November 5, 2018

Vietnam Economics

Against the Wind

Headwinds, But Opportunities Remain Analyst As US-China trade tensions escalate, headwinds appear to loom for THAI Quang Trung Vietnam’s open economy, where trade accounts for 200% of its GDP. Even (84 28) 44 555 888 x 8180 though our regional Economics team believes that Vietnam is a potential [email protected] winner and will likely fare better than most other ASEAN nations, shifts in global supply chains could still be disruptive for Vietnam.

We review the potential impact of the US-China trade war on Vietnam. We also review Vietnam’s core economics, focusing on structural drivers

and policy mechanisms in the next 6-12 months. We identify secular opportunities in Vietnam, independent of the global headwinds. Understanding Vietnam’s Macros Is Crucial

ECONOMICS Even without the US-China trade war, understanding Vietnam’s economics has become increasingly important, due to its fast-changing domestic market and trade profile. With its stock market growing rapidly and becoming more diverse in sector representation, macroeconomic

indicators have started to have more meaningful implications for setting capital-market expectations. We find monthly industrial-production and credit-growth data

Vietnam particularly useful for drawing investment implications for sector allocation and business cycles. Understanding Vietnam’s demographic make-up is also important in navigating growth opportunities. We generally prefer industry leaders which can navigate regional cultural differences. Growth is Becoming More Expensive The big picture: we believe growth will become more expensive for Vietnamese corporates from 2019 onwards. A notable output gap in 2017 means the country is operating slightly ahead of its natural capacity. Capacity constraints imply that its output gap could revert to mean in

2019E. Tariff-induced global inflationary pressures could lead to higher operating costs for businesses in the near term, although a CPI-mindful government will likely keep consumer prices contained. The current US- China trade war could, in fact, be deflationary for third-world countries in the medium term. Still, the combination of less attractive growth and equity risk premiums reverting to mean could raise the cost of capital. We recommend investors to switch from growth to value (e.g. dividend stocks or stocks with hidden-value assets). Or cautiously BUY growth-at- reasonable-prices (GARP) on dips. Vietnam remains essentially a growth market. Expect Capital-Market Improvements Vietnam’s capital markets have not been efficient enough in the past few years. Despite a booming stock market, there remains a gap between Vietnam’s fairly high saving rates and fairly low capital formation. Its corporate bond market, in particular, remains underdeveloped. Top-down, we sense increased pressures on the government to support the development of its capital markets and to push for the upgrading of the country to emerging-market status. EM status upgrade is expected by 2020. Bottom-up, there appears to more venture-capital funds available for Vietnamese start-ups in the past few years.

THIS REPORT HAS BEEN PREPARED BY MAYBANK KIM ENG SECURITIES LIMITED SEE PAGE 71 FOR IMPORTANT DISCLOSURES AND ANALYST CERTIFICATIONS Economics Research

Table of Contents

1. Focus charts ...... 3 2. Investment highlights...... 4 3. US-China Trade War: Impact on Vietnam ...... 12 4. Economic forecasts ...... 14 5. Economic review ...... 15 5.1 Economic growth ...... 16 5.2 Price stability ...... 50 5.3 Monetary policy ...... 52 5.4 Fiscal policy ...... 56 5.5 External balances ...... 59 6. Latest updates ...... 69

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1. Focus charts Vietnam’s stock market has become more diverse and more Economic data such as credit growth could provide insights inclusive of its wider economy. into business cycles, as growth becomes more expensive.

Historical sector breakdown on all three bourses VN-Index vs Credit Growth (HSX+HNX+Upcom) (trailing 12M basis) using constant market cap as at 31 Aug 2018 50 20.0 100 2 3 3 4 5 4 8 8 11 11 10 10 9 15 16 14 10 12 45 18.0 80 13 13 13 15 20 20 18 18 25 24 17 40 16.0 60 18 18 17

21 %

19 18 % 32 35 14.0 40 22 23 29 30 28 26 24 23 21 VND / index divisor index / VND 30 12.0 20 32 30 27 25 25 28 27 23 22 23 25 10.0 -

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 YTD 1Q14 Banks/financials Real estate Consumer goods Industrials/Materials Utilities/O&G Other services VN-Index - CAPEX per share (L) Credit growth (R)

Source: FiinPro, MKE estimates Source: State Bank of Vietnam, Bloomberg, MKE estimates

Expect capital-market improvements to bridge the gap Industrialisation from a low base has been and will continue between Vietnam’s high savings and low capital formation. to provide secular growth, in our opinion.

Venture capital availability (global rank) Manufacturing, value added (% of nominal GDP) 35.0 0

20 30.0 40 25.0

60 % 20.0

80 global rank global

100 15.0 120 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 10.0 2010 2011 2012 2013 2014 2015 2016 2017 Indonesia Malaysia Philippines Indonesia Malaysia Philippines Thailand Vietnam Thailand Vietnam

Source: World Economic Forum, The Global Competitiveness Report, 2007-2017 Source: World Bank

Domestic private-sector businesses have become more Foreign investors may consider growth-cyclical industry visible; investments mostly going into manufacturing. leaders due to their investibility and decent risk-adjusted returns. Total nominal investment growth (YoY) 25.0 Others 16%

15.0 Transportation

31% % Industrials - Cyclical 5.0 Construction Breakdown by 16% market cap (5.0)

Industrial materials

2010 2011 2012 2013 2014 2015 2016 2017 (metals, chemicals, etc) 37% Domestic non-state companies YTD 2018 Foreign invested companies

Source: General Statistics Office, CEIC, MKE estimates Source: Bloomberg, FiinPro, MKE estimates

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2. Investment highlights Theme 1: Understanding Vietnam’s economics has become important, due to its fast-changing domestic market and trade profile. In setting capital-market expectations for Vietnam, our research focuses on:

a) Sector allocation: macroeconomic indicators are starting to have Useful implications from the wider more useful implications for sector allocation. Not only has market economy could be drawn for sector cap from the three bourses ballooned in size from 30% of GDP in 2015 allocations. to 80% now, sector representation has become more inclusive of the wider economy. During 2017-18, important economic sectors previously not well- represented on the stock market have seen sizeable listings, such as upstream O&G (e.g. Binh Son Refinery – BSR VN, NR), fuel retailing (e.g. Petrolimex – PLX VN, NR), airlines (e.g. VietjetAir – VJC NV, NR), industrial machinery (e.g. Vietnam Engine, VEA VN, NR), telecommunications (e.g. FPT Telcom – FOX VN, NR) and media (e.g. Yeah1 Group – YEG, NR). We think this is set to continue. For beating the index, investors will likely have a wider selection of sectors and constituents, with meaningful implications from the wider economy.

Figure 1: Sectors more representative as the stock market grows

Source: Fiinpro, MKE estimates We believe industrial-production data may provide some leading insights for sector allocation, as they are updated monthly vs quarterly financial statements (see charts in the Industrial Production section later in the report).

b) Business cycles: macro indicators related to business cycles could Leading indicators related to business have meaningful implications for corporate cash flows in Vietnam’s cycles could be found in the economy. context. While its stock market has grown in size with more diverse sector representation, we reason that it may currently remain a lagging subset of the wider economy. As an open economy, with trade now accounting for >200% of GDP, Vietnam’s growth drivers in the past three years have revolved around its export-oriented Samsung-led FDI sector, following the conclusion of the Vietnam-Korea FTA (VKFTA) in 2015. On the other hand, the stock market, with aggregate foreign ownership hovering around 20% only, broadly represents domestic businesses catering to domestic consumption and investment.

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While domestic consumption remains the most resilient component of GDP, its growth appears to be lagging export growth. Meanwhile, the FDI sector is enjoying trade surpluses, high savings rates, and is still the driving force behind productivity and capital-formation growth. We find that one particularly useful indicator related to business cycles in Vietnam is credit growth, adjusted to a trailing 12-month basis. While data is only available with a 3-month lag, credit growth usually precedes corporate capex spending by 1-2 quarters. Most Vietnamese businesses rely on credit availability for expansion, with nationwide credit to GDP reaching 130% in 2017. Vietnam’s monetary policies aimed at stabilising domestic economic production also revolve around setting credit-growth targets. Figure 2: Economy-wide credit growth predicts corporate cashflows

Source: Bloomberg, State Bank of Vietnam, MKE estimates

We believe merchandise export / import growth (adjusted to a 3MMA basis) can also have useful implications for business cycles. Our theory is that Vietnam’s real import growth is correlated with both its domestic and export demand. Periods during which import growth is rising and exceeding export growth while terms of trade remain solid, such as in early 2017, usually bode well for cyclical domestic stocks. Yield spreads between 5-year and 1-year government bonds could also be interesting to watch. These spreads have dropped to their lowest since mid-2012 and are hovering near 50bps of late. However, we do not think this is conclusive of a downturn. Liquidity in the Vietnamese banking system jumped in late 2017-early 2018, following strong foreign inflows and a lack of full sterilisation by the central bank. This could have driven interbank rates and yields on government bonds a tad too low. Further details in our Monetary Policy section later.

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Figure 3: Export / import growth provides implications for cycles

Source: General Statistics Office, MKE estimates

Figure 4: Narrowing yields, but not conclusive of a downturn

Source: Vietnam Bond Market Association, MKE estimates

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Theme 2: Growth will become more expensive

The big picture is, we think growth will become more expensive for Vietnamese corporates from 2019 onwards, due to the following reasons:

a) Capacity constraints: 2017 GDP was markedly above its potential, with the output gap firmly in positive territory. This momentum spilt over to 2018 and cyclical domestic sectors such as banks and real estate have performed well. Our economic research on Vietnam’s external and domestic demand indicates Vietnam is growing slightly above its natural capacity in the near term. Capacity constraints imply the output gap will start reverting to mean in 2019. b) Tariff-induced inflationary pressures: Broadly speaking, the ongoing US-China trade war should be deflationary in the medium term for third-world countries. This is reflected in our base-case forecasts. However, short term, global import tariffs could disrupt supply chains and even create supply shocks for certain products / commodities that Vietnam imports. A bear-case scenario would include more expensive machinery / equipment imported from developed countries. We expect CPI to remain moderate in 2018-19, as the government appears to be CPI-centric. It is proactively controlling pork prices and prices in publicly-administered sectors such as education, healthcare and electricity. However, producer price indices (PPI) and import price indices (ImPI) in the country’s open economy could still rise. There could be other domestic pressures. The energy industry is biased towards undersupply in the medium term, while fuel subsidies could come under pressure in the short term from high oil prices. Even for consumer prices, inflation risks should not be dismissed. Food-related imports into Vietnam have been on the rise. In many cases, import sources are concentrated. For example, animal feeds, soybeans and corn products are heavily sourced from Argentina and Brazil. A bear case might include China imposing tariffs on US food- related products, prompting Chinese producers to switch to purchasing from Argentina and Brazil. This would temporarily push up prices for Vietnamese importers. Figure 5: Concentrated food-related import sources could be a risk

Source: Vietnam Customs, CEIC, MKE estimates We believe these forces could raise operating costs for many Vietnamese businesses from 2019. Nevertheless, our channel checks indicate that much of the business community might have already turned cautious, in expectation of slower growth. In the near term, it is unclear if businesses intend to pass on higher costs to customers.

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c) Higher costs of capital: we think costs of capital could rise in Vietnam, as most central banks in the region have been raising rates. The good news is, we think the cost-of-capital cycle in Vietnam lags those in the region. The government appears determined to keep rates stable in the near term, before tighter regulations kick in from 2019. Meanwhile, credit growth has prematurely slowed, probably due to precautions by both banks and borrowers. This should leave some room for growth for productive sectors. That said, we think corporates may still find it costlier to tap capital from 2019 onwards, due to a combination of a less attractive growth outlook and equity risk premiums reverting to mean. Figure 6: Equity risk premiums are below historical averages

16% Implied equity risk premium 14% 12% 10% 8% 6% 4% 2% 0%

USA Vietnam Linear (USA) Linear (Vietnam)

Source: Aswath Damodaran, MKE estimates Still, we think Vietnam remains essentially a growth market. As such, Although growth is getting more when looking for alphas in Vietnam’s equities in an environment of expensive, we think Vietnam remains increasingly expensive growth, we think investors could consider two essentially a growth market. options, or a combination of both:

a) Switch from growth to value: regionally, our strategists have been advocating a switch from growth to value since Dec 2017 (see The Strategist – Does No One See the Clouds?). Vietnam’s cycles usually lag those in the region, but we think a switch is now imminent. Within our coverage, PetroVietnam Power NT2 (NT2 VN, BUY, TP VND35,108), 59% owned by PetroVietnam Power (POW VN, NR), could fit value criteria from the perspective of attractive yields. Its FCFE- and dividend yields both averaged 10% annually in the past five years, thanks to stable cash flows that tend to be overlooked by the market. Figure 7: NT2’s total returns have been solid, thanks to its high yields 60.0 Total period returns

40.0 %

20.0

0.0 2015 2016 2017 NT2 VN-Index Source: Bloomberg, MKE estimates

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The latest addition to our stock coverage, Gemadept (GMD VN, BUY, TP VND32,900), could also fit value criteria from a SOTP / hidden- asset perspective. The market has probably overlooked the importance of its business restructuring and timely port expansion in premium locations. One of our SMID-cap top picks, Nam Long (NLG VN, BUY, TP VND35,506), could also fit value criteria, from an EV/EBITDA point of view. Despite operating in a cyclical sector, NLG has defensive characteristics such as high turnover - by relying on low-storey apartments and low-rise products - and net cash. Figure 8: NLG’s EV/EBITDA on the low side, with a strong balance sheet

30.0 Nam Long's EV/EBITDA

25.0

20.0

x 15.0

10.0

5.0

0.0

Jul-16 Jul-17 Jul-18

Jan-16 Jan-17 Jan-18

Sep-15 Sep-16 Sep-17

Mar-16 Mar-17 Mar-18

Nov-15 Nov-16 Nov-17

May-16 May-17 May-18

Source: Bloomberg, MKE estimates b) GARP: our back-tests tend to favour GARP investing in Vietnam (see Vietnam Special Report - Three Growth Investing Ideas, dated 8 May 2017). Given general uncertainties and volatility, we advocate buying our following top picks on dips:

i. Secular growth types: Mobile World (MWG VN, BUY, TP VND176,500) and Phu Nhuan Jewellery (PNJ VN, BUY, TP VND 141,900). Both companies are resilient industry leaders and may be able to find pockets of growth even when their respective industries slow. Short-term volatility may drive their share prices to attractive levels, in our view. However, both stocks require block trades as their foreign-ownership quotas are fully taken up.

ii. Cyclical growth types: Vinhomes (VHM VN, BUY, TP VND136,000) and Hoa Phat (HPG VN, BUY, TP VND52,857). Both companies belong to the “too large to ignore” camp. Both have been spending on capacity expansion in the past year and are two leaders in Vietnam’s capex cycle. The value aspect comes from the fact that both stocks have retreated from our last report, although we have not seen significant changes in their cashflow outlook. While we think capex growth at this stage could be expensive, both boast unassailable industry leadership. They have largely secured credit lines from banks for expansion. Their expanded capacity should help them extend their market shares even in a downturn, as in 2008-13. Both stocks also have ample foreign-ownership room and liquidity.

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Theme 3: Expect capital-market improvements

It has apparently been brought to the policymakers’ attention that Vietnam’s capital markets have not been efficient enough in the past few years. Despite a booming equity market, there remains a gap between Vietnam’s fairly high saving rates and fairly low capital formation. Its corporate bond market, in particular, remains underdeveloped. Top-down, we are sensing increased pressures on the government to support the development of Vietnam’s capital markets and to push for the upgrading of the country to emerging-market status. The latter is expected sometime in 2020, for an inclusion in the MSCI Emerging Markets Index. There are talks related to the FTSE Emerging Markets Index as a target, too. Vietnam’s monetary and fiscal policies have yet to modernise and there are limited countercyclical capabilities to cushion the economy from a recession. Also, Vietnam’s external debts are fairly high, while its foreign reserves are not that strong. In terms of months of imports, they were about >3 as at Mar 2018. With rising costs of capital playing out in the region, developing domestic capital markets is understood to be a priority. Bottom-up, Vietnamese start-ups have perceived improvements in venture-capital availability in the past few years. We suspect that venture-capital funding in Vietnam is predominantly coming from foreign sources. Earlier this year, support from the government also came in the form of Decree 38/2018/ND-CP. This made procedures for setting up venture-capital funds easier and less reliant on existing securities regulations. Figure 9: Venture-capital availability has improved

Venture capital availability (score) Venture capital availability (global rank) In your country, how easy is it for start-up entrepreneurs with innovative but risky projects to obtain equity funding? [1 = extremely difficult; 7 = extremely easy] 0 6.0 5.0 20 4.0 40

3.0 60 score

2.0 80 global rank global 1.0 100 - 120 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Indonesia Malaysia Philippines Indonesia Malaysia Philippines Thailand Vietnam Thailand Vietnam

Source: World Economic Forum, The Global Competitiveness Report, 2007-17

There also appears to be a significant number of small businesses growing strongly that remain under the radar in Vietnam. Out of the 500 fastest- growing companies in Vietnam listed by the latest FAST500 database, only 11 are captured in FiinPro’s database of public companies, in our recent survey. FAST500 captures Vietnam’s fastest-growing companies, based mainly on 2013-16 revenue CAGRs and industry-specific profitability metrics. Thanks to strong economic growth in the past few years, these under-the-radar companies might have become mature enough and could become attractive IPO candidates in the next few years. These indications lead us to believe that capital markets are due for meaningful improvements in the next few years.

