A RESILIENT GROWTH PATH

Transcription

1 05 October 2017 VIETNAM MACRO UPDATE 3Q 2017 A RESILIENT GROWTH PATH 3Q 2017 REVIEW GDP growth displayed improvement, despite a sluggish mining sector Despite Vietnam s GDP growth performance amongst the world s Top 20 in 1H 2017 at 5.73% YoY, it was nevertheless lower than the lofty government target of 6.7% YoY for The mining sector still remains as the black sheep of the family, as the sector is still in decline at -8.2% YoY. Excluding the mining sector, Vietnam GDP growth was 6.99% YoY in 1H 2017, well amongst the fastest growing economies in the world, and evidencing frenetic growth for the rest of the economy. Headline growth less than Vietnam s previous performance in 1H 2017 led to across-the-board downward revisions for Vietnam GDP growth, mostly to the 6-6.3% YoY level. However, the government is still keen on its pro-growth direction (signaling a higher credit growth to 21-22% YoY, and lowering the policy rate by 25 bps). 3Q 2017 GDP growth hit 7.46% YoY (or +6.41% YoY in September 2017), driven by breakneck manufacturing growth (+12.77%), gains in construction (+8.3%), and a firm growth in the service sector (+7.25%). Sources for such high growth might be also explained by gains from a low-base level in 3Q 2016 (disappointments during that period primarily upon the Samsung Galaxy Note 7 recall), while more megaprojects were launched back into operations in 3Q17, such as the Formosa steel project. As GDP growth is in line with our expectation, we reiterate our view that GDP growth will end up clocking in at 6.6% YoY in 2017, placing Vietnam well within the territory of Top 20 growing economies of Vietnam GDP growth % 7.50% GDP growth GDP growth (excluding mining) 7.00% 6.50% 6.00% 5.50% 5.00% 4.50% 4.00% (9M) Source: GSO, CEIC Page 1

2 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Macroeconomic stability remains intact Inflation pressure returned as of recent, as most CPI increase was derived from rising prices during the August and September period, with key drivers of inflation originating from the healthcare, education, and global commodity sectors. However, average CPI was still 3.79% YoY (just shy of the government target of 4% in 2017) with core inflation remaining stable at 1.45% YoY on average, surpassing even the lower range of % YoY targeted by the government. For the exchange rate, latest data from the central bank showed that current account balance was back to modest surplus levels of $300 million USD in second quarter, thanks to narrowing trade deficit. The third quarter current account balance is likely to be a sizable surplus, as better export growth will contribute towards the goal of bringing the trade balance to a surplus of $2.32 bn USD. Core inflation and average CPI (12-month moving average) 4.5% 4.0% 3.5% Core Inflation Average CPI 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% Source: GSO, SSI Research Favorable external factors The global trend of rising protectionism might end up not being a significant factor in Vietnam. Export growth was resilient, at 19.8% YoY (at $154 bn USD by the end of September). Disbursed FDI increased 13.4% YoY in 9M 2017, totaling $12.5 bn USD, while registered FDI hit $21.3 bn USD (+29.8% YoY) which ensures further growth for disbursement in Portfolio investment also rallied 64% YoY, at $4.16 billion USD, according to the Ministry of Planning and Investment. International tourist arrivals reached 9.4 million, i.e. increasing +28.4% YoY, becoming one of the world s fastest growing countries for tourism. Page 2

3 VND and regional peers vs USD (rebasing 5 years) Vietnam international tourist arrival % VND THB MYR PHP IDR 12 Visitor Arrival (mil) Visitor Arrival (YoY growth) 80% 50.00% 10 Visitor Arrival: China (YoY growth) 60% 40.00% 8 40% 30.00% 6 20% 20.00% 4 0% 10.00% 2-20% 0.00% 10/1/ /1/ /1/ /1/ /1/ % (9M) -40% Source: Bloomberg, SSI Research Source: GSO Mixed domestic factor On the consumption side, performance is positive year to date as Vietnamese consumption preferences and tastes continue to develop. Final consumption increased 7.3% YoY, with retail sale real growth (excluding inflation) being still slightly higher than last year (9.2% vs 9%). On the investment front however, we see investment overall is still making gains, as evidenced by viewing the breakdown proportions of total investment in the table below. Disbursements from the state for infrastructure projects is at sluggish pace, (at only 42.4% of the 2017 disbursement plan as measured YTD). Public investment appears to experience lowest growth since 2015 as compared with private investment and FDI. Regulation constraints and the realignments that come with a new political cycle might explain why, and we expect obstacles to be gradually removed by next year. Total investment growth and breakdown (current price) Sept 15 Sept 16 Sept 17 Total investment (YoY growth) 9.6% 9.6% 12.1% State 6.6% 6% 7.2% Non-State 11% 10.3% 15.9% FDI sector 12.4% 14.1% 13.5% Source: GSO Page 3

