Sector Report

Sector Report
Electricity sector update: Nationwide power consumption was back to normal as of September, possible recovery trend forming

Nationwide power consumption growth appears to be on a solid upward trend that could be part of a recovery trend, having expanded +8.2% YoY in Sept20, having caught up with the Sept19 growth pace of +8.4% YoY.  The price on the competitive market (CGM price) has also advanced by 26% on a QoQ basis, due to the miraculous recovery in electricity demand. The generation volume from hydropower remained high due to the rainy season. According to the Vietnam Meteorological & Hydrological Administration (VMHA), precipitation might still shape up nicely before declining in 1Q ’21. Regional thermal coal prices have already bottomed out, and are also on a recovery path due to partly to normalized economic activities that also exist outside of Vietnam. For 2021, we estimate that the domestic thermal coal price for coal-fired power plants will increase between approx. 2-3% YoY.


Vietnam Banking Sector: Quick Update on HSX new listings

Prompted by speculation surrounding the change of listing from both the UPCOM and HNX to the HSX, three banks have outperformed the market YTD. LPB, SHB, and VIB have respectively increased in value by 80%, 197%, and 95% YTD. While we still see a 16.7% further upside potential for LPB given our perceived upside in the shares, we do not feel the same way about VIB given its full FOL and valuation which has prompted us to initiate coverage on the shares with an Underweight rating. In terms of SHB, we issue a Market Perform rating.  


Industrial Real Estate Sector: Positive long-term outlook, yet near-term constraints in new land leasing due to Covid-19

Due to the Covid-19 outbreak, international flights in and out of Vietnam were closed for most business and travelling activities. Needless to say, it caused a significant drag upon closing deals, impacting recent leasing progress of industrial parks (IPs). Most successful transactions were at final stages before the outbreak occurred. In 1H 2020, listed industrial park tickers posted a total revenue of VND 21.4 trillion (-14% YoY) and net income of VND 3.6 trillion (-18% YoY). On the other hand, SZC, D2D, and SIP were tickers that witnessed positive earnings growth during the period. For example, SZC revenue jumped 1.5x YoY with 17 ha (+1.4x YoY) of IP land leased in 1H20. As such, its net income increased by 155% YoY accordingly. Meanwhile, D2D revenue reached VND 149 billion (+22% YoY), and deposit interest saw a leap of 3x YoY, lifting its net income to increase 80% YoY in 1H20. As for SIP, 1H20 revenue grew 10% YoY, while deposit interest and sales of investments increased 2.2x YoY, resulting in a 1H20 net income of VND 418 billion (+1.5x YoY).


Banking Sector Update: Risk control the utmost of priorities

The banking sector reported a decent earnings growth in 1H 2020 of +14% YoY. However, we suspect that the worst is in front of us and that bank bottom line performance could be under significant pressure in 2H 2020 (-22% YoY), followed by a reasonable recovery in 2021. We recommend investors to revisit the sector early next year.  We favor ACB and MBB. We appreciate ACB for its prudent lending practices and diversified loan book, which provides profit resilience. The bank also levers its bancassurance platform. MBB, on the other hand, is expected to settle much of its bad debt in 2020. While profits will be under pressure for the near-term, we would anticipate solid growth in 2021. The restructuring of Mcredit also poses reduced risk. VCB is on watch because of its resilient fundamentals and its ability to perform through thick and thin. Although we expect its earnings to be hit in 2020 because of the bank's measures to support customers as well as prudent provisioning, we believe its earnings will recover strongly after Covid-19. 


