Vietnam Midyear Strategy A rosier outlook

July 2019

IN ALLIANCE WITH Executive summary

Vietnam’s economy enjoyed a favorable growth in 1H2019 on the back of rebounding domestic consumption, strong manufacturing and surging FDI. We are fairly certain about the direction in which the economy is heading towards end-2019 and 2020 with stable GDP growth of 6.5-6.6%. • Vietnam‘s exports and PMI performances in 1H2019 are outliers which reaffirmed our view that Vietnam is likely one of the few economies that benefit from trade diversion as a result of trade tension. • Inflationary pressure remains benign which would create more room for SBV to follow a more flexible monetary policy in 2H2019. In our view, the weak performance of Vietnam equity market in 1H2019 could be explained by: (1) muted earnings growth in 1Q19, (2) no-show of IPO and sluggish SOE divestment, and (3) vibrant corporate bond market driving money away from equity market. However, despite the lacklustre equity market performance, we see no capital flight so far. Though the best is yet to come, the worst seems to be over. Vietnam’s stock market needs at least another year before being included in the MSCI “shortlist” and more than one to two years to be officially upgraded to emerging market status. Though the concerns over global economic slowdown along with heightening trade war tensions still cast shadow, the Fed’s dovish turn on interest rates could unleash emerging market rally. Overall, we expect a rosier outlook with the VNINDEX touching 1,020 points towards end-2019. Our forecast is based on a TTM P/E contraction of around 3% to touch 15.0x which, juxtaposed against a 17.9% rise in market cap-weighted earnings during the year, should translate into an approximate 14.7% rise in the index. On technical analysis front, we expect a breakthrough the 965-970pts resistance trendline could indicate a headway into the 1,000-1,030pts zone. 2 Executive summary

Consumer and retail are still the places to be. Our top picks are MWG and VRE regarding their leading position to ride the boom of new shopping trend. We also like VNM as the company should benefit from the broad strength in consumption and competitive edge from its brandname. There is growing awareness that Industrial parks, Logistics and Textiles are the biggest beneficiaries from the manufacturing capital outflow away from China but we feel that most of the names are looking expensive. Currently, KBC is a notable name in IP space with sizable net-leasable-area and prime locations. We also put GMD in our watch list as its plan to triple seaport capacity allows the company to ride on the buoyant logistics demand. We are generally neutral on banking sector in 2H2019 amid rising cost of fund and the potential spillover from global economic risks. We prefer banks with the following characteristics: 1) good exposure to and strong ability to capture the opportunities from retail lending and non-interest income activities; 2) well-positioned to offset the challenges from rising funding costs and lower credit growth quota; 3) good asset quality to buffer against the risks of rising system-wide NPL ratio. Our top picks are MBB and ACB, meanwhile we lower VCB’s rating to Hold as the stock price is close to fair price. Both Aviation and Power still appear appealing as they offer growth with defensive characteristics. We prefer ACV as the company is less exposed to rising fuel prices, while it could benefit from intensifying competition among regional airlines. We like POW because of its natural hedge against changes in weather conditions or key input prices. Although we believe the draft of home loans regulation is not worrisome, we play selectively in property space. NLG is our stock pick while VHM was put on radar thanks to its strategic pivot into the mid-end segment.

3 Chapter 1

Macro Economic Outlook Extending the resilient growth

4 1H19 snapshot: Strong macro fundamentals amid maintaining prudential policies

GDP growth remained resilient in 1H19 Inflation relatively muted (Sources: GSO, VNDIRECT) (Sources: GSO, VNDIRECT)

8.0% 6.0% 7.0% 6.0% 5.0% 5.0% 4.0% 4.0% 3.0% 3.0% 2.0% 1.0% 2.0% 0.0% 1.0% -1.0% 0.0% Agriculture, forestry and fishing Industry and construction Service Taxes and subsidies Real GDP growth Headline CPI Core CPI

Vietnam’s GDP expanded 6.76% yoy in the first half of 2019, fueled by a healthy growth in consumption and a strong manufacturing sector thanks to rising private and foreign direct investment. The country’s average consumer price index (CPI) increased 2.64% yoy in 1H2019, the slowest rise in three years. While the core CPI edged up in the six-month period, inflation expectations remained under government control. The 2019-20 outlook is solid, backed by the economy’s strong fundamentals. However, we expect a moderate growth over this period due to weak external conditions. 5 1H19 snapshot: Strong macro fundamentals amid maintaining prudential policies

