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.

After early surge, VNI sheds 2.6% in November to close at 971

The VNI surged 3% in the first few days of November before turning around and grinding steadily lower for the rest of the month to close at 971, down 2.6% in $TR.  The early rise was largely due to a surprise announcement of share repurchases from mega-caps Vinhomes (VHM) and Vincom Retail (VRE).  Market sentiment then soured on news of Heineken’s divestment from Sabeco (SAB) and IFC’s divestment from Vietinbank (CTG), where both have been major foreign shareholders for a long time.

Trading value rises while foreign selling continues

Liquidity picked up as average daily traded value increased to $202m (+18% mom).  Selling pressure from brokerage proprietary trading intensified during the month, exacerbated by foreign investors, who continued to net sell for the fourth consecutive month, withdrawing a further $46m from the HOSE.  Foreign investors withdrew $30m from Vinamilk (VNM) and $25m from CTG.  Both stocks were among the worst performers, dropping 6.5% and 7.1%, respectively.  Other underperformers included SAB, down 13.2% due to Heineken’s divestment, and Mobile World (MWG), down 12.5% from increased uncertainty surrounding the breakeven of its grocery chain.

2019 share buybacks support market

Taking advantage of declining share prices, a number of blue-chip companies have been buying back their shares this year.  Throughout 2019, company buybacks (as well as insider purchases in the case of HPG and MWG) in the range of around 2% of total outstanding shares were made by Military Bank (MBB), Vietjet Air (VJC), VPBank (VPB), and more recently, Vinh Hoan (VHC) and HDBank (HDB).  This has helped to offset the challenging foreign flow situation.  VHM and VRE enjoyed gains of 3.3% and 3.8%, respectively, after the announcement of their buybacks as foreign investors piled into the stocks, making them among the best performers of the month.

M&A deal of the year: Vincommerce and Masan Consumer

In an eventful month for the Vingroup family, 65% of Vincommerce, its retail arm, was sold to Masan Consumer (MCH) in a share swap deal.  While details remain unknown, the combined entity will own 2,600+ stores and have 20+ years of experience in consumer goods retailing.  While the long-term potential of the venture looks good, we need to stress the short-term challenges facing the business as Vinmart is currently incurring annual losses of over $200m.

Vietnam cheapest among peers with highest growth

The foreign outflows of the last few months have set up a good buying opportunity for patient investors:  Our Top 60 stocks are trading at a 2020F PER of 11.1x, cheapest among regional peers, on 16% EPS growth, highest among regional peers.

2020 should be another good year for Vietnam’s economy

This report provides our economic outlook for Vietnam for 2020, which we think will be another good year.  GDP is expected to grow by 7.1%, along with an improvement in trade, a cooling of inflation, and a stable currency.  And lending rates are expected to be reduced by 50 bps.

GDP should grow by 7.1% on infrastructure spending and FDI

We believe GDP can continue to grow at around 7%, with a recovery in infrastructure spending and lower lending rates being the strongest drivers.  2019 was a year in which the Government focused on legislation revision, with many new laws set to come into effect in the next 2-3 years.  During this period of intensive legislation, disbursement for infrastructure projects essentially came to a standstill.  As of 15 Nov 2019, investment and development expenditures had declined 4.6% yoy and fulfilled only 53.3% of the State’s full-year plan.  We believe that infrastructure spending has troughed and will pick up from here.  We also expect a J-curve growth in production from FDI, after 2019 was a year of relocation and setting up of capacity.

Sustained trade balance with improved trade activity

As such, we expect export and import growth to increase slightly to around 9% yoy, with the trade balance remaining at this year’s level.  We have a slightly different view on FDI disbursement, with our 2020 forecast being lower than this year.  Vietnam’s FDI inflow to GDP is estimated at 7.5% in 2019, which is the highest rate in the world.  In the coming years, Vietnam intends to be more selective in choosing FDI projects with more value addition and skill transfer.

Cooling inflation and stable currency

We project inflation at 3.5% for 2020, down from end-2019, as the impact of higher pork prices has already been factored in.  And although net FX reserves are not expected to increase as much as in 2019 when a lot of major equity deals took place, we believe that the trade balance and FDI inflows will still support the currency at a stable VND/USD rate of 23,300.

Lending rate expected to fall by 50 bps while VGB yields inch up

The lending rate is expected to be lowered by 50 bps, reflecting the monetary easing measures – after a period of lagging them.  During 2019, the rate of the 5-year VGB fell by 250 bps but lending rates actually increased slightly.  The VGB rate decline resulted from ample liquidity in the system resulting from slow public spending, new banking regulations with stricter risk asset weightings triggering banks to buy more Government bonds, and significantly lower net issuance of VGBs.  Monetary easing was also indicated by the Central Bank cutting its policy rate, but this was not immediately reflected in the economy.  We believe that the issue is recognized and there is a strong intention by the Government to lower the lending rate by at least 50 bps.