Sector Report

Sector Report
Vietnam Power sector update: More of dividend yield play rather than growth thesis

Power consumption growth weakened since Oct’22, as exports and Index of Industrial Production growth (IIP) slowed. In Nov’22, power demand growth decelerated to 2.4% YoY despite the Nov’21 low base. Further, IIP growth decelerated to between 5.3% -5.5% during the Oct-Nov’22 period compared to 10.3% in Sep’22.

Nationwide power demand in 2023 is forecasted to decelerate to 5% growth on the back of between 6.0%-6.2% GDP growth. To recap, our 2022 projection for power demand and GDP growth is 6.4% and 8.0%, respectively.

Hydropower power conditions could remain positive through 1Q23 and then turn into less favorable since 2H23, according to NOAA. We thus think that it might not be fancy for REE as more than a half of REE’s NPATMI could be driven by hydropower segment.

CGM prices are expected to be flat in 2023, as higher demand for thermal power should offset weak nationwide demand.


Vietnam Banking sector Update: A thorny path ahead

Conditions in the property and corporate bond market have rapidly deteriorated, and the government seemingly has the political will to make these markets more transparent and law abiding. Coupled with credit limitations and a rising loan rates, liquidity constraints at domestic developers have exacerbated the risk. Our credit risk concerns related to the aforementioned have materialized sooner than we had even expected, and as result, we downgrade the overall banking sector from Neutral to Underweight. Long-term investors should hold off until the pig is through the python, which we don’t expect to be fully discounted until sometime over the next 12 months. Despite the market’s overarching concerns, our earnings projections for 2023 exhibits that banks are poised for growth to VND 231 tn in aggregate (+10% YoY from +17% YoY in previous estimates). Banks projected to have the highest earnings growth are the three SoCBs, STB, and ACB. Our base case suggests that the banks will extend/allow rescheduling of loans/bonds issued by large developers (eg. VIC, NVL, Sovico, MIK Group, etc.) and maintain their current loan classification through 2023. Loans to move to riskier debt groups would include smaller and non-listed developers. Any possible haircut to bank book values caused by this risk has been applied to our covered bank target prices.


Vietnam Property sector Update: Market facing an elevated risk

As stated in our previous report, we continue to maintain our view that the Vietnamese property market will face many headwinds in 2022 and 2023. Given recent escalation in terms of the government’s crackdown of misconduct in both the property and stock/bond market, our view is that the characteristics of market liquidity will see significant changes ahead. From our discussion with many developers such as NVL, DXG, HTL, NLG, DIG, KDH, HDG, VPI, and others, we learned that these firms had announced to postpone their sales plan, capital raising, and/or IPO activities to 2023, in the view that better market conditions might materialize in 2023. That said, optimism is present, but tempered. Most developers’ base case is the outlook for 2023 to be still difficult for project development, and the real estate market might need 1-2 years to gradually recover.  As such, a situation of a prolonged project pipeline experienced by many real estate developers in the industry will affect their financial plans and cash flows in the coming years. Considering all factors, we see negative sentiment prevailing in the sector at the current time. We accordingly maintain an Underweight position for the sector.


Update on the exchange rate movement and impact on listed companies

The SBV has officially widened the USD/VND trading band from 3% to 5% for the first time since 2015, and raised the ask-price at the exchange to VND 24,380 (+1.9%). The announcement is largely in response to heightened pressure from last week for the SBV to support VND-denominated liquidity amidst the currently strong USD backdrop. USD/VND quotation at banks immediately increased to around VND 24,500 (+1.1% vs last week’s level). Year-to-date, the Dong has lost nearly -7% - marking the largest depreciation since 2012. Despite strong domestic fundamentals, the VND has not been spared from the broad-based Asia FX rout, triggered by aggressive Fed rate hikes and follow-up action by other central banks of major trading partners.


Vietnam Textile and Garment Sector Update: Expecting headwinds until 1H23

To conclude, we are of the view that order shipments will continue to be impacted by inflation and recession concerns through 1H23. We expect orders to improve between 2Q23 - 3Q23 provided inflation eases. While improved raw material prices should have a positive impact on gross profit margins, ASP too is being squeezed due to retailer pressure. As 1H22 was essentially a high base for most local textile and garment producers, we expect these companies to see a sales slump and net losses in 1H23.  We recommend to Underweight the sector.


Vietnam Seaports and Shipping Sector Update: Headwinds of faster-than-expected slowing global demand in 2023

Several derogatory changes have occurred in the Seaports & Shipping Sector since our last note, with the situation rapidly deteriorating tracking global economic trends. Shipping volume has decelerated, whilst freight rates likely will remain under pressure through 2023. Given our significantly less sanguine outlook on the sector, we revise our estimates for HAH and GMD and anticipate a deceleration in NPATMI growth figures to -12% YoY and +7.6% YoY, respectively, for 2023. Over the short-term, they will continue to perform well in 2H22 with strong 2022 NPATMI growth figures numbers for HAH (+96% YoY) and GMD (+49% YoY). As stock prices have largely corrected, we maintain our OUTPERFORM ratings for both HAH and GMD, and we reduce our 1Y-TPs to VND 54,000/share (from VND 84,500/share) and VND 55,600/share (from VND 65,000/share), respectively.