Public investment remained subdued, private investment Cautious monetary policy in 1H19 continued to surge (Sources: GSO, VNDIRECT) (Sources: GSO, VNDIRECT)

% yoy State investment Private investment % yoy M2 growth Credit growth Foreign investment Total investment 25.00% 25.00%

20.00% 20.00%

15.00% 15.00%

10.00% 10.00%

5.00% 5.00%

.00% .00%

Macro-prudential policies continued in 1H19: 1) public investment has not recovered as we expected; 2) the State Bank of Vietnam (SBV) continued its tightening monetary policy with a lower credit growth target set for this year. Besides, banking liquidity has been curbed by SBV’s regulation on high-risk sectors (real estate, consumer finance) and another regulation on the ratio of short-term funds used for medium and long-term loans, leading to higher interbank rates and deposit rates. 6 Domestic consumption is a key driver of 1H19 GDP growth

Domestic consumption remained resilient Vietnam’s consumer confidence index returned to a record (Sources: GSO, VNDIRECT) high in 1Q19 (Sources: Nielsen, VNDIRECT)

450,000 12.0% 129 129 400,000 10.0% 8.0% 124 350,000 122 120 6.0% 117 300,000 116 115 4.0% 112 112 250,000 2.0% 109 107 107 200,000 0.0%

Retail Sales (VND bn) Growth (% yoy, ex-inflation)

We continue to see consumption expanding in 1H19, with a stable retail sales growth (+8.7% yoy). Meanwhile, consumer confidence is outpacing other Asian countries, having revisited a record high in 1Q2019. Healthy income growth and a growing middle-income class are key drivers of domestic consumption amid weak external demand in the medium term, in our view. 7 Vietnam’s macro stability vs. ASEAN countries

Vietnam’s 2Q19 PMI outperformed regional Vietnam surpassed Indonesia to rank second in peers consumer confidence in 1Q19

55 Apr-19 May-19 Jun-19 Q3/2018 Q4/2018 Q1/2019 150 53 100 51 50 49 0 47

45 Vietnam Philippines Indonesia Singapore Thailand Malaysia ASEAN

The Dong is the only currency that depreciated Vietnam’s central banks is neutral in policy against US$ in 1H19 in ASEAN bloc rates vs. other ASEAN countries

ASEAN’s currencies vs. US$ (%) 1H2019 2018 % points changes in policy rates Depreciation Appreciation

Malaysia 0 -0.25 -2.2 Malaysia 0 1H2019 2H2018 5.1 Thailand 0.8 Thailand 0.25 0.7 Singapore -2.0 Indonesia 1.8 0.75 Indonesia -6.2 -0.25 2.4 Philippines Philippines -5.4 1.25 -0.5 0 Vietnam -2.1 Vietnam

-8 -6 -4 -2 0 2 4 6 -0.5 0 0.5 1 1.5

(Sources: NIKKEI, NIELSEN, BLOOMBERG, VNDIRECT) 8 Vietnam enjoys a better position than neighboring exporters amid the escalating trade war

Strong trade diversion from China to Vietnam’s export growth to US and Vietnam’s export growth outperforms Vietnam in order to avoid US tariffs China by major products in 5M19 other Asian countries

Exports to China (yoy change, %) YoY change 84.7 3MMA, Index (Jan 2018 = 100) 60.0% Exports to US (yoy change, %) 140 54.4 45.0% 35.0 130

30.0% 13.8 13.0 120 2.4 3.8 15.0% 110 -0.6 -3.9 -10.8 0.0% -14.4 100 -21.8 -15.0% 90 80 -30.0% Furniture

Jan-18 Apr-18 Jul-18 Oct-18 Jan-19 Apr-19

Electronics

Fisheryproducts

Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 Vietnam China Japan

US imports from Vietnam Agricultureproducts Korea Thailand Indonesia US imports from China