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Figure 10: Stocks mentioned in the report

Rated

Mkt cap Price TP PE (x) P/BV (x) ROE (%) EV/EBITDA Dividend yield (%) Ticker Company Name Sector (USDm) (VND) (VND) Rating FY17A FY18E FY19E FY17A FY18E FY19E FY17A FY18E FY19E FY17A FY18E FY19E FY17A FY18E FY19E

VNM Vinamilk Consumer Staples 10,168 136,000 164,583 Hold 24.1 21.9 19.6 9.7 9.0 8.0 44.8 45.8 45.5 16.5 15.2 13.6 3.7 4.3 4.3

VHM Vinhomes JSC Real Estate 12,137 105,500 136,000 Buy n/a 13.9 9.4 n/a 5.6 3.5 26.9 40.1 37.4 n/a 11.1 6.9 n/a 0.0 0.0

HPG Hoa Phat Group Metals & Mining 3,597 39,450 52,857 Buy 8.6 8.5 7.1 2.2 2.0 1.5 24.8 25.1 23.0 5.5 6.2 4.8 0.0 0.0 0.0

MWG Mobile World Investment Consumer Disc. 1,670 120,500 176,500 Buy 18.3 14.7 11.8 7.0 4.7 3.6 37.3 31.0 29.5 12.3 8.8 7.2 1.1 1.2 1.2

CTD Coteccons Construction 538 160,100 176,000 Hold 11.1 7.7 7.1 2.4 1.4 1.2 22.6 20.0 18.4 6.8 3.4 2.5 1.3 0.0 0.0

PNJ Phu Nhuan Jewellery Consumer Disc. 695 99,900 141,900 Buy 21.3 19.1 14.4 4.8 4.6 4.0 24.6 28.3 33.2 14.8 13.6 10.0 2.7 3.1 4.0

NT2 PetroVietnam Power NT2 Utilities 343 27,750 35,108 Buy 8.4 6.7 7.2 1.7 1.3 1.2 17.4 17.0 15.1 5.9 4.3 3.9 6.0 7.2 7.2

GMD GEMADEPT Corp Transport 330 25,900 32,900 Buy 28.3 20.1 17.3 1.6 1.2 1.1 8.0 29.2 7.6 14.8 11.6 10.9 3.7 30.9 5.8

NLG Nam Long Investment Real Estate 281 30,900 35,506 Buy 8.4 9.2 5.2 1.4 1.6 1.2 18.3 17.7 25.4 4.2 4.1 2.1 1.8 1.5 1.5

Source: Factset Partners, MKE estimates, 19 Sep 2018

Unrated

Effective PE (x) P/BV (x) ROE (%) EV/EBITDA Dividend yield (%) Mkt cap 3m ADTV foreign Ticker Company Name Sector (USDm) (USDm) room * FY18E FY19E FY18E FY19E FY18E FY19E FY18E FY19E FY18E FY19E (USDm) BSR Binh Son Refining Oil & Gas 2,385 1.27 114.0 8.0 7.3 n/a n/a 18.6 19.3 5.8 5.6 n/a n/a

PLX Vietnam National Petroleum Oil & Gas 3,556 1.97 350.7 21.9 21.4 3.3 2.9 16.9 16.7 11.7 11.0 2.1 2.1

POW PetroVietnam Power Oil & Gas 1,577 0.80 93.0 14.9 10.8 1.3 1.2 8.9 11.4 7.3 7.0 3.2 2.8

VJC Vietjet Aviation Airlines 3,473 3.99 183.0 13.9 11.8 5.6 4.3 36.1 34.1 12.9 10.8 2.1 2.1

VEA Vietnam Engine & Agri Machinery Industrials 1,667 0.66 168.1 6.6 6.0 1.9 1.8 30.5 29.4 16.0 14.8 10.8 11.1

FOX FPT Telecom Telecommunications 496 0.01 19.1 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a

YEG Yeah1 Media 316 0.19 119.5 30.9 n/a 4.5 n/a 27.5 n/a 21.2 n/a n/a n/a

VCS Vicostone Materials 674 0.71 134.9 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a

HSG Hoa Sen Group Materials 202 1.52 58.0 6.4 6.4 0.9 0.8 14.0 13.7 7.6 6.8 7.9 8.2

NKG Nam Kim Group Materials 107 0.12 49.8 4.5 4.4 0.7 0.7 18.2 16.5 5.7 5.4 6.3 6.6

SAB Saigon Beer Consumer Staples 6,145 0.54 0.0 32.1 26.3 9.0 7.4 32.3 32.7 23.7 20.1 1.6 1.6

VHC Vinh Hoan Corp Consumer Staples 357 0.40 142.2 12.4 10.4 2.4 2.1 21.8 21.9 7.3 6.2 2.2 2.6

DBC Dabaco Group Consumer Staples 100 0.07 11.0 8.2 7.6 0.8 0.8 13.6 12.5 7.2 6.2 n/a 1.8

STK Century Synthetic Fiber Consumer Disc. 38 0.02 16.0 6.9 5.4 1.1 1.0 16.2 18.5 4.8 4.2 5.5 5.5

TCM Thanh Cong Textile Consumer Disc. 69 0.35 0.0 9.6 8.0 1.6 n/a 17.5 16.8 6.4 5.5 3.2 n/a

TNG TNG Investment Consumer Disc. 30 0.16 10.0 5.6 n/a n/a n/a 16.6 n/a n/a n/a n/a n/a

EVE Everpia Consumer Disc. 28 0.04 11.0 8.1 6.9 0.6 0.6 8.3 9.1 4.4 3.9 6.1 6.1

REE Refrigeration Electrical Engineering Industrials 473 0.72 0.0 6.5 6.2 1.2 1.1 18.3 17.1 9.9 8.9 4.5 4.5

* current market value of shares available for foreign investors, free-float adjusted

Source: Bloomberg consensus estimates, FiinPro, MKE estimates, 19 Sep 2018

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3. US-China Trade War: Impact on Vietnam Our analysis led us to the following findings with regards to the impact on Vietnam from the ongoing US-China trade war:

(1) From an economic growth point of view, lower global growth amidst a large-scale trade war may affect the growth trajectory for Vietnam, where exports account for >100% GDP. Increased tariffs on a global scale may effectively reduce market sizes for Vietnamese corporates as a whole, even though some companies may be able to increase their market share. Our 2018-19 base-case economic forecasts take such risks into account.

(2) From a trade point of view, US taxation on China will both positively and negatively affect Vietnam. From the positive side, Vietnam could benefit in two ways:

(a) FDI into Vietnam may increase, as manufacturers relocate their production bases from China to Vietnam. Labour costs in Vietnam remain about half of those in China, according to Statista data. These FDI players could range from electronics suppliers to textiles manufacturers.

(b) Certain Vietnam-based manufacturers could grab US market share vacated by the Chinese. According to analysis by Dr. Nguyen Xuan Thanh from Fulbright University Vietnam in August 2018, within the almost 6,000 product categories subject to US taxation on China (of USD250b up to this point), exports from Vietnam to the US totalled about USD13b in 2017, a sizeable pie. These include wood/furniture (36.7%), fishery/processed food (19.4%) and electronic/electrical equipment (13.5%). A caveat is that the US taxation could theoretically extend to Vietnam. Vietnam still created the 5th largest trade deficit for the US in 2017 – the only ASEAN country in the top 5.

From the negative side, Vietnam could also be affected in a few ways:

(a) Chinese products previously destined to the US could head to ASEAN, including Vietnam: A combination of the CNY devaluation and the shifting of the trade profile could increase Chinese imports of intermediate and final products into Vietnam, including furniture, chemicals, plastics, rubber products and agricultural products. This could discourage domestic investment.

(b) Vietnam’s intermediate products exported to China destined for US could be disrupted: There is a rise in Vietnam’s exports of intermediate products to China, as the latter moves up the global electronics value chain. Top products include integrated circuits (#1) and broadcasting accessories (#3) (see Table 11, ASEAN Economics – US-China Trade War: Raising the Stakes, dated July 25). A disruption of the global electronics supply chain could affect growth and employment in a segment of the Vietnam’s economy.

(c) Transshipment (Chinese products exported to Vietnam to be re-exported to the US): Steel is an example - the US already imposed a 450% taxation on Vietnam’s steel originating from China. If a full-scale investigation is conducted, the entire product category could be affected, and could put Vietnam on the radar.

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(d) Certain Vietnamese food-related imports could be expensive in the short-term: Tariffs may shift Vietnam’s supply curves to the left for certain food-related inputs, such as animal feeds, soybeans, and corn products. As explained above, a bear-case scenario may involve Chinese producers importing food-related materials from South America faster than Vietnam’s increases in US imports, putting pressure on food prices. Along these lines, potential winners may include niche export- oriented players with an established market share in the US, such as Vicostone – VCS VN, NR (who reported an 11% market share in 2016). Losers may include steel producers with a combination of ASEAN export exposure and a low value-added product mix, such as Hoa Sen (HSG VN, NR) and Nam Kim (NKG VN, NR).

(3) From an FX point of view, tail-risks could come from a volatile CNY. Our back-test (further elaborated in the External Balances section) reveals that the CNYUSD devaluations occasionally magnified VNDUSD devaluations in the short-term. Besides the fact that Vietnam’s exports to China have grown from c.10% of total exports prior to 2016 to c.15% now, a lower CNYUSD would also intensify competition against Vietnamese products, domestically and globally. Certain corporates with high USD debts could also be affected if VNDUSD becomes volatile in the short term. Figure 11: Selected listcos with high export revenues 2017 Export 2017 Total Exports / Industrial sector (ICB) Ticker Name Exchange Revenue Revenue Total Level: 5 (VND tril) (VND tril) Revenue (%) MPC Minh Phu Seafood UPCOM Fishing 15.7 15.7 100% HSG Hoa Sen Group HOSE Steel Producers 10.5 28.3 37% VHC Vinh Hoan Corp. HOSE Fishing 6.8 8.2 83% NKG Nam Kim Steel HOSE Steel Producers 5.5 12.6 44% AAA An Phat Plastic HOSE Plastics 4.1 4.1 100% VCS VICOSTONE HNX Tile & Paving Materials 3.2 4.4 73% TCM Thanh Cong Textile Garment HOSE Clothing & Accessories 2.9 3.2 90% HTM Hanoi Trade (“Hapro”) UPCOM Other Retailers 2.5 3.2 78% ANV Nam Viet HOSE Fishing 2.1 2.9 71% GMC Saigon Garment HOSE Clothing & Accessories 1.6 1.6 98% PIT Petrolimex International Trading HOSE Other Retailers 1.3 2.1 62% AGF An Giang Fisheries HOSE Fishing 1.2 2.3 52% VOS Vietnam Ocean Shipping HOSE Inland water freight 1.1 1.6 69% STK Century Synthetic Fiber HOSE Clothing & Accessories 1.1 2.0 56% CMX CAMIMEX Group HOSE Fishing 0.9 0.9 97% ADS Damsan Yarntex HOSE Clothing & Accessories 0.9 1.5 58% SNC Nam Can Seaproducts UPCOM Fishing 0.8 0.8 93% TFC Trang Corp. HNX Seafood Products 0.4 0.4 100% SPH SEAPRODEX HANOI UPCOM Fishing 0.4 0.4 100% TPC Tan Dai Hung Plastic HOSE Plastics 0.4 0.7 51% NAF Nafoods Group HOSE Fruit Drinks 0.4 0.5 72% GDT Duc Thanh Wood HOSE Furnishings 0.3 0.4 86% GTA Thuan An Wood Processing HOSE Forestry 0.3 0.5 54% PTG Phan Thiet Garment UPCOM Clothing & Accessories 0.3 0.3 90% TDT TDT Investment And Development HNX Clothing & Accessories 0.2 0.2 93% NGC Ngo Quyen Food Processing HNX Fishing 0.2 0.2 91% AAM Mekong Fisheries HOSE Fishing 0.2 0.2 79% SGC Sa Giang Import Export Corp. HNX Other Food 0.2 0.3 55% Source: Bloomberg, Fiinpro, company data, MKE estimates

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4. Economic forecasts We expect the strong growth momentum since 2017 to be extended in 2018, mainly driven by strong real export growth. We expect mean reversion in 2019 as the output gap declines, export growth moderates, fiscal consolidation continues, and credit growth slows. While we also expect Vietnam’s current account to mean-revert, its position is likely to remain resilient, from a regional context. Vietnam’s latest August merchandise trade balance was nearing an all-time high. As such, we expect stable interest rates (as the government is likely to tighten monetary policy via slower credit growth rather than higher rates in the near-term) and slower CPI in 2019E (as the domestic supply chain improves and import price pressures gradually subside). Our FX team expects a gradual VND appreciation on the back of a strong current account position and further unwinding of long USD positions. Note, however, this is based on the base-case assumption that the US- China trade war is not prolonged and intensified further than the current level. Overall, Vietnam still intends to keep its exports competitive. Figure 12: Vietnam - Key Macroeconomic Indicators

Metric 2014 2015 2016 2017 2018E 2019E Notes Expect growth to moderate in 2019E as global growth Real GDP (%) 6.0 6.7 6.2 6.8 6.8 6.5 moderates and Vietnam's positive output gap reverts to mean. YTD real retail sales, tourist arrivals and consumer credit Private Consumption (%) 6.1 9.3 7.3 7.4 7.2 7.0 growth are moderating to 2016 levels. YTD government current expenditure growth (nominal) has Government Consumption (%) 7.0 7.0 7.5 7.3 7.0 7.0 moderated from 2017 level; fiscal consolidation to continue. YTD investment (nominal), FDI (nominal), and corporate Gross Fixed Capital Formation (%) 9.3 9.4 9.9 8.9 8.5 8.1 CAPEX (nominal) moderating as credit growth slows. YTD nominal export growth exceeding nominal import growth, Exports of Goods & Services (%) 11.6 12.6 13.9 16.7 14.0 11.5 with export price growth roughly equal import price growth. YTD nominal import growth taking a breather from the jump Imports of Goods & Services (%) 12.8 18.1 15.3 17.5 13.8 11.8 in machinery imports in 2017. To revert its trajectory in 2019E. YTD strong trade balance on strong commodities and Current Account Balance (% of GDP) 5.0 0.3 4.4 2.9 4.1 3.2 increased external demand; expected to mean revert in 2019E. Currently using our estimates of historical data based on MOF Fiscal Balance (% of GDP) (4.7) (4.3) (3.6) (3.5) n.a. n.a. data. Awaiting GFSM 2014 consistent data in 2018 to forecast. CPI to pick up in 2H18 on higher food/oil prices but expect Inflation Rate (%, period-average) 4.1 0.6 2.6 3.5 3.6 3.3 lower CPI in 2019 on domestic supply chain improvements. Expect stable employment due to the government’s efforts in Unemployment Rate (%) 2.1 2.3 2.3 2.2 2.3 2.3 restructuring agriculture and the ongoing move to industry. Exchange Rate (per USD, end- Our FX team is biased towards a revaluation on the back of a 21,388 22,485 22,761 22,698 23,000 22,700 period) REER undervaluation and a resilient current account. Benchmark Interest Rate (% p.a., Expect government to try to maintain unchanged interest 6.50 6.50 6.50 6.25 6.25 6.25 end-period) rates while slowing down credit growth.

Source: World Bank, MKE estimates (ASEAN X Macro, latest edition) Figure 13: Vietnam’s current account positions to remain resi lient

15 Current account, % of GDP

10 Indonesia Malaysia

% 5 Philippines

0 Thailand Vietnam (5) 2014 2015 2016 2017 2018E 2019E Source: CEIC, MKE estimates

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5. Economic review In this section, we review Vietnam’s macroeconomic standing, focusing on structural drivers and market/policy mechanisms. We believe the analysis and findings in this section will stay relevant in the next 6-12 months. At the end of the report, we included a one-page snapshot of the latest data updates, summarised in six charts. We believe these charts, updated monthly, provide a comprehensive economic overview of Vietnam. On the one hand, Vietnam is one of the few countries that report monthly economic data even before the reporting period ends. On the other hand, certain data may be subject to considerable revisions. An example is trade data, which is subject to multiple rounds of revisions. Our back-test of the 2009-17 trade data suggests that the General Statistics Office (GSO)’s initial estimates (released before month-end) tend to significantly underestimate the volatility of the actual merchandise trade balance, with only a moderate fit (r2 = 63%). This is despite the fact that GSO usually provides fairly close estimates of total exports and imports (r2 = 99%), before month-end. We believe it is more meaningful to look at 3MMA export/import growth, rather than the initial trade balance estimate. This has been depicted in one of our charts. Also, we note that Vietnam does not provide historical demand-side GDP quarterly; only historical annual data are available. Figure 14: Vietnam by the numbers Metric (unit) 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Income, production and employment GDP, nominal (USDb) 99.1 106.0 115.9 135.5 155.8 171.2 186.2 193.4 205.3 223.9 GDP per capita, nominal (USD) 1,145 1,160 1,273 1,517 1,748 1,907 2,052 2,109 2,215 2,385 GDP growth, real (% YoY) 5.7 5.4 6.4 6.2 5.2 5.4 6.0 6.7 6.2 6.8 Retail sales growth, real (% YoY) 6.5 11.0 14.0 4.7 6.2 5.5 8.1 8.4 8.3 9.5 Industrial production index (% YoY) 7.4 7.1 9.4 6.8 5.8 5.9 7.6 9.8 7.4 9.4 Industrial production index - manufacturing (% YoY) 10.5 5.6 12.6 9.5 5.5 7.6 8.7 10.5 11.3 14.5 Exports of goods & services, FOB, real (% YoY) 13.7 (5.1) 8.4 10.8 15.7 17.4 11.6 12.6 13.9 16.7 Imports of goods & services, FOB, real (% YoY) 15.0 (6.8) 8.2 4.1 9.1 17.3 12.8 18.1 15.3 17.5 Exports of goods & services, FOB, nominal (% YoY) 27.7 (9.8) 26.8 32.7 17.5 14.8 12.9 7.5 9.0 20.3 Imports of goods & services, FOB, nominal (% YoY) 26.8 (12.6) 19.8 25.1 7.0 17.3 11.3 11.6 5.9 21.8 Export growth, merchandise, FOB, nominal (% YoY) 29.1 (8.9) 26.5 34.2 18.4 15.1 13.8 7.9 9.0 21.2 Import growth, merchandise, CIF, nominal (% YoY) 28.8 (13.3) 21.3 25.8 6.6 16.0 12.0 12.3 4.9 22.3 Unemployment rate (%) 3.6 3.2 2.7 2.0 1.8 2.2 2.1 2.3 2.3 2.2 Under-employment rate (%) ------3.0 2.7 2.8 2.4 1.9 1.7 1.6

Prices and financial indicators Consumer price index (% YoY) 23.1 7.1 8.9 18.7 9.1 6.6 4.1 0. 6 2.6 3.5 USDVND exchange rate, official, period avg 16,302 17,065 18,613 20,510 20,828 20,933 21,148 21,698 21,935 22,370 USDVND exchange rate, official, period end 16,977 17,941 18,932 20,828 20,828 21,036 21,246 21,890 22,159 22,425 Deposit interest rate (%), period avg 12.7 7.9 11.2 14.0 10.5 6.7 4.9 4.7 4.8 4.8 Lending interest rate (%), period avg 15.8 10.1 13.1 17.0 13.5 9.6 8.2 7.0 7.0 7.4 Real interest rate (%), period avg (5.6) 3.6 0.9 (3.6) 2.3 4.6 4.3 7.2 5.8 3.1 Policy rate - Refinancing rate (%), period end 10.3 8.0 9.0 15.0 9.0 7.0 6.5 6.5 6.5 6.3 Policy rate - Discount rate (%), period end 7.5 6.0 7.0 13.0 7.0 5.0 4.5 4.5 4.5 4.3 M2 supply (% YoY) - period end 20.7 26.2 29.7 11.9 24.5 21.4 19.7 14.9 17.9 14.3 Credit growth (% YoY) - period end 15.8 37.5 41.2 10.9 8.9 12.5 14.2 17.3 18.3 18.2

External sector Merchandise trade balance (FOB-CIF) (USDb) (18.0) (12.9) (12.6) (9.8) 0.7 0.0 2.4 (3.6) 1.8 2.1 Current account balance (BoP, USDb) (10.8) (6.6) (4.3) 0.2 9.4 7.7 9.4 0.9 8.2 6.1 Current account balance (% of GDP) (10.9) (6.2) (3.7) 0.2 6.1 4.5 5.0 0.3 4.4 2.9 Total FX reserves (USDb) 23.9 16.0 12.1 13.1 25.2 25.5 33.8 27.9 36.2 48.7 Total reserves in months of imports 3.2 2.6 1.6 1.4 2.5 2.1 2.5 1.9 2.3 2.6 FDI inflows (USDb) 9.6 7.6 8.0 7.4 8.4 8.9 9.2 11.8 12.6 14.1 FDI disbursements (USDb) 11.5 10.0 11.0 11.0 10.0 11.5 12.5 14.5 15.8 17.5 FDI net inflows (% of GDP) 9.7 7.2 6.9 5.5 5.4 5.2 4.9 6.1 6.1 6.3

Public sector General government's gross debts (% of GDP) 39.4 45.2 48.1 44.6 48.4 51.8 55.0 57.0 59.8 58.2 Fiscal balance, overall (% of GDP) (0.5) (6.0) (2.8) (1.1) (6.9) (7.4) (6.3) (6.2) (6.3) (4.7) Fiscal balance, primary (% of GDP) 0.5 (4.9) (1.6) (0.1) (5.6) (5.9) (4.6) (4.3) (4.3) (2.7)

Capital markets VN-Index total return (% period-end, incl. dividends) (65.2) 60.2 0.6 (24.9) 22.9 27.2 12.5 10.2 18.7 52.3 Stock market (% of nominal GDP) -- 31.9 33.1 19.8 24.5 27.0 29.1 31.2 38.0 69.0 HOSE -- 25.3 26.1 15.9 20.9 23.3 24.7 26.4 32.3 51.4 HNX -- 6.4 6.3 3.1 2.7 3.0 3.4 3.4 3.3 4.4 Upcom -- 0.2 0.6 0.8 0.9 0.7 0.9 1.4 2.3 13.2 Bond market (% of nominal GDP) 16.0 13.7 16.0 15.3 16.3 18.6 22.5 22.0 22.2 21.4 Source: General Statistics Office, Vietnam Customs, State Bank of Vietnam, Ministry of Finance, World Bank, IMF, ADB, CEIC, Bloomberg, MKE estimates

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5.1 Economic growth 5.1.1 GDP growth: led by industrialisation Overall, we believe the headline GDP growth provides less implications for forming capital market expectations than identifying the specific growth engines and the magnitude of the output gap. From a production point of view, we believe the key structural engine behind Vietnam’s economic growth has been and will continue to be industrialisation, in sectors such as manufacturing and infrastructure. Such industrialisation has historically been led by FDI. However, we note that nominal investments from the Manufacturing activity from domestic private-sector outgrew that by FDI businesses in 2016, 2017 and the domestic private-sector is 2018 YTD (by 0.3, 2.8 and 7.2 percentage points, respectively). As these becoming more visible. investments mostly go into manufacturing, the domestic private-sector is becoming more visible within Vietnam’s industrialisation theme. Notwithstanding some recovery in 2018, contributions to economic growth from commodities-driven sectors such as agriculture and mining are The move from agriculture subsiding. We see the move from these primary sectors into industry an into industry is still on-going on-going driver of productivity growth, from a low base. Vietnam’s and will remain a secular urbanisation still stands at a mere 35%, only above Cambodia and Timor- productivity driver. Leste in ASEAN, and below the less developed Laos and Myanmar.

