01/15 03/15 05/15 07/15 09/15 11/15 01/16 03/16 05/16 07/16 09/16 11/16 01/15 03/15 05/15 07/15 09/15 11/15 01/16 03/16 05/16 07/16 09/16 11/16 Inventory Index 2017 OUTLOOK REPORT 14% Industrial Inventory and Manufacturing PMI IIP (yoy) 12% 10% % 6% % 2% 0% Inventory Index (% yoy) Manufacturing PMI PMI threadhold (50) -15 Industrial Production Index Mining and Quarrying Manufacturing Sources: CEIC, HSBC, NIKKEI, VCBS Manufacturing was the main driver to promote growth. Manufacturing was the main driver to promote either Industry or the whole economy in general. In detail, the IIP (Index of Industrial Production) of Manufacturing in November increased 13.1%, which was much higher than 11.3% growth, recorded same period last year. In the last 11 months, this index press higher 11%, which was slightly higher than that of 2015 (+10.4%). When it comes to the growth of 7.2% in industrial sector, manufacturing industry was proved to be the main contributor with 7.7 percentage point added to overall growth. According to Nikkei, Vietnam Manufacturing PMI rose to 54.0 in November from 51.7 in October, also is higher than 49 points in the same period last year due to output and new orders boosted. Besides the improved production in the past month, we believe that this increase partly stemmed from seasonal factor as the peak season of production is coming. Nevertheless, we should bear in mind that the sample in this research was mainly FDI firms. Therefore, there was a clear segmentation in production sector, in which the main contributors to economy growth were FDI firms rather than the domestic ones. Trade surplus was recorded due to a plunge in import activities. From export side, according to Custom office, total export and import turnover in the first 11 months reached USD billion, which was 5.8% higher than that of 2015 and was also better than 4.63% growth recorded last month). However, this figure was relatively lower than 10.3% growth recorded in Therein, export turnovers was USD billion- implied a growth of 3.7%yoy, which was much lower than last year s 12.7% growth. Therefore, we believe that a trade surplus of 2,98 USD billion was resulted from a plunge in import activities. Notably, some input for domestic production experienced marginal growth. In detail, machine, equipment, tools and instruments export turnover was USD billion, which grew slightly 0.7%; telephones, mobile phones and parts thereof export turnover was 9.56 USD billion, which pressed lower 3.9%; chemical export turnovers stood still at 2.87 USD billion; wood and wood products export value recorded at 1.62 USD billion, stumbled 16.8%; Fertilizer export value was 1 USD billion, sank 21.2%. VCBS Research Department Page 4

6 03/11 06/11 09/11 12/11 03/12 06/12 09/12 12/12 03/13 06/13 09/13 12/13 03/14 06/14 09/14 12/14 03/15 06/15 09/15 12/15 03/16 06/16 09/16 11/16 01/15 03/15 05/15 07/15 09/15 11/15 01/16 03/16 05/16 07/16 09/16 11/16 bn USD 2017 OUTLOOK REPORT Import - Export Export/GDP 17 90% % 11 70% 9 60% % 3 40% % -3-5 Exports Imports Trade Balance Sources: CEIC, VCBS Economic growth strongly depends on export activities, which was contributed by FDI. Registered FDI capital headed lower, which was interpreted as a bad signal to economy growth. Vietnam s economic growth strongly depended on import activities. The import/gdp ratio climbed up year by year. We anticipated that this ratio will be higher than 85%. FDI showed their crucial role in promoting economy growth as they contributed more than 70% import turnover of Vietnam. Registered FDI capital in the first 11 months reached 18.1 USD billion, which was 10.5% lower compared to the same period last year. Therefore, this was the third consecutive month registered FDI capital pulled back, which indicated a clearer slowdown. This movement might partly result from phenomenal registered FDI by multinational corporation s projects. We believe that any uncertainty from worldwide market or rising trade protectionism may hurt FDI inflow to Vietnam next year. As a result, economy growth in the upcoming period may press lower as the economy at the moment is highly depending on FDI sector. Realized FDI capital 14.3 USD billion - which was 8.3%. However, it was much lower than last year s growth of 17.9%. bn USD FDI Registered Capital Supplemental Capital Implementation Capital VCBS Research Department Page 5

7 01/15 03/15 05/15 07/15 09/15 11/15 01/16 03/16 05/16 07/16 09/16 11/16 Tn. VND 2017 OUTLOOK REPORT Sources: CEIC, VCBS Domestic investment demand has not improved much since Regarding credit growth, by the end of November 2016, total credit grew at 14.57% ytd, slower than the 15.51% growth in 2015, showing that the capital absorption capability of the economy, especially the domestic sector, has not improved much since According to data from SBV, credit growth in the Industrials sector, a core sector of the economy, was only 8.2% yoy, which was lower than the economy s credit growth of 14.46%. Meanwhile, several sectors saw impressive credit growth. Credit growth was 17.27% yoy in the Agriculture sector, 17% yoy in the Commercials, Logistics and Telecommunication Services sectors, and 24.18% in the Other Services sector. Retail Sales Credit growth and M % % 20% 15% 10% 5% 0 6 0% Services & Tourism Trade Hotel & Restaurant Trade Growth rate (%) Credit growth (yoy) M2 growth (yoy) Sources: CEIC, VCBS Consumer demand has shown moderate growth. GDP 2017 is expected to grow by 6.3%-6.5%. Total retail sales of goods and profit in consumer service in the first 11 months was estimated to increase by 9,5%, excluding the price growth of 7,6%, lower than the rates of 8,3% as compared to the same period in Consequently, the consumer demand has recorded a moderate growth and yet to breakthrough. Consumers seemed to continue to be cautious and keep on with the saving up trend. We suppose that the price growth of some essential commodities such as Education, Medical services and Oil might not be considered as a positive factor to the consumer demand. The economic growth has decelerated sharply based on the clear signs from the market indicators. The consumer and domestic investment demand have yet developed strongly and also were highly dependent on the FDI, natural resources and public investment. Accordingly, since there were difficulties in Government disbursement and the uncertain global risks, slow economy growth was rather hard to avoid. In 2017, the economy restructuring goal will continue to be the priority with major focus on the equitization and listing State enterprises by promoting restructuring of the public investment. Besides, the route of restructuring the banking system, bad debt, State budget control, improving the efficiency of the Government spending are going to be crucial objectives. Therefore, we have yet to recognize the new growth engine for the economy. Regarding bright side, Vietnam is considered an attractive destination for capital flow which resulted from the expansionary monetary policies in many developed countries, especially VCBS Research Department Page 6

8 Asian ones. Vietnam is famous for its stable politic environment and controllable inflation. However, there are some global events which may have negative impact on Vietnam s economic growth, including (1) Expected protectionism policies issued by the new US president, especially the his announcement about TPP, (2) the sharp fluctuation of major currencies value in response to FED s action and such irregular politic event as Brexit, (3) the deceleration of Chinese economy and related issues consisting of NPLs problem, real estate bubble, and weakened trade which may result in CNY depreciation. As the 2016 global politic environment was not stable, meanwhile the 2017 outlooks of major economies are in doubt, we do not expect any breakthrough of export and FDI group s performance next year. This group is believed to remain growing at the same rate as in As a result, in accordance with the export and FDI s group, government regulation on such activities as public investment, infrastructure development spending and natural exploitation (especially crude oil extraction) will play the key role in encouraging economic growth. The government policies are also required to be close and flexible. We believe that the target 2017 GDP growth rate of 6.7% is challenging. The expected GDP growth rate is 6.3% - 6.5%. Inflation under controlled 2016 inflation rate is about 5%. We forecast the 2017 inflation rate to be 4% - 4.5% As in previous year, providing that domestic consumption recovered at a medium rate, it is quite obvious that 2016 CPI mostly depended on the increase in necessity goods and services price, especially those under government regulation such as Health Care and Education. In 1H2016, January CPI (monthly data) did not change much thanks to the decrease in Oil & Gas price. However, in the next five months, CPI increased mom gradually, attributed to (1) higher demand from Lunar New Year holiday, which is a seasonal factor, (2) the bounce in Oil & Gas price, (3) the upward adjustment in Health Care and Education Services charge. On the other hand, in contrast to 2015, 2016 CPI is also under pressure from the rising food price which is resulted from the drought in the Southern provinces negatively influencing the supply. In 2H2016, CPI has sharply increased since September to December 2016, during which there were many factors influencing inflation rate such as (1) increasing tuition fee in the beginning of the new semester, (2) soaring Health Care services charges as government s plan, (3) bounce in Oil & Gas price in response to the recovery in Crude Oil price. However, the Government is capable of controlling inflation rate, ensuring that the 2016 inflation rate will not exceed 5%. The government has decided not to increase Health Care services charge since October 2016, relieving upward pressure on CPI in November and December VCBS Research Department Page 7

9 01/12 04/12 07/12 10/12 01/13 04/13 07/13 10/13 01/14 04/14 07/14 10/14 01/15 04/15 07/15 10/15 01/16 04/16 07/16 10/ OUTLOOK REPORT 2,5% 2,0% 1,5% 1,0% 0,5% 0,0% CPI growth rate 20% 16% 12% 8% 4% 0% -0,5% -4% CPI (mom) CPI (yoy) Sources: CEIC, VCBS As we believe the demand from consumption will not breakthrough, the adjustment in price of essential goods and services is considered the key factors influencing overall inflation rate in The pressure may come from the variety of source such as (1) commodities price movement, especially the bounce in crude oil price, (2) the government plan of regulating Health Care services charge and tuition fees. Regarding crude oil price, we do not expect another bounce in 2017 due to unimproved demand and bleak outlook of the global economy. On the other hand, the increase in Health Care services charges and tuition fees may significantly impact CPI. These increases are under government control. In the final analysis, we believe Government is capable of controlling the inflation in The target of less than 5% growth in CPI is likely to be achieved. The inflation rate in 2017 is expected to reach 4% - 4.5%. Exchange rate is under global pressure in However, we expect the stability in exchange rate next year The exchange rate and forex market was stable thanks to the ample supply of foreign currencies in The VND depreciated by 1.1% against USD Despite some sharp fluctuations during the year, the exchange rate and forex market is quite stable in In detail, during 9M2016, USD ask price in commercial banks did not change much, varying in a narrow range from VND 22,330 22,350 per USD. In Q4, especially in November, there are 4 sources of pressure which increase the exchange rate, including (1) the surprising outcome of the US president election which announced Donald Trump s winning, (2) FED decided to raise the interest rate in December, also declaring the plan to increase the rate faster than expectation in 2017, (3) the USD appreciated against others foreign currencies, (4) demand from repayment by the end of the year (seasonal factor). These pressures resulted in the appreciation of USD against VND, raising its value to VND 22,790 22,800 per USD (+1.1% ytd since the end of 2015). Since the beginning of 2016, the SBV has officially applied new exchange rate regime which regulates the reference rate based on (1) weighted average exchange rate on the interbank market, (2) exchange rate between VND and other currencies of close countries in terms of trade, debt, and investment, (3) the macroeconomic target, monetary policies. Instead of clear commitment on a stable exchange rate as in recent years, the SBV has come up with a new flexible regime. VCBS Research Department Page 8

10 As a result, before the exchange rate in commercial banks market increased, the reference rate has been rising since the middle of August by the SBV, up to VND 22,155 per USD (+1.2% ytd since the end of 2015). This upturn may be considered the flexible adjustment by authorities to orient the market and prepare for exchange rate pressure by the end of the year. The ample supply of USD was the key factor that kept the exchange rate stable during In detail, (1) the surplus balance in 11M2016 was estimated at USD 2.98 bn, (2) the FDI disbursement continued to increase, reaching USD 14.3 bn (+8.3% yoy), (3) the foreign currencies flow resulted from M&A cases, environment compensation, (4) Vietnam which country has a stable politic environment and growing economy was an attractive destination for the capital flow among other countries who maintained the expansionary monetary policies USD/VND Exchange rate /14 04/14 07/14 10/14 01/15 04/15 07/15 10/15 01/16 04/16 07/16 10/16 Reference exchange rate Floor exchange rate VCB spot offer exchange rate Ceiling exchange rate VCB spot bid exchange rate Sources: CEIC, VCBS In 2017, despite pressure from global market, the expected ample supply of foreign currencies may help SBV be active in managing and stabilizing the forex market in order to achieve important targets. We forecast the VND may depreciate against USD by 2% -4%. In 2017, we believe the pressure from exogenous factors and global market play the key role in affecting exchange rate and forex market. Some expected highlights are (1) the appreciation of USD resulted from the US economy recovery and the FED s plan of raising interest rate which the number of increases is higher than in 2016, (2) the depreciation of major currencies in the region. On the other hand, as there are irregular events and sharp fluctuation, the speculation sentiment may be strengthened. This factor may cause pressure on market in short term. The SBV is required to issue reasonable, flexible policies on time. VCBS Research Department Page 9

11 Devaluation of some countries' currencies against USD in % 6% 4% 2% 0% -2% -4% -6% -8% -10% 12/15 01/16 02/16 03/16 04/16 05/16 06/16 07/16 08/16 09/16 10/16 11/16 Vietnam Thailand Indonesia Philippines Malaysia Singapore China Sources: Bloomberg, VCBS On the contrary, we hold our point of view that the foreign currencies supply in 2017 will be ample, supporting the exchange rate. Except the US, many developed countries, especially in Asia, are maintaining loosening monetary policies. As a result, Vietnam is expected to be the investment highlight due to (1) stability in politic environment and economy, (2) favorable geographic location. Moreover, there will be many equitization and state divestment cases taking place in 2017, especially in some big state-owned corporations which are concerned by the foreign investors. These events might attract more foreign currencies to Vietnam. In the final analysis, in spite of VND being under more pressure than in 2016, the expected ample supply of foreign currencies may help SBV be active on managing and stabilizing the forex market if necessary in order to meet such important targets as (1) the stable economy, (2) ensuring the appeal of Vietnam toward capital flow, (3) maintaining low interest rate in order to promote growth, (4) acceptable public debt ratio. In conclusion, we forecast the VND to depreciate by 2% - 4%. VCBS Research Department Page 10

12 Deposit rates slightly increased in Although under pressure to rise in 2017, interest rates are expected to slightly fluctuate. Deposit rates rose slightly in 2016 while lending rates were pretty stable and less volatile. In 2016, deposit rates increased slightly compared to 2015 by a few dozen basis points, depending on each tenor from short-term to medium-term and long-term. Therein, two conspicuous corrections fell on Q1 and end of Q4. By the end of 2016, deposit rates of less than 6M tenor almost from 4.3% - 5.5%/year, from 6M to 12M tenor ranged from 5.3% though 7% / year, more than 12M tenor ranged from 6.5% - 8%/year. We recognized that the main cause of interest rates hike in Q stemmed from some developments of banking system, which led to the capital mobilization demand. Specifically, (i) deposit growth (13.59% in 2015) was lower than credit growth (17.3% in 2015), entailing a high LDR ratio of many banks at this time, (ii) Circular No. 06 amending some articles of Circular No. 36 tightened regulations on ratio of short term capital source to be used for medium term and long term loan. For the slight correction at the end of Q4, beside the competition in mobilization as mentioned above, deposit rates also faced pressure from (1) the exchange rate heated up after the US presidential election and FED s interest rate hike in December and (2) seasonal factors including credit growth acceleration in the latter part of the year as well as the liquidity demand of commercial banks around the year-end and Lunar New Year. Although deposit rates increased slightly in 2016, lending rates was pretty stable and less volatile. According to the SBV, the common lending rate for the priority areas ranged from 6% -7%/ ear for short-term and 9%-10%/year for the medium and long term. Lending rates for regular business sectors were 6.8%-9%/year for short-term; 9.3%-11%/year for the medium and long term. For good customers whose healthy financial situation, lending rates were about 4% -5%/year. Deposit and Lending rates 16% 14% 12% 10% 8% 6% 4% 2% 0% 06/12 10/12 02/13 06/13 10/13 02/14 06/14 10/14 02/15 06/15 10/15 02/16 06/16 10/16 L.R agriculture, rural & exports L.R manufacturing D.R (<1M) D.R 3M D.R (>12M) D.R 6M Sources: CEIC, VCBS Expected interest rate in 2017 is relatively stable and only slightly fluctuate around level at the end of The increase, if any, will not In 2017, the interest rates will still be under pressure due to (1) the existing problems in the banking system as described above and consequence of competition in mobilization and (2) fluctuations in worldwide market, especially FED s interest rate hike, which accompanies the exchange rate risk. Therefore, we assess that interest rates will be very difficult to further reduce. VCBS Research Department Page 11

13 1/16 2/16 3/16 4/16 5/16 6/16 7/16 8/16 9/16 10/16 11/16 1/16 2/16 3/16 4/16 5/16 6/16 7/16 8/16 9/16 10/16 11/ OUTLOOK REPORT exceed 50 basis points (0.5%). In 2016 (until the 16th of December), VND 335,873 bn (+31.95% yoy) worth of bond was issued and VND 1,517,662 bn (+73% yoy) was traded on the secondary market. We expect to see the bond yield to go sideways or tick down in However, the volatility would be differentiated to each term. On the opposite side, amid (1) inflation is under control as analyzed above; (2) the foreign exchange market s volatility and the devaluation of VND remain at reasonable levels as expected and (3) stable and abundant supply of foreign currencies continue to support the system liquidity, we believe that there is space for SBV to regulate the market and relieve the pressure on interest rates. Accordingly, we believe that, the government s aim of maintaining low interest rates level to support the growth is achievable. We expect that interest rates in 2017 will be relatively stable and only slightly fluctuate around the current level. The increase, if any, will not exceed 50 basis points (0.5%) and ceiling interest rate 5.5%/year for less than 6M tenor is likely to be ensured. The market seemed to catch up quickly in the first few months of 2016, and then became more active in the middle of the year and seemed to slowdown in the last few weeks of VND 335,873 bn worth of bond was issued from the beginning to the middle of December in 2016, which has boosted by 31.95% as compared to Therein, ST-Bond was accounted for VND 281,294 bn. After 2 times amending the bond issuance target, the State Treasury has surpassed over 0.1% in Government bond s demand increased significantly in 2016 thanks to (1) credit growth has yet shown signal of improvement; (2) ample liquidity thanks to SBV s continuous USD net-bought in the last 11 months and (3) Circular 06. 5Y tenor has taken lead this year with an outstanding issuance at over 57% of the total bond issuance. Moreover, 30Y tenor has up lifted to over 25% of the target Primary market Secondary market ST VBSP VDB Sources: HNX, VCBS Outright Repo In the last 2 years, bond issuance trend seemed to redirect from the short-term tenor to the medium and longer tenors, which has contributed in determining the market demand to the longer terms. Winning rates fluctuation showed clear differentiation between tenors. The longer tenors (20Y- 30Y) has swung in the tight band, moved sideways until the end of Q.3 then slightly ticked down and afterward stayed stable for the rest of the year. On the other hand, 5Y tenor has widened fluctuation from a slight decrease in Q.1 then fell sharply in Q.3 and later bounced back in Q.4. Lastly, 7Y tenor has shifted gently upward in Q.2 and then dropped significantly by the end of the year thanks to the increasing demand from investors. Therefore, we suppose that the liquidity and the market tended to improve in the longer terms. VCBS Research Department Page 12

14 01/15 02/15 03/15 04/15 05/15 06/15 07/15 08/15 09/15 10/15 11/15 12/15 01/16 02/16 03/16 04/16 05/16 06/16 07/16 08/16 09/16 10/16 11/ OUTLOOK REPORT % Winning rates and CPI CPI (y-o-y) 3Y 5Y 7Y 10Y 15Y 20Y 30Y Sources: HNX, VCBS In 2017, banking liquidity would continue to be the vital factor which could cause serious effect to the bond market. As expectation of (1) foreign currency supply remained high; (2) exchange rates risk stayed at a reasonable level and (3) SBV s orientation of keeping interest rates at a low level band, the liquidity in the system (excluding the seasonal factor) might as well maintain stable and abundant in the upcoming period. Therefore, we expect that bond yield would rather shift sideways in 2017, however the movement might somewhat distinguish between terms. 5Y bond yield is unlikely to decline further as compared to the trough in 2016 as for now the yield level was relatively close to the inflation rates and the inflation rate expectation in the long term. Meanwhile, liquidity and the investor s demand would swing to 7Y-15Y tenors which could trigger the yield fluctuation to expand. SBV effectively monitored the money market, ensuring banks liquidity. Global Economy SBV accomplished an outstanding job in Unexpected moves from the global market caused hardship to the local market, regarding interest rate and exchange rate; however, SBV was successful in maintaining interest rate levels and reduced speculation activities on the exchange market. Banks liquidity was ensured upon market s conditions and demand during holidays. USA US economy has continued to improve in Donald Trump has elected presidency. In 2017, the tightening monetary policy is likely going to be accelerated. Exceptional GDP growth in Q.3 at 3.2% yoy (2.6% in the same period last year) which was relatively higher than expectation of 2.9%. This figure has rather reached the highest peak in the last 2 years due to higher consumer spending, exports and fixed-asset investment throughout the period. Meanwhile, the unemployment rates in 2016 has managed to remain at a low level of 4.9% (even dropped to 4.6% at some points). The weekly number of applications for unemployment benefits also reduced to submissions per week in month. Service PMI growth in November has broken the record in the last 13 months and stayed steadily above 50 points in Likewise, the PMI manufacturing index posted at the upper band of 50 points and boosted in October and November (54,1 points in November). Inflation seemed to tick up by the end of the year and somewhat about to reach the target of 2%. In details, inflation rates of October was 1.6% yoy. VCBS Research Department Page 13