Vietnam Property Sector Update: Potential impact from Decree 65 on corporate bond issuance

We maintain our view of underweight for the sector, especially for those developers who have a weak financial status, and those of which were unable to adequately manage presales to capture sufficient cash inflows. On the other hand, large reputable developers who have available land plots for immediate sales of units to homebuyers may still be able to diversify their funding sources in time. At any rate, a further discount for homebuyers/ investors right now is likely, as purchasers are still taking a conservative tack given the current state of real estate market sentiment.  


Vietnam Pharmaceutical Retail Update: A transition towards modern trade

Pharmaceutical retail chains have witnessed aggressive network expansion over the past year. This can be explained by a trifecta of factors: (1) modern trade drugstores gained share from traditional drugstores, as the government gradually places more rigorous regulations on pharma retailers (tighter control over prescription drugs and implementation of electronic prescriptions); (2) the drugstore channel may have taken share from the hospital channel, as public hospitals have become more cautious when bidding for drugs; and (3) the increase in spending on vitamin/supplements to maintain good health given this year’s pivot in Vietnam toward the "live with COVID-19" mantra. We believe that pharma retail chains will benefit from this trifecta which is still very much in play. We continue to believe that retail pharmaceutical companies will maintain their pace of new outlet openings in the near future.


Vietnam Power Sector Update: To narrow the ASP gap between gas-fired and coal-fired power plants
Nationwide power demand was +14.7% YoY in Aug’22 and +6.5% YoY through 8M’22 - much better than the 1H’22 increase of +3.8% YoY. 
According to NOAA, hydropower conditions could be less favorable in 2023. Sales volume from thermal power plants, especially gas-fired, could be enhanced.
Thermal coal prices escalated while gas prices reverted. The gap in average sales price (ASP) between gas- and coal-fired has narrowed, making gas-fired more competitive.
We increased our CGM price forecast 5% to VND1,370/kwh due to the positive move through 8M22. The estimated CGM price in Aug’22 was approx. VND1,390/kwh (+4% MoM & 39% YoY). The 8M’22 average was VND1,427/kwh (+35% YoY). Given the thermal coal price hike and resumed nationwide power demand, CGM prices could remain high.
Gas price downtrend could be the largest catalyst for NT2. By increasing sales volume 7% and CGM price 5%, we upgrade NT2’s FY22E NPAT by 12% to VND835bn (+58% YoY). Approx. VND 240 bn of the 2015-2019 FX change could be claimed from EVN during 2H22. Amid the risk of a lending rate hike, NT2 has the lowest net debt/equity ratio and could be perceived as a safe haven. Our 1Y TP for the shares of NT2 is VND31,950 (+15% upside), representing a 22% ROI. At our TP, the implied FY22E EV/EBITDA of 5.9x is a 33% discount to regional peer. We thus upgrade to Outperform rating (from Market perform).


Vietnam Sugar sector Update: Anti-evasion measures for imported sugar become effective

The Ministry of Industry and Trade (MOIT) has officially applied anti-evasion measures (Decision 1514/QD-BCT) on imported sugar from five ASEAN countries (Indonesia, Malaysia, Cambodia, Laos, Myanmar). The implementation was applied between Aug 8, 2022 through Jun 6, 2026. The applicable tax rates for Thai sugar equate to 42.99% for the anti-subsidy tax, and 4.65% for the anti-dumping tax. The total tax rate imposed is 47.64%, applicable to almost all sugar exporters from these five countries that used sugar raw material of Thai origin.

According to the Vietnam Sugarcane & Sugar Association (VSSA) and Vietnam Customs, since the implementation of ATIGA on Jan 1, 2020, imported sugar from Thailand had reached 1.2 mn tons (+330% YoY) in 2020, and accounted for roughly half of the sugar supply in the Vietnamese market (between 2.1-2.3 tons per year). Further, since being investigated and taxed on AD-AS, Thai sugar exports have been indirectly exported via five ASEAN countries. According to Vietnam Customs, imported sugar from five ASEAN countries reached 865k tons (+280% YoY), while sugar exported from Thailand to Vietnam decreased to 370k tons (-70% YoY) in 2021. We expect that the MOIT's newest measures will help to increase domestic sugar competitiveness and domestic production over the long-term due to the Thai sugar import restrictions and the supply shortage in Vietnam.

Stock recommendation: We reiterate our Outperform rating on the shares of QNS with a target price of VND 59,800 per share (+23% upside, total ROI of 29%). In 2023, we expect QNS's NPAT to be VND 1.6 trillion (+16% YoY), with earnings from the sugar and biomass segments contributing VND 402 billion (+30% YoY). QNS's refined sugar gross profit margin will rise from 27.3% in 2022 to 29.1% in 2023.


