Sector Report

Urea price peaked in 1Q22 due to (1) high input costs caused by the Russia-Ukraine war, (2) resilient demand thanks to high argo commodity price at that time and (3) export restriction by major exporters (Russia and China). Urea producers recorded outstanding performance thanks to the urea price uptrend and certain exposure to the export market. 9M 2022 PBT of DPM and DCM jumped by 200% YoY and by 308% YoY, with the strongest growth occurring in 1Q22. Meanwhile, NPK producers experienced a deterioration in the gross profit margin and sales volume due to demand destruction and little exposure to the overseas market. 9M 2022 PBT of LAS increased by 15% YoY, while that of BFC declined by -8% YoY.

The banking sector declined 21% during 2022, but still outperformed the VN Index by 12%.  Best performers include: BID (+4%); VCB (+2%); SSB (-7%); CTG (-20%); and ACB (-21%).

Stronger credit growth, with a tweak in credit structure due to reduced corporate bond issuance. Credit growth for 2022 is estimated at 14.5% by the SBV (vs. 13.6% in 2021).

Vigorous earnings growth with normalized asset yields and provisioning. As bank results during 2021 were impacted by Covid-19 and 2022 results have not reflected the impact of higher lending rates and a sluggish property sector, we expect full-year earnings growth to be 35% YoY.

After stellar runs during 2020 and 2021, the steel industry corrected -51% in 2022, underperforming the VN Index by 18%.  Most shares experienced declining prices between 60%-70%, while HPG - the best performer – also witnessed a price decline of -49%.

Total sales volume of finished steel products through 11M 2022 dropped -3.8% YoY due to declines in the export channel, especially in galvanized steel segment. The domestic demand also experienced significant weakness during the second half. Steel prices soared during the first quarter thanks to pent-up demand and the recovery in global price before significantly correcting through the end of the year due to weakening demand and high inventories.

Having experienced impressive growth during 1H22, the textile and garment sector entered a difficult period mid-way through the year. McKinsey forecast global non-luxury sales to decline -5% YoY in 2H22. Luxury and discount fashion continued to outperform, while physical retailers too rebounded in 2022. In Vietnam, textile and garment exports are estimated to reach USD 42 bn for 2022 (+3.8% YoY and +11% compared to 2019). To recap, listed companies posted mixed results during 9M 2022. Yarn manufacturers were the worst earnings growth performers (NDT, ADS, STK), as export ASP began declining sharply during July ’22. Garment manufacturers based in southern Vietnam (VGG, GIL, TCM) were the best earning growth performers thanks to their low-base earnings in 2H21, being affected by Covid-19 lockdown.

During the 9M 2022, insurance premiums were VND 177 tn (+17% YoY), of which life and non-life insurance premium rose +16% and + 19% YoY, respectively. However, growth slightly decelerated toward year-end, as direct written premiums reached VND 251 tn as of 12 Dec 22, up +15.1% YoY. This growth rate was the lowest level since 2013, however.

During 2022, the industrial real estate sector declined 38.6%, slightly underperforming the VN Index by 6.7%. Most stocks in the IP industry (i.e., IDC, KBC, GVR, LHG, SZC) significantly declined, especially in the medium and small-cap space. Industry performance during 2022 is attributed to multiple factors, including slow land delivery (due to prolonged approval process) or management restructuring. ITA was the worst performer (-75.3% YTD), as the stock was put on the warning list by the General Department of Taxation. Meanwhile, BCM was the best performer, increasing 25.7% YoY during 2022 due to the successful land sales in Binh Duong New City to CapitaLand (18.9 ha with total value of USD 242 mn) and strong growth in net income (+60% YoY during 9M 2022).

During 2022, the Vietnam fishery sector experienced an outstanding year of recovery and growth, despite having experienced a mixed bag between the first and the second halves of the year. According to VASEP, Vietnam fishery exports reached USD 10.2 bn (+28% YoY) through 11M22. This is a record high, compared to fishery export CAGR of 4% between 2011-2021.