15 After raising interest rate in December 2015, there were many consecutive global events from China and Brexit which bounded FED to stay cautious and increase interest rates for only 1 time in 2016 at the December monetary meeting. At the same time, FED expected to raise interest rate by 3 times in As market s expectation before FOMC in Dec, FED made minimal interest rate adjustment. However, the expected timeline for interest rate lifting in 2017 seemed to be more aggressive. We forecast in the upcoming year, USD should continue to grow stronger against other major currencies. 11 % US Inflation and Unemployment US PMI Inflation rate Unemployment rate Manufacturing PMI Services PMI Sources: Bloomberg, VCBS. Donald Trump was elected as US President has been by far the most notable in After the short-term risks, US stock market has bounced back intensely thanks to the expectation of new policies, especially for the related matters such as (i) US has strengthened the trade protectionism entails the risk from extending or even withdrawal from TPP agreement; (ii) the route of tightening the monetary policy might be accelerated more than expected and (iii) capital flow would be adjusted to withdraw from the frontier market and emerging market. However, we suppose time is required in order to examine the actual effect of the policy to the market. While the withdrawal from TPP might not be as challenging since the decision would only take the approval of issuance from the President, the National Assembly s approval on the other hand would require more time. Therefore, uncertain risks might be increasing especially in the medium and long term. Therefore, uncertain risks might be increasing by times especially in the medium and long term. US economy is forecasted to continue to develop in 2017; however the growth pace would rather be sluggish as compared to We suppose time is needed to test the effectiveness from the policy of the Republican candidate. Though, this was rather a double-edged sword since the policy change might not be able to maintain the US economy s growth pace which has been actively functioning well in the last 2 years. Tightening monetary policy was the remarkable point since it came with the easing trend of the other Central Banks from around the world which could cause more pressures to strengthen USD value. Europe EU economy did not seem to manage well in Brexit was considered as the most shocking event. Europe economy in 2016 has not yet shown signal of improvement. GDP growth seemed to step back from 0.5% qoq in Q.1 to only 0.3% qoq in Q.2 and Q.3. In Q.3, GDP growth of Europe increased 1.6% yoy, which was unchanged from last year. On the other hand, Eurozone s GDP growth speed stayed at 1.8% yoy. Manufacture was the highlight of Eurozone since its PMI index has remained steadily at 51 points which indicated for expanding stable manufacturing.. Production index was the highlight of the area since the PMI manufacturing index has VCBS Research Department Page 14

16 maintained above 51 points which showed a stable expanding manufacture speed. Special manufacturing has developed in the year-end period as seasonal factor while PMI index has increased consecutively in the last 3 months reached 53.7 points in November. Unemployment rates seemed to decline in In EU19, unemployment rates dropped from 10.4% in January to 9.8% in October marked the lowest point in the last 7 years. Yet, this figure was still higher than the trough level of 7.2% in Meanwhile, the unemployment rates in EU28 decreased from 8.9% in January to 8.3% in October. Inflation rates has reached rock-bottom in Q.1 and then shown signals of recovery in November with + 0.6% yoy, which still quite far from the inflation target of 2%. Core inflation rate stayed stable at 0.8% yoy. Brexit has been considered as shocking news to the financial market in the past year. However, the full impact of Brexit was hardly recognized. Therefore, we are quite concern about the Europe and UK s monetary policy. Negotiation efforts from both the EU and UK were to focus on building the suitable trade fair to avoid risks from Hard Brexit. Uncertain political risks since Brexit along with other issues might pressure ECB to maintain their easing monetary policy in Brexit, Greek public debt and immigrants were heavily weighted on the European Economy. Accordingly, ECB might not terminate the asset re-purchased package in March/2017. We do not exclude the possibility that the program might be extended in terms of duration and implementation scale. We predict that it is only a matter of time before USD value would be equal to EUR 1. % 6M deposit rate of ECB 0,50 0,35 0,20 0,05 02/14 07/14 12/14 05/15 10/15 03/16 08/16-0,10-0,25 1,00 0,95 0,90 0,85 0,80 0,75 0,70 0,65 0,60 01/15 06/15 11/15 04/16 09/16 USDEUR USDGBP Sources: Bloomberg, VCBS. Asia China economy deceleration has slowed down by the end of However, PBOC is likely to continue on devaluating CNY in the upcoming period. GDP growth rates by the end of Q.3 reached 6.7%. Thereby, 2016 GDP growth might as well accomplish the target of 6.5%-7%. However, with the growth rates of 6.7%, 2016 would continue to grow at the slowest pace since In 2016, the manufacturing index has slightly recovered after a major plummet. PMI index has also ticked up to over 50 points in September. For that reason, quite the opposite from the previous negative perspective since the middle of the year, the manufacture index seemed to rebounce by the end of the tear. Industrial output boosted 6.2% in November. Production output also jumped 10.8% - the highest level in the past 12 months. Fixed asset investment increased by 8.3% in the first 11 months. Inflation improved by 2.3% yoy in November after a continuous downtrend of only ticking up by 1.3% in July, thanks to the higher food price. However, the export-import turnover of China has declined by 6.9%. The trade surplus has VCBS Research Department Page 15

17 01/15 03/15 05/15 07/15 09/15 11/15 01/16 03/16 05/16 07/16 09/16 11/ OUTLOOK REPORT narrowed significantly and slightly improved by November when exports and imports rising up by 0.1% yoy and 6.7% yoy respectively. At the same time, in 2016, foreign reserves ratio has bounced back to the lowest level of USD 3,050bn. We have recognized quite clearly the depreciation trend of CNY in order to promote exports. According to Bloomberg, CNY has marked downward by 6% as compared to the end of Since Donald Trump was elected for US President, CNY has continuously fallen sharply. We have yet seen the major drive that could cause China to put a stop on devaluing CNY. Therefore, in the upcoming year, global uncertain risks might become a reasonable opportunity for PBOC to continue on depreciating CNY (especially in the early period of 2017). USD bn China's foreign exchange reserves 7 6,8 6,6 6,4 6, Sources: Bloomberg, VCBS. USDCNY USDJYP Japan economy has shown weak growth. The global economy events have resulted in the uncertain trend of JPY and hardly pressured the BOJ s monetary policy. In 2017, easing monetary policy seems to remain to be the key factor. Japan economy grew weaker. Quarterly GDP growth pace has slowed down from a 0.7% in Q.1 to 0.3% qoq in Q.3. Therein, the growth figure in Q.3 has been adjusted to reduce against the previous estimated figure of 0.5% because there was no major change in domestic demand while commerce has less contribution to the economy growth. Unemployment rates in 2016 have decreased to around 3% while Japan has great demand for labor to serve the needs of postdisaster reconstruction. In 2016, the general trend of Japan has declined rapidly. From April, the inflation rates has stayed consecutively at under 0% and only ticked up to 0.1% yoy in November. Inflation core has maintained also under 0%. Japan commercial has shown signals of clear reduction. Therein, exports decreased dramatically to 10.3% - marked the 13 th consecutive month of shifting downward. In November, imports continued to drop harder than exports at 16.5% yoy. These events have somewhat shaped the trade surplus for Japan in 2016 instead of the trade deficit as recorded in Considering above factors, investors might shift their attention to the BOJ s policy. Besides, the Government has extent time for the inflation growth target as well as lower the GDP growth level, given BOJ s consecutive easing measures. In detail, in the first few months of 2016, BOJ has proceeded the expanding of asset acquisition package; yield curve impact or unlimited bond acquisition within the next 5 years. Nevertheless, BOJ monetary policy has shown signals of decelerate as (i) JPY boosted in Q.3 and (ii) negative impact from disaster factor. Therefore, we suppose BOJ would continue to precede the easing monetary policy in 2017 which extended more time for the growth target and inflation. VCBS Research Department Page 16

18 STOCK MARKET Market Highlights Source: VCBS 2016: A bull market lasted 10 months before the trend reversal took place in Q4. In the first 11 months, VN-Index and HNX Index rose 16.04% ytd and 2.64% ytd, respectively. A strong correction in January was quickly overshadowed by growth phase which lasted nearly 10 months. VN Index set the one-year high at 690 points (equivalent to an increase of 32.69% from the bottom at 520 points). The important motivations contributing to this trend included (i) the slow recovery of major economies led central banks to expand their easing programs, creating condition for inflows shift into securities market, (ii) the recovery of commodities price, especially crude oil, (iii) foreign investors active trading, and (iv) the abundant liquidity from banking system as well as stability of interest rate and exchange rate. These supporting factors caused index s quick rebounds after the unexpected movements in worldwide market, especially BREXIT event in June. As mentioned in the Equity Market Outlook Q4.2016, the year-end is not the time of disbursement of foreign investors. In addition, large correcting pressure after a long rally downward trend is the premise for continuing downward trend at least until the end of Q4. From the peak recorded in late October, excluding the effect of ROS, VN Index declined nearly 11% and lost the mid-term uptrend. VCBS Research Department Page 17

19 01/04/ /01/ /07/ /04/ /05/ /02/ /30/ /28/ /25/ /23/ /21/ /18/ /04/ /01/ /07/ /04/ /05/ /02/ /30/ /28/ /25/ /23/ /21/ /18/ /04/ /01/ /07/ /04/ /05/ /02/ /30/ /28/ /25/ /23/ /21/ /18/ /04/ /01/ /07/ /04/ /05/ /02/ /30/ /28/ /25/ /23/ /21/ /18/ OUTLOOK REPORT Volume VN-Index Volume HNX-Index Source: VCBS 2016: A bull market lasted 10 months before the trend reversal took place in Q4. In the first 11 months, VN-Index and HNX Index rose 16.04% ytd and 2.64% ytd, respectively. A strong correction in January was quickly overshadowed by growth phase which lasted nearly 10 months. VN Index set the one-year high at 690 points (equivalent to an increase of 32.69% from the bottom at 520 points). The important motivations contributing to this trend included (i) the slow recovery of major economies led central banks to expand their easing programs, creating condition for inflows shift into securities market, (ii) the recovery of commodities price, especially crude oil, (iii) foreign investors active trading, and (iv) the abundant liquidity from banking system as well as stability of interest rate and exchange rate. These supporting factors caused index s quick rebounds after the unexpected movements in worldwide market, especially BREXIT event in June. As mentioned in the Equity Market Outlook Q4.2016, the year-end is not the time of disbursement of foreign investors. In addition, large correcting pressure after a long rally downward trend is the premise for continuing downward trend at least until the end of Q4. From the peak recorded in late October, excluding the effect of ROS, VN Index declined nearly 11% and lost the mid-term uptrend Volume VN-Index Volume HNX-Index Source: VCBS P/E of Vietnam market increased In 2016, the P/E ratio on HSX increased sharply due to significant changes in the market VCBS Research Department Page 18

20 sharply in 2016, peaked in September and was no longer at attractive level compared to other frontier markets. As a result, correcting pressure boosted in the latter part of the year. price when many tickers broke their mid-term peaks. At the end of November, P/E on HSX rose 38.23% from the end of last year, equivalent to old peak in Although P/E of frontier markets and emerging markets boosted in 2016, growth rate of Vietnam s P/E still grew faster than the average. Accordingly, P/E level of VN Index in November far exceeded the frontier market s average and was beyond the average P/E of emerging markets at a time, indicating that the price level of Vietnam market was no longer too attractive P/E of Vietnam compared to some markets P/E Vnindex P/E Emerging market P/E Frontier market Oil & Gas stocks finished 2016 with outstanding performance Sources: Bloomberg, VCBS Oil & Gas sector was the market leader by growth rate, followed by Real Estate, Consumer Goods and Insurance witnessed an impressive return of Oil & Gas sector after the disappointment in 2015 with an increase of 71.73% growth yoy. Followed sectors included Real Estate (+ 36.1% yoy), Consumer Goods ( % yoy) and Insurance ( % yoy). Oil & Gas: Because business activity depends on the movements of worldwide oil prices, the group took the leading role after crude oil prices rebounded sharply since the beginning of the year. But since the end of September, this sector has entered the sideways stage. In Real Estate sector, amid revenue of many businesses focused on 2016, many stocks in this sector surged in the second half of the year. Besides, positive signal of Real Estate received major contribution from leading ticker VIC with strong growth, the share price, accordingly, also welcomed positive developments. Consumer goods sector recognized much volatility in The main dynamic growth of this group still was VNM with supporting news as loosening room to 100%; SCIC divestment or VNM was added to the portfolio of two foreign ETFs. The participation of Beer stocks at the end of the year will open up expectations on this group next year. VCBS Research Department Page 19

21 100% VCBS Sector Indices 70% 40% 10% -20% -50% -80% VCBS Oil & Gas Index VCBS Food Products Index VCBS Real Estate Index VCBS Mining Products Index VCBS Securities Index VCBS Banking Index Source: VCBS Minerals created the biggest drop, especially in the last 6 months as consecutive violations in raising capital and information disclosure of enterprises such as KSK, KHB, KHL were penalized by SSC. The downtrend of this group is caused by changes to investor appetite for stocks with fundamental factors. After a weak start in Q1, large-cap group regained the leading role. The divergence became stronger in the second half amid small-cap and midcap gradually halted. The trend in 2015 maintained as large-cap group still was the focus attracting inflows. The first half of 2016 witnessed a surge in mid-cap stocks which benefited directly from the fundamental factors as commodity prices recovered, loosening room, divestments. Tin the latter part of the year, beside the shift investment appetite from speculative stocks to fundamental stocks, the advance in the large-cap also received important support from new listing of some large enterprises. 36% VCBS MarketCap Indices 28% 20% 12% 4% -4% -12% VCBS LargeCap Index VCBS MidCap Index VCBS SmallCap Index Source: VCBS Foreign tended to withdrew fund after VN Index reached its peak of 690. After a net-buying period in the first 7 months, (excluding transaction at VIC), global unexpected events caused net-selling pressure from foreign investors to heat up in the latter part of the year. After 11 months of 2016, the Foreign net-sold of more than VND 5,000 billion on Vietnam market, terminating a chain of net-buying in four years. Upbeat rhythm in 7 months of the year received significant support from steady net-buying of foreign investors (excluding transaction at VIC). However, the following months witnessed a strong withdrawal trend in the context of (1) the price level has increased dramatically since the beginning of the year and was no longer attractive, (2) global unexpected events such as BREXIT, US presidential election or FED s interest rate hike caused negative effect on inflows in frontier and emerging markets. VCBS Research Department Page 20

22 VND Mil Monthly net bought/sold value by the Foreign Source: VCBS Foreign investors trading continued to focus on large-cap stocks: - Banking and Oil & Gas stocks accounted for large numbers at the list of top tickers by net-buying. Therein, MBB ranked first after loosening its room. 2 tickers CII and SSI whose higher room compared to last year were also located on the list. In addition, with the strong recovery of Oil & Gas sector, GAS, PVT, PVS were three of ten strongest netsold stocks by foreign investors Top 10 stocks by net buy value of Freign Investors Top 10 stocks by net sell value of Foreign Investors VIC VNM HPG HSG CTD HBC PVD DPM VSH MSN Source: VCBS - Meanwhile, foreign net-selling mainly focused on VIC with the pressure from the convertible bonds held by foreign organizations. However, many other large-cap stocks such as HSG, HPG, or MSN also joined the list of top stocks by net-selling value showed portfolio restructuring trend of foreign investors. Notably, VNM, after loosening its room to 100%, suddenly became the focus of the net-selling trend. We believe that the attractive profit in recent years of VNM caused foreign investors priority to profit realization in this blue chip. The fund withdrawal of two ETFs was pushed at the end of the year Moving the same direction with FIs, the net withdrawal fund from two ETFs boosted at the end of the year. When it comes to 2 main foreign ETFs in Vietnam: FTSE Vietnam UCITS ETF (FTSE) and Market Vectors Vietnam ETF (MVIS), we record a downward trend in the number of fund certificates outstanding. The pressure was on especially at the end of the year, and this was also the overall trend in In the last 11 months, there was 4.65 million was withdrawn, equivalent to a net-sold of 1,200 billion VND worth in Vietnam. Meanwhile, there was also 1.72 million fund certificates was withdrawn in FTSE fund, which equal to 877 million VND net-sold value in Vietnam. VCBS Research Department Page 21

23 06/15 08/15 10/15 12/15 02/16 04/16 06/16 08/16 10/16 NAV (USD) No. Outstanding Shares (mn) 2017 OUTLOOK REPORT Total Asset (mn.usd) VNM FTSE No. Outstanding Shares & NAV No. Outstanding Shares of VNM No. Outstanding Shares of FTSE NAV of VNM NAV of FTSE Source: Bloomberg, VCBS compiled The act of adding VNM into both ETFs caused a tremendous change in these two funds portfolio. In detail, that VNM was added to both ETFs at the highest rate resulted in the remaining tickers in the portfolio was sold out strongly in review procedure in September. Outlook 2017: Opportunities still exist. More risks to take at the 2H The year of 2016 experienced shocking events which derive from worldwide market, beyond investors expectation. Notably, two outstanding events of BREXIT and Donald Trump win US Presidential election. However, following the short-term effect, we concern about long-term impact which may cause unpredictable systematic risks. However, we believe that many central banks (except from FED) will have to maintain their loosening policy because of uncertainty events. Consequently, it is likely that Vietnam shall benefit from Asian countries such as China, Japan, Taiwan and Korea, etc. Therefore, in the context of good news and bad news it is important that investors keep up with market in order to scan opportunities for investors especially sectors: Growing stocks with fundamental factors, especially blue chips as investors taking risks in field such as Building materials, Construction, Retail sales, etc. Firms in individual cases, which may attract inflows such as newly listed ones, stocks moving to other stock exchanges, M&A case, and State divestment plan. Firms which benefit from commodities price change, which help to improve financial performance efficiently. Defensive tickers when indexes log into downward trend, notably the secondhalf of Beer and Air services sectors as we consider the fact that financial fund may devote some of their resources as newly listed large-cap tickers change the relative proportion among sectors. 2017: Opportunities lie on some spotlights. (1) We believe that the situation this year is a little bit different from last year as stocks provided for investors was anticipated to be better-off at either quantity or quality. This argument is supported by supportive approach of Government in equitization and listing state-owned firms. Notably, these are the cases, which investors shall be breath-taking for, (i) officially listed on stock exchange after IPO such as VEAM, Vinatex, Vietnam Airline; (ii) Firms, which are on IPO procedure such as Vietjet Air, PV Power, Mobifone, etc (iii) VCBS Research Department Page 22

24 the process of some large-caps firm moving to new stock exchanges after listed on UPCoM for a while. For example, Hanoi Beer and alcohol and beverage joint stock Corporation (BHN), Airport Corporation of Vietnam (ACV). The real procedure amid commitment of divesting scheme in 10 state-owned firms approved by the Government. Therein, following official offering VNM share held by SCIC, we expect that legislative body will open to more renovation in offering procedure with a view to (i) underestimating the state-owed assets value and (ii) creating a win-win deal after divesting scheme, which means that the growth of firm will be secured. (2) From the investors viewpoint, we believe that the supportive effect from the loosening monetary policy from huge state bank (except for FED) such as ECB, BOJ, PBOC, etc. as a result we expect that in the upcoming year, Vietnam still benefits from foreign inflows, especially the ones from Asian countries for instance China, Japan, Taiwan, Korean. The argument which support this idea are: (i) the cost of capital in these countries are relatively low compared to that in Vietnam; (ii) the comparative advantage of Vietnam is stable politics; Inflation and Exchange rate are under control; (iii) last but not least Vietnamese market was not too vulnerable to uncertain events in the market this year. (3) The expectation of newly released derivatives market shall bring new product to the market. The plan was that derivatives market may work from Q We believe that it is too early to judge for the success of new products. However, we believe that the orientations of legislative bodies are keeping up with the plan in both technical and human resources factor. Consequently, there is probability that this scheme may become spotlight in (4) Many large-caps tickers in Beverage, Airline service, Real estate shall create a huge change in the level of impact a sector made in the overall indexes. Consequently, to closely track to indexes movement, the investment funds may have to restructure their portfolio with. This means bearish pressure to the groups, which have huge impact on the indexes at the moment for instance, Consumer goods, Banking, Oil & Gas and simultaneously opportunities for the ones, who newly listed. (5) From 1 st November, Circular No.115/2016/TT-BTC, which regulated IPO process, managing and administrating revenue from 100% sate-owned firm divestment scheme, took effect. Notably, after 20 days due date for the investor to pay for auction shares, investors may trade these shares on UPCoM. This rule is expected to well-promoted listing and equitation process of state-owned firms. The biggest risks in 2017 shall derive from worldwide factor. In 2017, market may experience systematic risks derived from unpredictable factors. As a result, investors may find it out of the control in some ways. Therein, we draw attention to the following factor: (1) The policy of newly elected president of the United State mentioned in Global economy. (2) BREXIT is considered shocking event to financial market in However, at the present, we may not realize all the following effect of this event. To this effect, we will take into consideration the monetary policy of European State bank as well as Bank of England. We also bear in mind the negotiation effort from both sides EU and Britain so as to avoid hard BREXIT. Nevertheless, BREXIT will create probability that other countries may follow Britain s foot step to leave Eurozone. (3) Risks that the devaluation of CNY may not come to an end soon and put a lot of VCBS Research Department Page 23