Machineryand equipment Malaysia Singapore Philippines Textile,footwear and bags

Currently, we see several Vietnamese manufacturing sectors are benefiting from trade diversion, but to varying degrees. (Sources: USTR, CUSTOMS, CEIC, VNDIRECT) In 5M19, there were sharp rises in exports of electronics, machine and furniture to the United States. Meanwhile, the export of textile, footwear and handbags to both China and the United States had a moderate growth. On the other hand, agricultural exports recorded negative growth in these markets. We think exports will continue to outperform other Asian countries in the coming months thanks to: 1) continued trade diversion from China to avoid U.S. tariffs; 2) the potential ban on Huawei from the United States and electronics 9 production shift to Vietnam (e.g. LG, Apple’s suppliers) could boost tech exports further. Supply chain migration: positive impact on Vietnam’s economy

A new wave of FDI into Vietnam’s manufacturing sector Rising FDI from China, Hongkong and Taiwan into Vietnam (Sources: FII, VNDIRECT) (Sources: FII, VNDIRECT)

Fueled by a US-China trade 200.0% hope on TPP war tension The breakdown of registered FDI by country

150.0%

100.0%

50.0%

0.0%

-50.0%

-100.0%

2016 2017 2018* 1H2019

Jul-16 Jul-17 Jul-18

Jan-16 Jan-17 Jan-18 Jan-19

Mar-16 Mar-17 Mar-18 Mar-19

Nov-16 Nov-17 Nov-18

Sep-16 Sep-17 Sep-18

May-17 May-18 May-19 May-16 Japan + Korea China, Hongkong & Taiwan ASEAN EU US Other Registered FDI (yoy growth)* Registered manufacturing FDI (yoy growth)* * Excluding transaction of ThaiBev ($3.85bn in 1H2019)

In 1H19, we see a rise in foreign direct investment (FDI) in Vietnam, especially the inflow into the manufacturing sector. To be specific, FDI flows into the manufacturing sector rose 17.6% yoy. In addition, inward FDI flows from China, Hongkong and Taiwan also jumped (+95.2% yoy) in 1H2019, raising the contribution of FDI from these countries to Vietnam’s FDI stock. We think the U.S.-China trade war will likely to accelerate business plans to shift production into Vietnam, supporting both manufacturing and economic growth in medium term. 10 Global economic: slowdown but not slumping yet

Global manufacturing PMI is trending down since the U.S.- A synchronised global slowdown but no near-term recession China trade war tensions first escalated in Jun 2018 in 2019-20F

62 Annual GDP growth (%) 60 14.00 58 9.00 56

54 4.00 52 -1.00 50

48 -6.00

46

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2020F Jun-16 Nov-16 Apr-17 Sep-17 Feb-18 Jul-18 Dec-18 May-19 2019F

ASEAN China US EU Japan Korea US EU Japan Korea China Vietnam

(Sources: BLOOMBERG, VNDIRECT)

Global manufacturing activities showed signs of weakness in ealry 2019, and the recent escalation of trade tensions could further dent economic performance. Although Vietnam is considered the main beneficiary of the U.S.-China trade war, we expect GDP growth to stabilise at 6.5-6.6% in 2019-20F because of a weakening global expansion. 11 We see global financing conditions to become more favourable from 2H19 onwards

Forecast changes in central bank policy rates are reflecting Asian currencies faced less challenges despite an escalation dovish global monetary policy (Sources: BLOOMBERG, VNDIRECT) of the U.S.-China trade war (Sources: BLOOMBERG, VNDIRECT)

% points 7.3

1.25 3.6 3.9 3.9 3.5 3.1 0.75 1.6 1.6 1.9 0.5 0.8

0.50 Depreciation vs. $ (%) 0.1 Rate Rate hikes

0.25 0.25 0.25 (%) $ vs. Appreciation -0.1 -0.2 -1.0 -0.7-0.5 -0.7 0.05 0.05 -1.7 -0.8 -1.1 -1.8

Rate cuts Rate -2.4

-0.15 -0.15 -0.10 -0.15 -4.2 -0.25 -0.25 -0.25 -0.25 -0.25 -5.1

-0.50 -0.50

US Indonesia Malaysia Philippines Thailand Korea India

Jun 2018 - Dec 2018 Jan 2019 - Jun 2019 2H2019F 2020F Jun 2018 - Dec 2018 Jan 2019 - Jun 2019 May 2019 - now

