Sector Report

As per our latest note on airport services, our base case assumption is that total passengers might drop by -39% YoY in 1Q 2020 and -55% YoY in 2Q 2020 (when all international passengers decrease to near-zero during this period as the epidemic is unfolding), after which we see that recovery might start in 3Q 2020. We maintain our base case assumption at the moment, since we have 3 more months until the end of June for countries to determine if they can effectively contain the virus. For the moment, we recommend to avoid all airline stocks because they are now having very high leverage with virtually no revenue, which puts an obvious stress on cash flow for airliners. We change our rating for HVN to SELL, with a 1Y target price of VND 18,600/share (-15.4% downside), based on an EV/EBITDAR 2020-2021 time-weighted average target of 6x. The other companies with net cash position (ACV, NCT, SCS) is also taking a strong hit now, but are in a good position to survive the epidemic and can recover quickly after it is over. For ACV, our base case estimate for 2020 revenue and NPAT is VND 14.8 trillion (-18.8% YoY) and VND 5.3 trillion (-36% YoY), as per our latest report. We decide to maintain our base case estimates (even with Europe’s recent escalation of Covid-19) as our last assumptions are already skewed to be rather conservative. We maintain our BUY recommendation for ACV, with a 1Y target price of VND 68,600/share (29% upside), based on a 2020 EV/EBITDA target of 12x. 

Credit growth slowed down in 1Q 2020: According to the General Statistics Office (GSO), credit growth within the Vietnamese banking system was partially derailed by the Covid-19 pandemic, posting a lackluster cumulative +0.68% YTD growth up to 20 Mar 2020. This is the lowest level observed when viewed against the equivalents from 2015-2019 (ranging from 1.25% to 2.81%). Stagnant credit growth was witnessed amongst the three state-owned commercial banks as well as commercial banks MBB and ACB, which might have been spurred by an abundance of caution from these banks regarding elevated credit risk of new loan issuance. Meanwhile, VPB, HDB, and TPB broke the mold and blazed forward with elevated levels of credit growth; roughly 4.8% up to Feb ‘20 (VPB), 5% up to Feb ’20 (HDB), and 9% up to Mar ‘20 (TPB). We noticed that VPB and TPB were particularly active in purchasing corporate bonds. For HDB, growth was thanks to loan agreements with some corporate clients, previously signed in late 2019.

Export turnover of the fishery sector in USD reached $991.5 mn (-10.8% YoY) up to 2M 2020. This was driven by a decline of -20.2% YoY in the EU market and -43.8% YoY drop in the China market. Shrimp exports inched up 2.6% YoY to $383.4 mn up to 2M 2020, with a strong rebound of +39.5% YoY recorded in February. Main export markets diverged, as export value rose strongly in Japan (+16.5%), the US (+22.3%) and South Korea (+12.4%), but dropped sharply in the EU (-15.4%), as well as Mainland China & Hong Kong (-37.5%). Export value for Minh Phu (MPC: UPCOM) declined by a moderate -5.7%, while Fimex VN (FMC: HSX) exports sunk by -21.9% YoY. Pangasius exports dropped by -32.1% YoY to $210.3 mn up to 2M 2020, with this particular product line witnessing a sharp contraction across all markets (US by -26.9%, Mainland China & Hong Kong by -52.4%, the EU by -39.9%, and ASEAN by -19.3%). Export value by Vinh Hoan (VHC: HSX) and Nam Viet (ANV: HSX) both declined by -22.5% YoY and -32.4% YoY respectively.  In the first 2 weeks of March per VASEP, up to 35-50% of shrimp orders were either postponed or canceled by US and EU importers due to slower consumption in those markets. Specifically for pangasius, VHC stated that only orders for fresh products are reduced at the moment, while orders for frozen products are still growing steadily.

In Feb 2020 (start of Covid-19 epidemic), international arrivals to Vietnam dropped significantly by -22% YoY. Chinese and Korean passengers declined by -63% YoY and -16% YoY accordingly.  At the moment, the government of Vietnam has stopped all immigration of international passengers as an advanced measure against the escalation of the virus in Vietnam. This effectively reduced the volume of international passengers for all airports to nearly 0 from now until further notice (the exception is Vietnamese citizens coming back home). In our updated base case assumption, total passengers might drop by -39% YoY in 1Q 2020 and -55% YoY in 2Q 2020, when all international passengers decrease to near-zero in this period as the epidemic is unfolding. While passenger volume reduced quickly, we only expect a slight reduction in cargo throughput volume in 2M 2020. However, demand might be slightly lower from March 2020, when COVID-19 reduced consumption demand. 