4 REFORM UPDATE State-owned enterprises and banking reform are in focus, and not just about corruption charges or miscellaneous wrongdoing in relation to Ocean Bank, Construction Bank, PetroVietnam, Vinachem, as well as cases involving local government officials. Specifically in regards to banking system reform, the National Assembly has issued Resolution 42 on bad debt resolution, which superseded a lot of existing laws to empower both banks and the Vietnam Asset Management company (VAMC) in dealing with the debtors to resolve bad debt. We are witnessing more aggressive measures from banks and the VAMC to seize collateral linked to unpaid debt. After the seizure, the assets can be put up for public auction to realize a return on collateral. Regarding SOE reform, this is the first time the government is able to outline a detailed schedule for future equitization (IPO), as well as SOE divestments during the period. The timeline is set, but the pace of actual implementation is slow, as divestment at market prices is not an easy task in finding a happy medium between investors and the SOE. Additionally, current corruption charges in this transitional period weigh on SOE-related investment decisions. Market participants are still waiting for the new government decrees relating to SOE divestment, where a workaround in allowing more flexible divestment pricing to strategic partners, or allowing a book building process to assist in pricing for the SOE equitization and divestment process OUTLOOK To the rest of the year, for 4Q 2017, the government has proved that they could achieve the 2017 GDP growth target. Therefore, further easing in monetary policy (i.e. a policy rate cut, or a higher credit growth target) might not be a very critical tool in the monetary policy toolbox due to inflation concerns. The government might be still working on its regulation overhaul agenda and the guidelines for SOE equitization and divestment to better assist book building and price discovery for strategic and other investors. Key events might include the National Assembly meeting, where discussion on the 2018 socio-economic plan will be taking place, or the upcoming APEC summit in Danang in November, where we might see a deal on the TPP regardless of US level of participation. Here are our thoughts for 2018 outlook: Resilient GDP growth Growth for Vietnam in 2018 is projected to be strong, especially given the fact that Vietnam might be able to tweak total investment growth optimized to a desired level. First, private investment will likely maintain its strong momentum, thanks to better demand recovery, stable interest rate and reaping an early harvest from the expected upcoming administrative measure reforms to remove obstacles on business requirements and conditions. Second, foreign investment disbursement is likely to remain on track, encouraged by recent registered FDI figures having increased around 30-40% from the previous year. For public investment, the current cycle might give way to a new beginning, after legal constraints are eased (with revision to the Laws of Investment and its related guidelines). Credit growth is also playing its part in creating 2018 growth, not only to supplement a lagging positive impact from a more dovish monetary policy stance, but also allowing banks to transition their loan structuring by expanding their retail loan books, which in turn, push domestic consumption to grow even better. SOE IPO and divestment at its peak: We do not believe that the 2017 IPO and divestment plan for SOEs will be achievable. As a big part of the 2017 plan would be carried over to 2018, whereas the 2018 plan is already heavy, we could be witnessing shortly SOE IPO and divestment activities at their peak. For further context, please see the timeline below, and keep in mind a simple caveat regarding pace, as for some companies the Page 4

