Sector Report

The Oil & Gas sector was amongst the sectors which  have posted the deepest earnings declines in 2020. In H1 2020, sector earnings were eviscerated - declining -65% based on results of listed companies. Based on our estimate, earnings of companies under coverage declined -39% YoY in 2020, based on a Brent crude price assumption of USD 40/ bbl in 2020 (-37.5% YoY). Based on global consensus for oil prices in 2021, our base case is that the Brent crude will average USD 50/ bbl in 2021 (+25% YoY). E&P activities: Besides ongoing projects such as Sao Vang-Dai Nguyet, Nam Con Son 2 phase 2, LNG Thi Vai, and Long Son refinery, we expect other large projects to begin in 2021, including the NT3 power plant (EPC value of USD 500 mn), Block B (EPC value of USD 1.2 bn). Accordingly, we expect a 40% recovery in earnings of the oil & gas sector in 2021. Key earnings growth drivers for the sector are PLX (+181%) and GAS (+23% YoY) 

In 2021, we expect demand to rebound between 3%-5% from the low base in 2020, as we expect a nationwide economic recovery, on top of a recovery in infrastructure projects and stronger FDI inflows into Vietnam. According to the World Steel Association, a 4% recovery in global steel demand is expected in 2021, which should support the export channel of Vietnamese producers. Earnings of HPG is expected to increase by 15% fueled by Phase 2 of Dung Quat Integrated Complex, while HSG profit is expected to experience a mild correction due to margin normalization.

In 2021, we believe that demand can rebound by 3%-5% from the weaker performance in 2020 due to the recovery of the domestic economy, and from renewed interest in infrastructure projects. HT1 net profit is forecasted to rise +11% YoY from improved sales volume, and a decrease in interest expenses.

Demand for beer was more negatively affected by Covid-19 during H1 2020, contracting -12.7% by volume, while Nielsen observed that FMCG consumption declined by just -7.3%. According to Nielsen,  consumption was reduced by -22.6% YoY in  Q2 2020 by volume. The Nielsen data reflects actual beer consumption, while sales of SAB and other breweries refer to that from manufacturers to distributors. Beer consumption accounted for 20.7% of FMCG consumption in Vietnam in H1 2020 (Nielsen), a slight contraction from the -22% decline in 2019. Production volume has recovered since May, increasing +60% compared to the February to April period. Volume decreased by -17% YoY in 1H 2020 according to the Vietnam GSO. For 2020, we expect SAB to decline by -30% YoY in terms of beer volume.  2H is expected to be better than 1H provided that Vietnam does not issue another nationwide lockdown. For 2021, we believe that the sector could recover by 20% due to a resurgence from the low base expected in 2020. Having said this, we do not expect beer consumption to achieve pre-Covid levels in 2021. We find that beer consumption could take up to two years to recover to both pre-Covid and pre-Decree 100 levels.

As legal issues related to real estate projects usually take years to resolve, we anticipate a similar situation for 2021. As such, we only expect an incremental price gain of between 1-2% in the Hanoi market, while the HCMC market to again see moderate price expansion of between 5-7% in terms of price – not dissimilar to 2020. For property stocks under coverage, we forecast 2021 net profit growth of between 7-8% YoY, due to solid past sales which typically take 2-3 years to be fully amortized into earnings. We forecast between a 15%-17% YoY growth rate in pre-sales within our coverage universe. Several developers have expanded into areas outside major metropolitan areas and are developing large-scale townships, offering greater landed properties. These have received strong buyer interest of late. 

Our Top Call: VHM (Buy, TP VND 113,000), KDH (Buy, TP VND 30,500), NLG (Buy: TP VND 33,400)

Domestic demand for dairy products were less affected by Covid-19, posting just a -4% contraction in value vs. -7.3%  in FMCG growth consumption (source: Nielsen), and nominal retail sales growth of 3.4% (source: GSO) in H1 2020. Milk consumption accounted for 12% of FMCG consumption in Vietnam in H1 2020 (Nielsen), unchanged vs. 2019. Vinamilk (VNM) and Moc Chau Milk (MCM) posted 2.5%/9.7% sales growth, respectively, in H1 2020 outperforming industry and peers (Vinasoy: -6% YoY). As such, we think that Vinamilk has gained additional market share during the pandemic period. Assuming there are no other nationwide lockdowns in H2, we estimate that VNM will  attain growth of 8% in revenue and 5.5% in profit for 2020, while Vinasoy’s (QNS’s soymilk business) revenue and profit is anticipated to decline -1% and -9.2% YoY, respectively, in 2020. Our base case assumption: a) Covid-19 will not be a risk to public health as of mid-2021; b) there will be no more nationwide lockdowns in Vietnam; and c) dairy consumption will remain steady at a low single digit growth rate. VNM stands to gain the most market share under these conditions on the back of its wide range of products and extensive distribution. Accordingly, we forecast 6%/8% sales growth for VNM and MCM in the domestic market, while overseas market revenue is expected to increase 5%-7% from a low base in 2020. As such, we expect VNM to post a steady net earnings growth of 8.8% in 2021. 

Power grid consumption in May ‘20 reverted to positive growth of +1.55% YoY vs. Apr ‘20 of -9.5% YoY. Through 5M20, total consumption recorded 97.41 bn kWh (+1.9% YoY). Coal-fired generation volume continued to outperform. Through 5M20, electricity volume sourced from coal-fired power recorded 58.09 bn kWh (+16.8% YoY). Positive signs from hydropower. Volume through 5M20 posted an improvement with -33.8% when being compared to a deeper dive of -36.5% YoY through 4M20, implying the beginning of a recovery in May ‘20. Indeed, volume from the HuaNa and Drakrink hydropower plants in May ‘20 enjoyed positive double-digit growth of +22.45% YoY and 34.6% YoY respectively. May’20 average price on competitive market recouped 21% MoM. The price bottomed out in Apr’20 with VND887/kWh due to low demand as social distancing and then bounced back to VND1,073/kWh in May’20. Up to 5M20, competitive price averaged at VND1,088/kWh (-5.3% YoY). 

Total export of textiles & garments up to April reached $10.64 bn USD (-6.6% YoY), while total imports declined to $6.39 bn USD (-8.8% YoY). To compensate for the fall in demand for apparel products, many textile companies switched their production to fabric anti-bacterial facial masks for domestic consumption and export. Several companies in the industry have released their quarterly results, and most of them saw a YoY contraction in both the top line and bottom line in Q1. There were only 2 companies that posted growth in Q1, namely GIL (+32% YoY in both sales and net profit) and STK (+2% YoY in sales and +0.3% YoY in net profit). Vinatex (VGT: HSX) estimated that the industry may lose 30% of its work orders in April and 50% of its work orders in May. Another issue is that the recovery of supply amidst weakening demand may dump global market price of textile & garment products by 20%, as per Vinatex. The International Textile Manufacturers Federation (ITMF) conducted a survey on 700 textile & garment companies across the globe from March 28th to April 6th to inquire about order status and expectation of sales. On average, respondents expected 2020 sales revenue to decline by -28% YoY.

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.