In the first 3 quarters of 2022, most companies in the sector recorded mixed sales results with squeezed margins due to rising costs). DBC posted net sales growth of core business (real estate excluded) of 13% YoY, while net profit declined by -68% YoY as GPM was squeezed by -800 bps, mostly due to rising farming costs as a result of high feed costs. BAF posted a net sales contraction of -46%, yet turned a profit vs. last year by +17%. BAF saw its farming operation sales doubled in ‘22 in the first 3 quarters (albeit from a low base). BAF experienced a transition from raw material trading to farming, which helped net profit to expand. Similarly, from a low base, HAG had its farming business see sales expand by +125% YoY, while farming GPM declined by -720 bps. In 9M 2022, MML recorded farm revenue of VND 663 bn (-6% YoY) and GPM of 24.5% (significantly contracted from 36.9% in 9M2021) due to softer hog price and higher feed cost.

Power consumption growth weakened since Oct’22, as exports and Index of Industrial Production growth (IIP) slowed. In Nov’22, power demand growth decelerated to 2.4% YoY despite the Nov’21 low base. Further, IIP growth decelerated to between 5.3% -5.5% during the Oct-Nov’22 period compared to 10.3% in Sep’22.

Nationwide power demand in 2023 is forecasted to decelerate to 5% growth on the back of between 6.0%-6.2% GDP growth. To recap, our 2022 projection for power demand and GDP growth is 6.4% and 8.0%, respectively.

Hydropower power conditions could remain positive through 1Q23 and then turn into less favorable since 2H23, according to NOAA. We thus think that it might not be fancy for REE as more than a half of REE’s NPATMI could be driven by hydropower segment.

CGM prices are expected to be flat in 2023, as higher demand for thermal power should offset weak nationwide demand.

As stated in our previous report, we continue to maintain our view that the Vietnamese property market will face many headwinds in 2022 and 2023. Given recent escalation in terms of the government’s crackdown of misconduct in both the property and stock/bond market, our view is that the characteristics of market liquidity will see significant changes ahead. From our discussion with many developers such as NVL, DXG, HTL, NLG, DIG, KDH, HDG, VPI, and others, we learned that these firms had announced to postpone their sales plan, capital raising, and/or IPO activities to 2023, in the view that better market conditions might materialize in 2023. That said, optimism is present, but tempered. Most developers’ base case is the outlook for 2023 to be still difficult for project development, and the real estate market might need 1-2 years to gradually recover.  As such, a situation of a prolonged project pipeline experienced by many real estate developers in the industry will affect their financial plans and cash flows in the coming years. Considering all factors, we see negative sentiment prevailing in the sector at the current time. We accordingly maintain an Underweight position for the sector.

The SBV has officially widened the USD/VND trading band from 3% to 5% for the first time since 2015, and raised the ask-price at the exchange to VND 24,380 (+1.9%). The announcement is largely in response to heightened pressure from last week for the SBV to support VND-denominated liquidity amidst the currently strong USD backdrop. USD/VND quotation at banks immediately increased to around VND 24,500 (+1.1% vs last week’s level). Year-to-date, the Dong has lost nearly -7% - marking the largest depreciation since 2012. Despite strong domestic fundamentals, the VND has not been spared from the broad-based Asia FX rout, triggered by aggressive Fed rate hikes and follow-up action by other central banks of major trading partners.

To conclude, we are of the view that order shipments will continue to be impacted by inflation and recession concerns through 1H23. We expect orders to improve between 2Q23 - 3Q23 provided inflation eases. While improved raw material prices should have a positive impact on gross profit margins, ASP too is being squeezed due to retailer pressure. As 1H22 was essentially a high base for most local textile and garment producers, we expect these companies to see a sales slump and net losses in 1H23.  We recommend to Underweight the sector.

Several derogatory changes have occurred in the Seaports & Shipping Sector since our last note, with the situation rapidly deteriorating tracking global economic trends. Shipping volume has decelerated, whilst freight rates likely will remain under pressure through 2023. Given our significantly less sanguine outlook on the sector, we revise our estimates for HAH and GMD and anticipate a deceleration in NPATMI growth figures to -12% YoY and +7.6% YoY, respectively, for 2023. Over the short-term, they will continue to perform well in 2H22 with strong 2022 NPATMI growth figures numbers for HAH (+96% YoY) and GMD (+49% YoY). As stock prices have largely corrected, we maintain our OUTPERFORM ratings for both HAH and GMD, and we reduce our 1Y-TPs to VND 54,000/share (from VND 84,500/share) and VND 55,600/share (from VND 65,000/share), respectively.