Sector Report

Sector Report
Vietnam Aviation Sector Update: Flight time is now

Specifically, in 2023, we witnessed 114 mn of passengers (-2% vs 2019 level) passing through all Vietnamese airports, with 81 mn of those passengers through the domestic terminal (+10% YoY) and 33 million through the international terminal (-23% vs 2019 level). 1Q 2024 recovery is even more impressive, with international passengers reaching 10.5 mn pax +47% YoY, and already back to 1Q 2019 level, marking full recovery for the international segment. This pace of recovery is in line with other economies in the region, with the only segment waiting for full recovery being China (at 83% of 2019 level at the time of our writing). In our Strategy Note in the beginning of the year, we target 2024 as the final recovery year for the sector, and the story from 2025 onwards would switch from recovery theme back to long-term growth trend for the sector.

We maintain our Outperform rating for ACV (OUTPERFORM, TP VND 136,000/share) and AST (OUTPERFORM, TP VND 72,300/share) thanks to their ability to capture earnings growth consistently from international passenger growth in the next few years. We also rate Market Perform for HVN (Market perform, TP VND 27,400/share) and SCS (Market perform, TP VND 92,700/share) and keep VJC at Non-rating.


Container shipping update: Global supply chain disruption escalates into high season

The WCI is recently up by 181% YoY and 232% higher than average 2019 rates while the 1700-TEU time charter rate is up by 90% YTD. This rally derives from both supply and demand side. From the supply side, the consequences of ship diversion from the Red Sea has emerged gradually at all points of the supply chain that we start to see port congestion in key ports hub like Singapore, Dubai or Rotterdam. Container imbalance also leads to signs of container shortages in some key ports in China, further pushing up freight rates. From the demand side, we think that it inventories restocking activities from 1Q 2024 and surging shipping demand from China to the rest of the world, especially the US have led to the strong increase in container shipping freight.


Vietnam potential upgrade to market economy status and impacts on exporters

On the 8th of May, the US Department of Commerce (D.O.C) heard the testimony between Vietnamese government representatives and U.S industry and labor representatives regarding the pending upgrade decision to elevate Vietnam to market economy status. For the background information, Vietnam is currently on the US D.O.C list of 12 non-market economy countries for purposes of its application of US antidumping (AD) and countervailing dumping (CVD) laws. The upgrade was in discussion between Vietnam’s Ministry of Industry and Trade and D.O.C since 2019, but only tangible on the agenda since the Biden administration. This has been in the works a long time now – the U.S D.O.C initiate from Oct 2023 and by schedule, is expected to announce the final results on 26 July 2024. Details from surrounding discussions are quite neutral on the reclassification. Some supportive voices are the National Retail Federation or Samsung Electronics America, but many are against such as Alliance for American Manufacturing or the United Steelworkers (USW) union. It also needs to pass potential legal challenges in the U.S. as well. Please keep in mind that in 2016, for similar reasons, the DOC rejected China’s application for the reclassification.


1Q24 Banking sector results: Squeezing Lemons

The results for banks in our coverage universe were generally in line with what we had anticipated. Earnings recovery was slow (+8.3% YoY and +4.6% QoQ), as NIM continued to be under pressure (-8 bps QoQ) in a weak credit demand environment (+2% YTD or 15% YoY). Meanwhile, asset quality deteriorated after a brisk seasonal improvement in 4Q23. The deterioration, however, was at a greater magnitude than we expected. At 1Q24, special mention loans (SMLs) and NPLs to total loans were 2.23% (+24 bps QoQ) and 1.94% (+23 bps QoQ, close to the 3Q23 high of 1.98%) respectively. The good news is forex trading gains partly offset stagnant bancassurance sales and weak write-backs. In addition, banks in general successfully curbed OPEX, with a CIR of 30.7% (vs. 31% in 1Q23 and 36% in 4Q23).


Vietnam Textile & Garment Sector Update 1Q2024: Retailer uncertainty on demand outlook

During 1Q24, Vietnam textile and garment exporter proceeds reached USD 7.8 bn (+9% YoY), in line with the VITAS export forecast growth of 9% YoY for 2024. The growth in 1Q24 (+9% YoY) was driven mostly by volume due to the low base effect in 1Q23 (-17% YoY), indicating that the recovery has started slowly. We note that ASP was flat QoQ and decreased YoY for 1Q24, and weak ASP should remain through 3Q24. We maintain our view that export recovery will come during 2H24.