In fact, the move away from agricultural employment into industrial Growth has appeared sectors has also been credited by the IMF as essential in raising Vietnam’s inclusive, reflected in low total factor productivity (TFP) growth. Overall, growth has appeared underemployment and a inclusive and has apparently benefited the grassroots people, as reflected relatively low Gini coefficient. in low underemployment rates and a relatively low Gini coefficient.

From the demand side, consumption has been the most resilient GDP Break-out drivers could come component. While Vietnam’s population is ageing, and consumption as a % from e-commerce penetration and tourism growth. of GDP is already high (c.75%), break-out growth drivers could come from higher e-commerce and tourism penetration. Despite a high saving rate (of >30% of nominal GDP), investment has been declining to c.25% of GDP. This has been attributed to inefficient capital markets. Nevertheless, volume growth in the stock market and ongoing discussions by policymakers about supporting the bond market lend hopes Domestic corporates in to long-term capital being more efficiently channelled to investments. sectors supporting the overall industrialisation of the In real terms, investment growth has picked up in the past few years, led country, such as steel, could by FDI companies such as Samsung. In the next few years, we expect this move up the value chain. development to gradually help Vietnam move up the value chain (again, from a low base). We note that 2017 GDP growth of 6.8% was markedly ahead of potential GDP growth – the IMF recently used four different methods to estimate potential GDP, all of which resulted in a notable positive output gap. This was most strongly driven by Samsung’s investments since Q1 2017. The economy is probably operating slightly ahead of its short-term natural capacity - the IMF estimated Vietnam’s 2017 output gap to be +0.4%, with a long-term potential GDP growth of only 6.5%.

Domestic production of intermediate products (such as basic materials and With a positive output gap electronic components) has outgrown that of final products (such as steel in 2017 and accelerated structures and mobile phones); however, Vietnam has been able to inflation in 1H18, growth is competitively export much of its production capacity in intermediate set to be more expensive to products overseas, reducing short-term risks of production overcapacity. the economy. For this reason, we expect GDP growth’s reversion to its natural capacity to be gradual and smooth. That said, global inflationary pressures imply growth will start to become more expensive to the economy.

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Figure 15. Industrialisation has been a key contributor to growth…

Contribution to real GDP growth – production side (annual) 100.0 1.3 8.2 12.1 9.9 90.0 11.6 16.5 16.3 13.4 Others 9.6 11.1 24.4 11.7 8.3 80.0 10.4 9.0 20.7 15.4 Finance/real estate 70.0 18.4 18.6 16.6 16.9 20.7 60.0 13.7 22.6 24.1 Trade/tourism 23.2 20.0 50.0 22.5 26.6 % 40.0 21.6 33.4 27.3 Infrastructure (construction/utilities/logistics/public svc) 30.0 26.6 20.5 36.1 21.6 38.7 Manufacturing 20.0 33.3 21.6 10.0 19.3 14.8 16.1 Commodities-driven (agriculture/mining/quarrying) - (4.3) (10.0) 2011 2012 2013 2014 2015 2016 2017 2018 YTD Source: General Statistics Office, CEIC, MKE estimates

Figure 16. … as commodities-driven sectors take a back seat

Contribution to real GDP growth – production side (quarterly, T12M) 100.0 11.7 11.8 11.4 10.9 10.7 10.1 9.9 90.0 Others 11.7 12.1 12.3 11.5 11.0 10.3 9.9 80.0 17.3 Finance/real estate 70.0 18.5 19.1 18.6 19.4 18.4 17.3 60.0 Trade/tourism 23.0 22.6 21.2 50.0 26.7 25.4 25.4 24.0 % 40.0 Infrastructure (construction/utilities/logistics/public svc) 30.0 Manufacturing 38.5 38.1 20.0 33.4 34.7 34.2 35.5 38.4 10.0 Commodities-driven (agriculture/mining/quarrying) - (10.0) Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 Jun-18

Source: General Statistics Office, CEIC, MKE estimates

Figure 17. Manufacturing share in nominal GDP is rising…

Value added by sector, % of nominal GDP 100.0

17.5 16.1 14.6 14.8 14.8 14.9 15.0 14.8 15.2 Others 80.0 11.2 10.8 10.7 10.4 10.6 10.6 10.3 11.5 9.1 Finance/real estate 12.9 60.0 11.6 12.1 13.2 13.6 13.9 14.3 14.5 14.6 14.3 Trade/tourism % 15.1 14.4 14.3 14.8 15.4 15.8 16.0 15.8 40.0 13.3 Infrastructure (construction/utilities/logistics/public svc) 12.9 13.4 13.3 13.2 13.7 14.3 15.3 16.2 20.0 Manufacturing 27.9 29.4 30.6 29.0 28.5 26.6 24.4 22.8 21.5 Commodities-driven (agriculture/mining/quarrying) - 2010 2011 2012 2013 2014 2015 2016 2017 2018 YTD

Source: General Statistics Office, CEIC, MKE estimates

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Figure 18. …but, long way to go compared with ASEAN peers Manufacturing, value added (% of nominal GDP) 35.0

30.0

25.0 % 20.0

15.0

10.0 2010 2011 2012 2013 2014 2015 2016 2017

Indonesia Malaysia Philippines Thailand Vietnam

Source: World Bank

Figure 19. GDP/industrialisation have traditionally been led by FDI Breakdown by ownership, value added (% of nominal GDP) 35.0 Households 30.0

25.0 State

20.0 Foreign-invested % businesses 15.0 Private-sector businesses 10.0

5.0 Cooperatives

- 2010 2011 2012 2013 2014 2015 2016

Source: General Statistics Office, CEIC, MKE estimates

Figure 20. But investments from domestic businesses have accelerated Total nominal investment growth (YoY) 25.0

20.0

15.0

% 10.0

5.0

-

(5.0)

2010 2011 2012 2013 2014 2015 2016 2017 2018 YTD 2018 Domestic non-state companies Foreign invested companies

Source: General Statistics Office, CEIC, MKE estimates

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Figure 21. The public sector is still dragging nominal investments…

Gross capital formation (% of nominal GDP) 40.0

35.0

30.0

% 25.0

20.0

15.0

10.0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Indonesia Malaysia Philippines Thailand Vietnam

Source: World Bank, MKE estimates

Figure 22. …but real investment growth has picked up

30.0 Real GDP growth by expenditure component

20.0

% 10.0

-

(10.0)

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Export growth Import growth Private consumption growth Government expenditure growth Gross capital formation growth Source: General Statistics Office, CEIC, MKE estimates

Figure 23. Final consumption remains the most resilient driver…

Contribution to real GDP growth – expenditure side (annual) 200.0 150.0 100.0

50.0 % - (50.0) (100.0)

(150.0)

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Final consumption Gross capital formation Trade

Source: General Statistics Office, CEIC, MKE estimates

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Figure 24. Final consumption consistently makes up 70-75% of GDP…

120.0 Nominal GDP breakdown by expenditure

100.0 28 27 28 29 40 36 37 28 33 34 35 36 28 27 27 29 31 33 30 27 27 27 26 80.0 8 8 8 8 7 6 6 6 7 7 6 6 6 6 6 5 6 6 6 6 6 6 6

60.0 %

40.0 74 74 72 71 69 66 65 65 66 65 65 65 68 71 68 67 66 64 65 66 68 69 68 20.0

-

(20.0)

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Private consumption Government expenditure Gross capital formation Net exports Discrepancies Source: World Bank

Figure 25. … higher than most ASEAN peers

Final consumption expenditure (% of nominal GDP) 85.0

80.0

75.0

% 70.0

65.0

60.0

55.0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Indonesia Malaysia Philippines Thailand Vietnam

Source: World Bank

Figure 26. Economic growth has apparently been inclusive…

50.0 Latest Gini Coefficient (100% = maximum inequality) 45.0 40.0 35.0 30.0

% 25.0 46 40 42 20.0 38 40 35 35 15.0 32 32 10.0 5.0 -

Source: World Bank, CEIC

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Figure 27. …as moving from agriculture to industry raises productivity

5.0 Growth of Total Factor Productivity (TFP) 4.0 3.0 2.0

% 1.0 - (1.0) (2.0) (3.0) 2012 2013 2014 2015 2016 Indonesia Malaysia Philippines Singapore Thailand Vietnam

Source: The Conference Board Total Economy Database™ (Adjusted version), November 2017 Figure 28. High (and accelerating) growth in living standards

8.0 Per-capita Real GDP (PPP adjusted), latest data 35,000 7.0 30,000 6.0 25,000 5.0 20,000

% 4.0 15,000 3.0 10,000 2.0 1.0 5,000 0.0 - Malaysia Thailand Indonesia Philippines Vietnam

10-year CAGR 5-year CAGR 3-year CAGR 2017 Real GDP per capita (PPP) (RHS)

Source: World Bank, CEIC

Figure 29. Overall, 2017 GDP was still ahead of its potential

Note: The IMF uses four different methods to estimate potential output, all of which resulted in a positive output gap (i.e. actual GDP higher than potential GDP) for 2017.

Source: IMF Country Report No. 18/216, Jul 201

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5.1.2 Infrastructure: investibility is an issue Despite improvements in the past five years, thanks to state investments, Vietnam’s global ranking in infrastructure quality dropped in the latest 2017-18 Global Competitiveness Report by the World Economic Forum. Rankings in quality of roads, railways, ports, air transport and electricity also dropped or saw slower improvements during 2015-17.

Without faster reforms, Vietnam’s infrastructure could temporarily be a Growth-oriented investment growth constraint, rather than a growth enabler. In that case, growth- opportunities need to take into oriented investment opportunities in Vietnam need to take into consideration infrastructure consideration slower-than-expected infrastructure improvements. constraints. The pace of improvements has been slower than we expected. The scaling back of state investments since 2017 amidst administrative hassles and budget restructuring has been considerable, and mechanisms allowing for the participation of the private-sector and foreign investments have not significantly improved.

Despite holding tremendous potential, bankable/investible infrastructure opportunities could be difficult to find in the short term. Except for occasional major projects such as the USD2.6b Van Phong 1 BOT thermal plant by Japanese investors, infrastructure investments remain generally difficult for the private sector to access. We previously expected a rise in Build-Transfer (BT) projects, as a cost- effective way for the government to pay for infrastructure developments in the form of land allocation. Nevertheless, only a small number of developers have qualified for such a scheme. Going forward, approval of BT projects in major cities is expected to slow or temporarily cease given concerns over bidding and pricing transparency.

Our base-case economic growth forecasts take these infrastructure The good news is road transport, constraints into consideration. The good news is road transport, which which accounts for three-fourths of consistently accounts for three-fourths of total freight carried, is still total freight carried in Vietnam, is seeing double-digit growth in both freight volumes and freight tonne-km still seeing double-digit growth. (TKM). On the other hand, electricity supply, particularly in the South, has been facing shortages. The ratio of electricity production growth to real GDP growth dropped to a multi-decade low of 1.2x in 2017, around the level in 1992-94, during which Vietnam had to commission a 500 kV North- South Transmission Line to address electricity shortages in the South. Beyond the short term, we watch out for two possible game changers:

- Private-Public Partnership (PPP): PPP projects in Vietnam have seen slow progress, similar to those in Indonesia and Philippines (see p17, Macro Outlook 2018: Blue Skies, Bring an Umbrella, 1 Dec 2017). Back in July’18, Vietnam commented in IMF’s annual consultation that “private funding [for public infrastructure] will be considered in the form of PPP agreements”. This is on the back of the government’s commitment to the Public Investment Management Assessment (PIMA) - first introduced by the IMF in 2015 – as a “strategic priority”.

Overall, new legislations related to PPP since 2015 have mainly been issued at the local authority level. Back in May’18, however, the government did issue a fairly detailed regulation (Decree 63/2018/ND-CP), aimed at simplifying procedures for investors.

- China’s Belt-and-Road Initiative (BRI): While little has been discussed about specific projects under the BRI to be invested in Vietnam, we note ASEAN is likely to maintain the highest share in China’s outward investments. Some of the infrastructure projects under BRI, including railway projects, have been kick-started in Malaysia and Indonesia (see ASEAN Economics: Recharging Investment, 1 Dec 2017).

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Figure 30. Overall, infrastructure improvements slowed in 2015-17

Quality of roads Quality of railroads 0 0

20 20 40 40 60 60

80 global rank global global rank global 80 100 120 100 140 120 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2009 2010 2012 2013 2014 2015 2016 2017 Indonesia Malaysia Philippines Indonesia Malaysia Philippines Thailand Vietnam Thailand Vietnam

Quality of ports Quality of air transport 0 0 20 20 40 40 60 60

80 80 global rank global global rank global 100 100 120 120 140 140 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Indonesia Malaysia Philippines Indonesia Malaysia Philippines Thailand Vietnam Thailand Vietnam

Quality of electricity supply Overall quality of infrastructure 0 0

20 20 40 40 60 60

80 global rank global global rank global 80 100 100 120 120 140 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Indonesia Malaysia Philippines Indonesia Malaysia Philippines Thailand Vietnam Thailand Vietnam

Source: World Economic Forum, The Global Competitiveness Report, 2007-2017

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Figure 31. Vietnam is still seeing rapid infrastructure construction

Construction real GDP growth Vietnam's construction output by segment 12 20 60

10 15 40

8 % 10 % 6

% 20 4 5 2 0 0 0 Residential Infrastructure Others

-2 2013-16 CAGR (L) Indonesia Malaysia Philippines Thailand Vietnam 2011-16 CAGR (L)

2012-17 CAGR 2014-17 CAGR 2017 % of 2016 output (2010 constant price) (R)

Source: CEIC, MKE estimates

Figure 32. State was driving transport investment, until 2018

Vietnam’s total investment in transport/storage Ministry of Transport investments 35,000 100% 30,000

80% 25,000

60% 20,000

40% VNDb 15,000

20% 10,000

0% 5,000 2009 2010 2011 2012 2013 2014 2015 2016 0

2012 2013 2014 2015 2016 2017 8M18 State Non-state

Source: General Statistics Office, CEIC, MKE estimates

Figure 33. Transport capacity growth decent; electricity stretched

20% 3.5 Electricity production growth to real GDP growth (T12M) 15% 3.0

10% 2.5

5% 2.0

x 1.5 0% 1.0 -5% 0.5 -10% Railway Maritime Inland Road Airway -

Transport Waterway

1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 Growth in freight volumes carried, 2015-17 CAGR 1986

Growth in freight tonne-km carried, 2015-17 CAGR

Source: General Statistics Office, Vietnam Electricity, CEIC, MKE estimates

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Figure 34. PPP progress is slowing amid fiscal consolidation Number of PPP-related legal documents by type of issuing authority * 20

15

10

5

0 2013 2014 2015 2016 2017 2018 YTD

Central Government Local Authorities

* legal documents specifically addressing public-private partnership (PPP) in the subject title Source: Thu Vien Phap Luat, MKE estimates

Figure 35. That said, ASEAN’s share in China’s BRI remains high

ASEAN CIS USD bn Central Asia West Asia 40 East Asia South Asia Central/ Eastern Europe OBOR announced 35 in Sep-13 30

25

20

15

10

5

0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

ASEAN 41.5

Commonwealth of 28.4 Independent States

Central Asia 27.4

West Asia 23.9

South Asia 7.3 Total Central/Eastern (2005-2016) 6.1 Europe

East Asia 2.6 USD bn

0 10 20 30 40 50

Source: CEIC, MKE estimates (Tracking B&R Investment Flows into ASEAN, Jun’17)

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5.1.3 Demographics: grassroots in positive shape Strong economic growth and the move away from agriculture into industry has led to generally positive sentiment among the grassroots population. The underemployment rate has steadily declined; this metric, reported quarterly, has a strong negative correlation with T12M GDP growth (r = - 0.9 in the past five years) and is key in capturing grassroots’ well-being. There has occasionally been social unrest concerning land disputes, environmental impact and South China Sea tensions. During our on-the- Social unrest occasionally ground studies and discussions with market researchers, we also noted occurs. However, sentiment concerns on food safety and poor healthcare provision. However, social among the grassroots is generally positive. unrest appears well controlled at this stage, thanks to a socio-politically proactive government and as sentiment among the grassroots is generally positive. Contrary to popular belief, Vietnam’s age-related We note that, contrary to popular beliefs, Vietnam’s demographic demographic advantages are competitiveness does not entirely lie in its age structure; in fact, it is less not that strong. attractive than Indonesia and Philippines in terms of total population base, median age, working population growth and % of young population. Certain elements of From the eyes of the foreign investor, we believe the key grassroots Vietnam’s social dynamics demographic competitive advantages that Vietnam has, aside from its are progressive, and low-cost base, also lie in certain progressive social dynamics, compared conducive to growth. with regional peers. These dynamics, in our opinion, have resulted in a workforce conducive to growth, further attracting foreign investments. Some of the key measures in this regard include:

- High levels of participation by women in the economy and in Vietnam is a “success story” politics: With women taking up two-thirds of FDI employment and the when it comes to female % of parliament seats held by women only ranked behind the inclusion, according to IMF. Philippines in ASEAN, Vietnam has been dubbed “a success story” by the IMF when it comes to female inclusion.

- Open social attitudes towards demographic diversity in general, which includes religious diversity and gender/sexual diversity (GSD). There is a degree of openness in social attitudes towards In fact, Vietnam legalised same-sex marriage and sex change in 2015. diversity. Even though there has been a lack of legal enforcement since then, we believe this indicates a level of openness conducive to growth. Vietnam’s demographics has a balance between cultural homogeneity and diversity, which we believe is also conducive to growth. On the one hand, Vietnam has a high level of ethnic and linguistic The balance between cultural homogeneity. On the other hand, there is also intraregional cultural homogeneity and diversity diversity within the country, which we believe is the result of allows for labour mobility, Vietnam’s unique geography and history. In our discussions with while creating segmented market researchers, we noted markedly different lifestyles by growth opportunities and Vietnamese consumers in the North (represented by Hanoi’s need for entry barriers. social status), the Central (represented by Da Nang’s need for a smooth sailing in life) and the South (represented by Sai Gon’s need to be on the move constantly). Many domestic industry We believe the balance of cultural homogeneity and diversity allows leaders could shield for labour mobility, while segmenting growth opportunities into themselves from foreign competition by understanding geographical areas with high cultural entry barriers. Many domestic the cultural nitty-gritties in industry leaders could shield themselves from foreign competition by different regions. operating across the country and understanding the cultural nitty- gritties in different regions. Examples include companies ranging from industrials/materials to consumer sectors: Hoa Phat (HPG VN, BUY, TP VND52,857), Coteccons (CTD VN, HOLD, TP VND176,000), Vinhomes (VHM VN, BUY, TP VND136,000), Vinamilk (VNM VN, HOLD, TP VND164,583), and Mobile World (MWG VN, BUY, TP VND176,500). - Strong academic performance among students. Vietnam’s average scores under OECD’s Programme for International Student Assessment September 25, 2018 26

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(PISA) – a universal examination administered in local languages to measure 15-year-old pupils’ performance in math, science and reading - are only behind Singapore among ASEAN peers. Vietnam’s scores are exceptionally high among countries of similar income levels. Vietnamese youths are known to be academically studious, which could potentially make them fast learners at the workplace, provided proper higher education (i.e. secondary and tertiary education) and training. Decent birth rates have also helped Vietnam maintain the share of its population aged <15, which has been stable at c.23% in recent years.