For now, markets are pricing in the probability of an interest rate cut by the U.S. Federal Reserve in 2H19 and regional central banks (Malaysia, the Philippines and India) have also acted to pre-emptively ease the monetary policy. With a dovish bias to respond to a deterioration in the economic outlook of most central banks, we think the SBV has some scope to offer more monetary policy accommodation. We see less depreciation pressure on the Vietnamese dong compared to last year, thanks to: 1) better guidance from the SBV to the FX market and 2) less external pressures given the Fed’s dovishness. 12 From a macro perspective, we are positive on textile sector in the short run and industrial park sector in the long run

Export growth and industrial production growth by sector in 1H19 (% yoy) (Sources: GSO, CUSTOMS, VNDIRECT)

Export growth Industrial production growth • We see strong growth momentum at some manufacturing sectors (e.g. textile, furniture, Mining -6.8 1.2 Driven by external demand petroleum products, steel, motor vehicles). Textile 10.8 8.0 Dirven by domestic demand • We are positive on textile and furniture but we Shoes, handbags 12.1 8.5 Weak growth momentum have a neutral view on other sectors due to Wooden products 18.8 15.1 concerns over their profitability in the context of Paper products 4.7 8.7 rising raw materials (e.g. steel). Petroleum products 5.1 69.1 • New capacity investment will follow trade Chemical products 30.1 7.0 diversion in the upcoming months, supporting Rubber, plastic products 17.5 14.7 the manufacturing of electronic products. Key beneficiaries include industrial park operators Steel 8.7 40.1 and logistic companies. Other metals 13.5 4.8 Electronics 6.3 3.5 • We have a negative view on the agriculture sector this year due to: 1) unfavorable weather Machines 6.7 11.4 conditions; 2) decreasing exports and 3) Motor vehicles 4.7 11.7 negative effects from the African swine fever.

13 The EVFTA When the opportunity knocks

14 The EVFTA: An opportunity for Vietnam’s export products to expand market share in the European Union

Negotiation progress EVFTA could bring competitive advantages for Vietnam's exports Jun 2012: Negotiations on the EVFTA began The EU commits to abolishing 85.6% of tariff lines on Vietnamese goods as soon as EVFTA takes effect, equivalent to 70.3% of Vietnam's total export value to the EU. Now just over 42% of Vietnam's export value to the EU is Jun 2012 - Dec 2015: A total of 14 rounds of negotiation were held, alternating between Vietnam and the EU entitled to 0% tax rate under the General System of Preference (GSP). Within seven years since EVFTA takes effect, the EU commits to abolishing 99.2% of tariff lines, equivalent to 99.7% of Vietnam's total export value to the EU. 1 Dec 2015: Negotiations were concluded after 14 rounds of negotiation between Vietnam and the EU The reduction of tax on Vietnamese goods exported to the EU will create great competitive advantages for Vietnamese goods compared to other rivals such as China and ASEAN countries. Let’s take an example in the footwear 1 Feb 2016: The text of agreement was published industry. Vietnam's footwear exporting to EU market will enjoy a tax rate 3.5- 4.2% lower than those from China when EVFTA comes into effect. Jun 2018: The EVFTA was split into two pacts, one on trade and Exports to the EU are forecasted to increase 20% in 2020 if the EVFTA another for investment. The two parties announced to officially complete officially takes effect since end-2019 the legal review of the Trade Agreement (EVFTA) and the Investment Protection Agreement (now called EVIPA). According to a Ministry of Planning and Investment (MPI) research, if the EVFTA comes into effect in 2019, Vietnam's export value to the EU could jump about 20% in 2020, 42.7% in 2025 and 44.4% in 2030 compared to the 25 June 2019: The EVFTA and EVIPA were approved by the European Council of Ministers, paving the way for the pacts to be signed by the scenario without EVFTA. EU representatives and Vietnamese representatives in Hanoi on In term of GDP, the EVFTA could help Vietnam's GDP to be about 2.2-3.3% Sunday, 30 Jun 2019 higher (in 2019-2023 period); 4.6-5.3% higher (in 2024-2028 period) and 7.1- 7.7% higher (in 2029-2033 period) compared to the case without EVFTA. Next step: once the European Parliament has given its consent, the EVFTA can be officially concluded by the European Council and enter into force. The EVIPA will takes longer as it will need to be ratified by member states. 15 List of exported products/sectors which benefit the most when the EVFTA comes into effect

