Sector Report

Sector Report
Banking Sector's Flash Note

Banks have released their financial statements over the last weekend. In overall, we found the 2Q23 results for banks under coverage in line with what we had anticipated where earnings (+3% YoY and -1.2% QoQ) continued to be pressured with deceleration in credit growth (+6.6% YTD or 2% QoQ), a further squeeze in NIM (-15 bps QoQ) and rising NPLs (+11 bps QoQ). The good news is net income from fee-based services recovered QoQ and CASA appeared to have bottomed out for most banks.

31/07/2023

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Thematic Report - July 2023: Public Investment - From policy to implementation

As monetary policy in Vietnam seemingly reaches the saturation point, the Government clearly shows intention to focus more on fiscal-based solutions, as some aspects of the market (real estate & corporate bonds) remain cold. We believe that monetary policy could continue to be the first priority of this administration’s pro-growth strategy, while fiscal policy (into infrastructure) could be crucial for sustainable growth in Vietnam. 2023 Public investment plan reaches USD 30 bn (+25% YoY). This is very large for one year, as even the 2021-2025 government spending plan is only USD 106 bn. For 1H23, only 30% of disbursement target was met (although growing +44% YoY). While the size of the target for 2023 is large, disbursement progress is always challenging. First, it is about the compliance risk. It’s not simply the legal framework that contradicts itself at times, but sometimes the risk of being investigated after the project is completed is sometimes painful, and certainly does not encourage investor participation. Second, land clearance is slow. Third, project preparation is a lengthy process (18-24 months). Fourth, raw material availability (both capacity and price volatility) is difficult to keep under control. Fifth, the disbursement pattern itself. Disbursement is always low in 1H, and then better in 2H, as normally the first half of the year is for project preparation.

13/07/2023

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Retailer earnings bottomed out in 1H23

As of 1H23, the VN Index has increased by 11.2%, while retailer tickers declined by -1.3%. Sub-optimal share price performance for retail can be attributed to the dismal earnings of retailers in 1H23. However, we believe that earnings of most retailers may have already bottomed out in 1H23 in terms of absolute value, and retailers on a recovery path to profitability. We expect that earnings of retailers to come back to overall profitability from 4Q23 through 2024. Earnings recovery can be driven by (1) acceleration in disbursement of consumer loans, (2) improvement in macroeconomics conditions, (3) market share gain by companies with strong financial position and (4) profit margin improvement on lower inventory level after the fierce price war in 2Q23.

12/07/2023

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Update on fishery sector 2H23: Slow recovery

For June ’23, Vietnamese fishery exports is estimated to reach USD 800 mn (-21% YoY), with shrimp and pangasius exports reaching USD 341 mn (-18% YoY; +3% MoM) and USD 156 mn (-26% YoY; -2% MoM), respectively. Shrimp and pangasius exports for 1H23 reached USD 1.6 bn (-31% YoY) and USD 885 mn (-38% YoY), respectively. Signs of recovery in demand from major exports market such as the US, EU and China are not noticeable, given the persistent inflation and slow destocking. For 1H23, we estimate that ASP to the US for shrimp and pangasius reached USD 10.60/kg (-12% YoY) and USD 3.50/kg (-26% YoY), respectively. According to Agromonitor, pangasius sales volume to the US and China have declined -50% and -31% YoY, respectively, during 1H23.

06/07/2023

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The SBV Giveth and Taketh Away: Potential impact of Circular 06

SBV issued Circular 06 (effectively a revising Circular 39), which is expected to take effect on 1 Sept 2023, provides further guidance on lending activities. The trend of banking liberalization has begun to reverse course with the adoption of Circular 06, as the SBV seeks to create a general banking framework to allow greater autonomy/flexibility in lending decisions. This, however, does result in greater monitoring responsibilities for the banks, and is applicable to post-disbursement activities as well. With this circular, the SBV has drawn a proverbial line in the sand with reining-in risk – especially to riskier segments (commercial real estate, brokers, business cooperation contracts, et al). 

