Sector Report

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.

The banking sector soared 26.16% in terms of market capitalization in 2019. This vastly surpassed the VN Index, which increased by 7.67%. After having underperformed the VN Index in May and June, banking stocks have been ramping up since July when the BID Board of Directors officially issued a resolution approving a deal with Keb Hana Bank. As a result, the BID share price rose +50.5% from its trough point set on 30 Jun. Other state-owned bank stocks also yielded positive returns, in which the VCB share price scaled a whopping +70%, and CTG rose by +8.3%. For joint stock commercial banks, the story was bifurcated. On one end of the spectrum, winning stocks involved VIB (+23.6%), MBB (+18.6%), EIB (+26.7%), and TPB (+5.5%). Meanwhile, banks that were listed in 2018 were waning, such as TCB (-9%), HDB (-9%), and VPB (+0.3%).    

We had recommended a Neutral rating on the sector at the beginning of 2019, expecting a decelerated pace of credit growth, and a slightly edged up interest rate environment.

The steel sector declined -4% in terms of market capitalization in 2018, underperforming the VN Index, which increased by 7.7% in the period. The HPG share price decreased slightly by 1% due to the annual earnings decline up to Sept ‘19 resulting from the unexpected surge in the iron ore price. On the other hand, the HSG share price increased by 32% from its bottom at the end of 2018, thanks to the stabilization in its gross margin. 

The beer industry underperformed the VN-Index by 12.6% in 2019. This is chiefly because the sector is overwhelmingly comprised of SAB, which declined by -14.3%. We had recommended to go Underweight the sector at the beginning of 2019, as we expected its valuation would be on the decline. 

The dairy sector gained only 0.5% in terms of market capitalization in 2019, underperforming the VN Index which rose by 7.7%. The VNM share price increased in tandem by just 0.72% on low 2019 earnings growth, while the QNS share price dropped by –20.5% due to continuous selling pressure of internal shareholders. Its earnings went flat YoY. Meanwhile, the GTN share price surged 84.5% in 2019, which was sparked by the VNM acquisition. Overall, sector performance is slightly behind our Neutral recommendation, set at the beginning of 2019. 

The State Bank of Vietnam (the SBV) issued Circular 22/2019/TT-NHNN to replace Circular 36/2014 (and its related revision), which covers operational safety ratios for the banking sector. We are focusing on two changes, namely the reduction of the ratio of short-term funds used for medium and long-term lending (from the current 40% to 30%), and the elevation of the risk ratio of real estate-related consumer loans, from the current 50% to a maximum ceiling of 150%. Circular 22/2019 will become effective on Jan 1st, 2020, with a transitional period of 6 months (except in the case of the loan deposit ratio (LDR), with the new limit being 85% for both state-owned and joint-stock banks). In this particular case for LDR purposes, the transitional period is 2 years (by Jan 1st, 2022).

The trend is crystal clear for deep water seaport developments in Vietnam at the moment. These ports are equipped with a deep water draft of 12m to 15m in depth, equipped to handle large vessels of over 8,000 TEUs. Market demand is leading this trend of additional demand for deep seaports in Vietnam.

As noted in our previous report on Industrial Park sector, FDI inflows into Vietnam continue to remain resilient amidst an escalation of U.S – China tensions. U.S. concerns of Chinese-origin tech elevated to a national security issue provides an opportunity for further supply chain relocation to other countries to service the U.S. market. This of course includes Vietnam, and this unfolding trend will diversify the domestic industrial sector, and increase production value through a technological upgrade in manufacturing processes. Various FTAs including the CPTPP have already taken effect since early 2019, and the EU-Vietnam FTA is expected to take effect in late 2019. This will consummate increased access for Vietnamese manufacturing exports, further attracting foreign investment interests in the process.

Banking sector increased by 8.4% YTD, slightly underperforming the VN Index (+10.6% as of 20 May 2019). Only EIB, VCB, and TPB outperformed the VN Index. Performance of banking sector is still in line with our Neutral view for this sector in 2019. Credit growth reached +4.44% YTD as of 29 April 2019 vs. 4.3% YTD as of April 2018 and vs. 2019 credit growth guidance of 14% YoY. By the end of March 2019, reported NPL ratio was 2.02% & adjusted NPL ratio (including VAMC bonds + potential bad debt) was 5.88%. As of May 2019, there are 7 banks that comply with Basel II: VCB, VIB, OCB, MBB, VPB, TPB, and ACB