Product EU commitment on Vietnam's export goods Commentary Fisheries (except The EU is the second largest export market of Vietnam's seafood with export value in 2018 reaching US$1.44bn, up Immediately remove about 50% of import tariff lines on Vietnam's export canned tuna and by 1% yoy; As much as 90% of tariffs on Vietnam's seafood products will be reduced to 0% within three-four years, when the agreement takes effect; 50% of the remaining tax lines are fish balls) from an average export tax rate of 14% now. removed within three to seven years.

Telephones, As much as 74% of import tariff lines will be removed as soon as the The reduction in tariffs will create a competitive edge for Vietnam’s exported electronic products, while promoting the computers, agreement takes effect, the remainder will be eliminated within three to five trend of shifting manufacturing factories from elsewhere to Vietnam to take advantage of the tariff advantages under electronic products years. several FTA agreements, including the EVFTA. As much as 42.5% of import tariff lines on the Vietnamese export product will Currently Vietnam's textile products exported to the EU are subject to tariffs of 7-17% (an average of 9.6%) under be removed (mainly tariff on textile materials) as soon as the agreement the GSP. Textile comes into effect, the remainder (mainly tariff on final textile products) will be We believe that exporters of textile materials (fiber, yarn, wool…) to the EU will benefit as soon as EVFTA takes gradually reduced to 0% within three to seven years from a starting rate of effect. For companies that export final textile products to the EU, the benefits under the EVFTA will increase strongly 12%. along with tax reductions from the second year onwards. The EU is the largest export market of Vietnam's coffee, generating a value of US$1.34bn in 2018. Vietnam’s coffee Completely eliminating tariff on coffee exported from Vietnam as soon as the Coffee is expected to gain more market share in the EU market thanks to the elimination of tariff when the EVFTA comes agreement comes into effect. into effect. Port operators and NA This sector can receive benefits from the increase of the export and import volumes between Vietnam and the EU. the logistics sectors Industrial park (IP) The IP sector can receive benefits from the factory relocation to Vietnam from other countries as manufacturers NA sector seek preferential treatments from the FTAs that Vietnam is going to sign, including the EVFTA. About 37% of the import tariff lines will be removed as soon as the In the first two years after the EVFTA into effect, many footwear products could not benefit immediately as the agreement comes into effect (mainly tariffs on waterproof shoes with outer starting tax rates for some Vietnamese key footwear products exported to the EU will be higher than the current tax soles and upper of rubber or plastics, slippers and other indoor footwear); rates under the GSP (average at 3-4%). It takes about two years for the EVFTA's tariff on Vietnam's footwear to Footwear The remainder will be gradually reduced to 0% within three to seven years drop to the same level or below the tax rates currently granted from GSP. from starting rates of 5-8% (most of Vietnam's footwear exported to the EU When the tariffs on most of Vietnam’s footwear are reduced to 0%, the product will enjoy a tax rate 3.5-4.2% below belongs to this group). those on Chinese footwear products when exported to the EU market. About 83% of import tariff lines will be removed as soon as the agreement The EU is Vietnam's fifth-largest wood export market, with an export value of about US$770m in 2018, up 3.7% yoy. Wooden furniture comes into effect; The remainders (including particle board, fiber board and Currently Vietnam’s wooden furniture exports to the EU are subject to tariff of 0-2%. plywood, etc.) will be eliminated in line with a roadmap of three to five years. Source: the EVFTA agreement documents 16 The EU is Vietnam's second-largest export market with an annual growth rate of about 10%/year

Vietnam’s export-import value with the EU Proportion of Vietnam's export markets (US$bn) (from 2011-2018)

60

40 3.3% 17.7% 19.5% 20 7.5% 17.2% 0 7.7% 2011 2012 2013 2014 2015 2016 2017 2018 16.9% 10.2% Export Import Balance (Export-Import) The U.S. The EU China ASEAN Japan Korea Hongkong Others Vietnam's export value to some regions with a Proportion of major export products to the EU free trade agreement with Vietnam