Total auto sales in the first 2 months down -27% (VAMA figures). Import of CBU type cars dropped -42% in value to $333.3 mn (14,523 units), while spare parts and component went up 4.2%.  Discretionary automobile purchases may be deferred due to the pandemic in the near term. The new decree in taxi operations starting in April will regulate ride-hailing companies to function similar to traditional taxi firms, and could also negatively affect demand.   That is the reason why VAMA proposed to the Government to cut 50% of VAT and car registration fees yesterday. Supply encounters less impact than demand aspect in the pandemic. Supply chain of parts and spare parts is quite stable, sourcing from South Korea, Thailand, Japan, and even China. Ford Vietnam announces to close its factory in Hai Duong within the next 40 days mainly for the purpose of employees safety, along with the global strategy of this OEM. In our base case, (Covid-19 outbreak is contained by end-Q2), we forecast total sector sales to drop -30% in 1H before slightly rebounding 10% in 2H 2020. Full year sales could take a hit of -10% YoY (vs 10%-12% growth as per the previous update). This expectation does not take into account the impact on demand in case the Government approves the VAMA’s proposal. Motorcycle sales is also estimated to decrease by -3.5% in 2020 for Honda Vietnam. Reluctance to use public transportation may support motorcycle demand, while overall demand may drop due to a slowdown in economic activities. Honda Vietnam posted a -1% decrease in sales volume up to 2M 2020. Per MoIT estimates, automobile and motorcycle production declined by -11.5% and -5% YoY (37.8k and 524k units) in the first 2 months. 

The State Bank of Vietnam (SBV) has recently issued new policy rates effective as of March 17, 2020, as highlighted in the table below.  The new regulations aim in general to reduce the funding cost of banks, and increase interest payments to banks’ deposits at the SBV. This is to better facilitate the decrease in lending interest rates to better support the economy.  This new policy of SBV is in line with our forecast on deposit/lending rate trend for the whole year 202:  In our base case scenario, we forecast for deposit interest rate to reduce 70 bps YoY. Lending interest rates will be reduced 50 bps YoY, with the exception for the special clients, who are negatively affected by the epidemic, for whom the decline will be from 150 bps YoY. 

Brent oil prices recorded an unprecedented sharp tumble of 38% in just last 2 trading days, marking the greatest intraday trading drop for oil since the Gulf War in 1991. Oil cartel talks through OPEC+ collapsed as Russia balked at the prospect of additional production cuts on March 6th. Saudi Arabia on 7th March then turned the tables, and in a massive reversal move announced massive discounts to its official selling prices (OSP) for April. Saudi Arabia said it plans to ramp up its production to above 10 mn barrels per day (from the current level of 9.7 mn barrels per day and could be ramped up to its full capacity of 12.5 mn barrels per day), potentially escalating the current tit for tat price spat. For the overall sector, we downgrade our recommendation from Neutral to Underweight. Regarding impact on earnings, earnings estimates of GAS, PVS and PLX are revised down in accordance with the new oil price assumption.  

The pharmaceutical sector edged up by 4.0% in terms of market capitalization in 2019. The sector performed slightly below overall VN Index performance, which grew by 7.7%. The result stemmed from the mix in price movement of local listed companies. DHG (+18%), DBD (+40%), and DHT (+34%) outperformed the index, while DVN (-34%), PME (-10%), TRA (-10%), and IMP (-18%) underperformed the VN Index.

The coronavirus is spreading at a far more rapid pace than SARS while the WHO has just declared this a global health emergency. For background information, as of Jan 31^st, 2020 there are 5 confirmed coronavirus infections in Vietnam. Two of these were Chinese who came from Wuhan, of whom one recovered, and 3 of these were Vietnamese workers who returned after a training course in Wuhan. There were also 97 suspected cases, of which 65 cases have already tested negative, and 32 cases of which are awaiting final results. There are also 43 cases that have been kept in quarantine despite being asymptomatic, as they had contacts with patients suspected of being infected by the coronavirus. In recent days, the Vietnamese government has been very proactive and is on high alert towards the mitigation and eradication of this virus. Guidance and directions of how to tackle the public health challenge are issued at top level via directives from both the Politburo and the Vietnam central government. 