25 pressure on domestic exchange rate. Inflow is ready for disbursement opportunities. However, it will be badly impact by worldwide events. Inflow is ready for disbursement opportunities. However, competition is on when it comes to attract resources. Loosen monetary policy shall promote the abundant liquidity in the market. These results in investors seek for profitable opportunities at risky assets such as equity market. Although equity market shall have to compete with other investment channels such as Real estate, Gold, FOREX, etc. when it comes to attracting inflows. We believe that the scale of the market will still extend as tickers available for sale on stock exchanges are clearly better-off either Quantity or quality. However, as numerous largecaps tickers were listed on the market in a relative short period of time, the market shall be overwhelmed by newly-listed stock. Consequently indexes may be dragged to correction phase regarding the fact that it will take time for the whole market to absorb such a huge amount of shares. This also creates unexpected change to main indexes. This argument is supported by the fact that correlation between VN Index and VN30 Index dived when ROS was newly listed on 25 Aug, To sum up, we believe that newbie stocks may bring profitable opportunities for risk-lover investors because the outstanding feature of these newbie is significant volatility VN 30 Index VN Index The real effect of new inflow is still unknown when investors take exchange rate risk and interest rate into consideration. As mentioned macro outlook 2017, we believe that interest rate tended to form its trough in 2016 and therefore unlikely to tick down more. However, we do not speak highly chance that interest rate will surge. It is likely that interest rate will tick up marginally. In reality, higher interest rate shall create bad impact on investor s sentiment in the short-term. Nevertheless, the real impact of higher interest rate on the cost of capital of firms will only show up after 3-6 months due to a time lag. Accordingly, at the second half of 2017, we are more concern about interest rate risk. Inflow nay return to the market after the correction phase, which help to deem P/E to attractive level. On the other hand, many tickers logged in impress win in 2016, therefore, P/E ratio of these tickers was no longer attractive to investors regardless of gaining momentum in revenue and profit still remain. We believe that these tickers will keep boosting in At the same time, foreign inflow sustain a certain loss as the unpredicted event in worldwide market showed up out of the blue. Therein, We recorded the trend of netwithdrawal fund By two ETFs after both NAV number of share outstanding in the market reached their peaks in However, as far as the phenomenal growth of the indexes in 2016, we draw attention to the contribution of foreign inflow derived from other countries especially Asia ones. Nevertheless, the inflow may rush back to the market once again after correction phase occurs and push P/E ratio to a lower level, of which more attractive VCBS Research Department Page 24

26 compared to Frontier Market s P/E. Spotlight shall belong to Retail sales, Building material, Construction and Infrastructure, Fertilizer, Chemical, Natural Rubber and Bank. After taking into consideration of the following factors (i) systematic risks from worldwide events; (ii) the supportive effect from active inflows and (iii) steadiness of macroeconomics indexes, we believe that indexes will press higher while volume will also tick up. However, during the whole process, market may experience a significant downward phase around the timing of important international issues as well as domestic ones. Therefore, investors who are prudent, sensible to any market movement will stand a high chance of realizing a certain amount of profit. On the other hand, in terms of economy growth, we have yet recognized a new growth engine. Accordingly, apart from imports activities, public investment in infrastructure and Mining was the main driver of GDP growing. Noted that Oil extracting was the main contributor of Mining sector. VCBS believes that some firms in Retail sales, Building materials, Construction, Infrastructure, etc. sector may record outstanding business performance and consequently become the spotlight of the whole market. Besides, we also recommend keeping an eye on the commodity price of the global market as it will create a huge impact on sectors for instance: Fertilizer, Chemical, Natural Rubber, Oil &Gas, and Mining group. Last but not least, investors are likely to be drawn into tickers, which involved in M&A commercial affair, State divestment scheme; the newly listed stocks; and firms approved by stakeholders to switch to new stock exchange. We therefore evaluate the prospect of the key sectors as followed: (1) Retail sales: The population of 94 million people with young population is considered the excellent opportunity for the retailers of multi-industries, who have a professional chain management and uniformed expansion. Therefore, retail sales firms shall keep growing in (2) Construction and Infrastructure: The leading enterprises dominate the market. Vietnam s fast-paced urbanization has secured the steady growth in this group. Additionally, along with the orientation of continuously promoting public investment in infrastructure of the Government and National Assembly, P/E ratio of this group has increased significantly this year. Consequently, the relative attractiveness of this group dived. Therefore, we believe that it is unlikely that this group once again logs into impress win next year. (3) Building material: Diversified in types, categorized, various opportunities and potential in the upcoming year. Given that these are manufacturing firms, we bear in mind some key factors, which may determine the effectiveness of the firms core activities for instance input price, depreciation cost or the ability of pushing higher capacity to promote growth. For more details, take a look at the outlook of Building material sectors. (4) The growth capability remains questionable after a cycle of a phenomenal growth in Next year, we believe that fundamental factors will still the key point to differentiate the performance of banks. (1) Overall the pressure is on for Banking sectors as Basel II standard will soon officially enforced; (2) bad debt issues still prevent many banks from growing again (3) Circular No.06 (the amendment circular of Circular No.36) s will take effect soon and boost deposit demand in some banks to answer liquidity requirement. However, we should bear in mind that either positive information of any kinds may press VCBS Research Department Page 25

27 indexes or banking tickers higher as the large-caps tickers of this group secured a strong enough effect on the indexes. In this case, we assume that the supportive factors may be legal documents. Therefore, we suppose investors should monitor the Banking sector in (5) Oil & Gas: Assuming that the barrier of the production of the coal oil, crude oil, shale oil in America under President Donald Trump s policy would be somewhat removed, we expect the oil price will fluctuate in a tight band around USD55/barrel (breakeven point of shale oil), which promote a strong resistance for crude oil price. From the domestic Oil & Gas firms, we assess that the crude oil price steadily settling above USD50/barrel will be the chance for these firms to reactivate exploring and extracting activities. We believe that the positive effect, if any, is likely going to be reflected from Q since (i) it will take time to examine the effectiveness of OPEC s output cut deals, which is also promoted by Russia; (ii) the time lag effect shall create difference impact on listed Oil & Gas firms as the effect is determined by parent company PVN s production plan. Therefore, VCBS believes that Oil & Gas stocks should be monitored closely. The priority privilege shall PVN s subsidiaries level 1 and then level 2. The suitable timing would be the early (6) Fertilizer, Chemical, Natural Rubber, Coal and Mineral. These groups bear a direct impact from the commodities price changes. Therein, we concern about group which has a certain correlation with the oil price. Nevertheless, the real effect on the firms shall be determined by characteristic of these firms. Therefore, in a high-segmented industries like these ones, investors shall seek for opportunities at individuals firms (7) Real estate: Highly segmented industries, which means that investors need to classify clearly among tickers available. Key point of these groups is the capability of boosting sales and consequently promoting growth in revenue and profit. We believe that these tickers are more suitable for risk-lover investors with short-term trading strategies. VCBS Research Department Page 26

28 PROSPECTS FOR INDUSTRIES/CORPORATIONS In 2017, Banking industry will witness a slower credit growth rate which is forecast at 16% yoy. The interest rate is expected to rise as a result of inflation rate and demand for capital raising in prepare for the pilot phase of BASEL 2 application. There will be a sharp differentiation among the industry. We expect that those banks which have well solved NPLs in the part will have higher growth potential. On Real estate market, although the industry transaction volume may slightly decrease, the mid-class and common-class segment will have growth potential. Meanwhile, we expect a strict competition among high-class segment. In other aspects, we believe that the credit tightening policy, which will be in effective in 2017, is necessary for the sustainable growth of the real estate market, preventing the bubble from taking place The steel industry is expected to grow, attributed to the increase in urbanization rate, and the rise in public investment. The steel price should increase as the input costs soar. We believe that sale volume will rocket in the 1H2017 resulted from the steel agents stockpiling activities, decelerating gradually in 2H2017. The BOF steel producers will have more advantages against EAF one. The galvanized sheet export market will be slow down, while the domestic market grows. The facing brick industry will be differentiated sharply. The classification bases on products, geographic location, and fuels to be used. In details, we believe the investment opportunities will lie among those Northern granite producers who use CNG to operate their factory. Strict competition on domestic market will force the Vietnamese plastic producers to promote export market. The plastic pellets prices are expected to increase as the crude oil prices rise in Moreover, the tariff on PP pellets will increase from 1% to 3% in 2017 may put more pressure on domestic producers. The rock miners group is more stable than other mining groups. This group is also invulnerable from the commodities market. The seaport sectors will benefit from the increase in export-import turnover resulted from the FDI capital grows. However, the degree of benefit among this sectors will be differentiated The competition in domestic market is stricter than ever. Domestic producers are promoting export market, especially in the US and India. we believe that the outlook in 2017 for tire production firms will mainly depend on the volume growth of the Vietnam tire market, which is forecasted to grow at 12% yoy, and these firms ability to export to markets that are not in direct competition with Chinese tires such as the US and India markets. Vietnam s power industry structure is to be more heavily weighted toward coal-fired thermal plants. We believe La Nina effect in 2017 may support the production volume of Hydropower group, while the increase in coal and gas prices will narrow the Thermal power group s profit margin. The construction sector is expected to grow in both civil and infrastructure segments. In detail, the high urbanization rate and the population mix changing to mid-class will encourage the civil construction. On the other hand, we expect a stable growth in infrastructure construction thanks to the increase in public investment and the rise of PPP and BOT models. Demand for electronic and technology products is forecast to grow by 20% in We believe the expansion of young population and the rural modernization will be the main growth motivation. VCBS Research Department Page 27

29 Based on outlook of each sector and enterprise, we propose the following recommendations: No. Industry Recommendation 1 Banking VCB : Outperform ACB: BUY 2 Real Estate HDG: BUY HUT, NLG: Outperform KBC, SJS, VIC: Hold 3 Construction HBC: Outperform 4 Steel HPG: BUY HSG: Hold 5 Rock Mining NNC, C32: Hold DHA, KSB: Outperform 6 Facing Brick VHL, CVT: BUY VIT: Outperform TLT: Watch 7 Plastic BMP, NTP, DNP: Outperform 8 Tire DRC: Outperform 9 Power Industry SHP, NT2, PPC: Hold 10 Retail & Distribution of Consumer Electronics and Technology Products MWG: BUY 11 Seaport VSC: BUY GMD: Outperform VCBS Research Department Page 28

30 Banking 2016 highlights Credit showed slower growth rate. Deposit was boosted. As of 21 Nov 2016, credit grew by 13.94% ytd, which was lower than the rate of 14.5% same period last year and year-end plan target of 18%. Deposit growth was 15.32% ytd, which was 1.5 times higher than that of same period last year (11.14% ytd). As of 21 Nov 2016, credit grew by 13.94% ytd, which was lower than the rate of 14.5% same period last year and year-end plan target of 18%. This came from (1) Economic growth slowed down; (2) The average Capital adequacy ratio (CAR) has decreased to the minimum requirement ratio (9%) while the pilot phase of BASEL II application is coming; (3) The fact that some weak banks were still on restructuring process and restricted credit expansion negatively affected the overall credit growth rate. Deposit surged right from the beginning of the year and kept a higher growth rate than that of credit. As of 21 st November 2016, deposit growth was 15.32% ytd, which was 1.5 times higher than that of same period last year (11.14% ytd). The robust deposit expansion clearly reflected the impact of Circular 06/2016/TT-NHNN, proven by (1) The strongest deposit growth was from banks with high lending to deposit ratio; (2) Deposit expanded most in long-term tenors; (3) Solid deposit demand created deposit rate competition among banks in % Credit and deposit growth 15% Deposit and Lending rates 20% 15% 10% 10% 5% 5% 0% 0% Credit growth (yoy) L.R agriculture, rural & exports L.R manufacturing D.R (<1M) D.R 3M Sources: SBV, VCBS summarizes Banks bond portfolio expanded by 15%ytd in average in 9M Besides, bond trading was boosted As of end of October, deposit rate increased by % comparing Since the end of Q1, there was an ample interbank liquidity, which dampened interbank rate to low record level. In such favorable condition, banks boosted government bond investment. Since the end of Q1, there was an ample interbank liquidity, which dampened interbank rate to low record level. Overnight interest rate at some points decreased to %. In such favorable condition, banks boosted government bond investment. Banks bond portfolio expanded by 15%ytd in average in 9M Besides, bond trading was boosted and became an important income for banks in this year. However, interest rate did not follow. Deposit rate was under upward pressure. Lending rate, though showed decreasing signs as government plan, took little change over the VCBS Research Department Page 29

31 to the beginning of the year. Lending rate, though showed decreasing signs as government plan, took little change over the year year. Given banks boosted deposit, deposit rate continuously took upward adjustment in the whole year. As of end of October, deposit rate increased by % comparing to the beginning of the year. In contrast, lending rate was quite stable, except for two times of decrease adjustment in April and October. However, the adjustment showed in short tenors only with minor amount, which made little impact on the overall lending rate. NPL ratio kept at high. At present, banks still rely on their own by taking provision to resolve bad debts. NPL ratio kept at high. VAMC took as a tool to concentrate rather than efficiently solve NPL. At present, banks still rely on their own by taking provision to resolve bad debts. The overall NPL ratio at the end of Q2 was 2.58%. The ratio would be 5.21% if we add the NPLs kept in VAMC. The ratio would be even higher if we account for the NPLs which are not right classified and adjust the loan rollover to hide bad debts. Credit balance 5,104,873 NPL official 131,706 Total NPL sold to VAMC 262,054 VAMC collected 37,983 Provision for special bonds 89,628 NPL left in VAMC 134,443 Official NPL ratio 2.58% Adjusted NPL (with accounts for NPL at VAMC) 5.21% Contribution of methods in solving NPL Banks solve NPL themselv es 52% Banks take provision for special bonds 34% VAMC collects 14% Source: VAMC, VCBS summarizes VAMC took as a tool to concentrate rather than efficiently solve NPL. Over the past 4 years, several methods have been used to reduce bad debts including bad debt recovery through VAMC, banks took provision for special bonds after selling bad debts to VAMC, banks solved bad debt by themselves (by bad debt clearance, bad debt recovery ). We estimated the effectiveness of each method in the above chart (Noted that: NPL, which was solved to VAMC but had not been recovered or taken provision, was classified as unsolved). As from the chart, banks still relied on their own to resolve bad debts. VND bn T.2016 Cumulated NPL value sold to VAMC 36,257 92, ,000 26, ,054 Special bonds value 30,947 77,705 99,180 20, ,848 Value collected 145 4,875 17,763 15,200 37,983 Collected over total NPL sold 0.40% 3.90% 9.67% 14.49% 14.49% Source: VAMC, VCBS summarizes From the beginning of this year to end of Q3, VAMC bought an amount of VND 26,739 bn NPL, which was equivalent to only one fourth of the amount they bought in Given the NPL increase from 2.55% at the end of 2015 to 2.58% in Q2.2016, we think that the decrease NPL sold to VAMC was not due to an improvement of banks asset quality. Instead, the reason was the fact that banks were no longer under pressure to sold NPL to VAMC VCBS Research Department Page 30

32 when their NPL ratio had been lower than 3%. As explained in previous report, selling NPL to VAMC was considered as unfavorable selection for banks as (1) VAMC s modest ability to resolve bad debt; (2) high provision pressure to banks after selling NPL; (3) banks still have to keep their responsibility for bad debt sold. Several new policies were issued to boost NPL solving. However, the results were limited The pilot phase of BASEL II application was challenged by capital raising issue. The majority of banks relied on tier II capital by issued subordinated bonds to comply in short term. Since the beginning of this year, several new policies were issued to boost NPL solvement. However, the results were limited such as (1) Circular 08/2016/TT-NHNN, which amended and supplemented a number of articles of Circular 19/2013/TT-NHNN, expanded VAMC rights in buying, selling and solving NPL; (2) Draft of a circular regulated capital contribution and share purchase by credit institions with some articles on swap bad debts with shares of the borrowers. Banks boosted their preparation of the pilot phase of BASEL II application. However, the capital raising countered a lot of difficulty. The majority relied on tier II capital by issued subordinated bonds to comply in short term. The deadline for the pilot phase of BASEL II application is coming (Sep , as stimulated in the lastest draft). Therefore, the demand for banks to raise capital is increasingly high. Among 10 banks that participated in the pilot phase, private banks are under lower pressure since they have already had quite high Capital aquadency ratio (CAR) such as ACB, VIB, TCB... In contrast, state-owned banks (i.e. VCB, BID, CTG) will be under higher pressure. The success of their capital raising will have the decisive impact on the success of the pilot phase of the BASEL II application. Of those 3 banks, VCB has largest room to raise capital. BID and CTG counter more difficulty due to (1) their extremely low CAR, which are roughly equal to the minimum requirement ratio (9%); (2) they are obliged to pay cash dividend by the Ministry of Finance rather than keeping retained earnings to raise capital as they planned since the beginning of this year; (3) CTG has reached foreign ownership limit to call for new foreign investment while BID has reached tier II capital limit to issue subordinated bonds. At present, most banks among 10 in plot phase rely on raising tier II capital by issuing subordinated bonds. This only helps such banks to comply with the orientation of SBC (i.e. pilot phase of the BASEL II) in 1-2 years. Besides, those banks will have to bear a higher funding cost since interest rate of subordinated bonds is usually 1-2% higher than deposit rate. There was sharp differentiation among business results of listed banks in There was sharp differentiation among business results of listed banks in As of Nov , while VN Index rallied by 16.01%, bank index fell by roughly the same rate. This was explained by the unflavored business results of listed banks in 3Q Most were negatively affected by provision expense, decrease of NIM due to reversal of accrued interest and unflavored interest rate trend (rising deposit rate and declining lending rate). Main driver for net income in 2016 was from non-interest rate income, especially from bond trading given sharp fall of interbank rate. While the overall business results look gray, there was sharp differentiation among listed banks. Notably, few banks such as ACB, VCB, those who had determined to resolve NPL in the past, showed improvement in business results. Growth Credit Deposit Net interest income Noninterest income Profit before provision expense Provision expense Profit before tax NPL ratio NIM 3Q Q.2015 VCBS Research Department Page 31

33 ACB 19.23% 16.33% 17.0% -63.9% -5.4% -31.3% 14.1% 1.1% 3.30% 3.26% BID 12.83% 18.57% 21.8% 49.9% 32.2% 71.5% 3.4% 2.0% 2.65% 2.76% CTG 16.23% 25.62% 18.4% 24.4% 20.1% 30.3% 13.3% 0.9% 2.99% 3.08% EIB -4.79% 4.66% -2.5% 29.7% -4.3% 85.2% -70.2% 3.4% 2.77% 2.68% MBB 19.97% 2.79% 4.0% -1.6% -7.9% -33.6% 9.2% 1.3% 3.56% 3.91% SHB 12.11% 11.78% 6.0% 133.0% 19.4% 44.2% 6.2% 2.3% 1.80% 2.03% STB 4.94% 9.35% -35.0% 62.7% -61.0% -32.6% -74.3% 2.4% 2.16% 4.21% VCB 15.69% 14.43% 23.9% 9.1% 15.7% -4.3% 36.1% 1.7% 2.76% 2.63% Average 12.0% 12.9% 6.7% 30.4% 1.1% 16.2% -7.8% 1.9% 2.75% 3.07% Source: Banks financial statements, VCBS summarizes 2017 outlook The average interest rate is expected to rise Credit growth and funding cost could be negatively affected by the pilot phase of BASEL II application. The average interest rate is expected to rise despite the orientation of SBV to keep it at low. The orientation of SBV to keep interest rate to decrease further to stimulate economic growth could be challenged by: Deposit rate is under upward pressure due to (1) expected higher inflation when commodity price has hit bottom and bounded back since 2016; (2) Strong demand to mobilize deposit to comply with Circular 06. As of Q3.2016, many banks still have LDR exceeding the requirement ratio (80%) such as VIB (89%), TPB (83%), SHB (83%), CTG (96%), BID (90%), Viet A (87%), the ratio of long and medium term loan exceeding the requirement ratio (50%) such as EIB (60%), MSB (70%), STB (62%), TCB (70%), VPB (74%) Given upward pressure of deposit rate, there will be little chance for lending rate to go down. Noted that the gap between deposit rate and lending rate of Vietnam banks has decreased sharply over the past 3 years. At present, this gap is lower than that of most countries in Southeast Asia. The smaller this gap is, the thinner profit margin banks have. As a matter of fact, Vietnam banks now show little motivation to decrease lending rate further. The pilot phase of BASEL II application will be one of the most important objects of Vietnam banking industry in To lift up CAR to the requirement threshold, some banks could restrict credit growth and boost capital rising, which may put upward pressure on their funding cost. According to our calculation, banks need to increase their capital by 10-15% to have their CAR to rise by 1%. As such, there will be high pressure to raise capital among 10 pilot banks. While there are many difficulties to raise tier 1 capital and little regulation support from authorities, most banks are likely to either restrict their credit growth to keep their CAR not to go down or choose to raise tier 2 capital by issuing subordinated bonds. In general, such pilot application could put upward pressure on funding cost of banks and negative affect credit growth of the whole system. Therefore, we keep our conservative view in forecasting credit growth in 2017 with the rate of 16%, which is lower than this year plan of 18%. It takes time and more efficient methods to solve NPL issue in It takes time and more efficient methods to solve NPL issue in Vietnam banking system. NPL issue has been lasting for years but not fully solved. Up to date, the main method to VCBS Research Department Page 32