The value of apparel inventory in the US market remains high. Brands’ inventory by value was still higher than during the 2019-2020 period, and fashion brands sales growth (such as Nike, Adidas) is mostly mid-single digit growth for 2024.

Impact of USD/VND depreciation: During 2023, USD/VND decreased by 3% YoY, we saw that most export companies, such as TNG and MSH, recorded net exchange gains, accounting for between 14-16% of PBT. We expect that these companies will continue to benefit from USD/VND depreciation. During April 2024, The USD/VND declined almost 4% YTD.


Vietnam Banking Sector Update: Fundamentals should start improving from 2H24

We have begun to witness some initial signs of a better-than-expected recovery in the secondary property market, along with an improving macro backdrop during the first quarter of 2024. There were more transactions in the secondary property market given the extremely low introductory mortgage teaser rates (4.8% to 8%) offered during the first 1-2Y of the loan contract (avg. duration of 20 years). Condo prices in Hanoi and Ho Chi Minh City increased between 10-20% YoY during 1Q23. Although we have not seen this dynamic spreading yet to the primary market, this is still a positive sign as: (i) the value of loan collateral might not decrease as we had previously expected; and (ii) the improved state of market liquidity likely will support bank sale of collateral if necessary. In addition, manufacturing data is exhibiting some encouraging signs in the form of industrial production data. We expect similar results in consumption data later in the year. We believe that even in the case where recovery maintains its steady pace, it will still take some time to be reflected in bank fundamentals. The earnings trend for the banking industry during 1Q24 is expected to be in line with our expectations. We foresee a modest earnings growth range of 5 – 8% for banks under our coverage, given that credit growth only accelerated toward the end of March, while fee-based services remain sluggish. We expect that fundamentals might improve during 2H24 of lower-than-expected NPL formation, NIM improvement, and stronger-than-expected writebacks. We broadly maintain sector-wide earnings forecasts for FY 2024.


Block B – O Mon megaproject progress update

Last week, PetroVietnam Group (PVN) along with other investors and partners of Block B – O Mon gas-fired electricity megaproject has held a ceremony to sign several contracts, which is a significant move to reach the final investment decision (FID) for the project. Contracts signed include GSPA (gas selling and purchasing agreement, between upstream and midstream), GTA (gas transporting agreement), and GSA (gas selling agreement) for O Mon 1 power plant. After the signing ceremony, MOECO (investor of upstream and midstream parts) has immediately announced reaching FID for the upstream and midstream investment of the project, which we think is another major development, as it shows MOECO confidence in the profitability and feasibility of the project.


Vietnam Industrial Parks Sector Update: Conversion of Rubber Plantations to Industrial Parks

The supply of industrial parks in southern Vietnam during 2021-2030 likely will continue to come from converted rubber land. According to the industrial park (IP) master plan for Dong Nai province, industrial park area approved by the Prime Minister for rubber land conversion aggregates to 6,760 ha (accounting for 91% of the total area of IP) by 2025, and 2,000 ha between 2025- 2030 (accounting for 48% of the total area of IP). In addition, the total area of rubber land converted into industrial parks in 2025 in Binh Duong, Binh Phuoc, and Ba Ria Vung Tau is estimated at 3,084, 2,994, and 3,933 ha, respectively. We believe that conversion of rubber land into industrial park land has the following advantages: (i) large land tracts allow for a rapid land compensation process for land clearance; (ii) legal procedures for land valuation have clear guidance according to Decree 12/2024/NĐ-CP; and (iii) construction costs are low due to the firmness of the soil for land used by rubber tree plantations.