The good news is Vietnam’s global ranking in higher education and Higher education enrolment training in the Global Competitiveness Index published annually by rates have been growing the World Economic Forum has been steadily improving, mainly driven rapidly. by rapidly growing secondary and tertiary enrolment rates. However, non-structural risks, A key, albeit non-structural, risk is Vietnam’s global ranking in quality such as a lack of technology, of higher education has been declining, dragged by poor technology business education and access and a lack of business education, while its global ranking in on- training services are a drag the-job training (e.g. training service availability) has been stagnant. on labour force quality. All in all, we believe Vietnam’s grassroots demographics remain in a positive shape. The most significant structural risk, from a demographic point of view, is Vietnam is ageing faster than many would expect. There are also non-structural risks in the quality of higher education and training. Nevertheless, we believe these risks are manageable in the short term and/or will be mitigated in the long term. From a demographic point of view, given Vietnam’s already high level of Breakout growth drivers private consumption as a % of GDP and its ageing trajectory, we believe could come from higher e-commerce and tourism break-out growth could come from higher e-commerce penetration. The penetration rates. Vietnamese youth population, which has maintained a stable share in total population, is tech-savvy, and could drive e-commerce value in the future. Break-out growth could also come from tourism penetration, as three- fourths of Vietnam’s territory is hilly/mountainous, and is still keeping tourism-suitable venues from reaching their potential young demographic target customers. This will be further discussed in the Domestic Trade section below. Figure 36. Steady growth in wages, albeit still below China

5.0 Vietnam's minimum wage 7.0 Manufacturing labour costs per hour

4.0 20% CAGR 6.0 19% CAGR

3.0 18% CAGR 17% CAGR 5.0

2.0 4.0

VNDm/month 9% CAGR 1.0 USD 3.0

0.0 2.0 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 1.0 General Minimum Wage (public sector) Regional Minimum Wages: Region I 0.0 Regional Minimum Wages: Region II 2016 2017 2018 2019 2020 Regional Minimum Wages: Region III China Mexico Vietnam Regional Minimum Wages: Region IV

Source: Ministry of Labour, CEIC, IHS, Statista, MKE estimates

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Figure 37. Underemployment in Vietnam has steadily declined 8.0

6.0

% 4.0

2.0

-

Jun-11 Jun-12 Jun-13 Jun-14 Jun-15 Jun-16 Jun-17 Jun-18

Sep-11 Sep-12 Sep-13 Sep-14 Sep-15 Sep-16 Sep-17

Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18

Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Unemployent rate Underemployment rate Unemployment rate, urban Unemployment rate, rural Source: General Statistics Office, CEIC, MKE estimates

Figure 38. The move away from agriculture is still ongoing…

Employment by sector 100.0 8.8 9.2 9.2 9.8 9.8 10.2 Others 80.0 16.3 17.0 17.0 17.4 17.3 17.4 Trade/tourism 13.1 13.7 13.7 13.8 14.5 15.1 60.0 13.9 14.3 14.9

% 16.8 16.9 17.6 Infrastructure (construction, utilities, transport, etc) 40.0

47.9 20.0 45.8 45.3 42.3 41.5 39.8 Manufacturing

- Agriculture, Forestry and Fishery 2012 2013 2014 2015 2016 2017

Source: General Statistics Office, CEIC, MKE estimates

Figure 39. … but employment remains mostly in low-skilled jobs…

Employment breakdown by type 100.0 Unskilled/others 80.0 40.2 37.3 Machine operators

60.0 7.3 9.8 % 40.0 24.7 22.8 Craftmen/agri-skilled

20.0 17.7 18.4 Clerks/personal services 10.0 11.8 - From mid-level to leaders/managers 2012 2017

Source: General Statistics Office, CEIC, MKE estimates

Figure 40. … while urbanisation and labour productivity remain low

GDP per person employed Urban population, % of total 12,500 40.0 35.0 10,000

7,500 % 30.0

25.0 5,000

20.0 $ PPP 2011 constant 2,500

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Lao PDR Myanmar Vietnam Lao PDR Myanmar Vietnam Source: World Bank

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Figure 41. Contrary to popular belief, Vietnam is not that young…

Median age 50 45 40 35 30 25 20 15 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040

Indonesia Malaysia Philippines Thailand Vietnam

Source: United Nations, World Population Prospects: The 2017 Revision

Figure 42. … as labour contributions to growth have moderated

100.0 2.5 80.0 2.0

60.0 1.5 % 40.0 1.0 % 20.0 0.5 - -

% of population aged <30 (L) Working population, % of total (L)

Working population, 2012-17 CAGR (R)

Source: World Bank, CEIC, MKE estimates

Figure 43. Ageing has become more visible in recent years

% of population aged ≥60 18 16 14 12 % 10 8 6 4

Indonesia Malaysia Philippines Thailand Vietnam

Source: World Bank, CEIC, MKE estimates

Figure 44. But birth rates have been maintained

Crude birth rate (per 1,000 people) 45 40 35 30 % 25 20 15 10

Indonesia Malaysia Philippines Thailand Vietnam

Source: World Bank, CEIC, MKE estimates

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Figure 45. Youth as a share of total population has stabilised

% of population aged ≤14 55

% 35

15

Indonesia Malaysia Philippines Thailand Vietnam

Source: World Bank, CEIC, MKE estimates

Figure 46. Working professionals aged 20-35 key demographic group

80+ 75-79 70-74 65-69 60-64 55-59 50-54 45-49 40-44 35-39 30-34 Male Female 25-29 20-24 15-19 10-14 5-9 0-4 15 10 5 0 5 10 15 Percent Source: World Bank, CEIC, MKE estimates

Figure 47. Vietnam has high female participation in workforce…

Female labour force participation rate 50

% 40

30 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Indonesia Malaysia Philippines Singapore Thailand Vietnam

Source: World Bank, CEIC, MKE estimates

Figure 48. … especially among foreign-invested companies…

% of female employment in Vietnam 80 75 70 65 % 60 55 50 45

SOE Domestic private sector Foreign-invested Unclassified (*) (*) ceased to be reported since 2017 Source: GSO, MKE estimates

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Figure 49. … and in parliament positions…

% of seats held by women in parliaments 30

20 % 10

0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Indonesia Malaysia Philippines Singapore Thailand Vietnam Source: World Bank, MKE estimates

Figure 50. … and in the corporate boardroom

% of women at senior levels in SEA’s largest companies 40

30

% 20

10

0 Senior Management CEO/Board Level Vietnam Indonesia Malaysia Singapore

Source: BCG, Malaysia Dept of Statistics, World Bank, MOE Singapore, ILO, Sep 2017

Figure 51. Ethnic & linguistic homogeneity allows for labour mobility

Fractionalisation indices (lower = more homogeneous, higher = more diverse) Indonesia Thailand Malaysia Laos India Singapore Philippines Vietnam Cambodia China

0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1.0 Language Ethnicity Source: Alesina, A., Devleeschauwer, A., Easterly, W. et al. Journal of Economic Growth (2003) 8: 155. https://doi.org/10.1023/A:1024471506938. Retrieved Sep 2012 by Wikipedia.

Figure 52. Progressive social attitudes towards demographic diversity

% of surveyed people with stated belief NZ AU VN IN JP CN PK MY PH ID Same-sex should be legal 57 56 45 35 33 31 30 30 25 14 LGBT should be a crime 12 15 17 31 12 22 54 35 20 38 There is a conflict between one's religious beliefs and homosexuality 14 19 20 25 9 12 44 41 43 51

Green = relatively progressive; Red = relatively conservative

Source: ILGA-RIWI Global Attitudes Survey on LGBTI People, Octob er 2016

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Figure 53. Vietnam’s youths (aged <15) are known to be studious…

Average PISA scores by country, 2015 Singapore Japan Chinese Taipei Macao (China) Vietnam Hong Kong Beijing-Shanghai-Jiangsu-Guangdong (China) Korea Malaysia * Thailand Indonesia 0 100 200 300 400 500 600 Math Reading Science

* In Malaysia, the weighted response rate (51%) fell short of the standard PISA response rate of 85%. Results may not be comparable to those of other countries Source: OECD, Programme for International Student Assessment (PISA)

Figure 54. Strong academic performance despite low income

PISA Science Score 575 550 Vietnam 525 500 475 450 425 400 375 y = 44.24ln(x) + 319.29 350 R² = 0.36 325 4 8 16 32 64 128 Per capita GDP (in thousand USD converted using PPPs) (logarithmic scale) Source: OECD, PISA 2015 Database, Table I.2.11, MKE estimates

Figure 55. Overall, higher education and training are improving, but quality remains low

Higher Education & Training (overall ranking) Vietnam's Rankings in Quality of Education 0 0

20

40 50 60

80 100

Global ranking Global Gobal ranking Gobal 100

120 150 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Quality of Education (overall) Quality of Management Schools Indonesia Malaysia Philippines Thailand Vietnam Internet Access in Schools

Source: World Economic Forum, Global Competitiveness Index, 2017-18 Edition

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Figure 56. Fairly high social media and e-commerce penetration

70.0 62.0 59.0 60.0

50.0 47.0 40.0 39.0 40.0 37.6 33.8

% 33.2 31.6 29.9 30.0

20.0

10.0

- Indonesia Malaysia Philippines Thailand Vietnam

Facebook penetration Active e-commerce penetration

Source: Statista Digital Market Outlook - Jul 2017, We Are Social - Digital in 2018 – Jan 2018

Figure 57. Vietnam’s e-commerce value is expected to grow strongly

Vietnam's e-commerce market value (USDb) 3.7

3.03

2.5

2.06 1.69 1.38 1.15

2014 2015 2016E 2017E 2018E 2019E 2020E

Source: Frost & Sullivan, e-Commerce Retailers: The Next Billion $ Opportunity, March 2016

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5.1.4 Investment: expect improved capital markets Overall, we agree with IMF’s expectations that capital formation will Capital formation will be Vietnam’s remain Vietnam’s key economic growth driver in the next five years, key economic growth driver in the amid slowing contributions from the labour force. This is assuming next five years. improvements in capital markets in the next few years. Vietnam has a high saving rate, thanks to surpluses in the FDI sector and accumulation of assets among citizens. Yet, capital markets have not been efficient enough to channel these savings into productive investments:

- Even though the stock market has become the dominant channel for capital raising, only 2% of the Vietnamese population own a stock trading account. This indicates local corporates have only been able to raise capital from a very small portion of the domestic investing pool.

- The bond market (>20% GDP) mainly comprises government bonds (c. 15x larger than the size of corporate bonds outstanding). Aside from domestic commercial banks, insurance companies and pension funds, other types of investors have limited holdings of government bonds. We understand a significant portion of bonds issued by local corporates is also still held by local commercial banks, which indicates corporates are still unable to reach out to a wide range of investors when it comes to debt financing.

However, in recent years, we have seen corporate bonds outgrowing Growth in outstanding corporate government bonds in outstanding value terms, albeit from a low base. bonds has outpaced that of This growth picked up particularly strongly in 2Q18. government bonds, albeit from a low base. Growth was strong in 2Q18. On August 21, during the Vietnam Economic Forum (ViEF) on Capital/Financial Markets, Deputy Prime Minister Vuong Dinh Hue stressed that developing the local corporate bond market is one of the Developing the local corporate bond priorities, on the premise that the government bond market has greatly market is one of the priorities. improved in duration variety and volumes over the past few years. Alwaleed Alatabani, Lead Financial Sector Specialist at the World Bank in Vietnam, shared the same view during the event, proposing that a good platform to invest in local corporate bonds could help mobilise the sizeable annual domestic savings of USD60b. This was also preceded by discussions on working with potential credit rating agencies, developing information databases and improving trading platforms for corporate bonds. In 2017, the government put forward a roadmap (Decision 1191/QD-TTg), targeting a bond market with a total outstanding balance of 45% of GDP by 2020 - about twice the level now - and 65% of GDP by 2030. Besides, other forms of non-bank financing for corporates such as financial leasing, microfinancing and Fintech could likely be supported by the government, according to Mr. Hue. During the same event, it was noted that some Vietnamese SMEs have to rely on loan sharks/shadow banking for up to 60% of their total capital.

Against the backdrop of such discussions, during the same event, Mr. Tran Vietnam could obtain MSCI’s Van Dung – Chairman of the State Securities Commission – was also Emerging-Market Status by 2020. confident Vietnam could obtain MSCI’s Emerging-Market Status by 2020. Besides MSCI, we understand that inclusion into FTSE Russell’s Emerging Markets has also been identified as another possible target for Vietnam. The above developments have led us to expect Vietnam’s capital markets to see meaningful improvements in the next few years, helping channel high savings into productive investments.

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Figure 58. Capital formation to remain key growth driver

10.0 Contribution to growth - Production function approach

8.0

6.0

% 4.0

2.0

-

(2.0) 1986-93 1993-97 1998-02 2003-07 2008-12 2013-17 2018-23 Physical capital (k) Human capital (h) Labour force (L) TFP Real GDP Growth

Source: IMF Country Report No. 18/216, PWT 8.1, July 2018 Figure 59. Despite a fairly high saving rate…

Gross national savings (% of GDP) gross disposable income less final consumption expenditure after taking account of an adjustment for pension funds 40

35

30

25

20

15 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Indonesia Malaysia Philippines Thailand Vietnam

Source: International Monetary Fund Figure 60. …capital markets are inefficient in boosting investment

Gross capital formation (% of GDP) 45.0

40.0

35.0

30.0 % 25.0

20.0

15.0

10.0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Indonesia Malaysia Philippines Thailand Vietnam

Source: World Bank, MKE estimates

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Figure 61. Stock market has risen strongly…

Stocks traded, total value (% of GDP) Market cap of listed domestic companies

210.0 (% of GDP) 100.0

80.0 160.0

60.0 %

110.0 % 40.0 60.0 20.0

10.0 - 2013 2014 2015 2016 2017 2013 2014 2015 2016 2017

Indonesia Malaysia Philippines Indonesia Malaysia Philippines Thailand Vietnam Thailand Vietnam Source: World Bank, MKE estimates Figure 62. … but bonds are underdeveloped

Market cap of bonds (% of GDP) 110.0 100.0 90.0 80.0 70.0

% 60.0 50.0 40.0 30.0 20.0 10.0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Indonesia Malaysia Philippines Thailand Vietnam

Source: ADB AsianBondsOnline, MKE estimates

Figure 63. Corporate bonds remain underpenetrated…

FX-denominated bonds by outstanding value VND-denominated bonds by outstanding value 4.0 60 3.5 50 3.0 40 2.5 2.0

30 USDb

USDb 1.5

20 1.0

10 0.5 0.0 0

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2001 Government bonds Corporate bonds Q3 2017 Government bonds

Source: ADB AsianBondsOnline, MKE estimates

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Figure 64. Most corporates yet to tap long-term debt financing

Government bonds by maturity profile Corporate bonds by maturity profile

100 100 90 90 80 80 70 70 60 60

% % 50 50 40 40 30 30 20 20

10 10 0 0

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2000

Q1 2018

1-3 years 3-5 years 5-10 years >10 years 1-3 years 3-5 years 5-10 years >10 years

Source: ADB AsianBondsOnline, MKE estimates

Figure 65. Structural issues intensified during 2015-17

Government bonds (VND-denominated) Corporate bonds (VND-denominated) (4 = significantly advanced) (4 = significantly advanced)

FX Regulations FX Regulations

Greater Diversity Greater Diversity Transparency Transparency of Investor Profile of Investor Profile

Transaction Hedging Transaction Hedging Funding Mechanisms Funding Mechanisms

Tax Treatment Market Access Tax Treatment Market Access

Settlement & Settlement & Custody Custody 2015 2016 2017 2015 2016 2017

Source: ADB AsianBondsOnline, MKE estimates

Figure 66. But corporate bonds are growing fast from a low base

3MMA oustanding value, YoY growth 120.0 100.0 80.0 60.0 40.0 % 20.0 - (20.0) (40.0)

(60.0)

Jul-10 Jul-15

Apr-09 Apr-14

Jan-13 Jan-18

Oct-11 Oct-16

Jun-08 Jun-13 Jun-18

Sep-09 Sep-14

Mar-12 Mar-17

Feb-10 Feb-15

Aug-12 Aug-17

Dec-10 Dec-15

Nov-08 Nov-13

May-11 May-16

Government Bonds Corporate Bonds

Source: ADB AsianBondsOnline, MKE estimates

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5.1.5 Industrial production: structurally and cyclically driven Industrial production growth has been strong, driven by double-digit Nikkei Manufacturing PMI has growth in manufacturing output. The Nikkei Manufacturing PMI has remained above 50 since end-2015. remained above the neutral level of 50 since end-2015.

Even though growth in capital disbursements made by FDI companies (“FDI Strong manufacturing output growth disbursements”) as well as growth in merchandise imports have both despite moderating FDI/imports. moderated in nominal terms, real manufacturing output growth has remained strong, and increasing.

This implies there has been an increase in the amount of industrial Production has been increasingly volumes being produced domestically over the years, although this is domesticated, although mostly in mostly seen in low-level intermediate products. In many cases, low-level intermediate products intermediate products have seen higher growth than have final products, slated for exports. implying Vietnam has been exporting some of its intermediate production capacity overseas. Indeed, merchandise exports in 2018 YTD have been driven by basic materials and electronic/mechanical components.

Structurally, our analysis indicates Vietnam’s industrialisation has been and will continue to be driven by four major sectors listed below; these sectors have had high and increasing shares in the total industrial output in the past five years, supported by sustainable supply/demand dynamics.

- Electronics: Since the start of the Vietnam-Korea FTA in 2015, electronics consistently make up >30% of Vietnam’s industrial output and merchandise exports, based on our estimates. Unfortunately, it is currently difficult to find investible domestic companies in supporting industries catering to Samsung and LG.

- F&B: F&B manufacturing accounts for 15-20% of Vietnam’s industrial F&B manufacturing is driven by dairy output, based on our estimates, driven by strong per-capita domestic products, beer, fishery and animal consumption growth. We found that domestic F&B manufacturing is feeds. driven by several key sub-sectors such as dairy products (e.g. Vinamilk), beer (e.g. Saigon Beer – SAB VN, NR), fishery (e.g. Vinh Hoan – VHC, NR) and animal feeds (e.g. Dabaco - DBC VN, NR).

- Textiles/clothing: Traditionally the main export driver before Textiles/clothing will remain an Samsung/LG started turning Vietnam into an electronics hub was important engine as labour costs textiles/clothing (>10% of total industrial output, based on our remain half of those in China. estimates, if leather products are included) and is likely to remain an important engine. Despite strong rises in minimum wages, Vietnamese labour costs remain about half of those in China. Numerous companies are involved in various segments of the value chain, such as Century Synthetic Fiber (STK VN, NR), Thanh Cong Textile (TCM VN, NR), TNG Investment (TNG VN, NR) and Everpia (EVE VN, NR).

- Metals: While metals (>10% of total industrial output, per our Vietnam’s steel consumption has estimates) are generally cyclical, Vietnam’s steel consumption has been on a secular mode, with been on a secular growth path. The country moved from a top-40 to a apparent steel use per capita surpassing Indonesia and Philippines top-20 steel producing country in the world over the past 10 years. Its over the past 10 years by a large net imports of steel constantly rank in the top five globally. This has extent. been accompanied by secular growth in apparent steel use per capita, which has surpassed Indonesia and the Philippines over the past 10 years by a wide margin. We suspect this has been driven by a combination of rapid industrialisation, urbanisation, and possibly military spending, too. Companies moving up the value Companies moving up the value chain from a low base by producing chain by producing higher value- higher value-added steel inputs (such as stainless steel, structures or added metal inputs to manufacturing shapes) to manufacturing activities could resemble secular growth activities could be secular growth types, assuming regulatory and types (think Hoa Phat), not purely cyclicals. This is, however, assuming geographical/logistical entry barriers regulatory and geographical/logistical entry barriers (i.e. infrastructure remain strong. constraints) remain strong to protect domestic production and distribution of bulky metal products. September 25, 2018 38

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In all of the above cases, we note that production of intermediate Production of intermediate products products has outpaced that of final products, most notably so in 2018 YTD. has outpaced that of final products; Broadly speaking, Vietnam has been able to competitively export excess excess capacity has been exported. capacity in these intermediate products overseas, reducing overcapacity However, dangerous curves may be ahead. Avoid investing in export- risks. However, in view of uncertain global trade flows, dangerous curves oriented intermediate producers may be ahead. We would avoid investing in export-oriented producers of with no plans of moving up the value intermediate products, especially those not moving up the value chain. chain. Besides the abovementioned structural drivers, we also look at other Investors may also want to consider smaller industrial sectors. Certain growth-cyclical products (such as growth-cyclical products that enjoy significant physical entry barriers, in concrete and automobiles) have seen stronger growth than staples (such favour of staples products that are as beer and pharmaceuticals) over the past five years to a significant seeing slowing/saturated per-capita extent. Tactically speaking, we believe investors seeking medium/long- consumption. term growth may want to consider growth-cyclical products that enjoy significant physical entry barriers (e.g. due to infrastructure constraints), in favour of staples products that are seeing slowing/saturated per-capita consumption (e.g. due to slow consumer adoption).