34 Vietnam banking system. solve NPL is banks taking provision. If such method continues, meaning VND bn will be taken as provision each year, it will take 6-7 years to fully solve existing NPL. Over past years of restructuring, NPL has been accumulated to a group of banks (according to our data, NPL balance of 7 banks accounts for 50% of that of the whole system). This is a suitable time for SBV to take more action rather than keeping using public budget to support week banks, which has been showed inefficient over past years. While new methods to solve NPL problem have not been issued, banks could counter difficulty when solving NPL by an article in Civil Law 2015, which will take effect in beginning of Specifically, as stipulated in the existing related document (Decree 163), credit institutions, based on contracts with their customers, have right to handle collateral assets without delegation of authority made in documents when customers fail to fulfill their obligation. As stipulated in the article in Civil Law 2015, credit institutions have rights to sue customers. As law is higher than decree in regulation ranking, banks will have to refer to Civil Law 2015 rather than Decree 163 since Therefore, banks rights to deal with collateral assets will narrow down from rights as stipulated in contracts to rights to sue. From above analysis, we believe that banking industry could be challenged in However, the investment opportunities still have in some banks who have well solve NPL issue in the past now have high income growth potential Business results of banks are expected to continue sharp differentiation As mentioned above, the main method to solve NPL now is taking provision is the third year banks taking provision for special bonds, which banks received after selling NPL to VAMC in the past. As such, banks with high special bonds balance will continue being negatively affected by provision expense. In contrast, those who have more prudent risk management and determine to solve NPL in the past, now see their provision expense to go down. As the matter of fact, business results of banks are expected to continue sharp differentiation. Recommendation: From above analysis, we believe that banking industry could be challenged in However, the investment opportunities still have in some banks who have well solve NPL issue in the past now have high income growth potential. Based on such arguments, we recommend VCB and ACB as followed: Recommend lists VCB Outperform 2016: Breakthrough after years of solving NPL issue VCB reported high business results in 9M.2016 with VND bn profit before tax (36% yoy, completing 84% year-end target). High income growth was due to both improvement in core business result and decrease in provision expense. We expect VCB could report VND 8,255 bn in 2016 (+20.9% yoy, exceeding 10% plan). As such, BV at the end of 2016 would be VND 13,400 per share. With close price of VND 34,150 per share, VCB is traded at PB forward 2016 of 2.65 times outlook: Good asset quality, positive business outlook We forecast VCB could report VND 9,339 bn profit before tax in 2017 (12,99% higher than 2016) based on (1) Credit is expected to grow by 17%, which is lower than the rate of 18% in 2016 since the bank shows more prudent in credit expansion. (2) LDR is expected to stable at 79%, which is higher than that of 76% in 2016, since VCB VCBS Research Department Page 33

35 has been approved to raise LDR from 80% to 90%. (3) Lending yield to customers could expand by 15 bps to 7% since VCB continue boosting their retail loan. Deposit cost could increase by 10 bps because we forecast the deposit rate of the whole system could be under upward pressure when banks raise their deposit to comply with Circular 06. (4) Non-interest income is expected to increase by 10.73%, of which services income will keep high growth of 15% and other income (from securities trading, foreign currency trading ) will see a lower growth rate of 5% as we do not expect market condition will be good as (5) Provision expense is expected at VND 6,864 bn, comparing to the amount of VND 6,356 bn in This provision expense is based on assumptions of NPL ratio of 1.5% and the ratio of provision balance to NPL of 120%. VCB would not have to take provision for special bonds from VAMC since it had fully solved in 2016, which means that the provision expense for VAMC bonds will decrease by VND 1,600 bn. The total provision expense will still increase due to credit (and therefore NPL) expansion. Therefore, profit before tax in 2017 is forecasted at VND 9,339 bn, which is 12.99% higher than that in BV at the end of 2017 will be VND 14,270 per share. With close price of VND 35,450 per share, VCB is traded at PB forward 2017 of 2.48 times, which is lower than the peak point in 2016 of 2.94 times (based on PB forward 2017). Due to its high market capitalization and best fundamental base in banking industry, VCB is usually traded at a premium than the average. Since 2014, VCB is traded at PB between 2 to 3 times and the safe boundaries are between 2 and 2.5 times. Therefore, we believe such PB boundaries are the proper market value for VCB, which is equal to its stock price of VND 30,000 per share to VND 37,000 per share (based on PB forward 2017). The stock price has declined by 20% from the peak of 2016 when the selling price (which was believed at VND 29,000 per share) to GIC was released and then the rumor on the failure of this deal. At present, VCB has extended the time for SBV approval to the end of Based on the low selling price and the delay of SBV, we believe this deal may not be done in the short term. Though, this would put a negative effect on VCB s stock price, it could create attractive opportunities to buy VCB. With target price for VCB between VND 30,000 and 37,000 per share, we recommend OUTPERFORM for VCB at present and could rise to BUY at a lower price. ACB - Buy 9T.2016 ACB reported VND 1,244 bn profit before tax (+14% yoy, completing 83% year-end target). Core business kept positive results. Medium income growth was due to high provision for NPL issue. We forecast ACB could report VND 1,570 bn in 2016 (+19.49% and exceeding 4.4% plan). BV at the end of 2016 will be VND 14,282 bn. With close price of VND per share, ACB is traded at PB forward 2016 of 1.23 times outlook: Keeping on growing despite provision for NPL issue. We forecast ACB could report VND 1,945 bn profit before tax in 2017, which is 21.56% higher than that in 2016 based on: (1) Credit growth is expected at 20% since ACB could boost its credit after years of restricting credit expansion in restructuring process. (2) Deposit growth is expected at 20% since ACB will maintain a stable LDR complied with VCBS Research Department Page 34

36 the Circular 06. (3) Loan yield to customers will slightly increase by 10 bps when the bank continues expanding loans of long term tenors, which are mainly mortgage loans). Government bond yield is expected to flat since we forecast the interbank rate will move in tight band. (4) Deposit cost is expected to increase by 10 bps from 4.6% to 4.7% as we forecast the overall deposit rate will under upward pressure (see more in VCB). Funding cost from valuable paper will increase by VND 149 bn, which comes from cost of VND 2,000 bn bonds ACB issued in 2016 and VND 1,500 bond ACB plans to issue in 2017). (5) Non-interest income is expected to increase by 14.66%, which will mostly be contributed from services income (20%). (6) Provision expense is expected at VND 2,190 bn. ACB plans to solve VND 1,800 bn NPL from group of 6 companies in We assume that the bank will collect 50% value of the loan and have to take 50% as provision (i.e. VND 900 ban). ACB will also have to take provision for special bonds with an amount of VND 418 bn. The remaining value of VND 879 bn is taking provision for new loan. We forecast ACB could report VND 1,990 bn, which is 21.56% higher than that in BV at the end of 2017 would be VND 15,878 per share. With close price of VND 17,500 per share, ACB is traded at PB forward 2017 of 1.1 times, which is equivalent to the average. Given ACB high growth potential after NPL issue, we believe ACB should be traded at 20% premium than the average, equivalent to the price of VND 21,340 bn. The target price is 21.9% higher than ACB s current market price. We recommend BUY ACB. Real Estate Industry Performance 9M.2016: Market liquidity slightly declined compared with the same period last year. The apartment market s middle segment accounted for most of market liquidity. Tightened credit management policy led to cautious sentiments among developers and homebuyers. The villa and terraced houses segment emerged. The real estate industry was on the rise in Q but showed signs of slowdown in Q before slightly recovering in Q We observed the following developments in the industry: (1) market liquidity was still high but lower than in the same period last year, (2) the premium segment of the apartment market continued to see an increase in supply while the middle segment rose to claim the largest market share in terms of transaction volume, (3) the villas and terraced houses market saw a strong recovery and (4) credit flowing into the real estate industry was tightened due to SBV s new credit management policy. Apartment transaction volume declined. According to CBRE, in 9M.2016, there were 14,200 apartment transactions in Hanoi (-13.5% yoy) and 22,788 transactions in HCMC (- 11.4% yoy). Transaction volume rose in Q1.2016, declined in Q2 and recovered in Q3. Overall, apartment transaction volume in 9M.2016 was lower than in the same period last year. The middle segment rose to claim the largest market share, accounting for 40% of transaction volume in Hanoi and HCMC. The premium segment saw more intense competitions as transaction volume declined. The low-price segment s transaction volume dropped sharply to less than 20% of total apartment transaction volume the influence from the expiration of VND bn low-cost credit package. Meanwhile, the emergence of the luxury segment became more noticeable in 9M Apartment transaction volume by segment in Hanoi and HCMC VCBS Research Department Page 35

37 Hanoi Ho Chi Minh Low-price Middle Premium Luxury Low-price Middle Premium Luxury Source: CBRE, VCBS The villas and terraced houses market saw a strong growth in 9M The market saw increases in both selling prices and market liquidity, especially in projects that belonged to large developers and located in areas with good infrastructure. In HCMC, landed property projects reported high percentage of property sold at about 80% on average in the first launch. Notably, there are projects reported 100% properties sold (source: CBRE Vietnam). The rapid recovery of this segment attracted new project developments, leading to an increase in supply of villas and terraced houses in Hanoi and HCMC. Selling prices in the primary market for apartment sales increased while selling prices in the secondary market slightly decreased. According to JLL Vietnam, selling prices in the primary market for apartment sales increased compared with the previous quarters in all segments. By the end of Q3.2016, Hanoi saw the highest selling price growth rate at 3.6% QoQ while HCMC came second at 2.2% QoQ. In contrast, selling prices in the secondary market for apartment sales either stayed flat or fell slightly in both Hanoi and HCMC in all segments except for the villa segment, which has seen price increases in the last 11 consecutive quarters. Continuous rise in apartment supply, especially in the premium and luxury segments, created more intense competitions and led to an excess of supply over demand. However, developers were still attracted to the premium and luxury segments as (1) these segments can produce high profit margins and (2) their transaction rates, though declining, are still at an attractive level. The middle segment reclaimed its leading position in terms of apartment supply as apartment supply increased in line with a surge in the segment s transaction volume. The low-price segment was struggling as both demand and supply were low. According to Savills, in Hanoi, apartment supply reached 17,000 units (+16% yoy) while villa supply reached 2,300 units (+10% yoy) in 9M In HCMC, apartment supply reached 40,300 units (+54% yoy) while villa supply reached 3,800 units (+128% yoy) in 9M Credit flow into real estate increased as the sector recovered in Q By mid- November 2016, Vietnam s debt was estimated to reach 5.2 quadrillion VND (+11.81% yoy). Total debt in real estate accounted for 10% of that amount, according to Deputy Minister of Construction Do Duc Duy in his October meeting in HCM City. Regulators are concerned that the credit exposure in the industry is approaching its risk limits. Additionally, it is also a concern that most of the credit flow into real estate go into either premium or only some large VCBS Research Department Page 36

38 No. Ticker Total Assets (bn. VND) Debt/TA (%) size projects. SBV announced new credit management policy for the real estate industry. On May 05, 2016, the State Bank of Vietnam introduced Circular No. 06, which aimed to reduce the leverage ratios of credit institutions. In October 2016, SBV introduced Document No. 7586/NHNN-TD, requiring banks to tighten their controls over credit growth in the real estate sector and the flow of credit into premium apartment, resort and large-size projects. Business performance of companies in the industry in 9M.2016 Total Equity (bn. VND) Revenue 9M.2016 (bn. VND) Revenue growth yoy Net Income 9M.2016 (bn. VND) NI Growth yoy Gross profit margin (ttm,%) Net profit ratio (ttm,%) Trailing EPS (VND) 1 VIC 173, % % 1, % 31.0% 3.9% VCG 21, % % ,0% 15.5% 4.7% KBC 14, % % % 59.5% 42.9% 1, IJC 8, % 2,938 1, % % 16.1% 7.1% KDH 8, % % % 39.4% 18.1% 1, HUT 8, % 2, % % 21.2% 11.7% 2, SJS 6, % % % 48.9% 31.2% 2, HDG 5, % % % 21.3% 6.6% 1, NLG 5, % 2,828 1, % % 29.3% 12.9% 2, DXG 3, % 1,873 1, % % 36.0% 13.0% CEO 3, % 1, % % 40.8% 13.8% 1, BCI 3, % % % 52.8% 19.3% 1, P/E Sources: Bloomberg, VCBS 2017 Outlook: The market will continue to grow stably and sustainably. High supply will lead to intense competitions in the premium segment. The middle and low-price segments will dominate the market. Transaction volume might decline and prospects of different segments might vary. The premium and luxury segments will see fierce competitions among developers as apartment supply in the primary market increases while demand declines due to (1) low selling prices in the secondary market and (2) demand for buy-to-let properties reaching its saturation point in the short term. Market competitions will favor large-size developers that have good reputations in the industry. The middle segment will see the highest transaction volume among all the segments as it has the largest target market in Hanoi and HCMC. The low-price segment may recover as the segment offers reasonable selling prices that meet the demand of the low-income population. Additionally, Vingroup s introduction of its affordable housing brand VinCity along with the plan to build 200, ,000 lowprice apartments in the next 5 years is a positive signal for the segment. The villas and terraced houses segment will continue to grow as the segment s supply increases to meet the popular demand of traditional Vietnamese to own independent houses that include land ownerships. Credit management policy is necessary to ensure sustainability in the real estate industry and prevent the development of a real estate bubble. The impact of SBV s new credit VCBS Research Department Page 37

39 management policy will be more noticeable in late 2016 and While the policy roadmap had been delayed to reduce its negative impact on the real estate industry, SBV s new credit management policy will still have an apparent impact on the industry in late 2016 as credit institutions manage to meet the newly required leverage ratios by the end of the year. Changes due to the new policy will cause certain challenges for both developers and home buyers as it becomes more difficult to secure credit from banks. Overall, the new credit management policy is necessary to ensure the industry s sustainability. The market will continue to grow stably and sustainably. The bases for growth in Vietnam real estate industry include sustainable economic growth, rapid urbanization due to expanded investment on transportation and infrastructure system, a high demand for property due to growth in per capita income, and an increase in foreign investment. Industry outlook may be less optimistic for the premium and villa segments, but a recovery in the middle and low-price segments will help ensure industry stability and prevent a real estate bubble in Potential firms in 2017 Several real estate companies are expected to have positive earnings growth as their projects are completed and delivered in Nevertheless, high stock dilutions that are not supported by net profit growths will hinder the prospects of companies in the industry. The industry will see intense competitions in 2017 as demand stays flat. Companies with good financial health, extensive land bank holdings, and sought-after products will stay thriving despite 2017 s tight credit environment. We suggest investors to consider the following companies. Potential firms in No. Ticker 9M.2016 Performance Outlook 1 HDG 2 HUT 3 KBC 4 NLG Revenue reached 804 billion VND (-19.3% yoy, 34.7% of 2016 plan), net income reached 73 billion VND (-47.2% yoy, 31.5% of 2016 plan) Revenue reached 1,974 billion VND (+213% yoy, 82% of 2016 plan), net income reached 298 billion VND (+ 674% yoy, 78.5% of 2016 plan) Revenue reached 1,567 billion VND (+33.2% yoy, 82.5% of 2016 plan), net income reached 627 billion VND (+75.5% yoy, 99.6% of 2016 plan) Revenue reached 1,672 billion VND (+154% yoy); net income reached billion VND (+147% yoy). HDG s growth will be driven by its real estate segment withe Centrosa Garden project. Revenue in 2016 is expected to reach 2,250 billion VND (+52% yoy), consolidated NI to reach 238 billion VND (+71.2% yoy) and NI to reach 190 billion VND (+54% yoy), which is equivalent to 2,500 VND EPS In 2017, revenue is forecasted to reach 2,800 billion VND (+24% yoy), consolidated NI to reach 300 billion VND (+ 26% yoy) and NI to reach 240 billion (+26% yoy), which is equivalent to 3,161 VND EPS forward HUT s impressive growth in 2016 is attributed to the company s transition from the construction business to the real estate development business. However, there is risk of dilution from convertible bonds. Revenue in 2016 is expected to reach 2,500 billion VND (+10.8% yoy) and net income to reach 400 billion VND (+148.4% yoy), an equivalence of 2,350 VND in EPS Revenue in 2017 is forecasted to reach 2,800 billion VND (+10% yoy) and net income to reach 420 billion VND (+5% yoy), an equivalence of 2,382 VND in EPS forward KBC s land and infrastructure lending segments saw strong growth in In the long term, the company will continue to benefit from its large land holdings and low land clearing costs. Revenue in 2016 is expected to reach 2,250 billion VND (+56.8% yoy) and consolidated NI to reach 750 billion VND (+24.6% yoy). Revenue in 2017 is forecasted to reach 2,500 billion VND (+11.1% yoy) and net income to reach 850 billion VND (+13.3% yoy). Revenue in 2016 is expected to reach 3,190 billion VND (+62% yoy) and NI to reach 360 billion VND (+75% yoy), an equivalence of VND in EPS. Revenue in 2017 is forecasted to reach 4,000 billion VND (+25% yoy) and net income to reach 440 billion VND (+22% yoy). NLG will continue to focus on (1) apartment sales for Camellia, Fuji Residence, Ehome S projects and (2) completion of Kikyo (Phu Huu), Nguyen Son and Hoang Nam projects. Recommend ation BUY OUTPERFO RM HOLD OUTPERFO RM VCBS Research Department Page 38

40 5 SJS 6 VIC VIC: Hold Revenue billion VND (+7.6% yoy, 51.3% of 2016 plan), EBT billion VND (+ 58.1% yoy, 67.9% of 2016 plan), net income reached billion VND (+ 54.1% yoy). Revenue reached 34,655 billion VND (+76% yoy, 77% of 2016 plan), consolidated NI reached 3,094 billion VND (+210% yoy, 103% of 2016 plan), NI reached 1,719 billion VND (+76.8% yoy) Positive business results thanks to strong performance in the real estate segment, despite disappointments in the retail segment SJS will not reach its 2016 target as the company has not started selling its new villas and has been delaying in delivering its sold villas. SJS s Nam An Khanh project will benefit from Vinhomes Thang Long project. Revenue in 2016 is expected to reach 520 billion VND (-39% yoy) and EBT to reach 215 billion VND (-26% yoy), an equivalence of VND in EPS revenue is largely dependent on whether Song Da Corporation divests or increases its holding shares in SJS. SJS will be the beneficiary in both scenarios. VIC will surpass its 2016 business targets due to impressive performance in its real estate segment, even though the retail segment has been performing disappointedly. Revenue in 2016 is expected to reach 47,910 billion VND (+41% yoy), consolidated NI to reach 4,000 billion VND (+167% yoy), an NI to reach 2,500 billion VND (+106% yoy) - an equivalence of 948 VND in EPS. Revenue in 2017 is forecasted to reach 60,018 billion VND ( % yoy), consolidated NI to reach 4,500 billion VND (+12.5% yoy), an NI to reach 3,000 billion VND (+20% yoy). 9M.2016 results VCBS Research Department Page 39 HOLD HOLD Revenue in 9M.2016 reached 34,655 billion VND (+76.1% yoy, 77% target). Consolidated net income reached 3,094 billion VND (+210% yoy, 103% target). Net income reached 1,719 billion VND (+76.8% yoy). Net income s year-over-year growth was lower than consolidated net income s as (1) VIC s consolidated net income mostly came from the real estate segment s subsidiaries that VIC had low equity holdings in and (2) earning from StarCity project divestment in Q2. Outlook For 2016, we maintain our previous forecast, projecting revenue to reach 47,910 billion VND (+41% yoy), consolidated net income to reach 4,000 billion VND (+167% yoy) and net income available to common shareholders to reach 2,500 billion VND (+106% yoy) an equivalence of 948 VND in EPS VIC will surpass its 2016 business targets due to the impressive performance in the real estate segment, even though the retail segment has been performing disappointedly. For 2017, we forecast revenue to reach 60,018 billion VND (+25.27% yoy), consolidated net income to reach 4,500 billion VND (+12.5% yoy), net income available to common shareholders to reach 3,000 billion VND (+20% yoy) an equivalence of 1,137 VND in EPS Our 2017 forecast is based on the following assumptions: (1) 25% growth in the Real Estate Trading, Real Estate Leasing, Healthcare, and Education segment and (2) 30% growth in Hospitality and Retail segment. Investment thesis Vingroup is the industry leader in most of its core businesses. The company s long-term growth is guaranteed by VIC s continuous investment in large real estate projects that locate at first-rate locations in big cities. VIC also had impressive sales results. The company sold 14,000 apartments, villas and townhouses in 2015, and over 11,000 apartments, villas and townhouses in 9M Thus, VIC will be able to record high revenue after the delivery of these properties in the coming years. Our forecasted EPS forward 2017 of 1,137 VND per share is equivalent to a P/E forward of 36.9 times. Based on our NAV valuation, the intrinsic value of VIC stock is 44,897 VND per share (or 55,000 VND per share before the 22.5% bonus share was claimed). VIC is an industry leader with many promising business segments. Additionally, the company owns a large land bank for future development projects. Based on these factors, we maintain our