In terms of impact on the economy, it is challenging to compare with other historical events as this outbreak has more distinct defining characteristics that impact comparability. If we look back to the SARS outbreak during 2002-2003, the impact on the Vietnamese economy was essentially non-existent. This is because the number of infected cases were limited, quelling any sort of lasting global impact. However, Vietnam’s push towards international trade connectivity in modern times has turned it into an essential global value chain hub, especially in the manufacturing sector. Hence, any major global disruptions from other key suppliers such as China could pose a big threat to growth here. One key flashpoint to watch involves a number of border gates to China (e.g. Lao Cai, Lang Son) that are to be closed until Feb 8^th, 2020 – a key trade artery to and from Vietnam. Additionally, the Vietnamese government has implemented visa restrictions from areas of China materially impacted by the coronavirus. Agriculture exports and general tourism, thus, have become one of the sectors that could experience an adverse impact from these events, at least in the short term. We reiterate our view that for Vietnam to attain a Q1 2020 growth target of 6.6-6.8% YoY could be very challenging under these unique turn of events. Hence, actual results coming in between a more moderate 6-6.5% could be reasonable given these novel circumstances. A lower GDP post beyond that (between 5-6%) would be cause for significant concern. We may be looking at a situation where the government needs to provide a greater level of support to have growth recover in 2H20 in order to meet the target of 6.8% GDP growth for full year 2020.

The airlines sector industry market capitalization increased by 14% in 2019, outperforming the VN Index which increased by 6.69%. The best performer of the industry is VJC (+20%), while the worst performer has been HVN (+6%). We had recommended a Neutral rating to the sector at the end of 2018, as we expected the heat from competition to ramp up starting in 2019 from newcomers in the market (Bamboo and Air Asia – Thien Minh JV). We also had expected a fleet increase from existing players. Even though Air Asia – Thien Minh JV has failed to materialize, Bamboo and potential new players like Viettravel and Kite Air still put a shadow on the industry throughout 2019.

Textile & garment performance declined by -2.8% in 2019, underperforming the VN Index. As 2018 was a high base year, we had rated the sector as Neutral at the beginning of 2019 due to rising labor costs and minimal immediate impact of the FTAs signed.

Key Reasons for underperformance of the sector:

Many stocks performed well in 1H 2019 thanks to encouraging financial results, continuing the growth momentum set in 2018. However, as the trade war intensified in 2H 2019, the RMB devaluation, decline in the demand of yarn from China, as well as the massive dumping of yarn prices have made it very challenging for Vietnam’s local yarn and garment manufacturers to compete in the international market. Meanwhile, there is patchy consumer sentiment. VGT (the largest stock in the sector) declined by -10.7% during the year as its net profit declined by -18% YoY. MSH, STK, and TNG outperformed, with gains of 18%, 18%, and 7% respectively thanks to their stronger net profit growth up to 9M 2019 (+31% YoY, +23% YoY, and +34% YoY respectively). 

The energy sector’s market capitalization increased by  +1.9% in 2019, markedly underperforming the VN Index (+7.7%). Such performance was a bit off target from our forecast (we placed a neutral view on the sector at the beginning of 2019). Performances, however, diverged amongst stocks. GAS (+13%) and PVD (+13.4%) outperformed the VNIndex thanks to a strong Brent oil price upsurge of 43% YTD running up to April 2019, while PVS only increased by 3%. The PLX share price was up 9.9%, outperforming the VNIndex. However, a sharp drop of -39.8% in the BSR share price and -45% in the OIL share price (of which we had an Underperform view at the beginning of 2019), spoiled the performance of the overall energy sector. 

While at first glance overall results appeared disappointing, there was some outperformance in the sector, with distinct wins that were able to go to toe-to-toe across other sectors in the Vietnamese equity market. Overall, airport service industry market capitalization fell by -14.27% in 2019. However, the sector had also grossly underperformed the VN Index, which increased by 7.7%. The top performer to emerge from the industry was AST (+61%). Meanwhile, the worst performer was ACV (-15.7%), which is not so bad considering that overall market capitalization fell by roughly that amount. This tells us that ACV was mostly the only underwater equity in the mix, while others were able to springboard into action, posting much more positive growth figures. We had recommended a Positive rating upon the sector at the end of 2018, as we had expected positive factors such as strong GDP growth, capacity expansion of domestic airlines, and new airport openings to benefit airport service firms.

This sector declined -3.54% in terms of market capitalization in 2018. This markedly underperformed the VN Index, which increased by 7.7%. The VSC share price decreased by -20.5% and the GMD share price dropped -5.64%, while PVT and VTP outperformed the index with a 13.16% and 26.89% share price increase respectively.  We had placed a Neutral rating onto the sector at the end of 2018. We had expected in general the US-China trade war to be a positive factor for Vietnam trade activity, increasing demand for the seaport and transportation sector.  Key Reasons for underperformance of the sector involve the decline of both the VSC and GMD stock price.