5 divestments might be gradually completed over a 2-3 year timeframe (whereas for others, full divestment ahead of schedule is the desirable path). The list also does not include some specific SOEs, such as the ones in operation under the Ministry of Police or Defense where divestment decisions would be made later by the relevant authorities Number of enterprises IPOs Divestment Notable names IPOs Vinapaper, MobiFone, Vinacafe, Vinafood 1, Divestment Including Vinataba (tobacco), Song Da Corporation (construction), VICEM (cement), HUD (real estate and construction), IDICO (industrial zone, hydro power), Vinafood 2, GENCO 3 (power generation), Dong Thap petroleum trading (petroleum retailer), Hapro (Hanoi trading corporation), Khatoco, Becamex, and Thalexim. The plan does not include Binh Son Refinery, PV Oil or PV Power, entities of which might execute their IPO later this year VEAM (the SOE owns Toyota, Honda, Ford stakes), Seaprodex (fisheries), Vinasugar II (sugar), DVN (pharma), Song Hong Corporation, Hancorp, BDCC, CC1, VNCC, Licogi (construction), FICO (construction material). VTC, GENCO 1, GENCO 2, Handico, Hanoi Tourist, UDIC, Hapulico, Hawacom SATRA, SJC, Saigon Tourist, Ben Thanh group, RESCO, and Sawaco Petrolimex (PLX), Vinaincon, MIE, ACV, DVN, Lilama, VNCC, BDCC, Hancorp, VGC, Vinatex, Vinasteel, Cienco 5, Cienco 8 Agribank, VNPT, Vinachem, Vinacomin, and Dofico. Vinaincon, MIE, ACV, Lilama, VGC, Ha Long fisheries VEAM, ACV, Vinasteel Source: Vietnam government website Bad debt resolution to follow a more realistic path The establishment of the Vietnam Asset Management Company (VAMC) bought banks some additional time to resolve their bad debt, but we believe that Resolution 42 (discussed above) will be the real tool to effect a real change on cleaning up the bank balance sheets. In short, bad debt recognition is greatly improved (as the central bank estimate for NPL is now higher than IMF estimates, i.e 10.08% vs 8.4% - as in the table below). Bad debt resolution is a critical issue, given the fact that VAMC could resolve only 20% of its purchased bad debt since Any success in this regard would be a major step towards better preparation for Basel II implementation, as well as to maintain resilient credit growth. Unit: VND trillion Total loans Bad debt Bad debt breakdown NPL ratio Reported bad debt Sold to VAMC Restructured loan* Dec-16 Jun-15 Total banking sector % 12.70% State owned banks % 13.70% Private banks % 11.70% *From the decision 780/QD-NHNN in 2012, the central bank allowed banks to restructure short term loans (mostly potential bad debt) to medium and long term loans without reclassifying this loan to bad debt. This decision expired in Source: IMF Page 5

6 Growth with a double edge; downside risk is not minimal High growth in 2017 is associated with a proportionate level of risk, especially in the context of reforming the whole economy. An underdeveloped capital market has placed too much pressure on demands for credit growth, as bank loans are the major source to finance capital expenditures or business expansion, i.e the chalice of growth. Given that commodity prices are bouncing back, poorlymanaged credit growth could drive inflation higher, and pose a challenge to Vietnam s hard won macroeconomic stability. Credit/GDP at the current pace could easily hit 150% or more, and Basel II implementation (by 2020) or a failure to recapitalize the banking system could hinder growth potential. Last but not least, as public debt is hitting the 65% of GDP threshold, sourcing capital to finance the country s huge demand for infrastructure development would be quite a headache. However, for the public debt, as the larger part is funded domestically (and the target is less external, more domestic debt), and for the bank loan, more retail, less corporate, so we believe that the risk profile might be more manageable and diversified at least in the next one or two years (given the low penetration for retail loans, and the mortgage is rising on its low base, as Vietnam urbanization ratio is still lower than 40%, quite low in comparison with regional peers). Government 2018 plan (first draft, final version might be approved by November) 2018 plan GDP USD 241 bn GDP growth % Export USD 219 bn Export growth 9-10% Trade deficit/export 3% Total investment/gdp % State budget revenue USD 59 bn State budget expenditure USD 67.4 bn Budget deficit/gdp 3.50% FDI disbursement USD 16.5 bn ODA disbursement USD 4.5 bn Source: MPI Government GDP forecast for 3 scenarios, Period Business-As-Usual scenario Low scenario High scenario % 6.20% 7.40% % 6.00% 9.00% % 5.60% 8.70% % 5.10% 7.20% Source: MPI Page 6

