Sector Report

Pharmaceutical retail chains have witnessed aggressive network expansion over the past year. This can be explained by a trifecta of factors: (1) modern trade drugstores gained share from traditional drugstores, as the government gradually places more rigorous regulations on pharma retailers (tighter control over prescription drugs and implementation of electronic prescriptions); (2) the drugstore channel may have taken share from the hospital channel, as public hospitals have become more cautious when bidding for drugs; and (3) the increase in spending on vitamin/supplements to maintain good health given this year’s pivot in Vietnam toward the "live with COVID-19" mantra. We believe that pharma retail chains will benefit from this trifecta which is still very much in play. We continue to believe that retail pharmaceutical companies will maintain their pace of new outlet openings in the near future.

The Ministry of Industry and Trade (MOIT) has officially applied anti-evasion measures (Decision 1514/QD-BCT) on imported sugar from five ASEAN countries (Indonesia, Malaysia, Cambodia, Laos, Myanmar). The implementation was applied between Aug 8, 2022 through Jun 6, 2026. The applicable tax rates for Thai sugar equate to 42.99% for the anti-subsidy tax, and 4.65% for the anti-dumping tax. The total tax rate imposed is 47.64%, applicable to almost all sugar exporters from these five countries that used sugar raw material of Thai origin.

According to the Vietnam Sugarcane & Sugar Association (VSSA) and Vietnam Customs, since the implementation of ATIGA on Jan 1, 2020, imported sugar from Thailand had reached 1.2 mn tons (+330% YoY) in 2020, and accounted for roughly half of the sugar supply in the Vietnamese market (between 2.1-2.3 tons per year). Further, since being investigated and taxed on AD-AS, Thai sugar exports have been indirectly exported via five ASEAN countries. According to Vietnam Customs, imported sugar from five ASEAN countries reached 865k tons (+280% YoY), while sugar exported from Thailand to Vietnam decreased to 370k tons (-70% YoY) in 2021. We expect that the MOIT's newest measures will help to increase domestic sugar competitiveness and domestic production over the long-term due to the Thai sugar import restrictions and the supply shortage in Vietnam.

Stock recommendation: We reiterate our Outperform rating on the shares of QNS with a target price of VND 59,800 per share (+23% upside, total ROI of 29%). In 2023, we expect QNS's NPAT to be VND 1.6 trillion (+16% YoY), with earnings from the sugar and biomass segments contributing VND 402 billion (+30% YoY). QNS's refined sugar gross profit margin will rise from 27.3% in 2022 to 29.1% in 2023.

The Covid-19 pandemic appears to coming to an end, yet its remnants continue to place stress on the global economy. The Russia-Ukraine war has only exacerbated a stressful economic period. Rising inflation amid a gloomy growth outlook could seriously impact the global consumer demand, with goods transport activities being no exception. As an open economy, Vietnam can hardly avoid these consequences.

Container shipping demand could be decelerating, while oil & gas transport demand should accelerate. Container shipping freight rates are expected to gradually normalize, however, this path largely depends on supply chain congestion, which we expect to remain unresolved until 2H2023.

We expect tanker shipping companies to enjoy positive earnings momentum (PVT, VOS). Container shipping companies’ earnings growth could decelerate but earnings should remain robust through 2023 due to renewed long-term charter contracts and a stable domestic market (HAH). For port operators, earnings growth should remain constant for deepwater ports (Gemalink, HICT) while others could face downward pressure.

Our top picks for the sector include: PVT, HAH, and GMD

Demand for IPs lease land in Vietnam continues to grow. The opening of international flights comes at a time Vietnam has scrapped the majority of entry restrictions into Vietnam. This has supported the business environment in terms of enabling contracts, MOUs, etc. to be signed at a reasonable pace again to help facilitate the completion of investment procedures. The exchange rate of the Vietnam Dong has been trading a lesser depreciation band than other regional countries such as Indonesia, Thailand, India, and Malaysia, and other key APAC markets such as Japan. Vietnamese policies to attract FDI have also helped bring investors back to the fray, providing FDI investors with incentives such as corporate income tax exemptions for the first 4 years of operation, reduction of 50% of corporate income tax for the next 5 years, and other pro-business incentives. And of course, the ongoing megatrend of the production shift from China to Vietnam has been a constant dynamic, and further accelerated by China’s Zero-Covid policy.

The unexpected Russia-Ukraine war and the influence of the Chinese lockdown from its zero Covid policy have resulted in new challenges to the global economy. Disrupted supply chains, commodity price escalation, and flagging currencies have resulted in major challenges - and opportunities alike. Inflationary pressure (and the associated tendency of central banks to raise interest rates to control said inflation) have greatly affected the global financial market, and Vietnam has been no exception. The crackdown on corruption coupled with the recent strict controls imposed on property sector lending and the corporate bond market has had a much more severe impact than what we had previously anticipated. A series of new regulations and draft changes to previous Decrees/Circulars have been released, rendering altering market dynamics. Over the short-term, we believe that banks will be able to deliver strong earnings during 2H 2022, given the upcoming credit limit extension (as conditionally permitted) by the SBV, and a stable NIM vs. 2021. However, we anticipate medium-term challenges with respect to the corporate bond market. We do, however, remain positive about the sector’s earnings outlook over the short-term, and remain Neutral on the sector for 2023.

