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 gains 1.5% on SBV rate cut to close at 997 points

Following the State Bank of Vietnam (SBV)’s rate cut amid synchronized global monetary easing, the VN Index advanced 1.5% ($TR) in Sep.  While the Index was lower in the first half of the month despite easing by the US Fed, by month end it managed to surpass the psychological 1,000-point threshold during intraday trading before pulling back slightly to close at 997 points.

Trading value falls, foreign outflow continues

Despite quarterly ETF rebalancing, average daily trading value fell to $174m (-9.3% mom).  Foreign investors remained net sellers for the second consecutive month, withdrawing $17m from the HOSE.  VietJet (VJC) was net bought the most by foreigners ($39m) as it was officially added to offshore ETFs, while Vincom Retail (VRE) was the most net sold ($16m).  The theme of foreign outflow was also observed in other regional markets, including Thailand (-$381m), and Indonesia (-$519m), as foreign investors continue to divert money towards safe havens.

Banks, brokerages, FOL stocks lead; Vingroup-related stocks lag

Banking stocks recorded strong gains, with Vietcombank (VCB) +5.7%, Techcombank (TCB)  +8.6%, and VP Bank (VPB) +8.6%.  And brokerage stocks rebounded sharply after months of underperformance, led by HCM +16.0%, SSI +7.0%, and VCI +4.4%.  FOL stocks continued to deliver solid performance as FPT Group (FPT) and Mobile World (MWG) gained 8.7% and 7.9%, respectively.  Vinamilk (VNM) advanced 7.2% on the announcement that its first batch of dairy products will be exported to China in mid-October 2019.  On the downside, Vingroup-related stocks were among the biggest laggards, with Vingroup (VIC) -3.0%, and VRE -3.9%.

Deal activity picks up on purchase of big Vincommerce stake

Deal activity picked up despite subdued trading.  A GIC-led consortium invested $500m into Vincommerce, the retail arm of Vingroup that operates over 2,200 outlets of minimarts and supermarkets, valuing the business at a massive $3bn.  In other news, Vietcombank is within reach of finalizing an exclusive insurance distribution deal with Hong Kong-based insurer FWD Group, bringing $400m of upfront fee income to be booked in the next few years.

FTSE declines to upgrade Vietnam market

In the latest FTSE review, Vietnam remained just a “candidate” for reclassification from Frontier to Emerging Market status, as criteria on FOLs and clearing and settlement were not met yet.

Vietnam equities cheap on 2020F growth and valuation

While outflow continues to be a risk in the short term given the current global climate, we look at Vietnam as a long-term beneficiary of current trade turmoil.  Looking to 2020, Vietnam continues to offer attractive value for investors at a 2020F PER of 11x on ca 20% estimated EPS growth.

Economic indicators suggest Vietnam is dodging headwinds

Vietnam’s economic indicators improved in 3Q, with strong GDP growth and a decent trade position.  Overall, growth with stability is well anchored, and Vietnam seems, at least for now, to be shielded from the headwinds facing many of the world’s economies.

3Q GDP +7.31% yoy, beating expectations

3Q GDP grew faster than expected at +7.31% yoy, from 6.82% in 1Q and 6.73% in 2Q.  As such, cumulative 9M GDP is +6.98% yoy, the same as that of 2018, but much higher than in 9M17 when it came in at +6.41%.  The stronger-than-expected GDP growth was mostly driven by manufacturing, which rose 12.7% yoy, accounting for around a third of the rise, followed by construction (+9.71% yoy) and trade and retail (+7.49% yoy).  And while the reported number was a positive surprise, we should not get overly excited about it – given that the PMI has fallen for the last two months and came in at just 50.5 in September.

SBV cuts interest rates, but credit growth still lags

The SBV cut repo rates by 25 bps in Sep, and there were another two 25 bps cuts in 7-day treasury bills, which now stand at 2.25%/annum vs 3.0% at the beginning of the year.  While the first move was more of a validation of the SBV’s intention to ease monetary policy since there is no actual OMO activity, the latter will have more real impact as it is 8-10 bps lower than the current 1-week interbank rate.  Nonetheless, actual lending and deposit rates have not come down accordingly, as the need to comply with tougher regulations forces prudent leverage ratios on banks, i.e. short-term deposits as percentage of long-term lending (from 40% down to 30%).  Because of this, credit growth has not shown any signs of picking up, with estimated 9M credit growth of 8.64%, far behind the full-year target of 14%.  We do expect, however, that over 6-9 months, there will be further cuts by the SBV and a reduction in actual deposit and lending rates.

9M19 trade shows $7.2bn surplus vs $6.3bn in 9M18

Inflation has remained stable throughout the year.  Average headline CPI was 2.57% in August, the third straight month of decline.  However, average core inflation inched up to 1.90% yoy, higher than that of August 2018 (1.38%) and August 2017 (1.47%).

Slower state spending good for budget, not so good for growth

On the trade front, 9M numbers came in much better than we expected, with a ytd surplus of $7.2bn vs $6.3bn in 2018.  We expect a decent trade balance for 2019 but don’t expect it to be better than it was in 2018.  Vietnam has risen to being the seventh-largest exporter to the US, from number 12 last year.  This resurrects concern that President Trump might go after Vietnam for unfair trade practices. In Sep, Vietnam’s Minister of Industry and Trade, Mr. Tran Tuan Anh, visited the US for trade talks, and most of the US Department of Commerce’s demands were met at the negotiating table.  Vietnam is also doing a $5bn LNG project with the US, making it clear that it is serious about meeting US concerns about the trade imbalance between the two countries.  So we think the risk of the US targeting Vietnam for trade issues is low.