9.8% 80.0 11.1% 20.1% 60.0 3.2% 3.4% 2.2% 40.0

1.8% 31.4% 20.0 4.9% 0.0 11.9% EU EU (excl CPTPP EAEU England) Textile Footwear Bags, suitcases, umbrellas Telephones Export Import Total export-import Computers Machinery & Mechanical Appliances Wooden furniture Fishery 17 Coffee Others Sources: MoIT, Vietnam’s customs, VNDIRECT On the other hand, Vietnam will also open market for EU export goods

Accordingly, Vietnam commits to abolishing 48.5% of tariffs lines on goods exported from the EU immediately after EVFTA takes effect, equivalent to 64.5% of total import value from the EU. Within 10 years of EVFTA in effect, Vietnam commits to abolishing over 98.3% of the tariff lines on EU export goods, equivalent to 99.8% total import value from the EU. Some domestic sectors such as pharmaceuticals, milk and livestock will face increasing competitive pressure from imported products from the EU when EVFTA comes into effect. • Around half of EU pharmaceutical exports will be duty free immediately and the rest after seven years. The reduction of import duties on imported pharmaceutical products from the EU will increase the competitive pressure on pharmaceutical manufacturers. • Frozen pork meat will be duty free after seven years, daily products after five years, food preparations after seven years and chicken will be fully liberalized after 10 years. Currently the EU’s livestock products exports to Vietnam are subject to tariff of 10-40%. The reduction of import tariff on livestock products from the EU will promote the penetration of livestock products from Europe into Vietnam and increase the competitive pressure on domestic livestock products. • Some European countries are fame in dairy products. The reduction of import duties on milk products imports from the EU will increase the competitive pressure on domestic milk manufacturers. However, EVFTA also opens opportunities for Vietnamese dairy companies to more easily access to the production technology and milk ingredients from Europe, which are highly appreciated for quality and food safety, thereby contributing to improve the quality of domestic dairy products.

18 Chapter 2

Stock Market Outlook Every cloud has a silver lining

19 1H19 market snapshot: weak recovery

VN-INDEX performed side-way since Mar 2019 1H19 ADTV significantly dropped from high base 1H18 amid (Sources: VNDIRECT, Bloomberg) lacklustre performance of VN-INDEX (Sources: VNDIRECT)

• After succumbing in 2H2018, the VN-INDEX slightly increased 6.4% YTD by end-2Q19. • 6M19 Average Daily Trading Value (ADTV) stands at US$193m (-45% yoy). • In our view, the weak performance of Vietnam equity market in 1H2019 could be explained by: (1) muted earnings growth in 1Q19; (2) no-show of IPO and sluggish SOE divestment; 20 and (3) vibrant corporate bond market driving money away from equity market. Muted 1Q19 earning growth could be partially explained for VN-INDEX’s weak recovery

Revenue and NP growth by sector Muted growth in both revenue and NP growth (Sources: VNDIRECT, company data) (Sources: VNDIRECT, company data)