41 recommendation to HOLD on VIC share. HDG: Buy Strong growth prospect thanks to Centrosa Garden project 9M.2016 results In 9M.2016, HDG s revenue and profit results were unimpressive. Revenue reached 803 billion VND (-19.3% yoy, 34.7% of 2016 target). Consolidated net income reached nearly 73 billion VND (-29.5% yoy, 31.5% of 2016 target). Net income reached 50 billion VND (- 47.2% yoy). There are several key highlights about HDG s performance: (1) despite HDG s revenue decline, the company s gross margin increased to 27.7% compared with 17.4% in 9M.2015 due to high gross margins in the real estate and hydropower segments, (2) HDG s SG&A and interest expenses changed after the company increased its holdings of Za Hung Hydropower from 37.5% to 51.5% and consolidated Za Hung Hydropower into its financial statements, (3) despite HDG s increasing gross margin, the interest expense increase of 85 billion VND in 9M.2016 (compared with 4 billion VND in 9M.2015) and SG&A expense increase of 78 billion VND (+54.4% yoy) led to the company s low net income. Outlook For 2016, HDG aimed to generate 2,318 billion VND in revenue (+ 56.6% yoy) and earn 231 billion VND in consolidated net income (+65.9% yoy). We forecast revenue in 2016 to reach 2,250 billion VND (+52% yoy), consolidated NI to reach 238 billion VND (+71.2% yoy) and NI to reach 190 billion VND (+54% yoy), which is equivalent to 2,500 VND in EPS The real estate segment saw the strongest growth in Q as the Centrosa Garden project recorded approximately 800 billion VND in revenue from terraced houses sales. The real estate segment may generate large revenue of approximately 950 billion VND in For 2017, HDG is still expected to see its revenue and net income grow at 20% thanks to a growth in its real estate segment, which is heavily weighted toward the Centrosa Garden project, and stabilization in other segments. In 2017, HDG can achieve revenue of 2,800 billion VND (+24% yoy), consolidated net income of 300 billion VND (+26% yoy) and net income of 240 billion VND (+26% yoy) - an equivalence of 3,161 VND in EPS forward The real estate segment can generate 1,300 billion VND in revenue, including 800 billion VND from terraced houses in the Centrosa Garden project. Other projects, such as Hado Garden Villa (Su Van Hanh), An Khanh - An Thuong, Thoi An and Hado Parkside (Apartment CC1) could contribute approximately 600 billion VND to the real estate segment s revenue. Investment thesis HDG is one of the few real estate companies that have a portfolio of highly promising longterm projects. HDG s strategy is to focus on the three key segments, including: (1) the real estate segment, which is growing quickly and expects to generate 10 trillion VND in revenue from the Centrosa Garden project from 2016 to 2020, (2) the construction segment, which carries out Ministry of Defense s projects and (3) the hydropower segment, which will remain stable over the long term. With an EPS forward 2017 of 3,161 VND, HDG s P/E forward 2017 is 7.2 times. Our price target for HDG is 30,000 VND per share, an increase of 20% compared with our previous price target of 26,217 VND per share. We maintain our view that HDG is an attractive longterm investment option. Therefore, we repeat our BUY recommendation for HDG to longterm investors. We also expect the HDG s stock price will grow in the short term due to the company s likely positive business results in Q and 1H Investors should pay VCBS Research Department Page 40

42 attention to the HDG s low liquidity before trading the stock. Construction 9M.2016 highlights: According to the General Statistics Office of Vietnam 9M 2016, the total value of construction industry reached VND trillion (+13.1% yoy) and the growth rate tends to improve in comparison with the same period of 2015, 2014 and 2013 when the growth rate reached 12.5%, 10.5% and 8.8% respectively. In term of type of construction, residential construction accounted for 40.8%, the nonresidential segment accounted for 16% and civil engineering and technical construction took a part of 43.2% M M Q1.15 Q2.15 Q3.15 Q4.15 Q1.16 Q2.16 Q Total value of construction industry Non-residential sector Specilized engineering construction Residential sector Civil construction Source: GSO, VCBS Residential construction segment was the largest sector in the Vietnamese construction industry in 2016, continued to play an important role in structure of the industry. Value of this segment was estimated to be VND trillion, which increased 14.5% over the period of 9M of The growth of real estate market was the main driver of that of residential sector. Especially, market for condominiums was traded actively with high supply volume. According to Colliers, newly launched projects provided 18,635 units in HN and 29,010 units within 9 months of 2016 and the numbers of successful transactions were almost 23 thousand units and over 14 thousand units in HCM and HN respectively. The infrastructure construction sector recorded a moderate growth rate of 12.1% yoy, accounting for 43.17% of the total value of VND trillion in 9M Bridge and road sub-sectors are the main subject of infrastructure construction. The investment in urban infrastructure becomes a significant challenge for most of developing cities such as HCMC and Hanoi. State budget expenditures for capital investment in construction rose sharply in the first 9 months of In the 3rd quarter, the expenditure grew faster than the first two quarters of the year and reached VND 55,700 billion (+ 60.1% yoy). 9M 2016, the expenditure for construction hit the point of VND thousand billion (+ 15% yoy), while 2015 and 2014 growth rate were -8.5% and + 12% respectively. Progress of some key projects: the expansion project at Tan Son Nhat airport is being carried out (plan to increase capacity from 26.5 million to 40 million passengers); Noi Bai VCBS Research Department Page 41

43 International Airport expansion is under planning (the number of passengers raised from 25 to 50 million); Da Nang airport expansion is under construction (an increase of passengers from 5 million to 13 million). Metro lines have relatively slow construction process for the elevated section: Metro line No.1 (Ben Thanh - Suoi Tien) is in slow progress. Metro Line No.2A Hanoi (Ha Dong - Cat Linh) has been completed 80% and expected to be in trial in Q Metro Line No.3 (Nhon - Hanoi) has been completed 45% and expected to be in trial in The project of Thu Thiem Bridge including four major roads are taking shape (4 bridges connecting District 1, 4, 7, Binh Thanh and Thu Thiem new urban area district 2): Thu Thiem 2 TT2, which started construction on February 2015, is scheduled for completion in Q2 2018; TT3 is in the research process and TT4 is under planning. According to BMI, Vietnam s energy and utility sector will grow moderately with most of the expansion coming from coal-fired power plants. Renewable energy markets will continue to be a regional underperform and hydropower development will remain pessimistic, while water projects will gain traction due to droughts. In terms of funding sources, private sector still lead the entire industry with the total investment of VND 651 trillion, making up over 87% of the industry value and rising by 16% over last year. Value of construction industry continue to growth: % 8% T.2016 Gorvernment sector Private sector Foreign sector 87% 9M 2016 Source: GSO, VCB The Vietnamese construction industry experienced a moderate growth rate during the review period, recorded a growth rate of 9.1% and contributed the third-highest value in GDP of country. The construction sector contributed 0.5 point percent to the economic growth of Vietnam s GDP 9M 2016 (5.93% yoy). 9M 2016 construction activity growth remained high in comparison with GDP growth but has slowed somehow compared to last year. VCBS Research Department Page 42

44 12% 9% GDP AND CONSTRUCTION INDUSTRY GROWTH 10,8% 9,1% GDP growth 6% 3% 6,7% 5,9% Construction industry growth 0% M 2016 Source: GSO, VCBS FDI real estate within the first 10 months of 2016 remains moderate: total registered FDI in the real estate sector gained only million, less than a half of last year, (attracting USD 2,136 billion). Real estate was the second contributor with 46 new projects, accounting for 5.58% of the total registered FDI. FDI poured into real estate carefully shows that the international investors careful in choosing projects to invest in Vietnam. Source: GSO, FiinPro, VCBS 2017 outlook: The favorable economic conditions boost the construction industry: strong economic environment and improvement of regulatory framework help promote foreign direct investment, gradually improving business environment of the country; conductive monetary conditions boost construction activity. Moreover, sustained urbanization, rapid industrialization, the structural shift to the urban population and growing tourism sector as well as recent governmental measures to reduce restrictions on foreign ownership of property have made the residential and non-residential building sector more attractive toward foreign investors. Furthermore, the government decree (15/2015 / ND-CP) of the public-private partnership (PPP) provides greater opportunities for the private businesses to be involved in infrastructure, industrial and energy projects. Residential sector: Vietnam s urbanization rate is lower than other countries in ASEAN: Vietnam population increased from 66 million in 1990 to 91 million in 2016, making Vietnam the third-biggest population in the ASEAN area, following Indonesia and Philippines. However, it is also the third-lowest urbanization rate in ASEAN which reached 34% in VCBS Research Department Page 43

45 For the last 30 years, Vietnam has had the fastest urbanization speed in Southeast Asia (+3.4%/year). The process of urbanization in Vietnam is running quickly, by the end of this June urban population rate was 36%. By 2020, about 40% of Vietnam s population will have lived in urban areas and it is expected to reach 60% by Vietnam now has the golden demographic structure with working age population (15-64) accounts for 70.15%, a relative competitive advantage factor for demand in housing. The average age was 28.9 for males and 31.2 for females. According to the Brookings Institution, Vietnam is a country with the number of middle-class people increasing the fastest in Southeast Asia and expected to grow 18% annually in the period , compared to the increase of 15% over the period High demand for housing in the large cities is created by the structural shift of population from rural areas to industrial and services area. Urbanization rate increased 1% each year in VN, equivalent to million people moving to urban. There is a strong correlation between urbanization and economic growth along with an increase in construction and investment of the Government in infrastructure. Conductive monetary conditions: recent easing monetary conditions will help lower the cost of capital for construction companies and ease liquidity in real estate market, and further boost construction activity % 20% 15% 10% 5% 0% 12% 11% 10% 9% 8% Lower & upper mortgage rate Credit growth (%) Lending interest rate (%) Sources: SBV, Savills, VCBS Growth in residential construction sector depends heavily on the growth of the real estate market. According to Jones Lang LaSalle (JLL) in late August 2016, there were approximately 80,000 units in HCM city from new projects, in which affordable, mid-end and high-end VCBS Research Department Page 44

46 segments attained 43%, 42% and 15% respectively. JLL forecasts that for the next 3 years, the supply is expected to increase to 74%, especially in the supply of high-end and luxury (price> $ 2,000 / m2) even to double. With such a high-level supply, we assume that the residential sector in 2017, especially housing apartments, will remain active but still concern because the sales volume may not catch up with the new launch supply. Infrastructure: Infrastructure construction in Vietnam is gradually improving and expects steady growth over Vietnam is facing a serious shortage in infrastructure of transportation, energy, electricity, water and telecommunications. In the next 5 years, Vietnam needs an estimated amount of USD 200 billion so as to invest in infrastructure, and the same amount for the next 5 years. On the other hand, the fiscal deficit was up to more than 5% in the last 5 years which means that spending increased more sharply than income. Vietnam's public debt must increase to offset the deficit (currently approaching the 65% level of safety given by the National Assembly). In the context that ODA (infrastructure investment accounted for more than 30% of the total ODA) will not be sufficient in Besides, the state budget and other forms can only meet 40-50% of the required capital for infrastructure in the next 10 years. Therefore, private investment will be more necessary for promoting growth in the construction sector and infrastructure. According to the Ministry of Transport, it is estimated that 66.5 trillion VND shall be used for disbursement of infrastructure projects in 2016, half of which is coming from the private sector. About USD 48 billion will be require for transportation since 2015 to 2020, but the state budget can only afford 28%. Therefore, the government aims at boosting the publicprivate partnership project pipeline, providing opportunities for private investors. Infrastructure sector is expected to continue to lead the industry in Roads and bridges are expected to outperform, followed by airports. The Ho Chi Minh City People's Committee submitted a list of priority transportation projects that will be developed in a Public Private Partnership (PPP) format between 2016 and 2020, including a monorail line project, to the government for approval, underscoring the significant growth potential of the sector. 7,5% 5,0% 2,5% Residential and nonresidential value real growth % Transport infrastructure value real growth % Energy and utilities value real growth % 0,0% f 2017f 2018f 2019f 2020f Source: BMI Vietnam Infrastructure report Q4/2016 According to the Ministry of Planning and Investment, the total investment for the 68 projects in the list of priority PPP projects in the period amounted to VND VCBS Research Department Page 45

47 334,655 billion in which state capital is up to VND 114,211 billion and the rest is expected to utilize private capital. According to BMI, road sub-sector is the focus of the government, followed by airports and ports. In particular, the government has stated to priorities finances for Dau Giay Phan Thiet Nha Trang and Ninh Binh Thanh Hoa Vung Ang expressways, and Long Thanh international airport in the period of In addition, 23 large-scale transport infrastructure projects are to be financed without the state budget under PP and buildtransfer (BT) models. According to the government, investors of these projects will be selected in 2016 and of the total price tag of VND 39.9 trillion (USD 1.83 billion), VND 39.4 trillion (USD 1.8 billion) will be investors equity. According to BMI s database, 47% of companies involved in Vietnam s road projects are foreign companies in which the dominants are South Korean, Japanese and US companies with a market share of 13%, 11% and 8%, respectively % 600 6% 400 4% 200 2% e 2016f 2017f 2018f 2019f 2020f 2025f 0% Construction industry value Construction industry growth Infrastructure industry value Infrastructure industry growth Source: BMI VN Infrastructure Q We forecast that the investment demand for large infrastructure sectors of the government in the future along with the limitation of state budget will lead to the fact that PPP or BOT models shall continue to be positive in However, apart from the above favorable factors, there are some factors that need improving such as the weak fiscal health of Vietnam's central, high public debt level of Vietnam together with the time that could weaken the infrastructure positive outlook. 70% 65% 60% 64% 65% 60% 55% 56% 55% 51% 54% 50% Debt level of VN government/gdp Source: VCBS VCBS Research Department Page 46

48 USD per ton USD pẻ ton 2017 OUTLOOK REPORT HBC Updates of business results of Hoa Binh Construction and Real Estate company. 3Q.2016 results: revenue reached VND 7,002.5 billion, an increase of 98.8% yoy. Gross profit margin was improved at 10.3%, twice as high as that of the same period in last year. These impressive results owe to strong booking residential projects and consolidation with its subsidiary (HBI). In cumulative 9M 2016, net income was VND billion, a rise of 495.2% yoy. Net profit margin was 4.6% compared to 1.5% of the same period in the previous year. Hence, HBC completed 97% of the revenue target and 126% of the net income target for Total value of new signed contract in 2016 stayed impressively. At the present, the total value of new HBC-signed contract amounts to around VND 14,700 billion, twice as much as that last year and the size of contracts becomes bigger and bigger. The proportion of D&B contracts in total increasingly accounted for 33%, which helps to improve the gross margin. However, high debt ratio and dilution effect due to the plan of issuing 20 million shares to strategic partners (26.5% of current outstanding shares) will be a notable point in next year. We believe that the outlook of HBC for next year shall be positive and forward EPS will be VND per share in Steel 2016 Highlights 1. Raw materials prices sharply increased 3 main raw materials of steel industry including iron ore, hard coking coal and scrap have their price soared due to the expected tightened supply by big producers. In detail, China declared to cut down on their coal production, while Vale (the biggest Brazilian iron ore producers) declined their forecast on 2017 production by as 5% as the previous forecast Stockpiling period Iron ore price movement Stable period Stockpiling period Australian coal price Stable period Vale reduce their forecast of 2017 production Vale reduce their forecast of 2017 production thermal coal Coking coal Source: Bloomberg, VCBS compiled Other semi-product such as billet and HRC moved close to iron ore but there was a lag period among them. VCBS Research Department Page 47

49 01/ / / / / / / / / /2016 Thousand ton Iron ore, USD per ton Scrap, HRC, and billet, USD per ton 2017 OUTLOOK REPORT Price movement of Iron ore and other semi-products Iron ore Scrap steel HRC Billet Source: VCBS 2. Steel industry update Construction steel sales volume grew by 21.5% yoy in 10M2016, reaching 6.44 MN ton. The steel price bounced sharply, especially in March when the temporary safeguard tariff was imposed. However, the growth rate of each month as compared to the previous period gradually decreased, and the industry gross margin fell in 3Q2016. We believe, the dramatic sale volume was resulted from the stockpiling activities of steel agents, but from the real demand of the market Production and Sale volume of domestic producers in 10M2016 Steel market share in 10M Others 21% VNSteel 21% PoscoSS 7% Pomina 13% VNSteel Affiliate 18% Production Sale Hoa Phat 21% 0% Sources: VSA, VCBS Steel pipe sales volume grew by 31.7%, reaching 1.52 MN ton. The steel pipe price has increased recently, which was attributed to the demand from industry sector and huge amount of finishing construction project. Also, the HRC material price increased, VCBS Research Department Page 48

50 01/ / / / / / / / / / / / / / / / / / / / / /2016 USD per ton Thousand ton 2017 OUTLOOK REPORT contributing to the increase in pipe price. Galvanized sheet sales volume grew by 34.1%, reaching 2.29 MN ton, 1mn ton of which was exported. The dramatic increase in sales was contributed to the sharp growth of the Southern market (+32% yoy) and export activities (+42% yoy). Especially, 9M2016 export volume to the US market rose as 21 times as the previous period, reaching ton. There was no significant change in market structure. Hoa Sen group (HOSE: HSG) and Nam Kim group (HOSE: NKG) took the lead in the market with 32% and 14% share, respectively. Import volume of steel tent to grow slowly, meanwhile the import volume of billet sharply increased by the end of the year. The safeguard tariff has been effective, which is illustrated by the decreasing imported volume of billet in 1H2016. However, the billet imported volume bounced in September, rocketing by 148.6% mom and 227% yoy. On the contrary, the imported volume of scrap decreased in September, falling to ton (-23.3%, -7.6% yoy). We believe that the soar in scrap price has made the EAF steel producers to import cheaper billet from China Import steel Import volume Average price Source: Customs 3. Industry performance Most steel companies reported a dramatic growth in 1H2016 and then slowdown in 3Q2016. Those firms with worse performance in 2015 have the better growth rate in 1H2016. Stock Total assets (VND bn) Equities (VND bn) Debt/Assets NPM ROA (ttm) ROE (ttm) EPS (ttm) BVPS HPG 28,468 18, % 19.6% 18.3% 28.9% 6,192 21,439 VIS 2, % 1.5% 0.4% 1.2% ,942 TIS 10,894 2, % 3.1% 3.3% 12.7% 1,262 9,944 POM 6,520 2, % 1.9% 2.0% 5.2% ,423 VGS 1, % 2.0% 5.9% 14.5% 2,215 15,309 DNY 2, % 1.1% 0.9% 5.4% ,815 VCBS Research Department Page 49