Vietnam Seaports & Shipping Sector Outlook 2H22 & 2023: Long-term outlook is driven by Vietnamese export growth

The Covid-19 pandemic appears to coming to an end, yet its remnants continue to place stress on the global economy. The Russia-Ukraine war has only exacerbated a stressful economic period. Rising inflation amid a gloomy growth outlook could seriously impact the global consumer demand, with goods transport activities being no exception. As an open economy, Vietnam can hardly avoid these consequences.

Container shipping demand could be decelerating, while oil & gas transport demand should accelerate. Container shipping freight rates are expected to gradually normalize, however, this path largely depends on supply chain congestion, which we expect to remain unresolved until 2H2023.

We expect tanker shipping companies to enjoy positive earnings momentum (PVT, VOS). Container shipping companies’ earnings growth could decelerate but earnings should remain robust through 2023 due to renewed long-term charter contracts and a stable domestic market (HAH). For port operators, earnings growth should remain constant for deepwater ports (Gemalink, HICT) while others could face downward pressure.

Our top picks for the sector include: PVT, HAH, and GMD


Vietnam Industrial Parks Update: New regulations bringing a more efficient sector

Demand for IPs lease land in Vietnam continues to grow. The opening of international flights comes at a time Vietnam has scrapped the majority of entry restrictions into Vietnam. This has supported the business environment in terms of enabling contracts, MOUs, etc. to be signed at a reasonable pace again to help facilitate the completion of investment procedures. The exchange rate of the Vietnam Dong has been trading a lesser depreciation band than other regional countries such as Indonesia, Thailand, India, and Malaysia, and other key APAC markets such as Japan. Vietnamese policies to attract FDI have also helped bring investors back to the fray, providing FDI investors with incentives such as corporate income tax exemptions for the first 4 years of operation, reduction of 50% of corporate income tax for the next 5 years, and other pro-business incentives. And of course, the ongoing megatrend of the production shift from China to Vietnam has been a constant dynamic, and further accelerated by China’s Zero-Covid policy.


Vietnam Banking Sector Update: Change in legal framework to reshape sector's competitive landscape

The unexpected Russia-Ukraine war and the influence of the Chinese lockdown from its zero Covid policy have resulted in new challenges to the global economy. Disrupted supply chains, commodity price escalation, and flagging currencies have resulted in major challenges - and opportunities alike. Inflationary pressure (and the associated tendency of central banks to raise interest rates to control said inflation) have greatly affected the global financial market, and Vietnam has been no exception. The crackdown on corruption coupled with the recent strict controls imposed on property sector lending and the corporate bond market has had a much more severe impact than what we had previously anticipated. A series of new regulations and draft changes to previous Decrees/Circulars have been released, rendering altering market dynamics. Over the short-term, we believe that banks will be able to deliver strong earnings during 2H 2022, given the upcoming credit limit extension (as conditionally permitted) by the SBV, and a stable NIM vs. 2021. However, we anticipate medium-term challenges with respect to the corporate bond market. We do, however, remain positive about the sector’s earnings outlook over the short-term, and remain Neutral on the sector for 2023.


Vietnam Food & Beverage Sector Outlook 2H2022-2023: Time to stay defensive

Within a 1-year time horizon, we view defensive stocks to be a good investment during a period of high inflation and tight monetary policy. We like companies that can achieve both top-line resilience and margin improvement, including: SAB, VNM, QNS, MSN (MCH). We suggest investors revisit the de-rated VNM, as we expect the company to post 11% net profit growth in 2023 after two years of declining earnings (2020-2021) resultant of single digit sales growth and margin expansion on lower milk powder prices. We also like the shares of QNS as a consumer company due to its relatively inexpensive valuation and stable cash dividend. Further, we are hopeful that the conclusion of the investigation on Thai sugar tax-avoidance on the 21st of July. Should the outcome be favorable to Vietnamese sugar companies, it would serve as a long-term catalyst for the industry. For SAB, in 1H23, we expect higher growth for both top line and bottom line as compared to 1H22 thanks to the full reopening of HORECA channels and foreign tourist. In the context of inflationary pressure and income suffers, SAB with a high proportion of standard beer might benefit. On the cost side, declining commodity costs (malt, hops) will help beer companies expand margins. 



Update on fishery sector and VHC

Vietnamese fishery exports over the first five months of the year reached USD 1.06 bn (+34.5% YoY), whereby shrimp and pangasius exports reached USD 457 mn (+31% YoY) and USD 248 mn (+67% YoY), respectively. The largest export markets were the US (23% of total exports, +34% YoY) and China (16% of total exports, +71% YoY). Shrimp and pangasius ASP to the US reached USD 12/kg (+20% YoY) and between USD 4.50 – USD 5/kg (c.+60% YoY), whereas pangasius ASP to China reached USD 3.10/kg (+20% YoY). Coupled with the strong and resilient demand from major export markets, demand was also driven by pent-up orders associated with the production restraint during 2H21 from Vietnam Covid-19 lockdowns. There have been signs of a slowdown since May 2022, as inventory levels in export markets are high at this point.