7 SSI KEY MACRO FORECAST F 2018F GDP growth (%- 2010p) Agriculture (%) Industry & Construction (%) Construction (%) Manufacturing (%) Service (%) Retail Sale (%) Industrial Production Index (%) CPI (average, % YoY) CPI (year-end, % YoY) Exports (USD bn) Imports (USD bn) Trade Balance (USD bn) % of Export 0.70% 0.68% 1.33% -1.97% 1.52% -1.58% -1.84% Exchange rate (USD/VND) 20,900 21,250 21,250 22,520 22,790 23,200 23,600 Current Account Balance (USD bn) Foreign reserve (USD bn) Foreign reserve/imports (weeks) Credit growth (%) Deposit rate (VND -%) Page 7

8 1. ANALYST CERTIFICATION The research analyst(s) on this report certifies that (1) the views expressed in this research report accurately reflect his/her/our own personal views about the securities and/or the issuers and (2) no part of the research analyst(s) compensation was, is, or will be directly or indirectly related to the specific recommendation or views contained in this research report. 2. RATING Within 12-month horizon, SSIResearch rates stocks as either BUY, HOLD or SELL determined by the stock s expected return relative to the market required rate of return, which is 18% (*). A BUY rating is given when the security is expected to deliver absolute returns of 18% or greater. A SELL rating is given when the security is expected to deliver returns below or equal to -9%, while a HOLD rating implies returns between -9% and 18%. Besides, SSIResearch also provides Short-term rating where stock price is expected to rise/reduce within three months because of a stock catalyst or event. Short-term rating may be different from 12-month rating. Industry Rating: We provide the analyst industry rating as follows: Overweight: The analyst expects the performance of the industry over the next 6-12 months to be attractive vs. the relevant broad market Neutral: The analyst expects the performance of the industry over the next 6-12 months to be in line with the relevant broad market Underweight: The analyst expects the performance of the industry over the next 6-12 months with caution vs. the relevant broad market. *The market required rate of return is calculated based on 5-year Vietnam government bond yield and market risk premium derived from using Relative Equity Market Standard Deviations method. Our rating bands are subject to changes at the time of any significant changes in the above two constituents. 3. DISCLAIMER The information, statements, forecasts and projections contained herein, including any expression of opinion, are based upon sources believed to be reliable but their accuracy completeness or correctness are not guaranteed. Expressions of opinion herein were arrived at after due and careful consideration and they were based upon the best information then known to us, and in our opinion are fair and reasonable in the circumstances prevailing at the time, and no unpublished price sensitive information would be included in the report. Expressions of opinion contained herein are subject to change without notice. This document is not, and should not be construed as, an offer or the solicitation of an offer to buy or sell any securities. This report also does not recommend to U.S. recipients the use of SSI to effect trades in any security and is not supplied with any understanding that U.S. recipients will direct commission business to SSI. SSI and other companies in the SSI and/or their officers, directors and employees may have positions and may affect transactions in securities of companies mentioned herein and may also perform or seek to perform investment banking services for these companies. This document is for private circulation only and is not for publication in the press or elsewhere. SSI accepts no liability whatsoever for any direct or consequential loss arising from any use of this document or its content. The use of any information, statements forecasts and projections contained herein shall be at the sole discretion and risk of the user. SAIGON SECURITIES INC. Member of the Ho Chi Minh Stock Exchange, Regulated by the State Securities Commission HO CHI MINH CITY 72 Nguyen Hue Street, District 1 Ho Chi Minh City Tel: (84-28) Fax: (84-28) info@ssi.com.vn HANOI 1C Ngo Quyen Street, Ha Noi City Tel: (84-24) Fax: (84-24) info@ssi.com.vn Page 8

9 4. CONTACT INFORMATION Institutional Research & Investment Advisory Phuong Hoang Hung Pham Giang Nguyen, ACCA Deputy Managing Director, Associate Director Associate Director Head of Institutional Research & Investment Advisory SAIGON SECURITIES INC. Member of the Ho Chi Minh Stock Exchange, Regulated by the State Securities Commission HO CHI MINH CITY 72 Nguyen Hue Street, District 1 Ho Chi Minh City Tel: (84-28) Fax: (84-28) info@ssi.com.vn HANOI 1C Ngo Quyen Street, Ha Noi City Tel: (84-24) Fax: (84-24) info@ssi.com.vn Page 9