51 TVN 14,383 7, % 3.8% 3.7% 7.1% ,854 Median 9,415 4, % 4.7% 4.9% 10.7% 1,713 13,818 Average 6,520 2, % 2.0% 3.3% 7.1% ,942 Construction steel NPAT 9M.2016 growth (yoy) Galvanize 2297% Retaile BOF EAF 59% 109% 100% 542% 179% 149% 341% 100% HPG TIS VIS(*) POM DNY HSG NKG TLH SMC(*) Source: VCBS (*) VIS and SMC reported loss in 9M0215. Therefore we denoted the growth rate as 100% 3. Raw material price outlook Iron ore price is expected to fall again in We hold our point of view that the iron ore price should decrease in the next year because (1) Chinese government declared to cut down on their steel production, which decreased the demand for iron ore, offsetting the effect from the decrease in expected iron ore supply, (2) the big iron ore exporters from Australian and Brazilian who have the production cost advantage are expected to enhance capacity to gain more market share, (3) Inventories volume in Chinese port has sharply increased recently. Therefore, we believe the iron ore (62% Fe) price should fell back to USD 65 per ton in We expect the hard coking coal price to decrease as well which is contributed by the recovery in Australian supply. The big exporters from Australian will increase their productivity after the accident in the mine and weather problem have been solved. The additional supply from Australian may offset the impact of production cut in China, (2) the plunge in iron ore demand also lead to the decline in coal demand as these 2 commodities are considered complimentary good. Scrap price is forecast move at the opposite direction as iron ore and hard coking coal. We believe the impact of the soar in iron ore and hard coking coal price on scrap price should be reflected in the next year. In addition, demand for scrap will decrease as China is shifting their steel production technology from BOF to EAF. Therefore, the scrap price is expected to maintain at USD 280 per ton Based on the calculation of production cost and producers reaction to the raw material price movement, we forecast the average steel price in 2017 to be VND 10.8 mn per ton. VCBS Research Department Page 50

52 VND mn per ton 2017 OUTLOOK REPORT Forecasting of steel price movement in ,4 11, ,8 10,6 10,4 10,2 10 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Base case Strong case Weak case 2017 outlook The construction sector continue to grow in both civil and public segments. Vietnam has the h region, which keeps demand for civil construction ample. In addition, the public investment i government has been set up completely. According to the report of Ministry of Industry and Com short of 15 mn ton of construction steel per year, which means the demand for construction steel may The steel price increases, affecting the industry in different ways. Because the increase in ste production cost, but from the excess demand. Therefore, we believe those BOF steel producers with industry. Meanwhile, the EAF steel producers will hardly gain any profit from the increasing steel point. Regarding sale volume, we believe that the expected steel price movement should result in raising the sale volume in the 4Q2016 and 1Q2017. Vietnam Steel Association (VSA) suggests the Ministry of Industry and Commerce should impo wire rod. In the best scenario assuming the tax is imposed, we believe that the impact is not as signif the portion of HS wire rod in product mix is not big. However, the expected tariff sh sentiment toward steel industry stock, also supporting the increase in steel price. Formosa plans to operate in December The first phase of the complex with m3 furn The main product is semi-finished steel including HRC and slab. We believe that Formosa is n in short term because it does not produce any construction steel in the 1 st phase. However, if Fo domestic market, the EAF producers will have another source of billet other than taxed import o the steel producers may be narrowed. b) Galvanized sheet Steel pipe Steel pipe sector is potential, but its size is quite small. The steel pipe is expected to grow at a rate (1) steel pipe is complementary good with construction steel, (2) additional growth from furnitur among the steel pipe market is not as high asconstruction steel Galvanized sheet producers expand their domestic market share. The growth is contributed by urbanization growth rate. In addition, the anti-dumping tax on galvanized sheet (on September Commerce)should build a barrier against Chinese original product, supporting domestic producer dumping tax applied is varied from 4.02% to 38.34%. Higher protectionism level from many export markets may negatively impact galvanized sheet US decided to impose tariff against Vietnamese products, we think that the direct influence is not to sheet producers (including HSG and NKG) because their main export markets are Indonesia and Mal Thailand market are quite small, about tens of thousands ton. However, the indirect impacts are (1) VCBS Research Department Page 51

53 new potential markets, and the competition degree in traditional export market rises, (2) th CSVC may go back to compete in domestic market. Therefore, we come up with a conclusio enhance their sale network to expand domestic market share, and export volume is expected to per share. Potential firms in 2017 HPG - Buy 1. Hoa Phat Group (HSX HPG) Potential of the steel sectors. The phase 3rd of the Hai Duong complex will operate at its full capacity in the whole 2017, increasing the output up to 2mn ton of crude steel. In addition, by the middle of 2017, HPG will complete its capacity enhancement in Da Nang and Binh Duong Long An, increasing its steel pipe production up to tpa. We expect HPG s sale volume in 2017 of construction steel and steel pipe to reach 1.9 mn ton and ton, respectively Gross margin narrows. The increase in steel price is mainly attributed to (1) higher production cost, (2) the appreciation of USD against VND. Meanwhile, the low-cost inventories should be exhausted in 2017, which mean HPG cannot enjoy the margin expansion from the low-cost material and increasing steel price. The new welding rod product is not expected to breakthrough. The new product of welding rod has been produced in Q We think that this product should face some beginning difficulties such as: (1) The welding rod market is ruled by the cheap imported products. In addition, the Ministry of Industry of Commerce is currently imposing no tariff on the raw material of welding rod in (2) Demand for welding rod is not high. According to Viwelco s estimation, if the market consumes 10 mn ton of construction steel, it should consume 0.1 mn ton of welding rod only. Therefore, we think that welding rod contribution to HPG s sales is not too significant. Animal feed factories begin to operate stably and effectively. In 2017, the Dong Nai factory and Phu Tho factory should start their engines as planned, and the Hung Yen factory should have been operating for 1 year. Currently, this sector is reaching its breakeven point and generating a small amount of profit. However, HPG has to make more investment in their pig farms, and these 2 new factories need more time to operate at full capacity. Therefore, we keep our point of view that agriculture sector should not perform any better in the next 2-3 years. Breakthrough in We consider 2017 a slow year of HPG because all new projects, which are under construction, are expected to run at full capacity in 2018, including (1) steel pipe capacity enhancement, (2) galvanized sheet production line, (3) Mandarin Garden 2 real estate project (1) Steel pipe capacity enhancement. By the middle of 2017, the expansion of Da Nang and Binh Duong- Long factories should be finished as planned, improving the steel pipe production per year up to tpa (+80%). Under the circumstance that sale volume accounts for 90% of production, the increase in capacity would create more room for revenue of this product to grow. We expect the HPG s steel pipe sales volume to reach ton in 2017, and ton in VCBS Research Department Page 52

54 (2) Galvanized sheet factories project. This factory with capacity of tpa is expected to run in the beginning of We are quite doubtful about this project s potential because (a) HPG has had no experience in operating the galvanized sheet production line before, (b) the northern area of Vietnam is not in favor of galvanized sheet products. Therefore, we expect sale volume of galvanized sheet should reach ton ( 85% full capacity). (3) Realize revenue from real estate project. As planned by HPG, revenue from the Mandarin Garden 2 project should be realized in With the price of VND 25 mn per m2, HPG should generate VND 1,800 bn of revenue from the real estate project in The USD 3 bn steel production project in Dung Quat industrial park. Recently, HPG has announced that they will not expand the Hai Duong Complex. Instead, they are going to acquire the Quang Ngai Guang Lian project in Dung Quat industrial park. This project is expected to have 4mn tpa capacity. The 1 st phase will start in , producing steel bar with 2 mn tpa capacity. And HPG plans to produce hot rolled coil and sheet in the 2 nd phase of the project. In addition, HPG is suggesting the project should enjoy tax rate of 10% per year and rent exemptions in 18 years. Forecasting in 2017, we come up with some assumptions including (1) steel sale volume reach 1.9 mn ton, (2) steel price reaches VND 10.9 per ton and gross margin reaches 24%, (3) other sectors grow by 10%. In conclusion, HPG should generate VND 37,365 bn of net revenue and VND 5,895 bn of NPAT. EPS forward is estimated as VND 6,958 We recommend BUY HPG stock with the target price of VND per share. HSG - Hold 2. Hoa Sen Group (HSX - HSG) Expansion in sale network. As we analyzed above, main competitive factors in galvanized sheet market are inventories management policies and sale network. HSG has the largest network with 212 agents (9M2016). In the next year, HSG plans to increase its number of agents up to 300 and expand to the Central and the Northern market. We believe that HSG consider export market less attractive than the domestic market. Therefore, they expand the domestic agent s network to gain more market share in the Central and the Northern area. Capacity enhancement in Ha Nam and Binh Dinh factories. In 2017, the new factory in Ha Nam which produces steel pipe and plastic tube and the factory in Nhon Hoi (Binh Dinh) which produces galvanized sheet will go into operation. Product Capacity Factories Galvanized sheet tpa Nhon Hoi Steel pipe tpa Ha Nam Plastic tube tpa Ha Nam Source: HSG Ha Nam factory s capacity up to tpa of steel pipe, ranking 2 nd in the market (following HPG with expected capacity of tpa). On the other hand, its plastic tube VCBS Research Department Page 53

55 capacity should reach tpa, equivalent to 60% of BMP s max capacity. By locating these 2 factories in the Central and the Northern area, HSG may implement their strategies to expand market to these regions. Large inventories reserve. By the end of 3Q2016 (4Q of fiscal year ), HSG reported a huge amount of inventories, up to VND 4,500 bn. In detail, the raw material and on-the-way goods reached VND 2,714 bn. We believe that HSG has reserved a huge amount of low-cost HRC, up to ton according to our estimation, equivalent to one quarter production. As the HRC price has increased by 22.6% recently, the first quarter of fiscal year should realize a dramatic profit. New growth catalyst from Ca Na complex. The first phase of this project is planned to start in The project capacity is up to 1.5 mn tpa, using BOF technology. The total capital expenditure for this phase is USD 500 mn (VND 11,150 bn). We believe the impact of this project is expected tube not significant in 1-2 years ahead. However, the project may increase the financial leverage of the group. We currently exclude the project in our HSG valuation. Forecasting in 2017, we believe the plan VND 21,495 bn of net revenue (+22% yoy) and VND 1,400 bn of NPAT (+4% yoy) is conservative because (1) HSG will expand their consumption market to the Central and the Northern area with 2 new factories. Additional tpa of steel pipe, tpa of plastic tube, and tpa of galvanized sheet should result in VND 4,000 bn 5,000 bn of net revenue in 2017 (assuming the new factories run at 80% max capacity), (2) the gross margin is expected to expand thanks to the low-cost HRC reserve in the first quarter. In conclusion, HSG may generate VND 22,300 bn of net revenue (+25% yoy) and VND 1,700 bn of NPAT (+15.4% yoy). Therefore, we recommend HOLD HSG with the target price of VND Rock Mining 2016 Highlights Infrastructure development outlook. According to the Department of Statistics, the value of infrastructure construction by the end of Q in the South reached trillion VND (+13.1% yoy). The stable growth shows a tendency to continue in the next 2-3 years thanks to (1) governmental regulations/policies which boost the development of transportation infrastructure construction, (2) the recovery of real estate market, and (3) the improvement of FDI inflow. Key infrastructure projects in the South including the Metro system 1, 2, 3, 4; Long Thanh Dau Giay highway, Vo Van Kiet road, Thu Thiem tunnel, Saigon Bridge 2, and the Inner Ring Road project will be main catalysts for the surge of rock demand. VCBS Research Department Page 54

56 Value of constructions in the South of Vietnam T2016 Value of construction (trillion VND) Growth (%) 30% 25% 20% 15% 10% 5% 0% (Department of Statistics) Stable price with gradual growth trend. In 2016, rock price varies in regions across the country. Specifically, rock price showed a slight upward-trend in the Central of Vietnam, while it was a downward-trend in the South & the North. By the end of Q2.2016, the average price in the South was the highest with 279,031 VND/m3, which is 98.8% compared to last year. Despite recording a slight increase, average rock price in the Central area still remain the lowest price compared to other regions with 189,074 VND/m3-90,000 VND lower than the average price in the South. Average rock price across regions (VND/m 3 ) Regions Q4 Q1 Q2 Q3 Q4 Q1 Q2 North 190, , , , , , ,256 Central 193, , , , , , ,074 South 283, , , , , , ,031 (Ministry of Construction) After a long time being depleted, the decrease of rock capacity in the South leads to high selling price of rock in this region. Due to the high transportation cost, rock in the North/Central areas is rarely transported to long-distance regions such as the South, this is the main reason why rock price in the South stay higher than other regions. As a result, rock-mining companies in the South have more potentials than others. VCBS Research Department Page 55

57 Market Price Q Q Q Q Q Q North Central South (Ministry of Construction) The potential of rock-mining companies depends mainly on the capacity and the exploitation-period of rock-mines. As a result, some companies are extending the exploitation-period, or applying for permission to exploit new mines. Specifically, Nui Nho & Tan Dong Hiep rock-mines are close to their exploitation-period, which is by the end of These mines play the key roles in performances of KSB, NNC and C32 with high quality rock (1x2 rock has high demand with high price) as well as strategic location (close to the financial/industrial center such as HCMC, Binh Duong, Dong Nai). Although new mines can compensate for capacity when old mines expires, to some extent, revenue will be affected because at the beginning of mining period, newly-exploited mines can only produce low-quality rock with low selling-price. Southern rock-mines updates Rock-mine Location Company Tan Dong Hiep Binh Duong KSB & C32 Capacity (million m 3 /year) Remaining capacity (million m 3 ) Exploitation period (Extending) Phuoc Vinh Binh Duong KSB (Extending) Tan My Binh Duong KSB Tam Lap Binh Duong KSB Applying for mining license Nui Nho Binh Duong NNC Mui Tau (Tan Lap) Binh Phuoc NNC Thanh Phu 1 Dong Nai BBCC Thien Tan Dong Nai BBCC Doi Chua Dong Nai BBCC 10 Soklu Dong Nai BBCC Binh Loi Dong Nai CTI VCBS Research Department Page 56

58 Xuan Loc Dong Nai CTI Tan Cang 8 Dong Nai CTI Doi Chua 3 Dong Nai CTI Thanh Phu 2 Dong Nai DHA Tan Cang 3 Dong Nai DHA Nui Gio Binh Phuoc DHA Thanh Phu 3 Dong Nai 2017 Outlook Infrastructure Development HTX Binh Thanh (VCBS) Rock demand in According to the governmental planning for construction material from 2016 to 2030, the total demand for rock material is around 135 million m3 in 2016, and it is estimated to reach 181 m3 in In which, rock s demand in the South (the main market of rock mining companies such as KSB, NNC, C32, and DHA) is around 35 million m3 in 2016, and it is estimated to reach 45 m3 in Also, according to the Ministry of Transport, from 2016 to 2020, Vietnam will need around 1,015,000 billion VND (roughly $48 billion) to develop the transportation infrastructure mainly in HCMC and Hanoi. In which, 651,000 billion VND will be used for road infrastructures. Insignificant effect from the world market. The mining industry has been severely affected by the downward-trend of the world s demand due to the instability of China s economy. However, thanks to (1) the nature of rock-mining industry which rarely competes with imported products, (2) the recovery of real-estate market, and (3) plans for transportation infrastructure improvement, there are positive signals for the potential growth of rock-mining companies. Compared to other regions across the country, the growth demand for rock in the South is higher (10%-12% compared to 6%-7%). 1 Potential firms in 2017 NNC Hold Stable growth. Four rock-mining companies have published Q financial statements. In which, three companies including KSB, KSB and C32 recorded sales growth. Besides stable financial health, the recovery of real-estate market as well as development plans for transportation infrastructures will be significant catalysts for roc-mining industry growth. Low debt ratio with stable cash flow. Besides positive sales performance, the advantage of investing in rock-mining companies is that they have low debt ratio. Specifically, rockmining companies in the South maintain low Debt/Total Assets ratio, most of them have no bank loan. Also, companies in this industry such as KSB, NNC and C32 tend to have stable business performance with positive cash flow from operating activities. 9M.2016 Overview NNC Nui Nho rock-mine maintains stable sales growth. The comparative advantage of Nui Nho mine is that it has strategic location, high quality rock, and stable sales growth due to the increasing demand from construction projects such as My Phuoc Tan Van highway, Suoi Tien Metro, etc. In Q3.2016, NNC s revenue was VND 148 billion (+11% yoy). Despite increasing 11% in revenue, cost of goods sold increased only 6%, which led to 20% increase in gross profit VCBS Research Department Page 57

59 compared to last year. Also, income tax has been down from 22% to 20%, which contributed to the 18% growth of NPAT VND 45 billion. NNC s accumulated 9M.2016 revenue was VND 414 billion (+18% yoy), and NPAT was VND 136 billion (+55%yoy) - equivalent to EPS of VND 10,400/share. Outlook Currently, NNC is investing in M&C Binh Duong Binh Duong Construction Material & Construction Ltd (10% - equivalent to VND 103 billion) so that NNC can sign miningcontract with M&C Binh Duong s rock-mines in the future. Specifically, M&C Binh Duong s main operation is construction material & construction (brick, cement, sand, rock, etc). Currently, the company has mining-licenses of four rock-mines including Tan My, Thuong Tan (Tan Uyen province), and 2 other mines in Phu Giao province the average capacity of each mine is about 10 million m3 and can start mining-activities by the end of According to VCBS, this is an effective investment so that NNC can mitigate the risk of not being able to extend the exploitation-period of Nui Nho mine Nui Nho mine yields the majority of revenue/profit for NNC, and will expire on December 31st Recommendation C32 Hold 9M estimated mining capacity of NNC could reach 3.2 million m3, in which 85.2% of the total capacity is from Nui Nho rock mine estimated revenue and NPAT is VND 606 billion (+19% yoy) and VND 189 billion (+53% yoy) respectively equivalent to EPS of VND 11,524/share and PE In 2017, estimated revenue and NPAT is VND 691 billion (+14% yoy) and VND 210 billion (+11% yoy) respectively equivalent to EPS of VND 12,220/share and PE 5.9. Tan Dong Hiep rock-mine remains the main revenue contributor of C32 in 2016, the average selling price of rock from this mine is around VND 180,000/m3. In Q3.2016, C32 recorded slight revenue growth which reached VND 134 billion (+2% yoy). Thanks to the decrease of cost of goods sold, gross profit increased by 33% reaching VND 40 billion. Gross profit margin increased from 22.6% in Q to 29.6% in Q As result, C32 s NPAT was up 24% compared to last year reaching VND 26 billion. By the end of Q3.2016, accumulated revenue and NPAT was VND billion (slight growth compared to last year) and VND 75 billion (+23% yoy) equivalent to EPS of VND 9,884/share. Outlook According to the latest update, C32 has just become a major shareholder at DHA. Specifically, C32 has increased its ownership at DHA to 8.16%. Both C32 and DHA are rock-mining companies in Binh Duong. Currently, DHA has mining-licenses of 3 rockmines with the total capacity of 18 million m3. With the exploitation-period up to , DHA has comparative advantages compared to other companies such as NNC, C32 or KSB. According to VCBS, this can be a promising investment as C32 could secure its rock resources for the future. In case Tan Dong Hiep rock-mine expires by the end of 2017, C32 can still corporate with DHA to conduct mining-activities as a major shareholder at DHA s rock-mines. Recommendation VCBS Research Department Page 58

60 DHA Positive 9M C32 s estimated revenue and NPAT is VND 560 billion and VND 106 billion respectively (slight growth compared to last year) equivalent to EPS of VND 9,464/share and PE 5.8. In which, revenue from rock-mining accounts for 40% of the total revenue VND 225 billion, revenue from construction service accounts for 35% - VND 193 billion, sewer-pipe sales accounts for 10% - VND 56.7 billion, and revenue from other services accounts for 15% - VND 85.3 billion. C32 is likely to be able to accomplish its 2016 target because: 1. By the end of Q3.2016, accumulated rock-capacity reached the expectation, and is estimated to achieve the 2016 target 1.2 million m3, which accounts for 40% of the total revenue and 70% of the total NPAT. 2. Sewer-pipe production shows positive signals thanks to quality improvement as well as demand surge due to infrastructure construction such as National Route 1. Sewer-pipe production activity is estimated to account for 30% of the total revenue and 20% of the total NPAT estimated revenue and NPAT is VND 569 billion and VND 108 billion respectively (slight growth compared to 2016) equivalent to EPS of VND 9,642/share and PE 5.7. DHA Mining activities have been slowdown recently. Although rock mined from Nui Gio has high quality with huge demand, other rock-mines of DHA have been operating perfunctorily due to intense competition especially Thanh Phu 2 which contributes up to 60% of DHA s revenue. In Q3.2016, DHA s revenue reached VND 48 billion (slightly down compared to last year), increase in COGS leads to 18% decrease in gross profit which reached VND 12 billion. Gross profit margin was down from 29.4% to 24.6%, NPAT was VND 7.3% (-19% yoy) due to the increase of administration expense. By the end of Q3.2016, accumulated revenue was VND 139 billion (+1% yoy), NPAT was VND 30 billion (-10% yoy) equivalent to EPS (ttm) of VND 2,733/share. Outlook Currently, DHA operates mining activities on 3 rock-mines including Nui Gio, Tan Cang 3 and Thanh Phu 2. These mines exploitation-period will last for the next 8-10 years, which is a strong comparative advantage for DHA. Unlike other companies, DHA is not under pressure to look for new rock-mines to replace the old ones. According to the latest update, C32 has just become the main shareholder of Hoa An JSC (DHA). Specifically, C32 has increased its ownership at DHA up to 8.16%. As both C32 and DHA are operating in rock-mining industry, this could be an effective strategy for both companies to co-operate with each other. Recommendation 2016 estimated revenue and NPAT will be VND 210 billion (+4% yoy, 122% annual target) and VND 48.6 billion (+8% yoy, 118% annual target) respectively equivalent to EPS of VND 3,240/share and PE 9.1. VCBS ranks positive outlook for DHA due to the potential from Nui Gio rock-mine as Tay Ninh & Binh Phuoc is on the development planning estimated revenue and NPAT will VCBS Research Department Page 59