Oil&Gas Sector Update: Expecting recovery in 2021 from a 2020 low base and oil price rebound

The Oil & Gas sector was amongst the sectors which  have posted the deepest earnings declines in 2020. In H1 2020, sector earnings were eviscerated - declining -65% based on results of listed companies. Based on our estimate, earnings of companies under coverage declined -39% YoY in 2020, based on a Brent crude price assumption of USD 40/ bbl in 2020 (-37.5% YoY). Based on global consensus for oil prices in 2021, our base case is that the Brent crude will average USD 50/ bbl in 2021 (+25% YoY). E&P activities: Besides ongoing projects such as Sao Vang-Dai Nguyet, Nam Con Son 2 phase 2, LNG Thi Vai, and Long Son refinery, we expect other large projects to begin in 2021, including the NT3 power plant (EPC value of USD 500 mn), Block B (EPC value of USD 1.2 bn). Accordingly, we expect a 40% recovery in earnings of the oil & gas sector in 2021. Key earnings growth drivers for the sector are PLX (+181%) and GAS (+23% YoY) 


Steel & Cement Sector Update: Expected recovery momentum for industry-wide demand from 2H 2020, powered by infrastructure investment

In 2021, we expect demand to rebound between 3%-5% from the low base in 2020, as we expect a nationwide economic recovery, on top of a recovery in infrastructure projects and stronger FDI inflows into Vietnam. According to the World Steel Association, a 4% recovery in global steel demand is expected in 2021, which should support the export channel of Vietnamese producers. Earnings of HPG is expected to increase by 15% fueled by Phase 2 of Dung Quat Integrated Complex, while HSG profit is expected to experience a mild correction due to margin normalization.

In 2021, we believe that demand can rebound by 3%-5% from the weaker performance in 2020 due to the recovery of the domestic economy, and from renewed interest in infrastructure projects. HT1 net profit is forecasted to rise +11% YoY from improved sales volume, and a decrease in interest expenses.


Beer Sector Update: Hard time seems to be over, market recovers gradually

Demand for beer was more negatively affected by Covid-19 during H1 2020, contracting -12.7% by volume, while Nielsen observed that FMCG consumption declined by just -7.3%. According to Nielsen,  consumption was reduced by -22.6% YoY in  Q2 2020 by volume. The Nielsen data reflects actual beer consumption, while sales of SAB and other breweries refer to that from manufacturers to distributors. Beer consumption accounted for 20.7% of FMCG consumption in Vietnam in H1 2020 (Nielsen), a slight contraction from the -22% decline in 2019. Production volume has recovered since May, increasing +60% compared to the February to April period. Volume decreased by -17% YoY in 1H 2020 according to the Vietnam GSO. For 2020, we expect SAB to decline by -30% YoY in terms of beer volume.  2H is expected to be better than 1H provided that Vietnam does not issue another nationwide lockdown. For 2021, we believe that the sector could recover by 20% due to a resurgence from the low base expected in 2020. Having said this, we do not expect beer consumption to achieve pre-Covid levels in 2021. We find that beer consumption could take up to two years to recover to both pre-Covid and pre-Decree 100 levels.


Residential Property Sector Update: Cutting through challenges

As legal issues related to real estate projects usually take years to resolve, we anticipate a similar situation for 2021. As such, we only expect an incremental price gain of between 1-2% in the Hanoi market, while the HCMC market to again see moderate price expansion of between 5-7% in terms of price – not dissimilar to 2020. For property stocks under coverage, we forecast 2021 net profit growth of between 7-8% YoY, due to solid past sales which typically take 2-3 years to be fully amortized into earnings. We forecast between a 15%-17% YoY growth rate in pre-sales within our coverage universe. Several developers have expanded into areas outside major metropolitan areas and are developing large-scale townships, offering greater landed properties. These have received strong buyer interest of late. 

