Sector Report

Ongoing uncertainty surrounding external conditions makes us believe that consumers will remain price-conscious and prioritize products with good value. A few recent surveys pointed to improving consumer confidence, but only less than half of households anticipate a better financial situation within the next 12 months.

As consumers tighten their budgets, demand for staples should recover slowly. Meanwhile, we observe that e-commerce continues to see robust increases as consumers become familiar with discounts and last-mile delivery. The flush of cheap imports from e-commerce also adds to the competitive pressure.

We prefer companies with strong brands that should benefit from structural value share gains due to ongoing product innovation capturing consumer needs (MCH) and the shift from sub-premium to mainstream products (SAB). Both companies managed to defend (MCH) and gain (SAB) market share in 2023-2024.

In the milk sector, both local and international players compete aggressively for share.

On 30 Nov 2024, the National Assembly approved the Electricity Law (amended Law), which will take effect on 1 Feb 2025 and supersede the 2004 version. Such approval is an important milestone as it should help ensure national energy security, promote further mechanisms for each power source development and support the gradual energy transition from fossil fuels to renewables.

Nevertheless, to enforce the law, we believe that further specific policies/mechanisms are needed. Following this, we believe that the Law should benefit all electricity stocks under our coverage.

In order to protect the domestic fertilizer market and maintain food security and reducing dependency on imported fertilizers, a change in VAT rules (from VAT tax-exempt to 5% VAT taxable) for fertilizer companies has been proposed to the National Assembly in June 2024, followed by a discussion on November meeting. In the course of the discussions in the 8^th National Assembly meeting in November 2024, we see that most legislators expressed their willingness to protect domestic fertilizer market amid intense competition from imported substitutes, i.e. in favor for changing VAT rule (from VAT tax-exempt to 5% VAT taxable) for fertilizer companies. We hence expect that the government will likely change the VAT rule (effective from July 2025), whereby DPM and DCM stands to benefit from such change.

In 2024, earnings of both DPM and DCM rebounded from 2023 low base thanks to the recovery of urea price and profit margin of the trading activities, as well as the reduction in depreciation expenses (for DCM only). In 2025, we expect the recovery in urea price and profit margin of trading activities may still continue, though at a softer pace. Without the change in VAT rule, 2025 earnings growth for DPM and DCM at 21% YoY and 16% YoY. Nevertheless, the change in VAT rule would help DPM and DCM to claim back VND 259 bn and VND 200 bn, hence pushing 2025 earnings growth to 50% YoY and 29% YoY. We hence call for OUTPERFORM rating on DPM and DCM. 

Over the past decade, Vietnam has experienced resilient growth in FDI inflows, driven by the trend of manufacturing relocation. Countries like Singapore, Taiwan, and China have contributed to this growth, attracted by Vietnam’s competitive advantages, including favorable investment policies, low labor costs, strong intellectual property rights, and a stable economic environment.

However, in 2024, FDI inflows into Vietnam have decelerated. Total registered FDI reached $27.26 billion, representing a year-over-year increase of only 1.9% from January through October 2024. In the short term, FDI companies might adopt a wait-and-see approach until there is more clarity on Trump’s tariff policies, including those affecting imports from Vietnam.

The government is addressing bottlenecks to attract more FDI through several initiatives. These include researching and establishing mechanisms to support large enterprises affected by the Global Minimum Tax, proposing a new law with lucrative investment incentives for semiconductor investment, amending certain articles in the current investment law to allow provincial People’s Committees to approve new industrial park investments, and enhancing infrastructure to connect industrial hubs, such as the North-South expressway and the railway linking China and Vietnam. Consequently, we believe that FDI inflow will continue to grow, even with potential new tariffs from the US.

For investing in stocks, we continue to favor select industrial park stocks, each with unique growth drivers, such as BCM, SZC, KBC, and DPR.

For 3Q24, we observe that local garment manufacturers achieved record high quarterly results for both top and bottom lines, beating our in-house expectations on demand recovery. Apart from STK reporting a miss, TNG, MSH and TCM all recorded impressive results. Notably, TNG and MSH both achieved gross margin expansion. We attribute the strong sales to the high season, as expressed by solid volume order recovery in both the US and EU markets. Within our sector coverage, we have an OUTPERFORMrating on the shares of TNG (TP: 31,300/share, +23% upside), largely due to: (i) outstanding revenue CAGR of 14.5% for the 2018-2023 period; (ii) NPAT growth of +47% YoY during 2024 and +16% YoY for 2025; and (iii) an attractive valuation, with 2025 P/E of 8.1x for 2025 compared to the sector historical range of 10-12x. We have an OUTPERFORM rating on the shares of MSH (TP: 56,500/share, +11% upside) as we expect it to post NPAT growth of +17% YoY during 2025, while capacity expansion will continue to fuel growth over the medium-term. We have a MARKET PERFORM rating on the shares of TCM (TP: 51,400/share, +9.8% upside) and STK (TP: 27,500/share, +8.7% upside) due to unattractive valuations and STK still have uncertain sales outlooks.