61 be VND 270 billion (+28% yoy) and VND 50.4 billion (+3% yoy) respectively equivalent to EPS of VND 3,360/share and PE KSB Positive 9M.2016 Facing brick Due to the high quality rock at Tan Dong Hiep, KSB s 2016 estimated total rock capacity is around 3.7 million m3. By the end of Q3.2016, KSB s revenue was VND 327 billion (+28% yoy) and NPAT was VND 64 billion (doubled compared to last year), low COGS also lead to increase in gross profit margin which reached 57%. Accumulated revenue by the end of Q was VND 641 billion (+17% yoy), and NPAT was VND 154 billion (+59% yoy) which is equivalent to EPS (ttm) of VND 7,820/share. Outlook Besides positive outlook due to potential rock demands in 2017, Tan My and Phuoc Vinh extension plan as well as Tan Dong Hiep exploitation-period extension plan are catalysts for KSB to reach the rock capacity of over 4 million m3 each year. This is KSB s comparative advantage as other companies rock mines are going to expire. Besides rock-mining activities, KSB is planning to extend Dat Cuoc industrial park for another 340ha. Specifically, Dat Cuoc industrial park is planned to be extended for 136ha until 2018, and the remaining 214ha extension is planned until According to KSB, the company will record VND 505 billion in revenue from selling 53.2ha, and another 1,865 billion in revenue (VND 467 billion in gross profits) from selling the remaining areas until Also, KSB is currently negotiating with its strategic partner about selling Binh Duc Tien real-estate project. In case KSB can finish the deal on schedule, it will record revenue of VND 120 billion and gross profit of VND 37 billion in Q Recommendation With positive performance during 9M.2016, VCBS expects that by the end of 2016, KSB s revenue will reach VND 850 billion (+15.2% yoy, 106% annual target) and NPAT of VND 204 billion (+63% yoy, 142% annual target) equivalent to EPS of VND 7,846/share and PE The above forecast is without profit from real-estate segment. In case KSB record profit from real-estate segment in this year, KSB s revenue will reach VND 970 billion (+31% yoy) and NPAT of VND 237 billion (+90% yoy) equivalent to EPS of VND 9,115/share and PE In 2017, VCBS maintains positive outlook for KSB because (1) exploitation-period of Tan Dong Hiep and Phuoc Vinh rock-mines are planning to be extended for another 2 years, and (2) Phuoc Vinh s capacity is expected to double due to the contract with Bau Bang industrial park. KSB s 2017 forecasting revenue is VND 1,040 billion and NPAT is VND 250 billion equivalent to EPS of VND 9,615/share with PE Highlights There was a sharp bounce in brick producers performance. Thanks to the recovery of the real estate sector and a large amount of construction project since coming to completing stage, the brick producers performance had their gross margin expanded and their sale volume increased sharply. All the factories had to operate at full capacity to meet the market demand. VCBS Research Department Page 60

62 Producers Consumption in 9M2016 (sqm) Capacity (sqm/year) Expansion plan Main brick products VIT 4.55 mn 6.5 mn +2 mn/year in Granite CVT 9.2 mn 15 mn TLT* 4.44 mn 8.5 mn +3mn of granite/year in mn of porcelain/year in 2018 Ceramic, Porcelain Ceramic VHL 7.5 mn +4 mn of clinker/year in 2016 Cotto, clinker TTC 5,5 mn Expansion plan delayed Ceramic, granite (*)sqm is square meter Source: VCBS compiled Produ cers Revenue 9M2016 (VND bn) %yoy NPAT 9M2016 (VND bn) %yoy ROA TTM ROE TTM Equiti es/ Assets EPS TTM P/E VHL 1, % % 8.9% 21.6% 41% 7, VIT % % 6.3% 23.6% 27% 3, CVT % % 11.4% 33.0% 34% 5, TLT % % 14.4% 284% 5% 4, TTC % % 12.3% 22.5% 55% 3, GMX % % 17.8% 24.8% 72% 3, TCR 1,158-27% -1.3 n/a 3.6% 7.4% 48% 1, HLY % x 11.9% 18.1% 66% 4, VCBS Research Department Page 61

63 NPM Thousand VND per sqm 2017 OUTLOOK REPORT 14,0% Brick producers' net profit margin and products price ,0% 10,0% 8,0% 6,0% ,0% 40 2,0% 20 0,0% VHL VIT TLT CVT TTC GMX M2016 Products price VND/sqm 0 Source: VCBS compiled Encourage granite brick production. According to the Vietnam Construction Association, total brick production capacity has reached 500 mn sqm per year, 84% of which is ceramic (420 mn sqm per year), 12% of which is granite (60 mn sqm per year). The rest 4% is occupied by others tile such as cotto, porcelain. In the plan of Ministry of Construction, the ceramic production should be limited, meanwhile granite production should be encouraged. In this plan, until 2020, granite brick capacity of the industry should rise up to 140 mn sqm per year (equivalent to the CAGR of 23.5% pa). However, the Ministry also creates an entrance barrier, which state capacity of new granite brick factories must above 6mn sqm per year. Therefore, the minimum capital expenditure for new granite producers may rocket up to VND 500 bn 600 bn. We believe that this is an opportunity for granite tile manufacturers to expand their production Tile industry has more room to growth. As being construction material in completing stage, brick producers are expected to keep on growing thanks to the completion of construction projects since In 2017, the supply of real estate in Ha No is forecast to gradually grow at 9% in office segment, 4% in apartment segment and 10% in mansion segment. Especially, many Shop houses under construction can be the huge source of demand for brick products in the North area. Brick industry is being protected by State. Tariff imposed on brick is up to 35%, which creates a barrier against the new entrance from abroad. Therefore, the market share of imported brick has sharply reduced from 80% (2010) to 35% (2015) (according to VIBCA). High taxes help maintaining brick price at high level, also supporting domestic producers to fight against Chinese original products. Tariff on bricks classied by origin Origin Tax rate Applied since Preferential tariff 35% 1/1/2014 VCBS Research Department Page 62

64 Mn sqm per year 2017 OUTLOOK REPORT ASEAN (ATIGA) 5% 1/1/2015 ASEAN China (ACFTA) 20% 1/1/2015 ASEAN Korea (AKFTA) 10% 1/1/2015 ASEAN Japan (AJCEP) 20% 1/4/2015 Vietnam Japan (VJEPA) 22.5% 1/4/2015 ASEAN Australia New Zealand (AANZFTA) 10% 1/1/2015 ASEAN India 22.5% 1/1/2015 Source: Customs The whole industry enhances capacity, which makes the brick price decrease. During , total production has reached 500 mn sqm, rocketing from 300 mn sqm in The industry leaders (unlisted) increased their capacity to quickly gain more market share. The ample supply decreases brick price, even such trendy products as cotto, granite, and tile price has fallen by 3% - 4%, meanwhile ceramic products price has declined by about 10%. 100 Brick producers' capacity CVT Dong Tam Taicera Catalan Hoan My Toko Prime Source: VCBS compiled Using CNG as a replacement of coal in factories operation. According to our estimation, the cost of CNG which is as 10% higher as coal help increase the average quality of the product, raising the A1 (the best quality with 15% - 20% higher price) portion. CNG also provide heat more gradually, protecting environment and machine. The coal price has risen recently. Therefore, those producers who has shifted to using CNG may avoid the negative effect from coal. According to those prospects, we come up with some criteria to invest on brick producers, including (1) enhance capacity in 2017, producing new brick with higher margin, (2) use CNG to operate factories, (3) granite and cotto producers are preferred. Producer Catalyst Recommendation VHL Main products are cotto and tile BUY with target price of VCBS Research Department Page 63

65 Increase capacity from clinker factories Shifting product mix to tile with higher margin VND 65,956 per share Exclusive sale to VGC VIT TLT Main product is granite Higher efficiency of Thai Binh factories phase 2. Operate by CNG Tien Son factory has been fully depreciated (our estimation) Exclusive sale to VGC Do not increase capacity yet We expect a breakthrough in 2018 when the Phu Ha factory is completed OUTPERFORM Target price VND 32,772 per share HOLD Target price VND 18,590 per share CVT Increase capacity of granite by 3mn sqm per year in 2107 Flexible production line Good merchantability Profit margin is expected to narrow due to higher raw material cost and lower brick price BUY Target price VND 47,640 per share. Plastic 2016 Highlights Vietnam plastic industry is still a new sector compared to others such as mechanical, chemical or textile industry, but it has grown rapidly in recent years. In the period of , plastic industry is an industry which had the highest growth rate with an annual growth rate of 16-18%. This came from a high demand because plastic products are widely used in all sectors such as consumer goods, construction, telecommunication We can see that the amount of plastic per capita increased significantly from 33kg/year in 2010 to 41 kg/person in 2015, which shows a strong demand in domestic market. However, this figure is relatively low compared to an average of the Asian region and the World (48.5kg/year and 69.7 kg/year respectively). VCBS Research Department Page 64

66 T1 T2 T3 T4 T5 T6 T7 T8 T9 T10 T11 T OUTLOOK REPORT Consumption in Vietnam plastic industry and Global Production by quantity and value of Vietnam plastic industry ,50 69, Quantity (million tons) Value (billion USD) Note: Data of Asia, USA, EU and the World was in 2015 Source: VPA, VCBS Export turnover of plastic products increased by 5.3% yoy in the first 9 months, and Japan has been the largest export market. Since 2005, export of plastic industry has grown steadily, reaching the CAGR of 20%. Plastic products are now exported to over 150 countries and territories around the world including Japan, China, Middle East, Africa, Europe and America. In the first 9 months of 2016, export turnover of plastic products achieved USD 1,618 mn (+5.3% yoy). Japan has been the largest importer with import turnover of USD mn, accounting for 23.2%. The US market is the second largest exporter with import turnover of USD mn, making up 15.2%. Meanwhile, the Netherlands is the largest EU importer in the first 9 months with import turnover of USD 92.7 m, accounting for 5.73% of total export turnover of Vietnam plastic industry. Structure of the export market by value in 9T ,79% 2,59% 4,13% 2,12% 4,36% 5,24% 5,50% 5,73% 15,23% 23,22% Export turnover of plastic industry (million USD) Japan US Netherlands Korea German Cambodia UK Indonesia Phillipine Thailand Source: VPA, VCBS Plastic resin prices declined in the first half of year in tandem with oil prices, but has recovered since Q Most plastic resins are produced by crude oil and natural gas, only a modest amount is produced by corn or some other biological products, so plastic resins price depends on oil prices volatility as well as natural gas prices. Packaging segment accounts for the largest share, so PP and PE resins are two types of materials accounting for VCBS Research Department Page 65

67 01/01/15 01/03/15 01/05/15 01/07/15 01/09/15 01/11/15 01/01/16 01/03/16 01/05/16 01/07/16 01/09/16 01/11/ OUTLOOK REPORT the largest proportion in import turnover. In 2015, plastic firms have benefited greatly from the decline in world oil prices. Brent oil prices plummeted by 47.5% compared to 2014 leading to a downward trend in the prices of plastic resin (PVC resin price fell by 13.6% yoy, PP resin price fell by 27.6% yoy and PE resin price was down 24% compared to 2014). In the first half of 2016, resin prices remain downward trend, but by the end of Q3, oil prices have rebounded from the bottom of USD27 to over USD 50, so that resin prices have increased compared to Q2. In particular, PVC resin price rose by 4.4% qoq, PP prices increased by 14.6% qoq, only HDPE resin price was down slightly by 1.3% compared to Q2. 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% Structure of plastic resin imported 5,9% 5,4% 8,1% 8,3% 26,4% 24,7% 32,6% 32,1% 6,1% 11,9% 6,3% 11,6% 28,8% 31,7% 40,4% 40,5% 8,1% 5,6% 6,6% 8,8% 22,0% 22,8% 27,0% 27,5% Plastic resins and oil price volatility % PE PP PET PVC PS Sources: VPA, VCBS Source: Bloomberg HDPE PVC PP Brent oil 2017 Outlook Export turnover is expected to increase in 2017 with the main markets of Japan and the US. Look at the positive developments in the first 9 months, export turnover of plastic products is projected to rise in However, the EU market is likely difficult for domestic firms because of unfavorable evolution of EUR which causes damage on the number of orders as well as domestic firms. They are subject to competition from goods produced in the region due to the cost of goods and raw materials fell as the EUR down. Japan and the US are still potential markets for exporting with huge demands. Packaging segment - growth potential depends on the end - product industry such as food and beverages. Consumer segment - great potential but is under competitive pressure from foreign rivals. Construction segment the recovery of real estate and construction industry supports growth of this segment. Recycled plastic a new trend in future. Plastic resins price is expected to increase in the last months of 2016 and stay at this level in The explanations are below: VCBS Research Department Page 66

68 - Oil prices are expected to fluctuate between 50-55USD in The agreement to cut oil production of the members of OPEC made oil price rebound sharply to more than 50 USD/barrel. OPEC will reduce by 1.2 million barrels per day from 33.6 million barrels/at present and it will take effect since the early of However, this likely leads to the fact that shale - oil manufacturers in the US will increase oil production which will have negative impact to oil price. Meanwhile, demand for crude oil in China has risen strongly in the last months, but perhaps that imports surged by the decline of oil prices, rather than the increase in actual demand. Hence, the effort of OPEC to increase oil price may not be effective. - The US market: PPIPRAM Index which evaluates raw material and plastic resins in the US market has risen since September. - Other markets: PE and PP resins price in Turkey increased in November compared to the previous months due to pressure of being less profitable than other markets. Prices have fluctuated between 10-40USD/tons. The decline in supply can be because factories in Saudi Arabia, Oman, India and Egypt closed. Another reason contributing to this upward trend is due to the Chinese market has recovered and pulled prices up. At the same time, the import tax of PP resin which will increase to 3% in 2017 also have impact to the resin price when suppliers likely increase PP resin price in tandem with adjusted tax rate. According to this analysis, we think that plastic resins price will rise in the last months of 2016 and remain at this level or increase slightly in However, most Vietnamese plastic firms have reserved raw materials to produce within 2 to 6 months, especially in the peak season. Therefore, there is a certain lag and firms must be flexible in order to avoid significant impact of the volatility of raw material costs. Tax policy affecting to Vietnam plastic firms. Decree 122/2016/NĐ-CP on the import tariff for PP: - Since 01/09-31/12/2016: Import tariff of PP is 1% - Since 01/01/2017: Import tariff of PP is 3% This leads to difficulties in raw materials source for manufacturing enterprises, especially food and construction packaging. According to the VPA, if the import tariff increase to 3%, domestic plastic firms have to pay for importing materials around VND 1,870 bn in Hence, domestic plastic firms are subject to not only increase in plastic resin price but also the import tax cost. Meanwhile, PP manufacturers in some countries such as Asian nations, Korea, China has advantages. Competitive pressure in domestic market. There are more than 2,000 companies operating in the plastic industry, of which approximately 84% are concentrated in the South where intense competition occurs, and 14% are located in the North. Packaging plastic which competition does not take place directly because of having four small segments has remained the highest proportion (37.4% in 2015). However, we note that with an increase in import tax rate of PP resin, domestic firms in food and construction packaging will likely come under pressure competition from foreign rivals as we have mentioned above. Construction segment is under pressure of intense competition when two leaders which are NTP and BMP have begun to expand their market share into rival s market as well as the VCBS Research Department Page 67

69 central market which has no leader. The acquisition of Five Star Plastic JSC and the merger plan of Da Nang Plastic JSC show this strategy. Apart from BMP and NTP, other firms have begun to penetrate into the construction plastic market such as Hoa Sen Binh Dinh plastic factory of Hoa Sen Group, Stroman Hung Yen plastic factory of Tan A Dai Thanh and Europipe. Although domestic plastic enterprises remain dominant due to large-scale and strong brand, we believe that, if there is no reasonable policies to adapt to competitive market, the market share of them will be affected negatively. 9M.2016 Performance In the first 10 months, the majority of plastic stocks has risen significantly, caused by (1) Raw materials prices declined which supports profit margin. (2) Production has increased because of rising capacity and expanding scale of operation. (3) Real estate and construction market have recovered in recent years. (4) Demand for plastic products worldwide increases or the trade agreement will be signed (FTA...). Ticker Segment Market cap (VND bn) Net sales 9M.2016 % yoy NPAT 9M.2016 % yoy GPM 9M.2016 D/E AAA Soft package 1, ,476, % 101, % 14.11% % RDP Soft package , % 50, % 13.56% % SPP Soft package , % 11, % 13.35% % NNG PET package ,246, % 8, % 32.94% % TPC Food package , % 16, % 6.96% 60.35% TPP Food package , % 18, % 20.93% % DTT Food package , % 5, % 16.72% 17.26% VPK Food package , % 3, % 15.30% % BPC Construction package , % 13, % 16.42% 62.71% BXH Construction package , % 7, % 15.93% 66.34% DPC Construction package , % 1, % 19.63% 0.00% VBC Construction package , % 22, % 11.85% % BMP Construction plastic 9, ,478, % 539, % 34.69% 2.26% NTP Construction plastic 5, ,102, % 284, % 35.27% 50.95% DNP Construction plastic ,079, % 68, % 20.68% % DAG Construction plastic ,032, % 43, % 8.79% 74.08% Source: FS of firms, VCBS Potential firms in 2017 Based on the potential as mentioned above, we recommend investment opportunity in 2017 including: NTP, BMP and DNP. NTP Positive Tien Phong Plastic JSC (HNX-NTP) Results in 9M.2016 In the first 9 months, NTP recorded a positive growth in its performance. Net revenue was VND 3,102.6 bn (+21.9% yoy, 79.5% of plan), NPBT reached VND 319.6bn (+8.5% yoy, 77% of plan) and NPAT increased by 8.8% yoy to VN284.4 bn. VCBS Research Department Page 68

70 Net profit after tax recorded a modest growth. NPAT reached VND 87.7 bn (+2.2% yoy) in Q3.2016, and VND bn (+8.8% yoy) in 9 months. Despite a positive growth of revenue, NPAT increased moderately due to the fact that (1) plastic resins price has recovered which made COGS rise (2) NTP tries to protect and expand market share by boosting selling activity through increasing discount rate for dealers and contributors in the intense competition in plastic industry. This leads to an increase in selling expense and higher proportion of net sales. (2) Financial expenses increased mainly due to interest from bank loan. Hence, the net profit margin of NTP only achieved 9.17% compared to 10.27% of the same period in Central Tien Phong Plastic JSC: Benefit from tax incentive. Nghe An factory focuses on production of upvc, PE, PPR pipes which is divided into 2 phases with total capacity of 40,000 ton/year. This firm benefits from tax incentive: 0% for the first 4 years ( ), 7.5% for the next 10 years ( ) and 15% for the following years outlook In 2017, we forecast: - Net revenue is projected to achieve VND 5,131.2 bn (+18,1% yoy) with an increase by 17% yoy of production, reaching 99,549 ton. - Gross profit margin is forecasted to reach 34.2% due to the recovery of oil prices which leads to an increase in plastic resin prices. - Selling expense/sale ratio rises slightly to 20.5% because in 2017, NTP will subject to intense competition from other rivals such as Hoa Sen Group, Europipe and Tan A Dai Thanh. Hence, it is likely that NTP will increase selling expense to protect and expand market share. - We forecast 2017 NPAT of VND bn (+9.39% yoy). EPS in 2017 will reach 5,134 dong/share (after provision). With a price of 77,000 VND/share in 13, December 2016, NTP is trading at a PE forward 2017 of 15. NTP is a leading enterprise in Vietnam plastic industry with positive revenue growth and steady annual profits, cash flow and strong financial health. They are making efforts to protect and expand market share using a different strategy compared to BMP. While BMP focuses on profitable growth, NTP minimizes competitive risks by switching to a new strategy focusing on plastic pipes for projects with higher growth rates. We think that this is an important and reasonable strategy in this situation. However, NTP also has some risks, such as (1) fluctuations in raw material prices, (2) the high discount rate affecting profit and (3) the exchange rate risk. In terms of SCIC divestment, it is likely that Thailand shareholders - The Nawaplastic Industries with the percentage of ownership of 23.8% will increase ownership rate. However, the share price has surged 64% since the beginning of year due to information of this divestment. Using the discounted cash flow methods (FCFF, FCFE), we determine the price of NTP after one year is 88,238 VND /share. We recommend POSITIVE for NTP. BMP Positive Binh Minh Plastic JSC (HSX BMP) Results in 9M.2016 The first 9 months results recorded positive growth. Net revenue reached VND 2,478.6 bn (+19.8% yoy, 74.4% of plan, NPBT was VND bn (+34.8% yoy, 110% of plan) and VCBS Research Department Page 69

