Vietnam

Vietnam continues to be one of Asia’s most compelling investment stories. With 94 million people – 41% of whom are aged under 25 – this young and dynamic country is the world’s 15th most populous.

Vietnam benefits from excellent demographics, an entrepreneurial culture, abundant resources, a largely coastal population living on its long seaboard, and a strategic location bordering China in the north.

Vietnam’s lower wages and operating costs are allowing it to capture manufacturing business from China. At the same time, newly signed trade agreements and internal reforms are making it ever easier for foreign companies to do business here.

Consistently growing by close to 7% annually, Vietnam is rapidly transforming into an export powerhouse with a thriving domestic consumer market to match. As a place to invest, the country continues to offer extraordinary potential.

VNI edges up by 0.27% in October to close at 998.8

The VN Index edged up by 0.27% (TR$) in October to close at 998.8, supported by positive US-China trade developments and another rate cut by the US Fed, creating easier conditions for the SBV’s monetary policy.  After hitting the psychological 1,000-point threshold early in the month, the VNI fell back on a lack of supporting news.  The gradual release of upbeat 3Q earnings then helped the Index recover towards month end.  Our Top-60 companies reported profit growth of 14% yoy, outperforming the 11% growth of the overall market.

Liquidity weakens as foreign outflows continue

Liquidity continued to weaken as domestic investors sat on the sidelines amid foreign outflows. Average daily trading value slipped to $171.6m (-1.6% mom).  Foreign investors remained net sellers for the third consecutive month, withdrawing $72m from the HOSE, mostly from blue-chips like Vingroup (VIC, -$16.9m), Vinhomes (VHM, -$11.6m), Masan (MSN, -$9.4m), and Hoa Phat (HPG, -$9.1m).  On the other hand, the largest state-owned, non-FOL banks attracted the most foreign inflows:  Vietcombank (VCB, +$9.6m) and BIDV (BID, +$4.3m).

Banks advance, led by State-owned names

The inflows, coupled with positive fundamental developments, drove both VCB and BID to be among the best performers, with VCB gaining 6.8% and BID rising 3.1%.  VCB reported 51% yoy profit growth in 3Q19, while BID surprised the market with its announcement of a big cash dividend that also includes FY2017 retrospectively.  And state-owned Vietinbank (CTG) rose 4.0% on 11% 3Q19 profit growth.  Private banks HD Bank (HDB) and Techcombank (TCB) recorded 6.3% and 1.5% gains, respectively, capping off a strong month for the banking sector.

Blue-chips and property underperform

Meanwhile, most other sectors in the Index declined, from large-caps such as conglomerate Masan (MSN, -5.5%) and insurer Bao Viet (BVH, -3.6%), to the property and construction sector.  Laggards in the property sector included Dat Xanh Group (DXG, -11.5%), DIC Group (DIG, -7.6%), and Novaland (NVL, -6.7%), apart from the bright spot Khang Dien House (KDH, +2.7%).  The biggest construction contractor, Coteccons (CTD), was the worst performer of October, losing 16.8% on disastrous 9M19 results as profit plunged 60% yoy.

Vietnam equities cheap on 2020F growth and valuation

While foreign outflows have been a concern in the last few months amid volatile global markets, the 3Q results further solidifies our conviction that Vietnam is currently one of the best value opportunities.  At 2020 EPS forecast to grow at over 18%, the market is trading at an undemanding forward PER of 11x, among the cheapest among its peers – on superior growth.

October economic data on balance strong

Vietnam’s October economic data were strong although there were contradictory readings between the PMI and the IIP.  And the CPI was slightly higher while forex reserves hit an all-time high.

Manufacturing indicators mixed as growth slows

The October PMI slipped to the 50.0-point no-change mark, ending a 46-month run of expansion in the manufacturing sector.  While new order volumes continued to rise, the rate of growth was marginal.  In contrast to the PMI, the IIP reported by Vietnam’s General Statistics Office grew by 9.2%, even faster than the 7.7% recorded in October 2018.  The Manufacturing IIP led other sectors with 10.8% yoy growth vs 10.1% in the same month last year.  As such, what we are likely seeing is a growth slowdown rather than anything more concerning.

Headline CPI rises 0.59%; forex reserves hit high of $73bn

The headline CPI rose 0.59% mom on a 7.6% surge in the pork price, which accounted for over half of the rise.  Still, average 10-month inflation remains benign at 2.48% yoy.  Average core inflation remains more or less unchanged at +1.92% yoy.  Meanwhile forex reserves hit an all-time high of $73bn by end-October.  The central bank has done a great job in maintaining the dong’s stability amid large swings by some regional currencies.  With a very low risk of inflation and a stable currency, the Government targets to lower lending rates by 50 bps in 2020.

2018 GDP revised up from $242bn to $302bn

2018 GDP was revised up from $242bn to $302bn, bringing GDP per capita from $2,600 to $3,040.  The revision will not be officially applied until 2021, however.  It might be speculated that GDP was revised up so that the Government could increase borrowing, but this is not the case.  Without the revision, Vietnam’s 2018 debt/GDP ratio was only 58.4%, down from 63.6% in 2016, and until September 2019 the Government even paid off more than $1.4bn in both domestic and foreign debt.  As such, the latest debt/GDP ratio is much lower than the ceiling of 65% imposed by the National Assembly.  In fact, in this low-rate environment, we would actually prefer the Government to increase its leverage and accelerate infrastructure spending.

Moody’s puts Vietnam under review though downgrade unlikely

On 9 October, Moody’s put Vietnam under review for a potential credit rating downgrade, referring to a delayed payment on a Government-guaranteed debt.  Moody’s noted that there would be “no or minimal losses for creditors” but emphasized “the underlying institutional weaknesses that the delay represents”.  This could turn out to be a good thing for Vietnam as it could be a wake-up call for the Government to accelerate its clearing of legacy debt and increase institutional strength and transparency in order to foster investor confidence.