When it comes to stock picking, we believe investors seeking exposure to Investors seeking exposure to Vietnam’s industrialisation should not be biased towards structural factors Vietnam’s industrialisation should only. In other words, it may pay to look at sectors traditionally considered not be biased towards structural too cyclical in other markets, such as steel, cement/concrete and factors only. automobiles, and look for industry winners with unique entry barriers. The Vietnam market consists of various idiosyncratic constraints, from infrastructure/geographical constraints to stock investibility constraints. On the one hand, infrastructure/geographical constraints may result in persistent entry barriers, helping to protect growth in certain cyclical sectors for an extended period of time. On the other hand, industrial stocks listed in Vietnam are mostly in cyclical sectors, rather than in defensive/structural sectors. Despite the wide selection, these could be ignored by foreign investors, resulting in ample foreign room and liquidity. Stocks that are traditionally defensive and have clear structural exposure – such as Refrigeration Electrical Engineering (REE VN, NR) – could attract too many foreign investors and could be difficult to invest in, given the foreign ownership limit (49%).

We conducted a back-test and found that among those sectors with Among those sectors with exposure exposure to industrialisation in Vietnam, cyclical sectors historically to industrialisation, cyclical sectors offered a wider range of “winning ideas” than did defensive/structural historically offered a wider range of sectors, without sacrificing risk-adjusted returns. Here, a “winning idea” “winning ideas” than did is defined as stocks with annualised price returns (i.e. excluding defensive/structural sectors, without sacrificing risk-adjusted dividends) of ≥ 10% since IPO for a period of at least three years until 31 returns. August 2018. A total of 185 stocks met our criteria on all three bourses, half of which are classified under the cyclically-driven “Construction & Materials” and “Industrial Goods & Services” sectors.

If we applied stricter investibility criteria for foreign investors (ie, market cap of ≥USD50m at year-start, ADTV of ≥USD0.3m at year-start, available This is relevant for foreign investors foreign room of ≥USD1m at year-start, price returns of ≥ 15% at year-end, to consider, given constraints such as and beat the VN-Index at year-end), then there were, on average, about minimum market cap, liquidity and eight winning ideas annually with exposure to industrialisation during the foreign ownership room available. past five years (2012-17). If we further removed one-off winners (by

removing stocks with annualised price returns of <10% since IPO), the

choices available to foreigners would be reduced in half. As we expected, in either case, cyclical sectors provided foreign investors with a wider selection of “winners”, without sacrificing risk-adjusted returns.

One caveat is that “winning ideas” in cyclical sectors tend to be industry One caveat is that “winning ideas” in leaders only. In our back-testing, there were more losing ideas than there cyclical sectors tend to be industry were winning ideas in cyclical sectors – the winning stocks tend to account leaders only. for the majority of total market cap in these sectors.

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Figure 67. Industrial production has been strong since 2016

15.0 56.0

10.0 54.0

% 5.0 52.0

- 50.0

(5.0) 48.0

Apr-16 Apr-17 Apr-18

Oct-15 Oct-16 Oct-17

Jun-15 Jun-16 Jun-17 Jun-18

Feb-16 Feb-17 Feb-18

Aug-15 Aug-16 Aug-17 Aug-18

Dec-15 Dec-16 Dec-17

Nikkei Vietnam PMI (R) IPI - Manufacturing (12MMA YoY) (L)

Source: General Statistics Office, CEIC, MKE estimates

Figure 68. Strong output despite moderating FDI and imports

16.0 14.5 50.0 13.1 14.0 12.6 40.0 12.0 11.3 10.5 10.5 30.0 9.5 10.0 8.7 7.6 20.0

% 8.0 5.6 5.5 10.0 6.0 - 4.0 2.0 (10.0) - (20.0) 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017E 2018 YTD

Manufacturing output (real terms), YoY growth (L) FDI disbursement (nominal), YoY growth (R)

Merchandise imports (nominal), YoY growth (R) Source: General Statistics Office, CEIC, MKE estimates

Figure 69. Domestic private-sector most visible in metal production

Gross industrial output in HCMC and Hanoi combined, real terms (2010=100), 2016

Eletronics/machinary/equipment

Metals/minerals

Chemicals

Textiles/Clothing

F&B/Tobacco

0% 20% 40% 60% 80% 100% State Non-State FDI

Source: Ho Chi Minh City Statistics Office, Hanoi Statistics Office, MKE estimates

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Figure 70. Structural drivers: intermediates outgrowing final products

Group1: Electronics Group 2: F&B 80.0 production volume growth 15.0 production volume growth

60.0

10.0 %

40.0 % 20.0 5.0

0.0 0.0 2013-17 2015-17 2018 YTD 2013-17 2015-17 2018 YTD (CAGR) (CAGR) (YoY) (CAGR) (CAGR) (YoY)

Communication equipments Electronic components Dairy products Animal feeds

Group 3: Textiles/clothing Group 4: Metals production volume growth 25.0 production volume growth 20.0 20.0 15.0

15.0 % 10.0 % 10.0

5.0 5.0 0.0 0.0 2013-17 2015-17 2018 YTD 2013-17 2015-17 2018 YTD (CAGR) (CAGR) (YoY) (CAGR) (CAGR) (YoY) Clothes (non-leather) Fiber Metal products (non-structural) Basic metals

Source: General Statistics Office, CEIC, MKE estimates

Figure 71. Growth cyclicals have outgrown staples since 2013

Group 1: Industrial products Group 2: Consumer products 25.0 production volume growth 25.0 production volume growth 20.0 20.0

15.0 15.0

% % 10.0 10.0 5.0 5.0

0.0 0.0 2013-17 2015-17 2018 YTD 2013-17 2015-17 2018 YTD (CAGR) (CAGR) (YoY) (CAGR) (CAGR) (YoY)

Paper (non-corrugated) Rubber/Plastics Beer Pharmaceuticals Furniture Cement Concrete Motor vehicles Electricity/gas

Source: General Statistics Office, CEIC, MKE estimates

Figure 72. Vietnam’s steel consumption is on a secular growth path

Apparent crude steel use per capita 500.0

400.0

300.0 kg 200.0

100.0

-

Indonesia Malaysia Philippines Thailand Vietnam Source: World Steel Orgnanization, MKE estimates

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Figure 73. Constantly ranks high in steel production and imports Vietnam's global ranking by steel production metric - 5 10 15 20 25 30 35 40 45 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Total production Total imports Net imports

Source: World Steel Orgnanization, MKE estimates

Figure 74. Vietnam’s steel use is slightly high relative to income

Vietnam's steel use vs GDP per capita 7,000 300.0 6,000 250.0 5,000 200.0 4,000

150.0 kg

int'l $ int'l 3,000 100.0 2,000 1,000 50.0 0 0.0

1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015

GDP per capita (PPP) (L)

Apparent steel use per capita (R)

Source: World Steel Association, World Bank, MKE estimates

Figure 75. Military spending might have been a driver in the past

Military spending (% of GDP) Vietnam's steel use vs military spending 160 2.5 3.0 140 2.3 2.5 120 2.1 2.0 100

kg 80 1.9

% 1.5 60

1.7 % 1.0 40 1.5 20 0.5 0 1.3

-

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2003 Steel use per capita (apparent, crude) (L) Indonesia Malaysia Philippines Thailand Vietnam Military spending (% of GDP) (R)

Source: World Steel Association, World Bank, MKE estimates

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Figure 76. Major industrials stocks have listed in recent years

Current market cap of stocks on all three bourses (HSX+HNX+Upcom) 30,000 by historical IPO year by sector

25,000

20,000

15,000 USDm 10,000

5,000

- 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 YTD Other services Real Estate Banks Industrials - Cyclical (construction, materials, transportation, etc) Industrials - Defensive (F&B manufacturing, pharmaceuticals, utilities, etc) Commodities-driven (farming, fishery, plantations, O&G, mining, etc)

Source: Fiinpro, MKE esti mates

Figure 77. … now accounting for >40% of total market cap

Other Current market cap on all three bourses by sector services Commodities- 10% driven 6%

Industrials - Real Estate Defensive 21% 25%

Industrials - Banks Cyclical 20% 18%

Source: Fiinpro, MKE estimates

Figure 78. F&B and industrial materials largest components

Industrials - Defensive Industrials - Cyclical

Breakdown by market cap Breakdown by market cap

Others 9% Others 16%

Transportation 31%

Utilities Construction F&B 33% 16% manufacturing 58% Industrial materials (metals, chemicals, etc) 37%

Source: Fiinpro, MKE estimates

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Figure 79. Growth cyclicals: wider selection of winners

# of winning/losing ideas Health Care Personal & Household Goods Food & Beverage

Utilities Defensive ALL DEFENSIVE STOCKS Automobiles & Parts Industrial Goods & Services Construction & Materials

Chemicals Cyclical Basic Resources ALL CYCLICAL STOCKS

0 50 100 150 200 250 300 350 400 450 500 550 600 # of winning ideas # of losing ideas

Note: a “winning idea” is defined as stocks with annualised price returns (i.e. excluding dividends) of ≥ 10% since IPO for a period of at least three years until 31 August 2018. The remainder was considered “losing ideas”. This study only applied to industrial stocks (i.e. excluding services sectors such as retailing, financials and technology).

Source: Bloomberg, FiinPro, MKE estimates

Figure 80. Among winners, cyclical stocks have decent risk-adj returns

30.0% Personal & Household Construction & Goods 25.0% Materials Utilities Health Care 20.0% Chemicals F&B Avg Industrial Goods & Basic In this chart, cyclical Services Resources sectors are highlighted in 15.0% grey, defensive/structural Automobiles sectors are highlighted in yellow. 10.0% 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% StdEv Source: Bloomberg, FiinPro, MKE estimates This study only applied to industrial stocks (i.e. excluding services sectors). Criteria: Figure 81. Foreign investors should consider cyclicals with LT growth mkt cap≥USD50m, ADTV≥USD0.3m, investible room ≥USD1m, price returns≥15% during the 16.0 # of investable winning ideas for foreign investors (industrials) year, beat the VN-Index at year-end, had at least 3 years of listing track record. 14.0

12.0 Defensive/structural sectors: F&B, utilities. Defensive/structural - LT Growth 10.0 Cyclical sectors: automobiles, capital goods, 8.0 Defensive/structural - One-off Growth transportation, materials and energy. 6.0 One-off growth = performed well during the 4.0 Cyclical - LT Growth year under review, but failed to achieve ≥10% 2.0 annualised return since IPO Cyclical - One-off Growth - 2014 2015 2016 2017 LT growth = performed well during the year under review, and achieved ≥10% annualised Source: Bloomberg, FiinPro, MKE estimates return since IPO.

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5.1.6 Domestic trade: resilient, but moderating Domestic trade, driven by mom-and-pop businesses, has seen resilient but moderating growth in 2018 YTD compared with 2017. While less capital intensive than industrial production, domestic trade in Vietnam is determined by changes in consumer spending habits. Also, as much of the domestic trade in Vietnam goes through multiple layers of distribution intermediation, it also depends on infrastructure to sustain growth. We suspect a combination of short-term issues related to infrastructure, consumer credits and spending behaviour have led to moderating growth in 2018 YTD, coupled with the high-base effect from 2017. Nevertheless, 3MMA real retail sales growth has picked up in recent months, implying resilient domestic trade. Retail sales/tourism: strong but moderating growth Real retail sales growth has remained firmly over 8% annually since 2014. The return of the Chinese tourists since the temporary dip in 2015 due to tensions over the South China Sea (East Sea) disputes has partly helped maintain strong domestic retail sales growth. Growth in 2018 YTD remains strong but appears to be moderating from a high base. We believe tourism in Vietnam has yet to utilise its full potential considering the low urbanisation rate and the fact that three-fourth of Vietnam’s territory is hilly/mountainous.

Figure 82. Retail sal es vs tourism growth: moderating from high base

16.0 40.0 Note that real retail sales growth in Vietnam is reported monthly on a 14.0 30.0 12.0 YTD basis.

10.0 20.0 % 8.0 10.0 % 6.0 - 4.0 2.0 (10.0) - (20.0) 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 YTD Real retail sales, % YoY (L) International arrivals, % YoY (R)

Source: General Statistics Office, CEIC, MKE estimates

Figure 83. …but 3MMA growth has improved in recent months

20.0% Real retail sales growth, YoY 15.0% 10.0% 5.0% 0.0%

-5.0%

Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 Jul-17 Jul-18

Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18

Nov-10 Nov-11 Nov-12 Nov-13 Nov-14 Nov-15 Nov-16 Nov-17 3MMA 12MMA

Source: General Statistics Office, CEIC, MKE estimates

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Figure 84. Tourism arrivals from China/Korea growing

Visitor arrivals by origin 100%

80%

60%

40%

20%

0%

China South Korea Rest of World

Source: General Statistics Office, CEIC, MKE estimates Figure 85. Tourism potential may not have been fully tapped yet

Direct contribution from tourism (% of GDP) 10.0

8.0

6.0 % 4.0

2.0

-

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Indonesia Malaysia Philippines Thailand Vietnam

Source: World Travel & Tourism Council, MKE estimates

Business formations: slowing growth The business community in Vietnam, mostly comprising SMEs and mom- Note that government statistics and-pops, has been buoyed by optimism over the past few years. In 2018, provide business formations and however, net additions of businesses have slowed; there has been a rise in cessations on a monthly basis. The business cessations. While much of these business cessations could be cumulative # of businesses in related to SPV dissolutions, growth in new businesses appears to be existence is only updated annually. slowing. In contrast, most manufacturers are still expecting a strong quarter ahead.

Figure 86. Business cessations rose in 2018 YTD

Business formations and cessations 150,000.0 Suspended for Closing Company Code; W/o Register

100,000.0 Time-Limited Temporary Cessation of Operations

50,000.0 Dissolved

- Re-Operated

(50,000.0) number of companies of number Newly Registered

(100,000.0) Net additions of businesses 2014 2015 2016 2017 2018 YTD

Source: General Statistics Office, CEIC, MKE estimates

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Figure 87. Net additions of businesses have slowed

New business formations (net), YoY growth 150%

100%

50%

0%

-50%

-100% Dec-16 Feb-17 Apr-17 Jun-17 Aug-17 Oct-17 Dec-17 Feb-18 Apr-18 Jun-18 Aug-18

3MMA growth (YoY) 12MMA growth (YoY) Source: General Statistics Office, CEIC, MKE estimates

Figure 88. GSO Manufacturing Survey: 3Q18E vs. 2Q18A

New export orders

New orders Lower Same Output Higher Overall business prospect

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Source: General Statistics Office, MKE estimates

Motor vehicle sales: slowly recovering Car sales declined 8% YoY in 2017 as consumers adopted a wait-and-see Note that car sales statistics are approach, as the prospect of having 0% import taxes on certain car models usually reported with a one- from ASEAN starting from 2018 drew near. Car sales have since recovered month lag. in recent months, with 3MMA YoY growth returning to double-digit territory. A still-low per-capita vehicle ownership rate and growth in consumer financing could fuel car sales in Vietnam in the coming years, which could also lead to a rise in supporting manufacturing industries such as stainless steel (e.g. Hoa Phat). Leading auto makers, most of whom are FDI companies, have been prompted by the government to increase domestic production in place of imports, following stricter controls of imported car parts via Decree 116 issued in Oct’17.

Figure 89. Total vehicles sold: slowly recovering from 2017 decline

300,000.0 Total vehicles sold 250,000.0

200,000.0

150,000.0 unit 100,000.0

50,000.0

- 2011 2012 2013 2014 2015 2016 2017 T12M (latest) Source: Vietnam Automobile Manufacturers Association, CEIC, MKE estimates

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Figure 90. Vehicle sales recovered in the past few months

50.0 3MMA growth (YoY)

40.0

30.0

20.0

% 10.0

-

(10.0)

(20.0)

(30.0)

Car sales Retail sales, real terms

Source: Vietnam Automobile Manufacturers Association, CEIC, MKE estimates Figure 91. Passenger cars: almost two thirds of total vehicle sales

Sales breakdown by vehicle type (T12M)

Special purpose vehicles 3%

Commercial vehicles 34% Passenger cars 63%

Passenger cars Commercial vehicles Special purpose vehicles

Source: Vietnam Automobile Manufacturers Association, CEIC, MKE estimates Figure 92. Car penetration rate remains low in Vietnam

100 % of households owning a car in 2014, by country 90 80 70 60 50 40 30 20 10 0

Source: Pew Research Center, Statista, April 2015

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Property market: launches slow on regulatory issues Note that property market statistics Project launches and sales fell significantly in 2Q18 in the HCMC reported by consultants may differ apartment market, according to estimates by property consultants. This significantly even in historical data. was caused by regulatory issues. Barring this drop, sales have been strong vis-à-vis launches in the past three years in both HCMC and Hanoi. Price growth in both primary and secondary markets have, on average, been fairly contained. Property price growth has broadly been lower than Modern housing penetration in Vietnam remains low, with <5% of disposable income growth among the top 20% highest-earning households the population living in modern (i.e. the main target market at this stage), which is about 5-10% annually apartments. on average based on our estimates. In addition, modern housing penetration in Vietnam remains low, with <5% of the population living in modern apartments. Figure 93. Project launches in 2Q18 dropped due to regulatory issues Hanoi apartment market HCMC apartment market 15,000 T12M supply/demand T12M supply/demand 15,000 10,000 10,000

units

5,000 units 5,000

- -

2012Q3 2013Q1 2013Q3 2014Q1 2014Q3 2015Q1 2015Q3 2016Q1 2016Q3 2017Q1 2017Q3 2018Q1

2012Q1

2012Q3 2013Q1 2013Q3 2014Q1 2014Q3 2015Q1 2015Q3 2016Q1 2016Q3 2017Q1 2017Q3 2018Q1 2012Q1 Launches Take-up Launches Take-up

Source: Savills/JLL/CBRE consensus estimates, MKE estimates

Figure 94. HCMC developers are still enjoying price growth

Hanoi apartment market HCMC apartment market 10% T12M YoY Price Growth 10% T12M YoY Price Growth 5%

5% 0%

-5% 0% -10%

-5% -15% -20% -10%

2013Q4 2014Q1 2014Q2 2014Q3 2014Q4 2015Q1 2015Q2 2015Q3 2015Q4 2016Q1 2016Q2 2016Q3 2016Q4 2017Q1 2017Q2 2017Q3 2017Q4 2018Q1 2018Q2

2013Q3

2013Q3 2013Q4 2014Q1 2014Q2 2014Q3 2014Q4 2015Q1 2015Q2 2015Q3 2015Q4 2016Q1 2016Q2 2016Q3 2016Q4 2017Q1 2017Q2 2017Q3 2017Q4 2018Q1 2018Q2 Primary Market Secondary Market Primary Market Secondary Market

Source: JLL, MKE estimates

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5.2 Price stability The CPI has been well contained in Vietnam in the past five years, with core CPI of less than 2% in the past three years. Even during periods of accelerating GDP/credit growth (2015 – early 2016), CPI was still Import prices have become the key maintained at one of the lowest levels in the region, thanks to improved exogenous driver of consumer domestic food supply chains and decelerating global commodity prices. inflation in Vietnam, rather than We believe the degree of exchange rate pass-through in Vietnam is monetary liquidity. generally high. As such, import price inflation (especially pork prices and oil prices) is a strong exogenous driver of consumer inflation in Vietnam, perhaps more so than monetary liquidity. Producer price indices (PPI) for manufacturers, which have been highly correlated with CPI, have seen accelerating growth since late-2017 from a low base. In view of the outlook for global commodities relevant to the Vietnam economy, we expect CPI and PPI to see slightly accelerating growth in 2018, from 2017. While CPI looks moderate, PPI for electricity generators has accelerated While CPI looks moderate, PPI could at a faster pace, which could eventually lead to higher PPI for accelerate on higher electricity tariffs, implying a higher cost base manufacturers. More than half of the electricity in Vietnam is consumed for manufacturers. by the industrial economy (see our PetroVietnam Power NT2 initiation – ‘Hidden Power’, dated 2 Jan 2017, p. 11). Prime Minister Nguyen Xuan Phuc specifically asked that electricity tariffs be maintained in 2018. However, Vietnam is still essentially subsidising electricity costs for businesses and households. Electricity tariffs in Vietnam are considered low, despite a fairly high electricity access rate. The subsidies are expected to be gradually removed. Electricity of Vietnam (EVN) was allowed to raise tariffs by 3-5% without having to ask for permission by the government in 2017. Figure 95. CPI contained even during periods of high growth