Pretax profit at banks under coverage increased 13.6% YoY at 3Q24, reflecting the low base effect. Pretax profit for the first three quarters of 2024 has roughly met our expectations, tracking 73.9% of our annual projection. However, NIM missed, prompting us to lower our earnings forecasts for 2024:

The new Land Law, effective from August 1, 2024, introduces significant changes compared to the previous legislation. One of the key updates is the removal of the old land price framework. Instead, the land price table is now updated annually to reflect market values, considering factors such as land use purpose, duration, input information, and other influences. This table is crucial for calculating land use fees (LUFs), rent, land use tax, income from land use rights transfers, management fees, fines, compensation for land-related violations, and starting prices for auctions.

Following the implementation of the new Land Law, several provinces, including Ho Chi Minh City, Hai Duong, Lam Dong, Ha Nam and Ba Ria Vung Tau provinces, have drafted or issued new land price tables. These updates have led to significant increases in land prices, ranging from 20% to 50 times, depending on the location and will take effect from the date of approval as stipulated by the new Land Law.

Although all banks in attendance agreed that deposit rates would rise slightly during 2H24 due to a recovery in credit demand, there has remained a divergence of opinion with respect to the NIM outlook. For state-owned commercial banks, the NIM is expected to remain flat or be slightly higher than 1H24. Meanwhile, the reverse tendency is likely to be observed at the joint stock commercial banks due to the intensely competitive lending rates. On the other hand, we also see a positive outlook for asset quality, as NPL formation rate appears to have decreased. The NPL ratio may peak between 3Q24 and 4Q24. In general, all participating banks appear to be confident in their previous profit guidance set during the AGM season.

Based on Research and Markets, Vietnam’s 2023 data center market is valued at USD 685 mn, and is projected to surpass the average growth of APAC between 2024-2029. We primarily attribute this to the underdeveloped background of the data infrastructure in the country compared to many other APAC nations. For a competitive environment overview, domestic players are dominant in the data center market, whereas the cloud segment is primarily driven by foreign players. FPT, CMC Corp, FPT Telecom (subsidiary of FPT) and VNG are notable domestic companies that have data center exposure in Vietnam. We expect such industry landscape to remain in place - at least in the short and medium term.

For FPT, we recommend an OUTPERFORM rating for the stock, with a 12-month target price of VND 153,100/share – representing a 14% upside. The company currently operates three data centers (3,940 designed racks) in Vietnam, and targets to launch a new one (over 3,000 designed racks) during 2025. Nearly a double increase in capacity implies a promising medium-term double-digit growth potential for the field.

2Q24 earnings of the banks under coverage beat our expectations 16.4% YoY (vs. our estimate of between 12-14% YoY). The beat came from a recovery in the NIM (+11bps QoQ), NFI (+14% QoQ) and write-back income (+133% QoQ). The surge in write-back income was a surprise to us given the current still low liquidity in the property market. The NPL ratio at Jun was broadly in line with our expectation, hovering at 1.94% (flat QoQ). However, the NPL formation rate and credit costs were higher than expected, mostly due to the surge at BID, CTG, VPB and OCB. All in all, we did see positive signs from credit demand, which is expected to continue during 2H24. However, uncertainties exist as the inherent credit risk related to renewable energy, real estate (developers and mortgage) have not yet unfolded and the NIM is highly dependent on the pace of credit demand recovery. Cumulative through 6M24, pretax profit of banks under coverage were generally in line with our expectations, achieving 48% of FY24 estimates. Details of the change in estimates (if any) will be discussed in our reports on the individual banks.

On 3 Jul 2024, the Vietnamese government enacted Decree No. 80/2024/NĐ-CP, governing the direct electricity trading mechanism between renewable power generators and large electricity users (Direct Power Purchase Agreement-DPPA mechanism). Considering the importance of the mechanism for outlook of Vietnam electricity sector, we list out key points and potential impacts on key beneficiaries.

Overall, the DPPA mechanism could encourage more investments into renewable power projects in Vietnam, which should promote environmental sustainability and enhance the efficiency of the electricity market in Vietnam.

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.

On the 8^th 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.