03/07/2023

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Impact of Block B project on Oil and gas stocks

Block B – O Mon is the project chain which develops, extracts, and transports gas from upstream gas fields in Block B&48/95 and Block 52/97 to the downstream gas-fired power plants. The project is currently expected to be granted its final investment decision (FID) by June 2023, and bring forth the first gas extracted during 2026. The project is expected to supply a total of 3.95 tn ft3, equivalent to around 102 bn m3, and 12.65 mn condensate barrels, over a life span of 23 years. Total investment value for the upstream component (including Capex, Opex, and cancelation cost) is estimated at around USD 17 bn. Upon completion, the gas from Block B fields will be transported through the Block B – O Mon gas pipeline to downstream end-users, including four O Mon power plants in Can Tho province, with a total gas demand for the complex at around 5 bn m3/year, divided between the four plants (O Mon 1, 2, 3, 4).

05/06/2023

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Vietnam Sugar Sector Update: High sugar prices to fuel profit growth in 2023

Global sugar prices surpassed a 10-year peak. The production forecasts for both India and China have been revised down by 7% and 10%, respectively, due to unfavorable weather conditions. Raw sugar prices increased 56% YoY and 35% YTD through April 2023. The USDA forecasts that worldwide stockpiled sugar volume will fall -13% YoY in  FY 2022–2023 crop, and exert pressure on sugar prices to remain at elevated levels. Domestic sugar prices begin to increase thanks to (i) the surge in global sugar prices; and (ii) the implementation of the anti-dumping anti-subsidy policy, which protects domestic producers from imported sugar from Thailand. During May 2023, domestic sugar prices reached VND 20,000/kg (+12% YoY, +10% YTD), and we believe that refined sugar prices will remain at this level from 2Q23, after remaining unchanged during 1Q23 at around VND 18,000/kg. We expect that the increase of domestic sugar prices will encourage farmers to revert back to sugarcane plantation.

31/05/2023

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Vietnam Fertilizer Sector Update: High dividend yield to cushion the share price decline

We previously rated the fertilizer sector UNDERWEIGHT in our recent report as we believe that 2023 earnings will decline notably from the record high set in 2022. Share prices of DPM and DCM have declined by -18% YTD and -12% YTD. In fact, 1Q23 earnings was even worse than our expectations, by the dual effects of: (i) lower than expected urea ASP and (ii) higher than expected transportation tariffs, as companies had to source natural gas from high-cost gas field of Cuu Long basins. In the remaining quarters of 2023, earnings of DPM and DCM may still remain sluggish, as companies may have to reduce urea production to help easing electricity shortages from time to time while also grappling with weak export demand from overseas. 2Q23 earnings may be even worse than that in 1Q23, and could be the earnings trough in terms of absolute value. We hence trim 2023 earnings of DPM to VND 1.23 tn (-78% YoY, from VND 2.98 tn) and earnings of DCM to VND 1.18 tn (-73% YoY, from VND 2.57 tn).

29/05/2023

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Vietnam Banking Sector’s Regulation Update: Flexibility is the key

On 23 Apr 2023, SBV has released two Circulars in a row with immediate effect, targeting the corporate bond trading activities of banks (Circular 03) and setting out a debt restructuring framework (Circular 02). A bank can now can repurchase bonds which it had previously sold within 12 months, so long as the bonds satisfy a set of criteria (bond issuers not having NPLs at banks; the bond issuance purpose must not be to restructure debt or to contribute capital to another entity, etc.). At the same time, Circular 02 provides motivation for banks to move forward with loan restructuring.

25/04/2023

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Draft Circular 16 revision and potential impact on banking sector

In a surprise to the market, the SBV published a draft for public comment to amend Circular 16/2021 regarding banks involved in non-bank corporate bond trading. The central bank also took a dovish step to complete the other half of the previous policy rate cut. During the last rate cut, the refinancing rate and the cap for deposit rate of less than 6-month tenure had been kept unchanged in the previous rate cut, whereas this time these rates were also lowered this time by 50 bps to 5.5%, completing the lap of the Vietnamese central bank’s 50bps policy rate cut initiative. The cap of short-term lending rate to priority sectors was further cut by 50 bps to 4.5%. These moves have been well-received by the market, as expectations rise that a well-executed circular amendment could provide a boost to corporate bond demand, while the lower interest rate environment could gradually revive credit demand and support overall economic growth.

03/04/2023

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Mortgage lending – A safe asset for Vietnam banks?