8.0 25.0 6.0 20.0 15.0 4.0 10.0

2.0 5.0

% TTM (YoY) TTM % (YoY) TTM %

- -

Jun-14 Jun-15 Jun-16 Jun-17 Jun-18

Sep-14 Sep-15 Sep-16 Sep-17

Mar-14 Mar-15 Mar-16 Mar-17 Mar-18

Dec-14 Dec-15 Dec-16 Dec-17

CPI (L) Real GDP (L) Credit (R)

Source: General Statistics Office, CEIC, MKE estimates

Figure 96. Food & healthcare have been major CPI drivers

CPI drivers (2007-12) CPI drivers (2013-now) 100% 25.0% 100% 8.0%

80% 20.0% 80% 60% 6.0% 60% 15.0% 40% 4.0% 40% 10.0% 20% 0% 2.0% 20% 5.0% -20% -40% 0.0% 0% 0.0%

2013 2014 2015 2016 2017

2008 2009 2010 2011 2012 2007

8M2018 Foods/foodstuffs Housing/construction Foods/foodstuffs Housing/construction Transport Health/personal care Transport Health/personal care Education Others Education Others CPI (% change) (RHS) CPI (% change) (RHS)

Source: General Statistics Office, CEIC, MKE estimates

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Figure 97. Food prices pushed up CPI in 1H18 but moderated of late

Monthly CPI - YoY growth 6.0 4.0

% 2.0 -

(2.0)

Jul-16 Jul-17 Jul-18

Jan-16 Jan-17 Jan-18

Sep-16 Sep-17

Mar-16 Mar-17 Mar-18

Nov-16 Nov-17

May-16 May-17 May-18 Foods/foodstuffs Housing/construction Transport Health/personal care Education Others Source: General Statistics Office, CEIC, MKE estimates

Figure 98. But producer & import price growth have accelerated

30.0 25.0 20.0 15.0 10.0

% YoY 5.0 - (5.0)

(10.0)

Jun-10 Jun-11 Jun-12 Jun-13 Jun-14 Jun-15 Jun-16 Jun-17 Jun-18

Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 CPI Import Price Index - All items Producer Price Index - Manufacturing Source: General Statistics Office, CEIC, MKE estimates

Figure 99. Electricity tariff growth accelerating since 2016

20.0 15.0 10.0

% YoY % 5.0 -

(5.0)

Jun-12 Jun-13 Jun-14 Jun-15 Jun-16 Jun-17 Jun-18

Sep-12 Sep-13 Sep-14 Sep-15 Sep-16 Sep-17

Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18

Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17

PPI - Manufacturing PPI - Electricity

Source: General Statistics Office, CEIC, MKE estimates

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5.3 Monetary policy Vietnam is yet to adopt a modern monetary policy framework. The State Bank of Vietnam (SBV) has been advised by the IMF to move from credit growth targets to inflation targeting, with greater FX flexibility. Both the IMF (via its annual consultation paper – Article IV dated July 2018) and the World Bank (via its annual report Taking Stock dated June 2018) believe a tighter monetary policy is warranted, which we agree:

- Monetary policy has been slightly too accommodative: Credit to GDP has surpassed its long-term trend since 2016, reaching 130% in 2017. This was noted by the IMF as higher than comparable ASEAN countries and those of similar levels of development. Throughout 2017, credit growth also surpassed M2 growth by a significant margin. Despite warning from the IMF, the SBV lowered its policy rates by 25- 50bps in Jul 2017, defending the move as necessary to boost economic growth. While credit growth has retracted rapidly during 1H18, it still outpaces financial deepening. Recall, some Vietnamese SMEs have to rely on loan sharks for 60% of their total capital. In general, our economist Chua Hak Bin thinks a tighter monetary policy is warranted for Vietnam.

- There was excess liquidity in the banking system in 1H18: Following strong foreign inflows in 2017, partly related to the “equitisation” (i.e. incorporating and subsequently listing) of SOEs, the SBV has accumulated large reserves. This has not been fully sterilised, subsequently driving interbank rates below policy rates. Instead of shoring up balance sheets, this excess liquidity could potentially lead to credit misallocation, according to the IMF. It did, however, help drive government bond yields down in much of 1H18.

- NPLs could be a fat tail risk: Although the property market upturn in the past five years has greatly accelerated the disposal and restructuring of bad debts, banks in Vietnam are essentially still in the process of transitioning to Basel II by 2020. There is plenty of room for improvement regarding data quality on loan classification and sector exposures, as well as loan underwriting practices. The NPLs currently reported by banks could still be well understated. First, the Vietnam Asset Management Corporation (VAMC) remains a warehouse of bad debts, with insufficient capital to purchase NPLs at market prices; debts warehoused at VAMC should be added back to arrive at the effective NPL level. Second, certain small/medium-sized banks still have thin capital, low profitability and poor disclosure standards. Sources of bad debts unaccounted for by official data may include interest receivables, off-balance sheet commitments, evergreen loans and connected lending, while increased consumer lending could backfire in a downturn. The good news is the government appears aware of the above issues. While it intends to adhere to the 2018 credit target (17%), it is following or is planning to follow many of IMF’s recommendations, such as (1) acknowledging the need to modernise its monetary policy framework with inflation targeting and greater exchange rate flexibility, (2) delaying the required dividend payments by state-owned banks to the state budget (in view of the improved fiscal standing and moderated debt service costs after falling bond yields), (3) targeting an equitisation of Agribank by 2020 and reducing government stakes in BIDV, Vietcombank and Vietinbank to 51%, (4) using the Credit Information Bureau (CIB) to increase financial deepening, and (5) tightening regulation on margin lending. With the government’s stance, we expect tighter monetary policy to be conducted via slower credit growth. We expect rates to remain unchanged, assuming excess liquidity in the system is prudently used. September 25, 2018 52

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Figure 100. Credit grow th h as been driving GDP, but has slowed in 2018

20.0% T12M YoY growth 7.5% 18.0% 7.0% 16.0% 6.5% 14.0% 6.0% 12.0% 5.5%

10.0% 5.0%

Jun-14 Jun-15 Jun-16 Jun-17 Jun-18

Sep-14 Sep-15 Sep-16 Sep-17

Mar-14 Mar-15 Mar-16 Mar-17 Mar-18

Dec-14 Dec-15 Dec-16 Dec-17

Credit growth (L) (T12M) GDP growth (R) (T12M)

Source: General Statistics Office, State Bank of Vietnam, CEIC, MKE estimates

Figure 101. Credit growth still above trend line

Domestic credit to private sector (% of GDP) 200.0

150.0

% 100.0

50.0

- 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Indonesia Malaysia Philippines Thailand Vietnam

Source: IMF Country Report No. 18/215, July 2018; World Bank, MKE est

Figure 102. Financial deepening has been slow in Vietnam

% of respondents reporting having a bank account 90.0 80.0 70.0 60.0 50.0 % 40.0 30.0 20.0 10.0 - 2011 2014 2017

Indonesia Malaysia Philippines Thailand Vietnam

Source: World Bank, Global Findex database, MKE estimates

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Figure 103. NPLs occasionally shoot up

Towards end-2016/early-2017, Sacombank reported unexpectedly high NPLs, about a year after its acquisition of Southern Bank.

Note: “special treatments” mainly refer to the exclusion of “rescheduled loans” under Decision 780 dated April 2012, in which commercial banks were allowed to continue classifying these loans as “performing loans” based on subjective assessment of the borrowers’ soundness.

Source: Vietnam Asset Management Corporation (VAMC), SBV, MKE estimates

Figure 104. Banking profitability and capital adequacy remain low

Return on assets Tier-I capital to risk-weighted assets 4.0 25.0

3.0 20.0

15.0

% 2.0 % 10.0 1.0 5.0

- - Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 Dec-16 Jun-17 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 Dec-16 Jun-17 Indonesia Malaysia Philippines Indonesia Malaysia Philippines Thailand Vietnam Thailand Vietnam

Source: IMF, MKE estimates

Figure 105. Banking liquidity helps lower government bond yields

22.0 6.0 20.0 18.0 4.0

16.0 %

% YoY % 14.0 2.0 12.0

10.0 0.0

Apr-15 Apr-16 Apr-17 Apr-18

Oct-15 Oct-16 Oct-17

Jun-15 Jun-16 Jun-17

Feb-15 Feb-16 Feb-17 Feb-18

Aug-15 Aug-16 Aug-17

Dec-15 Dec-16 Dec-17 Government bond yield (1YR Mid YTM) (RHS) Credit growth M2 growth Source: General Statistics Office, CEIC, MKE estimates

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Figure 106. Interbank rates dropping well below policy rates The repo rate for OMO used to be 10 believed as the SBV’s preferred 8 means of influencing liquidity many years back. 6

4 Most sources now refer to the

% TTM (YoY) TTM % 2 refinancing rate (i.e. rate imposed 0 by the SBV on loans to a bank when it exceeds its credit limit) as the key

policy rate.

Jul-13 Jul-14 Jul-15 Jul-16 Jul-17

Apr-13 Apr-14 Apr-15 Apr-16 Apr-17

Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18

Oct-13 Oct-14 Oct-15 Oct-16 Oct-17

VNIBOR Overnight Refinancing rate Discount rate Repo Rate

Source: State Bank of Vietnam, IMF, CEIC, MKE estimates

Figure 107. Yield curve is now flattening after yields fell rapidly

6.5 Vietnam government bond yield curves 5.5

4.5

% mid YTM mid % 3.5

2.5

1.5

1Y 2Y 3Y 5Y 7Y

3M 6M

10Y 15Y Current 1M ago 3M ago 1Y ago

Source: Bloomberg, MKE estimates, 28 Aug 2018

Figure 108. Yield spreads have dropped to 3-year lows

300.0 Vietnam government bond yield spreads

200.0 bps 100.0

0.0

-100.0

Jul 12 Jul 13 Jul 14 Jul 15 Jul 16 Jul 17 Jul 18 Jul

Mar 12 Mar 13 Mar 14 Mar 15 Mar 16 Mar 17 Mar 18 Mar

Nov 12 Nov 13 Nov 14 Nov 15 Nov 16 Nov 17 Nov

5Y/1Y 5Y/2Y 5Y/3Y Source: Bloomberg, MKE estimates, 28 Aug 2018

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5.4 Fiscal policy Similar to the monetary policy framework, fiscal policies in Vietnam are in need of reforms. Government expenditures as a % of GDP are currently at the highest level in ASEAN, much of which could be non-priority spending. Per IMF, Vietnam’s wage bill – 9.5% of GDP – is also higher than most regional peers. Government financing statistics are incomprehensive, with quasi-fiscal activities (e.g. of the SBV and SOEs) and extra-budgetary funds (including Social Security Fund) excluded. Final data and provisional data also have varying cash/accrual bases. The good news is strong economic growth greatly mitigated government financing risks during 2013-17 in two ways: (1) favourable economic conditions have led to higher revenues from state divestments (1.2% of GDP, per IMF) while falling yields have constrained debt-servicing costs; (2) in meeting domestic investment needs, government deficits have been more than made up for by private-sector savings and current account surpluses.

Indeed, strong growth has reduced fiscal deficits below 5% of GDP and kept public/publicly guaranteed debt (PPG) below the statutory limit of 65% of GDP. The IMF views Vietnam’s public debt as sustainable in the medium term. However, there may not be enough room for fiscal policy to fully cushion risks from a downturn or contingent liabilities from SOE debts. Broadly speaking, the government is aware of the need to take advantage of the strong economy to accelerate fiscal consolidation. It appears committed to the statutory debt limit and to lower fiscal deficits to 3.5% of GDP by 2020. Fiscal consolidation started in 2017, albeit mostly in the form of non-tax revenues from state divestments. Beyond this, the government plans to: (1) introduce non-agricultural land and property taxes in 2018; (2) put new limits on carry-forward spending; (3) continue the two-out one-in policy for civil servants; and (4) provide GFSM 2014 consistent data starting in 2018.

Figure 109. Deficits mitigated, but government data to be revamped

1.0 Fiscal deficit, % of GDP - (1.0) (2.0)

(3.0) % (4.0) (5.0) (6.0) (7.0) (8.0) 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018E 2019E

Overall Balance (IMF est) Primary Balance (IMF est) Fiscal Balance (current MOF standards)

Note: “overall balance” is the difference between revenue and grants, and expenditure and net lending; “primary balance” excludes interest payments from expenditure.

Source: IMF, Vietnam Ministry of Finance (MOF), CEIC, MKE estimates

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Figure 110. VAT largest revenue component

Government revenue breakdown 100% 15.8 16.8 90% 22.9 23.6 20.0 18.7 80% 11.0 11.2 Other revenues 17.8 18.7 70% 13.1 Grants 9.4 11.0 16.4 60% 9.9 8.1 7.1 Other taxes 9.0 50% 25.2 Customs taxes 27.5 40% 25.3 26.8 27.7 25.2 Value-added taxes 30% 17.0 Corporate income taxes 15.4 20% 15.0 Personal income taxes 5.7 15.1 16.2 17.0 5.5 10% 5.7 Oil revenues 14.5 6.1 7.0 7.6 11.4 6.8 0% 3.7 2013 2014 2015 2016 2017E 2018E Source: IMF

Figure 111. Non-social current spending is the largest component

Government expenditure breakdown

100%

90% Net acquisition of non- 29.3 28.4 25.8 26.3 26.2 26.4 80% financial assets

70% Non-social current spending 60% 34.2 38.3 34.4 34.0 36.3 50% 36.3 Social current spending 40% 30% Interest expense 32.5 32.7 20% 29.4 31.4 29.1 30.2 10% 6.0 6.8 6.8 7.0 7.2 0% 4.9 2013 2014 2015 2016 2017E 2018E Source: IMF, Ministry of Finance, MKE estimates

Figure 112. Government revenue as a % of GDP highest in ASEAN…

30.0 Government revenue, % of GDP

25.0

20.0

% 15.0

10.0

5.0

-

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Indonesia Malaysia Philippines Thailand Vietnam

Source: IMF, CEIC, MKE estimates

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Figure 113. But so is government expenditure…

35.0 Government expenditure, % of GDP

30.0

25.0

20.0 % 15.0

10.0

5.0

-

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023

Indonesia Malaysia Philippines Thailand Vietnam

Source: IMF, CEIC, MKE estimates Figure 114. …and government debts

100.0 Government debt (gross), % of GDP 90.0 80.0 70.0 60.0

% 50.0 40.0 30.0 20.0 10.0

-

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023

Indonesia Malaysia Philippines Thailand Vietnam

Source: IMF, CEIC, MKE estimates Figure 115. External debts are also high

140.0 External debt, % of GNI

120.0

100.0

80.0 % 60.0

40.0

20.0

-

Indonesia Malaysia Philippines Thailand Vietnam

Source: World Bank, MKE estimates

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5.5 External balances Vietnam has markedly reduced its external vulnerabilities in the latter half of the past decade (2014-18), compared with the former half (2009- 13), in several important ways:

- A more diversified trade profile since 2013 has resulted in a more robust current account: since electronics overtook textiles/clothing as the largest export component in 2013, Vietnam’s current account has averaged about 3.3% of GDP annually, higher and more stable than other ASEAN developing peers.

- More flexible currency management since 2016 has resulted in less Vietnam’s currency exchange rate volatile trade and financial flows: While still following a regime that regime has elements of both a managed float (i.e. with occasional has elements of both a managed-float and a crawling-peg system, the interventions) and a crawling peg (i.e. SBV started adjusting its central reference rate daily since 2016, after with frequent rate adjustments and a widening the daily interbank band to ±3%. Since then, both current trading band). account and financial account have become less volatile. The effective exchange rate is now managed against a basket of It is managed against a basket of currencies from major trading partners, which has probably remained currencies from major trading partners, which has probably remained the same since 2016 (USD, EUR, CNY, JPY, KWR, TWD, THB, and SGD). the same since 2016 (USD, EUR, CNY, Prior to this, China and Vietnam’s central banks devalued their JPY, KWR, TWD, THB, and SGD). currencies against the USD by 5.8% and 2.9% during 2015, respectively. Commercial banks in both countries (represented by Bank of China and Vietcombank), however, had to adjust their exchange rates by 4.4% and 5.0% by year-end, respectively, indicating that pressures from CNY devaluations are mostly visible in commercial exchange rates. Vietnam’s trade balance and current account took a hit in 2015 as a result, amidst a commodities slump. The current regime, with managed-float and crawling-peg elements against a basket of currencies with daily proactive management, is meant to mitigate balance of payments shocks like those in 2015.

- More FTA negotiations with major trading partners have resulted in stronger FDI inflows: From a trading point of view, Vietnam has been running increasing trade deficits with South Korea and ASEAN, following the establishment of the Vietnam-South Korea FTA (VKFTA) and ASEAN Economic Community (AEC) in 2015. However, FDI from South Korea and ASEAN has also increased strongly since then. Besides, FDI from Japan also increased, with a few billion-dollar projects in energy and real estate. Altogether, net foreign direct and indirect investments (i.e. net FDI and FII) have largely surpassed dividend/interest payment outflows to foreigners. Vietnam’s key external vulnerabilities, as one of the most open economies in the region, lie in its low foreign reserves and high external debts. While total foreign reserves increased to 10-year highs of USD56b (3.2 months of imports) in Mar’18, per World Bank Global Economic Monitoring, they remain well below comparable peers in ASEAN (typically 5-10 months). Meanwhile, Vietnam’s external debt to GDP rose to 49% in 2017, per IMF estimates, half of which is public/publicly guaranteed (PPG) debt. Also, while Vietnam’s trade profile has moved up the value chain, its export mix remains geared towards labour-intensive and intermediate products. A bear-case scenario for Vietnam may include a large-scale global trade war, a current account deficit induced by lower global growth and protectionism, a real currency depreciation induced by low foreign reserves and increased inflation, and finally increased external debt. The good news is the increase in external debt in recent years has been driven by and in tandem with the increase in FDI, which appears to be generally backed by the long-term commitment of the FDI sector. Domestic companies, on the other hand, generally have limited exposure September 25, 2018 59

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to foreign debts. Among our BUY calls, only Vinhomes (VHM VN, BUY, TP VND136,000) has significant USD-denominated liabilities of USD277.5m as at Jun’18, against average FY18-19E EBITDA of USD1.2b. The VND also appears to be undervalued by certain fundamental metrics, especially the current account strength. On 21 Jul 2018, the IMF estimated the VND’s real effective exchange rate (REER) as at 2017 was undervalued by about 7% considering the current account strength. We looked at Vietnam’s REER since 2012 – the start of its increased trade linkages - and found that it has been on a structural uptrend, thanks to the competitive cost basis and low inflation. This structural uptrend subsequently led to an appreciating nominal effective exchange rate (NEER), as the noise in the FX market is gradually cancelled out, leaving the VND to appreciate against Vietnam’s major trading partners. Overall, Vietnam’s REER/NEER appreciated 5.2%/3.4% annually during 2012-16. In 2017, however, the VND was probably pegged too heavily to a weakening USD. The decline in the USD’s REER and NEER (as well as the DXY Index) led to a decline in VND’s REER and NEER. With a strong current account in 2017, driven by accelerated shipments in the electronics sector, the VND’s REER/NEER depreciation appears to suggest an undervalued currency, as at 2017. While VND’s REER/NEER appreciation during 2018 YTD has probably closed the undervaluation gap, there is still a valuation buffer. The investment community in Vietnam pays special attention to the USDVND nominal spot rate, due mainly to two sentiment-related concerns:

(1) USDVND premiums in the free market: before the SBV changed its USDVND premiums in the free market foreign currency management mechanism in 2015, the USDVND can be thought of as the % at which premiums in the free market used to credibly signal pressures and the USDVND exchange rate exceeds the daily upper limit allowed in the precede subsequent VND devaluation. This also used to be interbank foreign currency market. accompanied by large negative errors and omissions (E&O) on the BOP (e.g. unrecorded imports and USD holdings outside the formal sector). The upper limit used to be 1%, then was lifted to 2% on 12 Aug 2015 Since 2016, however, the wider daily band and SBV’s more frequent (Decision 1595/QD-NHNN) and shortly adjustment of the central rate have allowed commercial banks more after that to 3% on 19 Aug 2015 flexibility in adjusting its exchange rates. This has helped stabilise (Decision 1636/QD-NHNN). domestic business activities. Dollarisation is closely watched, as SBV targets to lower FX deposits to 7.5% of money supply in 2020, from 8.2% last year. All else equal, we think the impact from such premiums on the VND is limited going forward.