60% 1Q19 revenue 1Q18 revenue 1Q19 NP 1Q18 NP 50% growth growth growth growth Title: 40% Retail 9.0% 35.0% 25.0% 40.0% Source: 30% Insurance 12.0% 21.0% 20% Real estate -11.0% 50.0% -3.0% 66.0% 10% Beverage 16.0% 9.0% 9.0% 0.0% 0% Financial services -32.0% 28.0% -44.0% 81.0% -10% Transportation 5.0% 11.0% 4.0% 38.0% Please fill in the values above to have them entered in your report -20% Pharmaceuticals 7.0% -3.0% 0.0% -4.0% -30% Personal goods 4.0% 17.0% -6.0% 28.0% Industrial goods 40.0% 58.0% 142.0% -26.0% Consumer appliances -13.0% 4.0% -27.0% -34.0% Chemical and rubber 0.0% 8.0% -53.0% -14.0% Market Quarterly revenue growth (yoy) (LHS) Market Quarterly NP growth (yoy) (LHS) Mining 15.0% 18.0% -47.0% 47.0% Industrial Metals 5.0% 37.0% -50.0% -4.0% Banking 10.0% 20.0% 12.0% 56.0% But it was not as bad as feared. At the beginning of 2019, we Gas, Water & Multi-utilities 4.0% 26.0% 18.0% 18.0% expected that corporate earnings would decelerate this year from a Automobiles & Parts 27.0% -14.0% 46.0% -43.0% high base last year. Therefore, the concerns on earnings slowdown Technology 21.0% -37.0% 27.0% 5.0% was largely taken into our forecasts, bringing 40% of companies Power -1.0% 8.0% -6.0% 16.0% under our coverage to post 1Q19 results in line with our expectations. Oil and Gas 0.0% 28.0% 37.0% -8.0% Food producer 5.0% 3.0% 14.0% 32.0% Conmunication -7.0% 14.0% -8.0% 81.0% Telecomunication 21.0% -20.0% 14.0% 23.0% Construction 11.0% 13.0% -12.0% -51.0% Building materials 4.0% 5.0% 16.0% -20.0% 21 Equitisation and divestment of state-owned enterprises has lagged behind schedule

In 5M19, no SOEs equitised (Source: government document) • According to the government’s Official Letter 991/2017/TTg-ĐMDN, 18 state-owned 80 64 enterprises (SOEs) must undergo equitisation in 2019. However, by the end of May, no enterprises in the list had completed the process. 60 44 40 • In addition, the same letter stated that 64 SOEs must complete equitisation in 2018. But only 22 18 20 12 12 of the SOEs completing the process last year. The task for the remaining firms has been 0 1 forwarded to 2019 and 2020. None of them has undergone the process in 5M19. 0 2017 2018 2019 2020 • By the end of May 2019, only 34 out of 127 SOEs (~27%) named in Official Letter 991/2017/Ttg-ĐMDN had been equitised. Number of SOE must be equitized according to plan • The state divestment in post-equitised SOEs under Decision No.1232/QD-TTg is much Number of enterprises actually completed equitization slower than planned. At the end of May 2019, the government had divested in nine SOEs, collecting VND1,657bn in proceeds while according to Decision No.1232/QD-TTg, divestment should have been conducted at 181 SOEs. Notably, the Ministry of Construction In 5M19, only three SOEs got equitisation plans approved divested from Viglacera Corporation (VGC), with a book value of VND690bn, collecting VND1,587bn. 60 56 • In 1H19, some notable SOEs have listed on HOSE, such as Vietnam Airlines (HVN) and PV 50 45 POWER (POW), the first move to pave the way for state divestment in these SOEs in the near future. 40 32 • SCIC (State Capital Investment Corporation) is preparing for divestment at Bao Minh 30 19 Insurance JSC (BMI), Sa Giang Import-Export (SGC), Vocarimex (VOC), FPT Corp. (FPT) in 20 2H19. 10 3 0 2016 2017 2018 1H2018 5M2019 22 Source: MOF High-yield corporate bond market drove money away from equity market

Lower Vietnam’s G-bond yield doesn’t Decelerate M2 and credit growth partly Corporate bond market expanded in both represent the market rate affect cashflow into equity market market size and yield (Source: Bloomberg) (Source: GSO) (Sources: FiinPro, VNDIRECT)

• Vietnam’s G-bond yield dropped in 1H19 but the actual rates continued to rise (the deposit rate and corporate bond yield). We think weak G-bond yield is a results of lower-than-expected public capital expenditure. Until Jun 2019, Vietnam had only disbursed 26.1% of 2019 annual target. • Low M2 growth and vibrant corporate bonds with high yield (9.3% in average in Apr-May 2019) kept domestic cashflow away from returning to the equity market. 23 Despite the sluggish equity market performance, we see no capital flight so far

VN-index was among the average performer year-to-date, Foreign investors still recorded net buy worth US$433m in despite being one of the worst performers in June 1H2019 (Source: Bloomberg) (Source: VNDIRECT)

• Global equity markets recovered since May, catalysed by the FED turning dovish; making emerging and frontier market indexes grew positively year-to-date. VN-Index fell behind regional peers due to the worst performance in June. • We see no capital flight so far as foreign investors net bought equity 10 months in a row since Sep 2018.