Vietnam Banking sector quick note: Reinforce financial guardrails for banks

As the Law on Credit Institutions was passed by the National Assembly in Jan 2024, there will be some guiding documents proposed, including 2 Decrees and 4 Circulars, in April. Recently, the SBV drafted some amendments to current circulars on operational safety ratios (Circular 22/2019 and Circular 23/2020) and on lending activities (Circular 39) to be consistent with the new law. Our key takeaway from the key revision: The amendments for Circular 39/2016 showed SBV’s determination in keeping a strict management perspective on the lending activities to borrowers whose purpose is to make deposits under land/project transferring contract. Accordingly, the clause on putting such disbursement into an escrow account was kept unchanged in this new draft, opposing to what has been protested by developers. There were also stricter requirements on disclosing related parties in the loan contract to address the issue of related lending activities. These are in line with our expectation that one of the key focus of the SBV in the coming time would be mitigating related lending activities to ensure the system’s safety with lesson learnt from the SCB – Van Thinh Phat case. Although the purpose of this clause is clear, effective enforcement essentially hinges on both the truthful statements of the borrowers, as well as the time & efforts from banks in verification processes.


Vietnam Aviation Sector 2024 Outlook: Full recovery in sight, valuation below pre-COVID level

2023 was the year that the global aviation industry returned to pre-pandemic activity. According to IATA, industry-wide passenger traffic measured in revenue passenger-kilometer (RPK, a measure of demand for air travel) grew +40% YoY during 9M 2023 and has reached 93% of pre-Covid levels.

Vietnam aviation has also witnessed a very impressive recovery during 2023, despite China international passenger slow recovery. According to ACV, total passenger throughput of Vietnam airports reached 114 mn passengers during 2023 (in line with our assumption of 117 mn passengers).


Vietnam Sea Port & Logistics Sector 2024 Outlook: Inventory restocking and geopolitical tension as key catalysts

2024 key theme for the seaport industry would be volume recovery due to improving external demand (especially from inventory restocking in the US/EU), while supply should be stable through 2025. 

Average 2024 forward P/E for stocks under coverage is 13.4x, which is on par with historical levels, corresponding with the average core earnings growth of 10% YoY for the industry. We think that the industry is correctly priced relative to our base case assumptions. This means that we can expect upside/downside if the actual economic activities and external demand perform better/worse than our expectations. We remain overweight the sector on the improving outlook, focusing on names with good core earnings growth (PVT) while watching names with potential to benefit from geopolitical tensions (HAH, VOS), waiting for correction (GMD) and the new listing of VTP for ecommerce logistics story.


Vietnam Banking Sector's Regulation Update: A missing piece

The revised Law on Credit Institutions (LCI) officially takes effect on July 1, 2024. The law addresses the thorny issue of cross-ownership and provides a more streamlined mechanism related to weak banks under governmental administration. While having been at the center of discussion, Resolution 42 was not codified into law with this final version therefore there is still a lack of mechanism to deal with bad debt in this cycle.         


Land Law 2024 update - Key impacts on listed RE developers

On 18 January 2024, the National Assembly completed the ratification of the revised Land Law. The ratification ushers in a more market-based & transparent legal environment and maintaining a good balance between being conducive to business while protecting landowners.


Vietnam Cement Sector 2024 Outlook: Valuations ahead business rebound

A turnaround is approaching for cement sales volume: During 1Q24, we anticipate that domestic cement consumption will be at the lowest level since 3Q21 (COVID lockdown period), due to seasonal factors (the Tet holiday) and weak demand. However, from 2Q24, we expect that cement sales volume will improve YoY with a minor recovery due to a recovery in construction activity. In addition, major public investments could offset weak demand during 2024. We believe that cement sales volume will bottom out during 1Q24 and will gradually recover throughout 2024.


Vietnam Technology & Telecom Sector 2024 Outlook: Continuing solid growth for IT & eyes on 5G auction plan

Global IT spending is expected to post higher growth during 2024. According to US technological research and consulting firm Gartner, the sluggishness in IT spending for 2023 implies that IT spending will rebound during 2024. Gartner claims that the spending for cloud and AI were two key drivers for 2023 global IT spending growth, and will continue into 2024, which should support growth for FPT, as these two segments account for over 40% (in total) of the company’s DX revenue. We also believe that the need of automation in automotive industry will continue to be solid during 2024. Over the next ten years, Precedence Research forecasts double-digit CAGRs for automotive software, global cloud services, and AI.