(2) CNY devaluations: As mentioned above, CNY devaluations have historically led to VND devaluations. This has also become important, not only because Vietnamese products compete with Chinese products in many areas, but also as Vietnam’s trade deficit against China has been shrinking (exports to China and imports from China have increased/decreased from 11%/30% in 2015 to 15%/27% in 2018 YTD). Our back-test indicates that every 1% devaluation in the Every 1% devaluation in the CNYUSD CNYUSD led to a 0.4% devaluation in the VNDUSD, on average, using historically led to a 0.4% devaluation exchange rates by Bank of China and Vietcombank. However, there in the VNDUSD, on average. However, were occasionally outliers during which a 1% CNYUSD devaluation led certain outliers led to a 2% to a corresponding 2% VNDUSD devaluation. We note that Vietnam has devaluation in the VNDUSD. recently accepted CNY as a means of payment within its border areas with China, apparently to smooth trading activities between the two. As at Aug 31, under the base-case scenario that US and China are not going to have a prolonged and intensified trade war, our FX team expected a gradual VNDUSD appreciation, on the back of resilient fundamentals and further unwinding of long USD positions (see FX Monthly – 2018, Issue 8: Taking the Lead From RMB, Aug 31, p. 54).

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Figure 116. Exports historically outpaced imports in nominal terms

Export and import value growth 40.0 Commodities: soft commodities (farming, plantations, & fishery products); hard commodities (oil, coal, etc). 20.0 Industrial products: industrial materials (chemicals,

% YoY % - metals, plastics); mechanicals (machinery/tools, equipment, wires, cables, vehicle parts, etc)

(20.0) Clothing: yarn, fabrics, textiles, apparel, footwear, etc

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2005 Electronics: computers, phones, cameras, etc

Export growth, merchandise, FOB, nominal (% YoY) YTD 2018 Non-durables: wooden products, handicrafts, etc Import growth, merchandise, CIF, nominal (% YoY) Source: Vietnam Customs, General Statistics Office, CEIC, MKE estimates

Figure 117. Trading of industrial products rose in 2018

Merchandise exports by product Merchandise imports by product 100.0 100.0 8.7 11.0 4.8 8.7 12.1 19.4 5.7 17.5 21.2 20.1 22.2 23.6 27.3 25.2 25.4 24.8 30.1 31.8 34.9 33.4 10.5 11.6 11.5 24.3 25.9 11.0 24.2 11.2 11.6 11.1 10.8 10.6

22.5 25.0 22.1 20.0 9.9 % % 24.0 50.0 13.1 24.7 50.0 18.6 18.2 19.1 16.6 17.6 26.0 25.4 23.2 22.9 22.4 21.4 19.7 17.4 17.5 16.7 16.9 36.2 15.8 16.4 17.1 19.8 36.0 36.1 33.7 30.2 29.9 27.6 39.7 34.5 32.5 26.0 25.2 25.3 27.2 22.0 20.8 15.9 14.9 14.2 13.4

- - 5.1 7.0 8.9 7.0 7.5 7.3 7.0 7.7 7.7 8.5

2009 2010 2011 2012 2013 2014 2015 2016 2017

1H18

2009 2010 2011 2012 2013 2014 2015 2016 2017 1H18 Commodities Materials Mechanicals Commodities Industrial products Clothing Clothing Electronics Consumer non-durables Electronics Consumer non-durables Unclassified Others

Source: Vietnam Customs, General Statistics Office, CEIC, MKE estimates

Figure 118. Increased trading with ASEAN & EU in 2018

Merchandise exports by destination Merchandise imports by origin 100.0 100.0 20.4 20.4 19.4 19.6 19.7 19.5 24.0 24.5 22.9 22.4 24.1 25.2 24.2 21.8 21.6 22.4 23.6 22.8 23.5 21.4 80.0 80.0 6.3 6.3 5.6 5.7 7.6 7.5 7.3 7.7 7.1 6.0 16.5 17.1 17.7 19.3 17.8 18.1 14.4 13.7 13.1 13.8 15.8 18.4 18.6 19.1 18.3 16.1 15.5 60.0 60.0 23.5 19.3 19.6 4.7 5.0 4.4 5.2 14.3 14.1 9.9 10.1 10.7 4.0 4.3 15.3 15.2 % 4.2 % 14.1 12.7 11.3 4.4 4.2 3.9 27.3 27.2 40.0 19.3 18.9 40.0 27.9 29.5 29.9 28.6 19.7 17.5 17.2 20.7 21.8 25.5 20.0 18.1 19.1 22.0 23.8 23.3 8.6 7.8 8.0 20.0 9.5 10.7 12.0 11.2 10.0 9.9 10.6 12.4 16.5 14.6 20.0 10.2 8.8 8.7 8.7 9.8 10.6 9.7 11.1 10.7 11.4 11.4 10.3 9.8 8.7 8.3 7.8 7.8 18.3 22.0 20.4 9.6 11.5 12.3 13.7 15.7 14.7 16.7 - 3.6 4.3 5.0 4.9 5.1 4.8 5.5 6.5 6.9 7.6 -

2009 2010 2011 2012 2013 2014 2015 2016 2017

2009 2010 2011 2012 2013 2014 2015 2016 2017

1H18 1H18

South Korea Japan China USA ASEAN EU Others South Korea Japan China USA ASEAN EU Others

Total merchandise trading value by trading partner 100.0 22.2 23.2 21.8 20.7 20.4 21.0 80.0 12.8 12.3 12.6 12.8 11.7 12.0 11.6 60.0 15.1 14.1 12.8 11.8 12.2

% 11.9 11.0 11.7 12.6 13.4 12.2 40.0 19.0 19.7 20.3 20.5 22.0 20.8 20.0 9.6 9.3 8.7 8.5 7.9 7.9 10.3 11.2 12.4 14.4 13.9 - 9.7

2013 2014 2015 2016 2017 1H18 South Korea Japan China USA ASEAN EU Others

Source: Vietnam Customs, General Statistics Office, CEIC, MKE estimates

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Figure 119. Vietnam one of the most open economies in the region

Total trade, % of GDP 250

200

150 % 100

50

0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Indonesia Malaysia Philippines Thailand Vietnam

Source: World Bank, MKE estimates

Figure 120. Resilient current account since FTA with Korea at end-15

Current account, % of GDP 20 15 10

5 % 0 -5 -10 -15 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Indonesia Malaysia Philippines Thailand Vietnam

Source: World Bank, MKE estimates

Figure 121. VND often depreciated with trade deficits, except in 2018

Trade balance vs FX 5,000.0 5.0 - -

(5,000.0) (5.0) %

USDm (10,000.0) (10.0) (15,000.0) (15.0)

(20,000.0) (20.0)

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 YTD 2018 Merchandise Trade Balance (FOB-CIF) (L) VND against USD (% change, period-end) (R)

Source: Vietnam Customs, General Statistics Office, CEIC, MKE estimates

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Figure 122. VNDUSD biased downward despite rising terms of trade

Terms of Trade vs FX 110.0

105.0

100.0

Jun'13 = 100 = Jun'13 95.0

90.0

Jun-13 Jun-14 Jun-15 Jun-16 Jun-17 Jun-18

Sep-13 Sep-14 Sep-15 Sep-16 Sep-17

Mar-14 Mar-15 Mar-16 Mar-17 Mar-18

Dec-13 Dec-14 Dec-15 Dec-16 Dec-17

Commodity Terms of Trade VNDUSD

Source: General Statistics Office, CEIC, MKE estimates

Figure 123. BOP surplus/deficit corresponds to VNDUSD movements

15,000.0 BOP positions vs FX 6.0

10,000.0 4.0 Errors/Omissions

5,000.0 2.0 Financial Account

- 0.0 % USDm Current Account (5,000.0) -2.0

(10,000.0) -4.0 BOP Surplus/Deficit

(15,000.0) -6.0

VNDUSD (period-end, YoY) (R)

Jun-13 Jun-14 Jun-15 Jun-16 Jun-17 Jun-18

Sep-13 Sep-14 Sep-15 Sep-16 Sep-17

Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18

Dec-13 Dec-14 Dec-15 Dec-16 Dec-17

Source: State Bank of Vietnam, General Statistics Office, CEIC, MKE estimates

Figure 124. CA usually corresponded to VNDUSD, but not in 2018

8,000.0 Current Account (CA) Breakdown vs FX 6.0 6,000.0 4.0 4,000.0 2.0 Secondary Income, net 2,000.0 Primary Income, net

- 0.0 %

USDm Services Exports, net (2,000.0) -2.0 Merchandise Exports, net (4,000.0) -4.0 Current Account (6,000.0) VNDUSD (period-end, YoY) (R)

(8,000.0) -6.0

Jun-13 Jun-14 Jun-15 Jun-16 Jun-17 Jun-18

Sep-13 Sep-14 Sep-15 Sep-16 Sep-17

Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18

Dec-13 Dec-14 Dec-15 Dec-16 Dec-17

Source: State Bank of Vietnam, General Statistics Office, CEIC, MKE estimates

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Figure 125. FDI the most stable driver of FA; IO most volatile

10,000.0 Financial Account (FA) Breakdown 8,000.0

6,000.0

4,000.0

2,000.0

USDm - Other Investments, net

(2,000.0) Indirect Investment, net

(4,000.0) Direct Investment, net

(6,000.0)

(8,000.0)

Jun-13 Jun-14 Jun-15 Jun-16 Jun-17 Jun-18

Sep-13 Sep-14 Sep-15 Sep-16 Sep-17

Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18

Dec-14 Dec-15 Dec-16 Dec-17 Dec-13 Source: State Bank of Vietnam, General Statistics Office, CEIC, MKE estimates

Figure 126. IO mostly driven by changes in deposits related to trade

10,000.0 6.0 FA - Other Investments (IO) vs FX Others

4.0 Loans (liabilities side) 5,000.0 2.0 Deposits (liabilities side)

- 0.0 %

USDm Deposits (non-banks, assets -2.0 side) (5,000.0) Deposits (banks, assets -4.0 side) Financial Account - Other (10,000.0) -6.0 Investments, net VNDUSD (period-end, YoY)

(R)

Jun-13 Jun-14 Jun-15 Jun-16 Jun-17 Jun-18

Sep-13 Sep-14 Sep-15 Sep-16 Sep-17

Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18

Dec-13 Dec-14 Dec-15 Dec-16 Dec-17

Source: State Bank of Vietnam, General Statistics Office, CEIC, MKE estimates

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Figure 127. FX daily management has been more flexible since 2015

USDVND - Official vs free-market rates 24,000.0

23,500.0 Prior to 3Q15, free-market rate spikes above SBV’s 23,000.0 upper limit (i.e. black line above grey line) used to signal pressures and precede 22,500.0 devaluations (yellow line’s upward adjustment).

USD/VND 22,000.0

21,500.0 Since 3Q15, the USDVND daily trading band was widened to 3%, and the SBV moved to a managed float/crawling peg regime with 21,000.0 more frequent daily adjustments based on a basket of currencies from major trading partners.

20,500.0

Jul-13 Jul-14 Jul-15 Jul-16 Jul-17 Jul-18

Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18

Sep-13 Sep-14 Sep-15 Sep-16 Sep-17 Sep-18

Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18

Nov-13 Nov-14 Nov-15 Nov-16 Nov-17

May-13 May-14 May-15 May-16 May-17 May-18

SBV - Reference rate SBV - Upper limit Free Market - USD Sell Rate Vietcombank - USD Sell Rate

Source: State Bank of Vietnam, FiinPro, CEIC, MKE estimates

Figure 128. Commercial banks can adjust more proactively post-2015

Free-market vs commercial banks, 15-day moving averages 3.00%

Proactive adjustments before free- 2.50% market pressures kicked in.

2.00%

1.50%

1.00%

0.50%

0.00%

-0.50%

-1.00%

Jul-13 Jul-13 Jul-13 Jul-13

Apr-13 Apr-13

Jan-15 Jan-15 Jan-16 Jan-16 Jan-17 Jan-17

Jun-13 Jun-13 Jun-13 Jun-14 Jun-14

Sep-15 Sep-15 Sep-15 Sep-15 Sep-18

Mar-13 Mar-13 Mar-13 Mar-15

Feb-13

Aug-13 Aug-13 Aug-15 Aug-15 Aug-15 Aug-18 Aug-18 Aug-18

Dec-14 Dec-15 Dec-15 Dec-15 Dec-16 Dec-16 Dec-16

Nov-15

May-13 May-13 May-13

Free-market USDVND, % above SBV's upper limit (MA15) Vietcombank USDVND, % change (MA15)

Only includes dates during which free-market USDVND rate was above SBV’s upper limit.

Source: State Bank of Vietnam, FiinPro, CEIC, MKE estimates

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Figure 129. CNY pressure on VND more visible in commercial bank rates

Central bank rates (LCU/USD) Commercial bank rates (LCU/USD) 21,000.0 6.0 21,000.0 6.0

6.2 21,500.0 6.2 21,500.0 6.4 22,000.0 6.4 22,000.0 6.6 22,500.0 6.6 22,500.0 6.8 23,000.0 6.8

23,000.0 7.0 23,500.0 7.0

Jul-16 Jul-17 Jul-18 Jul-16 Jul-17 Jul-18

Jan-15 Jan-15

Oct-15 Oct-16 Oct-15 Oct-16

Jun-15 Jun-15

Sep-17 Sep-17

Mar-15 Mar-16 Mar-17 Mar-15 Mar-16 Mar-17

Feb-18 Feb-18

Aug-15 Aug-15

Dec-15 Dec-16 Dec-17 Dec-15 Dec-16 Dec-17

May-17 May-18 May-16 May-17 May-18 May-16 VND (L) CNY (R) VND (L) CNY (R)

Central bank rates Commercial bank rates LCU/USD depreciation, 10-day moving average LCU/USD depreciation, 10-day moving average -4.00% -3.00%

-2.50% -3.00% -2.00%

VND VND -2.00% -1.50%

y = 0.0612x - 0.0011 -1.00% -1.00% R² = 0.0639 -0.50% y = 0.3973x - 0.0004 0.00% 0.00% R² = 0.346 0.00% -1.00% -2.00% -3.00% -4.00% 0.00% -0.50% -1.00% -1.50% -2.00% -2.50% -3.00% CNY CNY

Source: State Bank of Vietnam, China State Administration of Foreign Exchange, Bank of China, Vietcombank, MKE estimates

Figure 130. Foreign reserves highest since 2009 but still below peers

Foreign reserves, months of imports 16.0 14.0 12.0 10.0 8.0

months 6.0 4.0 2.0 0.0 Dec'09 Dec'10 Dec'11 Dec'12 Dec'13 Dec'14 Dec'15 Dec'16 Dec'17 Mar'18

Indonesia Malaysia Philippines Thailand Vietnam

Source: World Bank Global Economic Monitoring (latest version), MKE estimates

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Figure 131. REER depreciated in 2017, signalling undervaluation

REER - ASEAN NEER - ASEAN 120.00 140.00 110.00

120.00 100.00 90.00 100.00

Dec 2007 = 100 = 2007 Dec 80.00 Dec 2007 = 100 = 2007 Dec

80.00 70.00 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Jun-18 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Jun-18

Indonesia Malaysia Philippines Indonesia Malaysia Philippines Thailand Vietnam Thailand Vietnam

REER - Vietnam's Trading Partners NEER - Vietnam's Trading Partners 150.00 140.00

125.00 120.00

100.00 100.00

Dec 2007 = 100 = 2007 Dec 100 = 2007 Dec

75.00 80.00 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Jun-18 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Jun-18

USD EUR KRW JPY USD EUR KRW JPY TWD SGD THB CNY TWD SGD THB CNY

Source: Bruegel – Effective exchange rate dataset dated 28 June 2018, MKE estimates

Figure 132. FDI inflows still strong vs peers

FDI (net), % of GDP 10

8

6 % 4

2

0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Indonesia Malaysia Philippines Thailand Vietnam

Source: World Bank, MKE estimates

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Figure 133. FDI registration mainly goes into manufacturing

40,000.0

30,000.0

20,000.0 Others USDm Electricity 10,000.0 Real Estate Manufacturing

-

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 YTD 2018

Source: Foreign Investment Agency, General Statistics Office, CEIC, MKE estimates

Figure 134. Japanese energy & real estate projects drove 2017-18 FDI

40,000.0

35,000.0 Others 30,000.0

25,000.0 ASEAN

20,000.0

USDm Rest of East Asia 15,000.0

10,000.0 Japan 5,000.0

- South Korea

2009 2010 2011 2012 2013 2014 2015 2016 2017

2018 YTD 2018 Source: Foreign Investment Agency, General Statistics Office, CEIC, MKE estimates

Figure 135. New FDI registration in 2018 YTD was high

20,000.0

15,000.0 Share capital contribution

10,000.0

USDm Additions to existing projects

5,000.0 New

-

2013 2014 2015 2016 2017

2018 YTD 2018 Source: Foreign Investment Agency, General Statistics Office, CEIC, MKE estimates

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6. Latest updates

GDP growth vs unemployment rate Industrial production –manufacturing (YoY growth) 7.5 20.0 7.0 Communication equipment 18.0 6.5

6.0 16.0 Steel - Basic % 5.5 %

5.0 14.0 % 4.5 Textiles - Fiber 12.0 4.0 3.5 10.0 Food products - Dairy

Overall Manufacturing

Jun-14 Jun-15 Jun-16 Jun-17 Jun-18

Sep-14 Sep-15 Sep-16 Sep-17

Mar-14 Mar-15 Mar-16 Mar-17 Mar-18

Dec-14 Dec-15 Dec-16 Dec-17 Unemployment + underemployment rate (L) 0 5 10 15 20 25 Real GDP growth, T12M (L) Credit growth, T12M (R) YTD Jul-18 Aug-18

Source: General Statistics Office, MKE estimates Source: General Statistics Office, MKE estimates

CPI – Contributions to monthly inflation (YoY Growth) Real retail sales and tourist arrival growth 6.0 16.0 40.0 5.0 14.0 4.0 30.0 12.0 3.0 10.0 20.0

% 2.0 % 1.0 8.0 10.0 % - 6.0 - (1.0) 4.0 (2.0) 2.0 (10.0)

- (20.0)

Jul-16 Jul-17 Jul-18

Jan-16 Jan-17 Jan-18

Sep-16 Sep-17

Mar-16 Mar-17 Mar-18

Nov-16 Nov-17

May-16 May-17 May-18

2009 2010 2011 2012 2013 2014 2015 2016 2017 Foods/foodstuffs Housing/construction 2008 Transport Health/personal care

Education Others YTD 2018 CPI (L) Core CPI (L) Real retail sales, % YoY (L) International arrivals, % YoY (R)

Source: General Statistics Office, MKE estimates Source: General Statistics Office, MKE estimates

Merchandise trade balance and export/import growth USDVND and VNIBOR

2,500 40.0 2,000 30.0 2.0 6.0 1,500 20.0 1.5 1,000 5.0 1.0 500 10.0 4.0 0.5

0 - %

USDm % (500) (10.0) % - 3.0 (1,000) (0.5) (20.0) 2.0 (1,500) (1.0) (30.0) (2,000) 1.0 (1.5) (2,500) (40.0)

(2.0) -

Apr-17 Apr-18

Oct-16 Oct-17

Jun-17 Jun-18

Feb-17 Feb-18

Aug-17 Aug-18

Dec-16 Dec-17

Jun-16 Jun-17 Jun-18

Sep-15 Sep-16 Sep-17

Mar-16 Mar-17 Mar-18

Dec-15 Dec-16 Dec-17 Trade balance (L) USDVND depreciation (MoM) (L) Export growth, 3MMA (YoY) (R) Import growth, 3MMA (YoY) (R) VNIBOR - Overnight (R)

Source: General Statistics Office, Vietnam Customs, MKE estimates Source: State Bank of Vietnam, Vietcombank