Vietnamese fishery exports over the first five months of the year reached USD 1.06 bn (+34.5% YoY), whereby shrimp and pangasius exports reached USD 457 mn (+31% YoY) and USD 248 mn (+67% YoY), respectively. The largest export markets were the US (23% of total exports, +34% YoY) and China (16% of total exports, +71% YoY). Shrimp and pangasius ASP to the US reached USD 12/kg (+20% YoY) and between USD 4.50 – USD 5/kg (c.+60% YoY), whereas pangasius ASP to China reached USD 3.10/kg (+20% YoY). Coupled with the strong and resilient demand from major export markets, demand was also driven by pent-up orders associated with the production restraint during 2H21 from Vietnam Covid-19 lockdowns. There have been signs of a slowdown since May 2022, as inventory levels in export markets are high at this point. 

Due to the negative impacts of rising inflation on consumer spending, the growth of retailers may not be as strong as previously expected. DGW and FRT earnings growth have already peaked in 4Q21, while PNJ may peak in 3Q22. As inflation may still intensify in the coming quarters, we recommend to reduce position in retail stocks in the short term. Meanwhile, leading retailers may still post resilient long term growth on the back of market share gain.

After increasing by 15% in Q1 thanks to pent-up demand, domestic sales volume of finished steel products in April and May dropped by around -32% YoY. The export volume has remained solid in 2Q22, but could also decelerate in coming quarters due to slowing demand, the concern of the fall in steel price, and protection measures from export markets. Regarding price, the price of construction steel in Vietnam has dropped by around -11% from its peak in March, while the HRC steel price also dropped by -25% from its peak in early April, following the movement in the global price. We expect the margin of steel companies will be squeezed in 2Q22 and 3Q22 but will still be much higher than the bottom level in 2018-2019 thanks to less pressure from capacity ramp-up and safer debt level.

During the first five months of 2022, Vietnamese textile and garment exports reached USD 18.7 bn (+24% YoY), with garment and yearn exports of USD 14 bn (+24% YoY) and USD 2.4 bn (+11% YoY), respectively. Garment exports to the US reached USD 7.6 bn (+27% YoY, 54% of total garment exports). Despite inflationary pressures that may hamper apparel demand in developed countries over the medium-term, most local garment manufacturers have orders to produce through to November 2022 due to the order transfer from China to Vietnam.

As was the case in our strategy report in the beginning of 2022, we maintain our view that the Vietnamese property market will be a mixed picture, marked by both growth catalysts and headwinds. However, given recent development in terms of the government’s crackdown of misconduct in both property and stock market, we see that the property market has been facing the need to evolve, with significant changes ahead. Meanwhile, the property price continues to rise in many key region across Vietnam due to limited number of supply. Not to mentioned, with tightened credit/ funding flows into the property market, these will be headwinds that may affect both developers and homebuyers/ investors in the coming time. At this point, we keep a conservative view, especially on the liquidity and absorption rate of second tier city projects and other segments while the overall market may need some time to stabilize and recover.

Pharma sales to continue healthy growth during recent Omicron outbreak: In Q1 2022, we estimate total Vietnam’s pharmaceutical sales to increase 7% YoY, with sales from retail drug stores to increase 23% YoY and sales in hospitals to decline 5% YoY. Pharma demand continues to be strong till 2022 year-end, backed with strong recovery of sales in hospital: With a low growth base from 2021 due to the serious fourth wave COVID outbreak, we expect a strong recovery in hospital pharma sales, result in an estimated 11% YoY for full year 2022, imply a recovery close to pre-Covid sales level. The race to open new stores of pharmacy chain is stimulating higher demand in upcoming years. Three largest pharmacy chains Long Chau, An Khang, Pharmacity are expanding at a rapid rate with ambitious target to increase their market presence in each province. The pharmaceutical business to be a fair hedge against high inflation, with more stable input costs: As a defensive industry, pharma companies will provide a safe bet against inflation and market turmoil.

Sector Top Picks for 2022 & 2023: TRA (BUY, 1-yr TP: VND 120,500/share), DBD (BUY, 1-yr TP: VND 70,000/share)

Economic reopening should allow for nationwide power consumption to heat up; coupled with the temporary limited coal supply continues to push prices on competitive market higher. The average price on competitive market (CGM price) advanced +37% YoY in 1Q2022 which likely will save thermal power plant earnings from negative growth (i.e. NT2, POW, HND). 1Q2022 nationwide power consumption was 63 bn kwh and improved +7.8% YoY (vs. 2021 level of +4%) on the back of 1Q GDP growth of 5.03% YoY. Given the economic reopening, we expect power consumption to recover. We expect power consumption growth of +9.2% YoY in 2022. What if commodity prices keep rising? Commodity prices (incl. oil, gas and thermal coal) could lead to global stagflation which no doubt will impact Vietnam’s export activities, along with Vietnam’s GDP growth (from 6.8%-7.2%YoY to between approx. 5%-6%YoY), and power consumption (from 9.2%YoY to approx. 7%YoY).