Our Top Call: VHM (Buy, TP VND 113,000), KDH (Buy, TP VND 30,500), NLG (Buy: TP VND 33,400)


Dairy Sector Update: A good consideration for a defensive strategy

Domestic demand for dairy products were less affected by Covid-19, posting just a -4% contraction in value vs. -7.3%  in FMCG growth consumption (source: Nielsen), and nominal retail sales growth of 3.4% (source: GSO) in H1 2020. Milk consumption accounted for 12% of FMCG consumption in Vietnam in H1 2020 (Nielsen), unchanged vs. 2019. Vinamilk (VNM) and Moc Chau Milk (MCM) posted 2.5%/9.7% sales growth, respectively, in H1 2020 outperforming industry and peers (Vinasoy: -6% YoY). As such, we think that Vinamilk has gained additional market share during the pandemic period. Assuming there are no other nationwide lockdowns in H2, we estimate that VNM will  attain growth of 8% in revenue and 5.5% in profit for 2020, while Vinasoy’s (QNS’s soymilk business) revenue and profit is anticipated to decline -1% and -9.2% YoY, respectively, in 2020. Our base case assumption: a) Covid-19 will not be a risk to public health as of mid-2021; b) there will be no more nationwide lockdowns in Vietnam; and c) dairy consumption will remain steady at a low single digit growth rate. VNM stands to gain the most market share under these conditions on the back of its wide range of products and extensive distribution. Accordingly, we forecast 6%/8% sales growth for VNM and MCM in the domestic market, while overseas market revenue is expected to increase 5%-7% from a low base in 2020. As such, we expect VNM to post a steady net earnings growth of 8.8% in 2021. 


Electricity Sector Update: Electricity Demand Back to Positive Growth in May

Power grid consumption in May ‘20 reverted to positive growth of +1.55% YoY vs. Apr ‘20 of -9.5% YoY. Through 5M20, total consumption recorded 97.41 bn kWh (+1.9% YoY). Coal-fired generation volume continued to outperform. Through 5M20, electricity volume sourced from coal-fired power recorded 58.09 bn kWh (+16.8% YoY). Positive signs from hydropower. Volume through 5M20 posted an improvement with -33.8% when being compared to a deeper dive of -36.5% YoY through 4M20, implying the beginning of a recovery in May ‘20. Indeed, volume from the HuaNa and Drakrink hydropower plants in May ‘20 enjoyed positive double-digit growth of +22.45% YoY and 34.6% YoY respectively. May’20 average price on competitive market recouped 21% MoM. The price bottomed out in Apr’20 with VND887/kWh due to low demand as social distancing and then bounced back to VND1,073/kWh in May’20. Up to 5M20, competitive price averaged at VND1,088/kWh (-5.3% YoY). 


Textile & Garment sector update: Covid-19 pandemic impacted severely on the demand side

Total export of textiles & garments up to April reached $10.64 bn USD (-6.6% YoY), while total imports declined to $6.39 bn USD (-8.8% YoY). To compensate for the fall in demand for apparel products, many textile companies switched their production to fabric anti-bacterial facial masks for domestic consumption and export. Several companies in the industry have released their quarterly results, and most of them saw a YoY contraction in both the top line and bottom line in Q1. There were only 2 companies that posted growth in Q1, namely GIL (+32% YoY in both sales and net profit) and STK (+2% YoY in sales and +0.3% YoY in net profit). Vinatex (VGT: HSX) estimated that the industry may lose 30% of its work orders in April and 50% of its work orders in May. Another issue is that the recovery of supply amidst weakening demand may dump global market price of textile & garment products by 20%, as per Vinatex. The International Textile Manufacturers Federation (ITMF) conducted a survey on 700 textile & garment companies across the globe from March 28th to April 6th to inquire about order status and expectation of sales. On average, respondents expected 2020 sales revenue to decline by -28% YoY.


Vietnam aviation sector: Update on 1Q2020 preliminary result and 2020 guidance amid COVID-19