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Research Offices

REGIONAL MALAYSIA HONG KONG / CHINA THAILAND

Sadiq CURRIMBHOY WONG Chew Hann, CA Head of Research Mitchell KIM Head of Research Maria LAPIZ Head of Institutional Research Regional Head, Research & Economics (603) 2297 8686 [email protected] (852) 2268 0634 [email protected] Dir (66) 2257 0250 | (66) 2658 6300 ext 1399 (65) 6231 5836 • Strategy • Internet & Telcos [email protected] [email protected] • Strategy • Consumer • Materials • Services Desmond CH’NG, ACA Christopher WONG Ornmongkol TANTITANATORN WONG Chew Hann, CA (603) 2297 8680 (852) 2268 0652 (66) 2658 6300 ext 1395 Regional Head of Institutional Research [email protected] [email protected] [email protected] (603) 2297 8686 • Banking & Finance • HK & China Properties • Power & Utilities • Infrastructure [email protected] LIAW Thong Jung Jacqueline KO, CFA Surachai PRAMUALCHAROENKIT (852) 2268 0633 [email protected] Head of Retail Research ONG Seng Yeow (603) 2297 8688 [email protected] • Oil & Gas Services- Regional • Consumer Staples & Durables (66) 2658 5000 ext 1470 Regional Head of Retail Research [email protected] (65) 6231 5839 ONG Chee Ting, CA Ricky NG, CFA • Auto • Conmat • Contractor • Steel [email protected] (852) 2268 0689 [email protected] (603) 2297 8678 [email protected] Ekachai TARAPORNTIP Deputy Head • Regional Renewables • Plantations - Regional 66) 2658 5000 ext 1530 • HK & China Properties ECONOMICS [email protected] Mohshin AZIZ Sonija LI, CFA, FRM Sutthichai KUMWORACHAI Deputy Head Suhaimi ILIAS (603) 2297 8692 [email protected] Chief Economist (852) 2268 0641 [email protected] (66) 2658 5000 ext 1400 • Aviation - Regional • Petrochem Malaysia | Philippines | China • Gaming [email protected] • Energy • Petrochem (603) 2297 8682 YIN Shao Yang, CPA [email protected] Stefan CHANG, CFA Suttatip PEERASUB (603) 2297 8916 [email protected] (852) 2268 0675 [email protected] • Gaming – Regional • Media (66) 2658 5000 ext 1430 CHUA Hak Bin • Technology – Regional [email protected] Regional Thematic Macroeconomist • Media • Commerce TAN Chi Wei, CFA Tony REN, CFA (65) 6231 5830 (603) 2297 8690 [email protected] Termporn TANTIVIVAT [email protected] (852) 2268 0640 [email protected] • Power • Telcos • Healthcare & Pharmaceutical (66) 2658 5000 ext 1520 [email protected] LEE Ju Ye WONG Wei Sum, CFA Wendy LI • Property Singapore (603) 2297 8679 [email protected] (852) 2268 0647 [email protected] (65) 6231 5844 Jaroonpan WATTANAWONG • Property • Consumer & Auto [email protected] (66) 2658 5000 ext 1404 [email protected] LEE Yen Ling INDIA • Transportation • Small cap Dr Zamros DZULKAFLI (603) 2297 8691 [email protected] (603) 2082 6818 • Building Materials • Glove • Ports • Shipping Jigar SHAH Head of Research Sorrabhol VIRAMETEEKUL [email protected] (91) 22 6623 2632 [email protected] Head of Digital Research (66) 2658 5000 ext 1550 Ivan YAP • Strategy • Oil & Gas • Automobile • Cement Ramesh LANKANATHAN (603) 2297 8612 [email protected] [email protected] (603) 2297 8685 • Automotive • Semiconductor • Technology • Food, Transportation [email protected] Neerav DALAL (91) 22 6623 2606 [email protected] Wijit ARAYAPISIT Kevin WONG (66) 2658 5000 ext 1450 • Software Technology • Telcos FX (603) 2082 6824 [email protected] [email protected] • REITs • Consumer Discretionary Saktiandi SUPAAT Vishal PERIWAL • Strategist Head, FX Research Kritsapong PATAN Adrian WONG (91) 22 6623 2605 vishalperiwa@maybank- (65) 6320 1379 (66) 2658 5000 ext 1310 (603) 2297 8675 [email protected] ke.co.in [email protected] • Infrastructure [email protected] • Constructions • Healthcare • Chartist Christopher WONG INDONESIA Apisit PATTARASAKOLKIAT (65) 6320 1347 Jade TAM (603) 2297 8687 [email protected] (66) 2658 5000 ext 1405 [email protected] Isnaputra ISKANDAR Head of Research • Media • Building Materials [email protected] (62) 21 8066 8680 • Chartist Leslie TANG [email protected] Mohd Hafiz Hassan (65) 6320 1378 • Strategy • Metals & Mining • Cement VIETNAM [email protected] (603) 2082 6819 [email protected] • Small & Mid Caps Rahmi MARINA LE Hong Lien, ACCA Fiona LIM (62) 21 8066 8689 Head of Institutional Research (65) 6320 1374 TEE Sze Chiah Head of Retail Research [email protected] (84 28) 44 555 888 x 8181 [email protected] (603) 2082 6858 [email protected] • Banking & Finance [email protected] Aurellia SETIABUDI • Strategy • Consumer • Diversified STRATEGY Nik Ihsan Raja Abdullah, MSTA, CFTe (603) 2297 8694 (62) 21 8066 8691 THAI Quang Trung, CFA, [email protected] Sadiq CURRIMBHOY [email protected] Deputy Head, Institutional Research • Property Global Strategist (84 28) 44 555 888 x 8180 (65) 6231 5836 SINGAPORE Janni ASMAN [email protected] [email protected] (62) 21 8066 8687 • Real Estate • Construction • Materials Neel SINHA Head of Research [email protected] (65) 6231 5838 [email protected] LE Nguyen Nhat Chuyen Willie CHAN • Cigarette • Healthcare • Retail • Strategy • Industrials (84 28) 44 555 888 x 8082 Hong Kong / Regional • SMID Caps – Regional [email protected] (852) 2268 0631 PHILIPPINES • Oil & Gas [email protected] CHUA Su Tye Minda OLONAN Head of Research NGUYEN Thi Ngan Tuyen, (65) 6231 5842 [email protected] (63) 2 849 8840 FIXED INCOME • REITs Head of Retail Research [email protected] (84 28) 44 555 888 x 8081 • Strategy Winson Phoon, ACA Derrick HENG, CFA [email protected] (65) 6231 5831 (65) 6231 5843 [email protected] Katherine TAN • Food & Beverage • Oil&Gas • Banking [email protected] • Property • REITs (Office) (63) 2 849 8843 TRUONG Quang Binh, [email protected] Deputy Head, Retail Research Se Tho Mun Yi Luis HILADO • Banks • Construction (603) 2074 7606 (65) 6231 5848 [email protected] (84 28) 44 555 888 x 8087 [email protected] • Telcos Luis HILADO [email protected] (65) 6231 5848 [email protected] • Rubber Plantation • Tyres & Tubes • Oil & Gas LAI Gene Lih • Telcos TRINH Thi Ngoc Diep (65) 6231 5832 [email protected] (84 28) 44 555 888 x 8208 • Technology Romel LIBO-ON [email protected] (63) 2 849 8844 • Technology • Utilities • Construction [email protected] • Property NGUYEN Thi Sony Tra Mi (84 28) 44 555 888 x 8084 [email protected] • Port Operation • Pharmaceutical • Food & Beverage NGUYEN Thanh Lam (84 28) 44 555 888 x 8086 [email protected] • Technical Analysis

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APPENDIX I: TERMS FOR PROVISION OF REPORT, DISCLAIMERS AND DISCLOSURES

DISCLAIMERS This research report is prepared for general circulation and for information purposes only and under no circumstances should it be considered or intended as an offer to sell or a solicitation of an offer to buy the securities referred to herein. Investors should note that values of such securities, if any, may fluct uate and that each security’s price or value may rise or fall. Opinions or recommendations contained herein are in form of technical ratings and fundamental ratings. Technical ratings may differ fr om fundamental ratings as technical valuations apply different methodologies and are purely based on price and volume-related information extracted from the relevant jurisdiction’s stock exchange in the equity analysis. Accordingly, investors’ returns may be less than the original sum invested. Past performance is not necessarily a guide to future performance. This report is not intended to provide personal investment advice and does not take into account the specific investment objectives, the financial situation and the particular needs of persons who may receive or read this report. Investors should therefore seek financial, legal and other advice regarding the appropriateness of investing in any securities or the investment strategies discussed or recommended in this report. The information contained herein has been obtained from sources believed to be reliable but such sources have not been independently verified by Maybank Investment Bank Berhad, its subsidiary and affiliates (collectively, “MKE”) and consequently no representation is made as to the accuracy or completeness of this report by MKE and it should not be relied upon as such. Accordingly, MKE and its officers, directors, associates, connected parties and/or employees (collectively, “Representatives” ) shall not be liable for any direct, indirect or consequential losses or damages that may arise from the use or reliance of this report. Any information, opinions or recommendations contained herein are subject to change at any time, without prior notice. This report may contain forward looking statements which are often but not always identified by the use of words such as “anticipate”, “believe”, “estimate”, “intend”, “plan”, “expect”, “forecast”, “predict” and “project” and statements that an event or result “may”, “will”, “can”, “should”, “could” or “might” occur or be achieved and other similar expressions. Such forward looking statements are based on assumptions made and information currently available to us and are subject to certain risks and uncertainties that could cause the actual results to differ materially from those expressed in any forward looking statements. Readers are cautioned not to place undue relevance on these forward-looking statements. MKE expressly disclaims any obligation to update or revise any such forward looking statements to reflect new information, events or circumstan ces after the date of this publication or to reflect the occurrence of unanticipated events. MKE and its officers, directors and employees, including persons involved in the preparation or issuance of this report, may, to the extent permitted by law, from time to time participate or invest in financing transactions with the issuer(s) of the securities mentioned in this report, perform services for or solic it business from such issuers, and/or have a position or holding, or other material interest, or effect transactions, in such securities or options thereon, or other investments related thereto. In addition, it may make markets in the securities mentioned in the material presented in this report. One or more directors, officers and/or employees of MKE may be a director of the issuers of the securities mentioned in this report to the extent permitted by law. This report is prepared for the use of MKE’s clients and may not be reproduced, altered in any way, transmitted to, copied or distributed to any other party in whole or in part in any form or manner without the prior express written consent of MKE and MKE and its Representatives accepts no liability whatsoever for t he actions of third parties in this respect. This report is not directed to or intended for distribution to or use by any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation. This report is for distribution only under such circumstances as may be permitted by applicable law. The securities described herein may not be eligible for sale in all jurisdictions or to certain categories of investors. With out prejudice to the foregoing, the reader is to note that additional disclaimers, warnings or qualifications may apply based on geographical location of the person or entity receiving this repor t. Malaysia Opinions or recommendations contained herein are in the form of technical ratings and fundamental ratings. Technical ratings may differ from fundamental ratings as technical valuations apply different methodologies and are purely based on price and volume-related information extracted from Bursa Malaysia Securities Berhad in the equity analysis. Singapore This report has been produced as of the date hereof and the information herein may be subject to change. Maybank Kim Eng Rese arch Pte. Ltd. (“Maybank KERPL”) in Singapore has no obligation to update such information for any recipient. For distribution in Singapore, recipients of this report are to contact Maybank KERPL in Singapore in respect of any matters arising from, or in connection with, this report. If the recipient of this report is not an accredited investor, expert investor or i nstitutional investor (as defined under Section 4A of the Singapore Securities and Futures Act), Maybank KERPL shall be legally liable for the contents of this report, with such liability being limited to the extent (if any) as permitted by law. Thailand Except as specifically permitted, no part of this presentation may be reproduced or distributed in any manner without the prior written permission of Maybank Kim Eng Securities (Thailand) Public Company Limited. Maybank Kim Eng Securities (Thailand) Public Company Limited (“MBKET”) accepts no liability whatsoever for the actions of third parties in this respect. Due to different characteristics, objectives and strategies of institutional and retail investors, the research reports of MB KET Institutional and Retail Research Department may differ in either recommendation or target price, or both. MBKET Retail Research is intended for retail investors (http://kelive.maybank-ke.co.th) while Maybank Kim Eng Institutional Research is intended only for institutional investors based outside Thailand only. The disclosure of the survey result of the Thai Institute of Directors Association (“IOD”) regarding corporate governance is made pursuant to the policy of the Office of the Securities and Exchange Commission. The survey of the IOD is based on the information of a company listed on the Stock Exchange of Thailand and the market for Alternative Investment disclosed to the public and able to be accessed by a general public investor. The result, therefore, is from the perspective of a third party. It is not an evaluation of operation and is not based on inside information. The survey result is as of the date appearing in the Corporate Governance Report of Thai Listed Companies. As a result, the survey may be changed after that date. MBKET does not confirm nor certify the accuracy of such survey result. The disclosure of the Anti-Corruption Progress Indicators of a listed company on the Stock Exchange of Thailand, which is assessed by Thaipat Institute, is made in order to comply with the policy and sustainable development plan for the listed companies of the Office of the Securities and Exchange Commission. Tha ipat Institute made this assessment based on the information received from the listed company, as stipulated in the form for the assessment of Anti-corruption which refers to the Annual Registration Statement (Form 56-1), Annual Report (Form 56-2), or other relevant documents or reports of such listed company. The assessment result is therefore made from the perspective of Thaipat Institute that is a third party. It is not an assessment of operation and is not based on any inside information. Since this assessment is only the assessment result as of the date a ppearing in the assessment result, it may be changed after that date or when there is any change to the relevant information. Nevertheless, MBKET does not confirm, verify, or certify the ac curacy and completeness of the assessment result. US This third-party research report is distributed in the United States (“US”) to Major US Institutional Investors (as defined in Rule 15a-6 under the Securities Exchange Act of 1934, as amended) only by Maybank Kim Eng Securities USA Inc (“Maybank KESUSA”), a broker-dealer registered in the US (registered under Section 15 of the Securities Exchange Act of 1934, as amended). All responsibility for the distribution of this report by Maybank KESUSA in the US shall be borne by Maybank KESUSA. This report is not directed at you if MKE is prohibited or restricted by any legislation or regulation in any jurisdiction from making it available to you. You should satisfy yourself before reading it that Maybank KESUSA is permitted to provide research material concerning investments to you under relevant legislation and regulations. All U.S. persons receiving and/or accessing this report and wishing to effect transactions in any s ecurity mentioned within must do so with: Maybank Kim Eng Securities USA Inc. 400 Park Avenue, 11th Floor, New York, New York 10022, 1-(212) 688-8886 and not with, the issuer of this report.

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UK This document is being distributed by Maybank Kim Eng Securities (London) Ltd (“Maybank KESL”) which is authorized and regula ted, by the Financial Conduct Authority and is for Informational Purposes only. This document is not intended for distribution to anyone defined as a Retail Client under the Financial Services and Markets Act 2000 within the UK. Any inclusion of a third party link is for the recipients convenience only, and that the firm does not take any responsibility for its comments or accuracy, and that access to such links is at the individuals own risk. Nothing in this report should be considered as constituting legal, accounting or tax advice, and that f or accurate guidance recipients should consult with their own independent tax advisers. DISCLOSURES

Legal Entities Disclosures Malaysia: This report is issued and distributed in Malaysia by Maybank Investment Bank Berhad (15938- H) which is a Participating Organization of Bursa Malaysia Berhad and a holder of Capital Markets and Services License issued by the Securities Commission in Malaysia. Singapore: This report is distributed in Singapore by Maybank KERPL (Co. Reg No 198700034E) which is regulated by the Monetary Authority of Singapore. Indonesia: PT Maybank Kim Eng Securities (“PTMKES”) (Reg. No. KEP-251/PM/1992) is a member of the Indonesia Stock Exchange and is regulated by the Financial Services Authority (Indonesia). Thailand: MBKET (Reg. No.0107545000314) is a member of the Stock Exchange of Thailand and is regulated by the Ministry of Finance and the Securities and Exchange Commission. Philippines: Maybank ATRKES (Reg. No.01-2004-00019) is a member of the Philippines Stock Exchange and is regulated by the Securities and Exchange Commission. Vietnam: Maybank Kim Eng Securities Limited (License Number: 117/GP-UBCK) is licensed under the State Securities Commission of Vietnam. Hong Kong: KESHK (Central Entity No AAD284) is regulated by the Securities and Futures Commission. India: Kim Eng Securities India Private Limited (“KESI”) is a participant of the National Stock Exchange of India Limited and the Bombay Stock Exchange and is regulated by Securities and Exchange Board of India (“SEBI”) (Reg. No. INZ000010 538). KESI is also registered with SEBI as Category 1 Merchant Banker (Reg. No. INM 000011708) and as Research Analyst (Reg No: INH000000057) US: Maybank KESUSA is a member of/ and is authorized and regulated by the FINRA – Broker ID 27861. UK: Maybank KESL (Reg No 2377538) is authorized and regulated by the Financial Conduct Authority.

Disclosure of Interest Malaysia: MKE and its Representatives may from time to time have positions or be materially interested in the securities referred to he rein and may further act as market maker or may have assumed an underwriting commitment or deal with such securities and may also perform or seek to perform investment banking services, advisory and other services for or relating to those companies.

Singapore: As of 25 September 2018, Maybank KERPL and the covering analyst do not have any interest in any companies recommended in this research report.

Thailand: MBKET may have a business relationship with or may possibly be an issuer of derivative warrants on the securities /companies mentioned in the research report. Therefore, Investors should exercise their own judgment before making any investment decisions. MBKET, its associates, directors, connected parties and/or employees may from time to time h ave interests and/or underwriting commitments in the securities mentioned in this report.

Hong Kong: As of 25 September 2018, KESHK and the authoring analyst do not have any interest in any companies recommended in this research report.

India: As of 25 September 2018, and at the end of the month immediately preceding the date of publication of the research report, KESI, authoring analyst or their associate / relative does not hold any financial interest or any actual or beneficial ownership in any shares or having any conflict of interest in the subject companies except as otherwise disclosed in the research report. In the past twelve months KESI and authoring analyst or their associate did not receive any compensation or other benefits from the subject companies or third party in connection with the research report on any account what so ever except as otherwise disclosed in the research report.

MKE may have, within the last three years, served as manager or co-manager of a public offering of securities for, or currently may make a primary market in issues of, any or all of the entities mentioned in this report or may be providing, or have provided within the previous 12 months, significant advice or investment services in relation to the inves tment concerned or a related investment and may receive compensation for the services provided from the companies covered in this report.

OTHERS Analyst Certification of Independence The views expressed in this research report accurately reflect the analyst’s personal views about any and all of the subject securities or issuers; and no part of the research analyst’s compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in the report. Reminder Structured securities are complex instruments, typically involve a high degree of risk and are intended for sale only to soph isticated investors who are capable of understanding and assuming the risks involved. The market value of any structured security may be affected by changes in economic, financial an d political factors (including, but not limited to, spot and forward interest and exchange rates), time to maturity, market conditions and volatility and the credit quality of any issuer or reference issuer. Any investor interested in purchasing a structured product should conduct its own analysis of the product and consult with its own professional advisers as to the risks involved in making such a purchase. No part of this material may be copied, photocopied or duplicated in any form by any means or redistributed without the prior consent of MKE.

Definition of Ratings Maybank Kim Eng Research uses the following rating system BUY Return is expected to be above 10% in the next 12 months (excluding dividends) HOLD Return is expected to be between - 10% to +10% in the next 12 months (excluding dividends) SELL Return is expected to be below -10% in the next 12 months (excluding dividends) Applicability of Ratings The respective analyst maintains a coverage universe of stocks, the list of which may be adjusted according to needs. Investment ratings are only applicable to the stocks which form part of the coverage universe. Reports on companies which are not part of the coverage do not carry investment ratings as we do not actively follow developments in these companies.

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 Malaysia  Singapore  London  New York Maybank Investment Bank Berhad Maybank Kim Eng Securities Pte Ltd Maybank Kim Eng Securities Maybank Kim Eng Securities USA (A Participating Organisation of Maybank Kim Eng Research Pte Ltd (London) Ltd Inc Bursa Malaysia Securities Berhad) 50 North Canal Road PNB House 400 Park Avenue, 11th Floor 33rd Floor, Menara Maybank, Singapore 059304 77 Queen Victoria Street New York, New York 10022, 100 Jalan Tun Perak, London EC4V 4AY, UK U.S.A. 50050 Kuala Lumpur Tel: (65) 6336 9090 Tel: (603) 2059 1888; Tel: (44) 20 7332 0221 Tel: (212) 688 8886 Fax: (603) 2078 4194 Fax: (44) 20 7332 0302 Fax: (212) 688 3500

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