Mortgages are considered the safest asset at Vietnamese banks, as these instruments generally offer a good return and low loss rates. Outstanding mortgage loans in the entire domestic banking system are VND 1.7 qn (USD 74 bn) or 14.4% of total outstanding credit at 2022. Amongst banks under our coverage, total mortgage lending was VND 1.4 qn (USD 58 bn, or 20% of total outstanding credit at our covered banks). Hence, the quality of mortgages is a high priority for maintaining strong bank balance sheets. However, there are signals that downside risk in the property sector could shift from supply factors to demand factors. Specifically, NVL recently refused to service interest payments on mortgage loans related to its projects. If cash flows of other developers do not improve near-term, this situation could be the case for other mortgage loans which remain under the grace period (ie. developers make interest payments on mortgages on behalf of borrowers), which could be complicated by projects having an incomplete legal status. This could leave borrowers in the lurch.

30/03/2023

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Vietnam Retail Sector Update: Navigating the trough

In 9M 2022, the financial performance of retailers recorded a recovery from last year low base. Core earnings of MWG, FRT, DGW and PNJ increased by 28% YoY, 169% YoY, 60% YoY and 132% YoY in 9M 2022. However, from 4Q22 the consumer spending may be hurt by weak macroeconomics factors such as rising inflation and unemployment. These coupled with interest rate hike and last year high base will weigh down significantly on 4Q22 earnings of retailers, especially ICT and CE.

19/01/2023

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Vietnam Seaports & Logistics Sector Update: Bracing for headwinds in a downcycle

Container shipping market upcycle was over, normalization is underway: The container shipping market craze ended during 2022, as many expected. The Ukraine war sent the world into a supply shock, pushing up energy prices and commodity prices. Consumer confidence was severely affected by skyrocketing inflation from importing countries. The typical high season was absent during 2H22 and shipping demand fell dramatically toward year-end. Domestic market followed international market downtrend. This triggered a deep fall in domestic freight rates to a level not seen since 2020, or -50% off peak levels. Earnings growth remains resilient for all sub-sectors, however, lower prices have caused stock valuations to drop to historical averages or even to historical lows in the case of the shipping stocks P/E.

19/01/2023

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Vietnam Residential Property Sector Update: Struggles persist

Vietnam’s residential real estate sector has gone through a challenging 2022 with: (i) tighter credit for the entire sector; (ii) the government’s investigation of land auctions and corporate bond issuance; and (iii) weaker demand for residential properties as lending rate rose. As such, most developers have witnessed a slowdown in presales and recorded decelerating earnings growth since Q3.

We maintain our view that the Vietnamese real estate market will remain pressured through to 2023. Lending rates may cool toward the end of 2023, but we do not expect a sharp decline. In addition, developers with weak financial status or lack of sales capability likely will continue to struggle from a cash flow perspective if this tight credit policy continues and market liquidity does not improve.

19/01/2023

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Vietnam Electricity Sector Update: Thermal power heat

A 2022 year of hydropower outperformance was thanks to La Nina pattern. REE stood out with 20% increase in its market capitalization. NT2 was an exception among thermal power plants due to gas price correction and healthy balance sheet.

Low power demand growth is expected at 5.4% during 2023 on back of 2023 GDP growth projected between 6.0%-6.2%. To recap, the 2022 projection for power demand and GDP growth were 6.2% and 8.0%, respectively. Hydropower power conditions should remain positive through 1Q23, and possibly turn less favorable during 2H23, according to NOAA. Higher probability of less favorable hydropower conditions is assumed for 2023, with sales volume from the hydropower plant to see negative growth of -8% YoY during 2023. We believe that it might not be positive for REE, as over half of REE’s NPATMI is driven by the hydropower segment.  Higher utilization of thermal power plants should be supportive to CGM prices, and offset lower power demand growth. We expect flat CGM pricing during 2023. CGM prices include two parts of CAN and SMP. SMP could be driven by power demand and the cap lift of 11% YoY. However, the 2023 CAN is set to decline 20% by ERAV/MOIT. We have learned that ERAV/MOIT want to control input costs. If weak power demand were to occur, CGM pricing could cause downside, similar to what was seen during 2020.

18/01/2023

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