Sector Report

The 4th wave of the pandemic in Vietnam has negatively affected pharma companies, as lockdowns have been prolonged nationwide: Cumulative up to 8M 2021, we estimate that total pharmaceutical sales in Vietnam have declined by -11% YoY, with sales from retail drug stores declined -3% YoY and sales in hospitals declined -16% YoY based on estimate from listed pharma companies and drug bidding data from Vietnam Drug Administration. Strict lockdown measures, especially Southern provinces, has caused disruption in supply and distribution activities. Pharma companies in the South like IMP, DHG, and OPC had to cut production by 20 – 30% during July & August to comply with the Vietnamese government’s “three on the spot” work-and-live-on-site social distancing requirement. Also, many hospitals in the South have been transformed into Covid-19 treatment centers, which has resulted in significant drop of pharma sales, as the hospital channel accounts for over 60% of industry demand. 

Recently, the Ministry of Finance submitted to the Government a draft revision to the Insurance Law, which is expected to take effect from 2023. In general, this revision will allow insurers greater autonomy in their business activities, with regulators not interceding in their operations as much as before. Instead, the draft prioritizes monitoring, promoting transparency, and the healthy development of the insurance sector. Accordingly, this draft revision adds additional articles which will serve as a guideline to insurers, while revising previous regulations in order to avoid confusion upon actual practice. The second most notable point is the introduction of a capital adequacy ratio, with stricter requirements on disclosure. The draft of the Insurance Law did not clearly state which solvency framework would be applied, however, we expect it to be a risk-based capital (RBC) framework which would be regulated under subsequent sub-law documents. Lastly, we note that this draft prohibits insurers from engaging in real estate business, with the only exception of engaging in real estate business related to the insurer’s headquarters  - along with a few other narrow exceptions. We view this draft revision as a positive for the long-term development of the insurance sector. Given  changes to the solvency framework, there might be pressure to raise capital at certain insurers. The regulations do, however, have a 5-year transitional period which provides a buffer between legal framework and real world application (2023 – 2027). Hence, we do not believe that this will cause abrupt changes to the sector’s short and medium-term outlooks.  

The SBV recently issued Circular 11/2021/TT-NHNN (Circular) for loan classification and loss provisioning, which takes effect 1 Oct 2021. The frequency of loan classification and provisioning was increased from “at least quarterly” to “at least monthly”, which allows for a more aggressive and earlier address of credit quality deterioration. That being said, most banks under our coverage already appear to classify loans and make provisions monthly. However, this Circular, from our perspective, acts more as a document to ensure the sector applies the same standards across the board. As a result, we do not anticipate this Circular to lead to a significant change in bank risk management. It should be noted, however, that Circular 11 does not apply to banks which are under special supervision. We also find an exception to the classification of loans/deposits which are used to support specific banks under special supervision. These exceptions could also apply to banks which are willing to support banks under special supervision, potentially facilitating a resolution of the ‘zero-dong’ banks. Overall, this Circular provides a more coherent framework for loan classification and provisioning. 

Earnings growth shall normalize in 2H21 at 15.5%YoY and 22.2% YoY in 2022. 1H21 earnings growth for banks under our coverage is estimated to be a stellar 55-60% YoY, backed by solid NIM expansion and robust credit growth (7.9% YTD and 18.1% YoY in 1H21 vs. 4.6% YTD and 10.3% YoY of 1H20). For 2H2021 and 2022, we believe that the advantage of NIM expansion will be difficult to maintain. Meanwhile, credit growth may be slightly lower than 1H21 if we assume a credit growth target for the whole banking system in 2021 of 13%. Hence, growth in 2H21 is dependent upon the SBV’s extension of credit limits for commercial banks. For banks under coverage, we assume outstanding loans at December 31, 2021 to increase by 15.7% YoY, leading to a normalized average 2H21 earnings growth of roughly 15.5% YoY

The Ministry of Planning and Investment is drafting a new Decree to replace Decree No. 82/2018/ND-CP to better regulate IPs and EZs. Some of the proposed regulations: 

1. Decentralization of authority. The draft Decree allows for the decentralization on the procedure to establish new IPs, and to adjust and expand the existing IPs by authorizing either: (1) the Minister of Planning and Investment; or (2) the People's Committee of the province.  According to the Decree No. 82/2018/ND-CP, all such decisions have to be approved by the Prime Minister. 
2. Regarding the consideration and approval of new IPs, adjusting and expanding IPs: According to the draft Decree, total land area of IPs must be at least 75 ha; and IPs must have at least 5% of the total land area dedicated to SMEs and supporting industrial enterprises. This is a new regulation. 

Nationwide power consumption volume in total kept growing +11.1% YoY in May 2021. 

Despite an +11% YoY increase in power consumption volume, the average price on the competitive market (CGM price) declined -5.1% YoY during May-2021. This was largely due to low utilization from thermal power plants, especially gas-fired plants. 

Oil price to leg higher. The Brent oil price exceeded USD 70/barrel on 1st June, the highest level since June 2019. The rally was triggered by optimism over the fuel demand outlook for the summer, especially as developed countries start to re-open, while Chinese factories continued to expand in May. YTD, Brent crude oil prices averaged USD 63/bbl, increasing 52.7% YoY. Given the recent price action, we have lifted our Brent crude oil price assumption from USD 65/bbl to USD 68/bbl in 2021 (+62.6% YoY) and USD 70/bbl in 2022. For the fuel oil (FO) price, we raise our assumption from USD 330/ton to USD 360/ton (+48.8% YoY) in 2021, and USD 380 /ton in 2022. Our top picks:  We factor updated oil price assumption and roll our valuations forward to mid-2022 for stocks that we have under coverage. Accordingly, we see potential upside for GAS, PLX, PVT, PLC. PVS is also our favorite stock in the sector, however we only recommend accumulating this name on price weakness. 

2021 AGM season has nearly ended, with the theme of equity capital raises just beginning. In particular, the two most heavily weighted sectors (banking and property) which combined represent over 50% of the VNIndex are expected to be most active. While the bank recapitalization story is returning after a two-year hiatus, property developers are finding the current positive market sentiment an opportune time to evolve from bond financing to equity. Provided that earnings dilution isn’t significant, we believe these capital raises could act as catalysts for both sectors’ shares into year end. We remain Overweight on the shares of the residential developers, and somewhat more muted in our outlook for the banks as valuations have already begun to price in the positive outlook. There are, however, some specific names where we are much more sanguine: CTG, TCB and VCB. We also have VPB, TPB and STB in our watch list as they may have upside surprise relating to capital raising plan (VPB, TPB) and turnaround story after settlement of legacy assets (STB).  In property sector, our current top picks are NLG, DIG and DXG for being beneficiaries from improving infrastructure in HCMC and neighboring areas as well as strong earnings growth outlook in 2021.