As per our latest note on airport services, our base case assumption is that total passengers might drop by -39% YoY in 1Q 2020 and -55% YoY in 2Q 2020 (when all international passengers decrease to near-zero during this period as the epidemic is unfolding), after which we see that recovery might start in 3Q 2020. We maintain our base case assumption at the moment, since we have 3 more months until the end of June for countries to determine if they can effectively contain the virus. For the moment, we recommend to avoid all airline stocks because they are now having very high leverage with virtually no revenue, which puts an obvious stress on cash flow for airliners. We change our rating for HVN to SELL, with a 1Y target price of VND 18,600/share (-15.4% downside), based on an EV/EBITDAR 2020-2021 time-weighted average target of 6x. The other companies with net cash position (ACV, NCT, SCS) is also taking a strong hit now, but are in a good position to survive the epidemic and can recover quickly after it is over. For ACV, our base case estimate for 2020 revenue and NPAT is VND 14.8 trillion (-18.8% YoY) and VND 5.3 trillion (-36% YoY), as per our latest report. We decide to maintain our base case estimates (even with Europe’s recent escalation of Covid-19) as our last assumptions are already skewed to be rather conservative. We maintain our BUY recommendation for ACV, with a 1Y target price of VND 68,600/share (29% upside), based on a 2020 EV/EBITDA target of 12x. 


Property sector Update: Impact of Decree 25/2020/NĐ-CP and 1Q 2020 market performance
From our point of view, we favor developers which focus on the mid-end segment and that have a healthy financial status and reasonably resilient demand in their client market such as VHM, NLG, or KDH. Also, 2020 developer profits can still achieve decent growth due to that the fact that they record profit at the time when property units are handed over to homebuyers. As such, the process can be affected by some minor delays by the corona outbreak, but can still possible to finalize agreed-upon sales later in 2020. From our discussion with management of various developers in the industry, sales for new launches from VHM, NLG and KDH will still be in the pipeline, and not be postponed in 2020.


Banking sector: Quick Update on Covid-19 impact

Credit growth slowed down in 1Q 2020: According to the General Statistics Office (GSO), credit growth within the Vietnamese banking system was partially derailed by the Covid-19 pandemic, posting a lackluster cumulative +0.68% YTD growth up to 20 Mar 2020. This is the lowest level observed when viewed against the equivalents from 2015-2019 (ranging from 1.25% to 2.81%). Stagnant credit growth was witnessed amongst the three state-owned commercial banks as well as commercial banks MBB and ACB, which might have been spurred by an abundance of caution from these banks regarding elevated credit risk of new loan issuance. Meanwhile, VPB, HDB, and TPB broke the mold and blazed forward with elevated levels of credit growth; roughly 4.8% up to Feb ‘20 (VPB), 5% up to Feb ’20 (HDB), and 9% up to Mar ‘20 (TPB). We noticed that VPB and TPB were particularly active in purchasing corporate bonds. For HDB, growth was thanks to loan agreements with some corporate clients, previously signed in late 2019.


Fisheries sector and VHC VN: Quick Update on Covid-19 impact

Export turnover of the fishery sector in USD reached $991.5 mn (-10.8% YoY) up to 2M 2020. This was driven by a decline of -20.2% YoY in the EU market and -43.8% YoY drop in the China market. Shrimp exports inched up 2.6% YoY to $383.4 mn up to 2M 2020, with a strong rebound of +39.5% YoY recorded in February. Main export markets diverged, as export value rose strongly in Japan (+16.5%), the US (+22.3%) and South Korea (+12.4%), but dropped sharply in the EU (-15.4%), as well as Mainland China & Hong Kong (-37.5%). Export value for Minh Phu (MPC: UPCOM) declined by a moderate -5.7%, while Fimex VN (FMC: HSX) exports sunk by -21.9% YoY. Pangasius exports dropped by -32.1% YoY to $210.3 mn up to 2M 2020, with this particular product line witnessing a sharp contraction across all markets (US by -26.9%, Mainland China & Hong Kong by -52.4%, the EU by -39.9%, and ASEAN by -19.3%). Export value by Vinh Hoan (VHC: HSX) and Nam Viet (ANV: HSX) both declined by -22.5% YoY and -32.4% YoY respectively.  In the first 2 weeks of March per VASEP, up to 35-50% of shrimp orders were either postponed or canceled by US and EU importers due to slower consumption in those markets. Specifically for pangasius, VHC stated that only orders for fresh products are reduced at the moment, while orders for frozen products are still growing steadily.