71 NPAT reached VND bn (+38.7% yoy). The positive performance came from: - Consumption increased compared to the same period. - Plastic resins price reduced which made gross profit margin improve. Conducting Phase 2 of Long An plant. Phase 1: capacity of 5,000 tons/year was put into operation from 10/2015. BMP will implement Phase 2, with a capacity of 90,000 tons/year. In 2 years from 2017 to 2018, BMP will install machinery, production lines according to the ability of the company and increase capacity to match the demand of the market. BMP estimates in Phase 2 of Long An, plant, BMP will disburse more than VND 300 bn each year Outlook In 2017, we forecast: - Net revenue is projected to achieve VND 3,649.6 bn (+12.9% yoy) with an increase by 13% yoy of production, reaching 90,444 tons. - Gross profit margin is forecasted to decline from 34.3% to 33% in We believe that similar to NTP, BMP will be affected when oil prices rise. - Selling expense/sale ratio rises slightly to 4.7% and G&A/sales ratio remains 3.44%. - We forecast 2017 NPAT of VND bn (+12.4% yoy). EPS in 2017 will reach dong/share (after provision). With a price of VND/share in 13, December 2016, BMP is trading at a PE forward 2017 of BMP is one of two leaders in Vietnam plastic industry with an extensive distribution system and reputable brand for more than 38 years of operation. Besides, BMP has maintained steady growth, sales production and ensured reasonable discount policy for dealers as well as good customer care regime. Financial health has maintained a healthy state with no long-term debt and only a small amount of short-term debt to finance the production and core activities. Moreover, BMP is one of 10 companies on the list SCIC divestment in the future, so when completing the internal procedures to open room to 100%, BMP will become more attractive to foreign investors. Using the discounted cash flow methods (FCFF, FCFE), we determine the price of BMP after 1 year is 222,500 VND/share. We recommend POSITIVE for BMP. Note: The prices of NTP and BMP exclude premium for investors' expectations after the SCIC divestment. DNP Positive Dong Nai Plastic JSC (DNP) Results in 9M.2016 DNP recorded an outstanding performance in 9T Net revenue reached VND 1,081.6 bn (+65.3% yoy) and NPAT increased 72.6% yoy to VND 52.9 bn. Gross profit margin of DNP also raised from 17.8% to 20.7% in the first 9 months. Thus, DNP has completed 67% of revenue plan and 70.3% of the profit plan. DNP has two plants with total capacity of 48,000 tons/year, loyal customers and a good relationship with suppliers and dealers. The company s products are used mainly in construction segment rather than consumer segment which helps them avoid competing directly with BMP and NTP. VCBS Research Department Page 70

72 Gross profit margin has maintained a high level despite plastic resin price recovery. This could be because, DNP has reserved raw materials since the beginning of the year, making inventory in the first 3 quarters maintain at a high balance. This low price of raw materials will improve profit margin when oil prices rise. As we discussed above, oil prices have recovered and reaching over 50 USD/barrel, DNP will therefore benefit from cheap raw materials. Water sector will help to improve overall profit margin of DNP. DNP owns Binh Hiep Water Plant - one of the leading profitable companies in the water supply with two plants Ca Giang and Tan Thanh with total capacity of 30,000 m3/day supplying water for Phan Thiet city, Binh Thuan province. With the advantage of Ca Giang lake located near the plant, Binh Hiep does not need to invest pipeline (accounting for 50-60% of total investment cost). DNP has just completed the acquisition of the Dong Tam Water plant (DTW), but it works quite lower than capacity of 35,000m3/day. However, DNP expects to restructure DTW and increase capacity to 50,000 at the end of Q and to 70-80,000 m3 at the early of Due to lack of financial information, we will not evaluate effectiveness of this investment outlook Main growth drivers of DNP in 2017 still come from manufacturing plastic products estimated to grow by about 10%. Besides, in 2017 DNP will start selling accessories and pipes in construction and consumer market which is expected to increase revenue. DNP is improving the system of plastic pipe production plants in all three regions, and continue to invest in northern plant systems to reduce transportation costs from the central to the north, and complete contribution network in all three regions. The water sector will also create good cash flow with revenue and profit mainly come from Binh Hiep Plant. After water plant in Long An, Tien Giang put into operation and the capacity expansion of Binh Hiep Plant completes (+20,000 m3/day), this will contribute higher profit to total profit of DNP at the end of 2017 onwards. Recommendation We believe DNP is a POSITIVE stock in 2017, caused by: DNP is one of the leading enterprises in drainage pipes sector used in construction in the Central and the South. Profit margins remains stable thanks to reserving raw materials at low price. M&A activities in recent years help to increase revenue and profit. - Water production is forecasted to have a high potential and contribute to the profitability and sustainability of DNP. Tire 2016 Highlights: Tire consumption continued to grow; however domestic firms had to face many difficulties due to unfair competitions posed by imported The strong growth of the domestic market for automobiles and motorcycles is a prerequisite for growth in production and consumption of tires. According to the Vietnam Automobile Manufacturer s Association - VAMA, total automobile sales volume in the first 11 months of the year reached 243,675 vehicles (+32% yoy), including 140,921 units from sales of passenger cars (+36% yoy), 90,227 units from sales of commercial vehicles VCBS Research Department Page 71

73 tires from China. (+25% yoy) and 12,527 units from sales of special-purpose vehicles (+37% yoy). In particular, sales volume of CKD reached 205,355 units (+33% yoy) and sales volume of CBU reached 65,768 units (+7% yoy). Not having a strong double-digit growth as the automobile market, the motorcycle market maintained a stable growth with 1,444,182 units sold (+8% yoy) in the first 6 months of 2016 (Source: Vietnam Association of Motorcycle Manufacturers - VAMM). According to the Traffic Police Department, there were about 2.5 million cars and 49 million registered motor vehicles, of which motorcycles accounted for 95% (~46.5 million units), at the end of Therefore, we have estimated that, there will be about 2.8 million cars and about 49.5 million motorcycles at the end of The fact that the Ministry of Transport has enhanced its measures to control truck load limits since 2014 has become one of the key drivers for tire consumption growth in the domestic market. Because of these measures, production of domestic firms in the tire industry had increased positively. According to the 6M.2016 data of Vinachem, automobile tire production reached 1,214,527 units (+10.9% yoy); motorcycle tire production reached 3.8 million units (+20.1% yoy); and bicycle tire production reached 5.6 million units (+1.9% yoy). Specifically, automobile tire exports reached 353 thousand units (+23.3% yoy). The truck load limits, however, helped reduce weight pressure on tires and extend life cycles of tires. Hence, the growth of tire consumption was somewhat slower than the growth of automobile sales. Although the market looked positive, domestic tire manufacturers were struggling for sales due to some main reasons: (1) Pressure to lower selling prices in order to compete with tire imports from China. According to Vinachem, selling prices of some major domestic tire manufacturers had to be discounted by 16-19% for bias tires and 4-6% for radial tires since the beginning of 2016 as the Chinese tire tax fraud was still happening. Currently, a majority of tires in Vietnam are imported with Chinese tires, which are mainly radial tires, accounting for 60-70% of tire imports. The import tax for these products is officially set at 10-25%. However, stated values of Chinese tires are usually declared at 70% lower than their true values at the Custom. Hence, with lower expenses from import tax, these tires can be sold at more attractive prices than domestic tires. Meanwhile, the production scale of domestic manufacturers though has been expanded significantly, remains small compared with the scale of Chinese manufacturers. Thus, domestic production costs per product are not yet at an optimal level. Moreover, since radial tire is a new business line of domestic manufacturers, selling prices still have to bear depreciation and interest expenses, which are very high in the early stage of the business. Accordingly, selling prices of domestic tire manufacturers become less competitive compared with prices of products imported from China. (2) Sharp increase of input prices. As one of the main materials in tire production, natural rubber accounts for 30-40% of tire component. Hence, the fluctuation of natural rubber has an important impact on profit margins of tire manufacturers. Prices of natural rubber have started to rebound strongly (+36.63% ytd) compared with at the beginning of 2016, but still remain at a low level. After bottoming out in the final months of 2015 and early 2016, natural rubber prices have rebounded strongly, reducing gross profit margins of domestic tire manufacturers in the last 6 months of 2016 compared with in the previous months. VCBS Research Department Page 72

74 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov OUTLOOK REPORT Natural rubber price (USD cents/kg) Source: Index Mundi Accordingly, business results of listed companies in the industry are also less positive than in the same period in 2015 and the possibility that these companies will not reach their yearly guidance is quite high. Specifically, the 9M 2016 business results are as follows: Net revenue (billion VND) Net income (billion VND) 9M 2016 % yoy % guidance 9M 2016 % yoy % guidance DRC 2, % 64.28% % 66.22% CSM 2, % 66.63% % 68.29% SRC % 65.78% % 69.08% Source: VCBS 2017 Outlook: Competition in the industry is getting fiercer; the outlook in 2017 will depend largely on the mechanical growth rate of the sector and exports. The automobile market will maintain its steady growth, but can hardly achieve a surge as in previous years. While the import tax rate for vehicles from ASEAN countries will fall from 40% to 30% in 2017, this rate will fall further to 0% by the beginning of Thus, consumers resistance behavior might arise and slow down the growth of personal vehicle sales, which account for approximately 57.29% of total of vehicle sales (Source: VAMA). With the macroeconomic environment forecasted to be as stable as in 2016, we believe that the sales volume of trucks in 2017 will not sharply increase. Besides, the motorcycle market will likely be saturated. Since the registered motorcycle volume in the whole nation today (about 49 million units) has outweighed the traffic planned for 2020 (36 million units), we believe that the State will create new policies to limit the number of motorcycles. Therefore, the demand for tires in the domestic market is expected to maintain a steady growth as in 2015 at 12% yoy. However, export activities have shown positive signals as the US and India markets will apply anti-dumping duties to truck tires from China, lifting tariffs to 42-45%. In 2015, the number of Chinese tires for trucks exported to the US market is about 9 million tires, which are worth USD 1.07 billion (Source: Tire Business). Therefore, the opportunity to expand market share in the US for Vietnamese tires is quite bright. Current sales of light truck tires from Vietnam show a strong growth in the US market with a selling price 12.11% lower than the price of the same type of tires from China and 15.88% lower than the average price of the VCBS Research Department Page 73

75 same type of imported tires to the US. Light truck tire imports to the United States 2015 (Units) 2014 (Units) % change Average $ value Canada 7,525,713 9,181, % $66.04 Japan 3,025,421 2,408, % $97.39 South Korea 2,973,774 2,711, % $78.96 China 2,973,051 6,346, % $60.88 Thailand 1,858,374 1,061, % $68.51 Vietnam 1,341, , % $53.51 Mexico 1,239,053 1,040, % $62.45 Indonesia 928, , % $73.69 Chile 714,578 1,018, % $64.21 Taiwan 541, , % $ Others 1,136, , % $89.85 Total 24,258,180 25,916, % $72.37 Source: U.S. Department of Commerce As for the Indian market, imported tires from China accounted for 90% market share of Indian imported tire for truck market, which sold about 708 thousand tires in the fiscal year of (Source: ATMA). We believe that there is a chance for Vietnamese tire manufacturers to increase their market shares in the US and India markets. Natural rubber prices may rise but will remain at a low level in The possibility for rubber prices going uptrend in the long term is not high because: Currently, rubber prices are in the low range at around USD 0.76/kg, lower than the average price of rubber in the last 5 years at USD 1.05/kg (Source: Index Mundi). The fact that the US and India will adopt anti-dumping taxes on imported tires from China in 2017 will reduce the consumption of Chinese tires, and as a result, the demand for rubber. Therefore, we believe that in 2017, rubber prices will not increase sharply and will maintain at a low level. However, tire manufacturers will now no longer benefit from the reduction of input costs as seen in the early months of The competition with Chinese products will be intense, especially when Chinese truck tires that are usually exported to the US and India markets (estimated 10 million truck tires in volume) will be difficult to sell due to anti-dumping taxes in these markets and will be dumped to Asian markets, including Vietnam. However, we believe that this pressure will not last in the long run since the Chinese government is also planning to shrink its tire industry size by raising barriers to entry such as quality and environmental requirements. In addition, interest rates are expected to increase in 2017 and the USD/VND is likely to go uptrend even though the rate will still be controlled within a small fluctuation. As a result, production costs of domestic manufacturers will rise and selling prices will be less attractive compared with Chinese products. VCBS Research Department Page 74

76 Therefore, we believe that the outlook in 2017 for tire production firms will mainly depend on the volume growth of the Vietnam tire market, which is forecasted to grow at 12% yoy, and these firms ability to export to markets that are not in direct competition with Chinese tires such as the US and India markets. Due to the difficult market environment, there is a high probability that publicly-listed tire production companies such as DRC, CSM and SRC will not meet their business targets for We forecast business results of these 3 companies as follows: Net revenue (billion VND) Net income (billion VND) 2017F 2016F % yoy 2017F 2016F % yoy DRC 4,199 3, % % CSM 3,203 3, % % SRC % % The facts that all publicly-listed tire companies could not maintain positive growth rates in 2016 and that the outlook for 2017 of the tire industry is not quite as optimistic as in the previous years have clearly reflected on the stock prices of DRC, CSM and SRC. The stock values of these tickers have dropped by as low as %; % and % respectively since the beginning of October. We think that the tire industry is in a pretty attractive price range and investors should pay attention to stocks with good fundamentals and clear business strategies. Potential firms in 2017 DRC Regarding the three listed companies, we maintain our HOLD recommendation for DRC in a long term perspective because the firm still has potential for growth, considering the increase in its production capacity of radial tires and the firm s opportunity to expand its target market by exporting to the US and Indian markets. Business results in 9M 2016 In 9M 2016, DRC had shown a good performance in sales volume with 163,587 units of radial tire (+30.76% yoy) and 667,164 units of bias tire (+5.24% yoy) sold but a downtrend in sales with VND 2,428.4 billion in revenue (-1.39% yoy, 64.28% of 2016 target) and VND billion in PBT (-4.86% yoy, 66.22% of 2016 target). The main reasons for these results are: (1) The bias tire segment, which had high profit margins (from 25.93% to 37.60%), declined because that were gradually being replaced by radial tires and demand for tires in general were slow down since the product life cycle was greatly improved thanks to stricter truck load limits policy by government. (2) The radial tire segment s production had yet to reach the breakeven volume and its gross margin is still negative (-10.32%). (3) The pressure to further discount its selling prices to compete with Chinese tires had made DRC drop the average selling prices of radial tires and bias tires by 17.04% yoy and 13.90% yoy respectively. Therefore, DRC s gross margin fell from 24.93% a year ago to 20.84% this year. Interest expenses decreased by 22.98% yoy thanks to the decrease in borrowings and the stability of the VND/USD rate, considering that 50% of DRC s borrowings were denominated in USD. Consequently, debt to total assets ratio was at 0.45 times, lower than that a year ago at 0.51 times. VCBS Research Department Page 75

77 Outlook in 2017 Despite DRC s pressure to compete with Chinese tires and the possibility that its gross margin will be negatively impacted due to increasing depreciation costs after Phase 2 of the radial tire plant starts, we still believe that DRC's outlook remains positive in the long term. In particular, the major growth drivers of DRC in 2017are the following: (1) Reducing fixed costs per radial tire. DRC began to start Phase 2 of its radial tire plant with an extra production capacity of 300,000 units/year (100% higher than the current capacity). The total investment costs of this Phase 2 are only half the investment costs of Phase 1, at approximately VND705 billion, an equivalence of VND 502 billion was borrowed in dollars with an interest rate of ~4%/year to finance Phase 2 operation. As planned, the first batch of Phase 2 radial tire project will go on sale in Q This will help DRC s radial tire sales volume reach the breakeven point soon. However, the facts that the phase 2 of DRC s radial tire plant will go into operation next year and that DRC has shortened its depreciation policy for equipment from 17 years to 8 years on average since 2015 mean that DRC s depreciation expenses will increase, while depreciation expenses/total revenue and depreciation expenses/unit will decrease. Hence, gross profit margin will be affected negatively in short-term before improving gradually in long-term. The gross profit margin is projected to fall from 20.6% to 18.4% in (2) Opportunity to expand the market for car tires to the US and India. Although the shifting trend from bias tires to radial tires is taking place gradually in the domestic market, selling prices of DRC s radial tires are not yet attractive compared with prices of the same products from China. Therefore, in light of the anti-dumping policy for Chinese truck tires in the US and India market, DRC is expected to boost exports to these two markets in the near future in order to avoid direct price competitions with Chinese truck tires. Currently, DRC has been testing its products in the US market by exporting around 4 containers/month (~240 units/month). Moreover, DRC has also found potential customers whose orders for the coming year can be as big as the company s entire radial tire production (600,000 units) in these markets and is under the process of negotiating prices with these potential customers. We project that revenue of DRC in 2017 will reach VND 4,199 billion (+26.57% yoy) and net income will be VND 371 billion (-0.44% yoy). Forward EPS for 2017 is VND 1,702 according to Circular 200 (or ~VND 2,837/share based on the old EPS calculation method), corresponding to a P/E of 18.80x (~11.28x based on the old EPS calculation method). We assume that the fair price for DRC in 2017 is VND 34,917/share. Power Industry 2016 Highlights: Hydrological developments adversely affect hydropower plants in the first half of 2016 while leaving a positive impact in the second half. Fuel prices tend to rise for both coal-fired and gas thermal plants, Overview As of October 2016, the power industry in Vietnam has total installed capacity of around 38,676 MW. According to Vietnam Electricity (EVN), power output in Vietnam grew at 10.84% CAGR in the period from 2011 to In the first 10 months of 2016, total power output reached billion kwh % higher than total power output in the same period in EVN s forecast of Vietnam s total power output in 2016 is billion kwh % higher than total power output in Changes in structure of the industry between 2015 and 2016 VCBS Research Department Page 76

78 reducing these plants profits in the second half of Power output 11M.2015 vs 10M.2016 Installed capacity 2015 vs 2016 (Source: NLDC, EVN, VCBS) Vietnam s power industry structure is to be more heavily weighted toward coal-fired thermal plants. According to the adjusted Power Development Plan VII (PDP 7), the Vietnamese government aims to increase the share of capacity from coal-fired thermal plants (32.8% in October 2016) to 42.7% in 2020 and 49.3% in The share of power output from coal-fired (37.05% in 10M 2016) is targeted to increase to 49.3% in 2020 and 55% in The main reason behind this emphasis on coal-fired plants is that the utilization of the river system in Vietnam for hydropower is close to its maximum level. As a result, the industry needs to shift toward building more coal-fired plants to catch up with the double-digit growth of power demand. Geographically, as of October 2016, total installed capacity is 15,516 MW in North Vietnam, 9,275 MW in Central Vietnam and 15,455 MW in South Vietnam. There is not much change from 2015 regarding the structure of power demand in these three regions. The South continues to have high power demand, resulting in power transmission from the North and Central to the South Average daily electricity price in Vietnam competitive generation market 1000 Stock ticker Total Assets (VND bn) Debt/ Assets (Source: NLDC, VCBS) Electricity prices in Vietnam competitive generation market (VCGM) in 2016 decreased compared with in 2015, reducing profits of companies in the industry. The price cap of the market in 2016 was 1,171 VND/kWh while the price cap in 2015 is 1,280 VND/kWh. Gross profit margin ttm 0 1/2015 4/2015 7/ /2015 1/2016 4/2016 7/ /2016 Performances of companies in the industry Net profit margin ttm Average price SMA 30 day SMA 30 day - max price ROE Revenue 9M 2016 (VND bn) Revenue 9M 2016 yoy EV/ EBIT ttm EV/ EBITDA ttm SHP 2, % 48.2% 18.1% 6.3% % 14.5x 8.0x 25.2x 1.6x VSH 5, % 61.8% 54.4% 8.2% % 20.1x 15.2x 13.8x 1.2x CHP 2, % 59.8% 34.7% 14.0% % 12.2x 8.2x 12.7x 1.8x TMP 1, % 44.2% 24.7% 10.5% % 9.9x 5.5x 18.5x 2.0x SJD 1, % 58.0% 35.9% 11.4% % 10.2x 7.1x 9.3x 1.0x SBA 1, % 67.5% 29.1% 8.8% % 10.4x 8.1x 11.5x 1.0x S4A 1, % 50.3% 9.2% 3.9% % x 1.5x VCBS Research Department Page 77 P/E ttm P/B