24 Top net buy/net sell of foreign investors in 1H2019

VNDbn Net buy Value buy Value Sell Net buy Value buy Value Sell 1 VIC 5,617 9,370 3,753 1 VJC -2,168 914 3,082 2 MSN 2,701 7,957 5,256 2 VGC -1,095 392 1,487 3 E1VFVN30 2,403 2,727 324 3 VHM -1,065 8,204 9,269 4 VCB 1,475 4,365 2,890 4 HDB -753 749 1,502 5 VRE 669 10,203 9,534 5 DHG -696 347 1,042 6 PLX 569 1,112 543 6 IDC -629 3 631 7 MWG 566 916 350 7 SBT -548 162 710 8 GAS 505 1,558 1,054 8 NBB -460 4 464 9 MPC 497 540 44 9 YEG -377 279 656 10 BVH 434 1,203 770 10 VNM -343 9,925 10,267 11 CDN 401 402 1 11 HBC -342 222 564 12 PVS 395 933 538 12 AAA -223 54 277 13 GEX 364 561 197 13 HCM -214 197 410 14 SCS 359 692 332 14 VCI -210 229 439 15 BWE 359 365 6 15 CII -205 484 689 16 VTP 355 849 494 16 GTN -178 5 184 17 HVN 348 445 97 17 BSR -163 165 328 18 CTG 345 845 500 18 FLC -138 23 161 19 PVI 305 306 1 19 VHC -137 255 392 20 STB 280 824 544 20 DQC -135 1 136

25 Cyclical sectors continued to dominate list of underperformed sectors

Top outperforming and underperforming sectors in 6M2019 (Sources: VNDIRECT, FiinPro)

130.0 125.0 Outperformers: 120.0 Utilities, Airlines, 115.0 Technology, Real estate 110.0 105.0 100.0 95.0 Underperformers: Insurance, Financial 90.0 Services, Construction, 85.0 Steel 80.0 Dec 18 Jan 19 Feb 19 Mar 19 Apr 19 May 19 Jun 19 Banks Utilities Utilities Beverages Electricity Airlines Insurance Retail Real Estate Financial Services Steel Heavy Construction VNINDEX

26 Recent sharp correction has made VNINDEX compelling on valuation front

P/E of VNINDEX and regional peers as at June 24th 2019 P/B of VNINDEX and regional peers as at June 24th 2019 (Source: Bloomberg) (Source: Bloomberg)

3.5 30 3.0 25 2.5 20 2.0 15 1.5 10 1.0 5 0.5 - -

27 2H19 market outlook: Every cloud has a silver lining

The concerns over rising interest rates along with weakening liquidity still cast a shadow on Vietnam’s stock market; we see a cloudier outlook towards year-end. Re-rating catalysts to the market include: • MSCI and FTSE’s market status upgrade: Despite the fact that it may take some more years for MSCI to add Vietnam to its emerging short-list, we can expect to achieve FTSE upgrading status (next review period in Sep 2019). • FED’s possibility of cutting rates for the first time since Dec 2016, thus allow emerging and frontier market to benefit from a “knee-jerk inflow into riskier asset”. • The signing of EVFTA is expected to boost export industries when the agreement take effect (expected by end-2019). For investors looking for alpha, we re-iterate our ideas: • Money will focus less on new listings and more on high-quality stocks with leading industry positions and healthy balance sheets. • We see buying appetite picking up on defensive sectors such as electricity, consumer staples or companies with high cash dividend yields. • The positive export story may continue with tailwinds from Free Trade Agreements (FTAs) and the U.S.-China trade war drawing investors to Fishery, Textiles, Agribusiness, Industrial Parks and Logistics stocks. • Midcaps may be selectively targeted. Although the market breadth typically narrowed in an aging bull markets and flows concentrate on larger, blue chip and more liquid names, we believe that the end of a “momentum-driven” trading strategy will spur interest in bottoms-up stories. Overall, we expect a TTM P/E contraction of around 3% to touch 15.0x which, juxtaposed against a 17.9% rise in market cap-weighted earnings during the year, should translate into an approximate 14.7% rise (versus the beginning of 2019) in the index to touch 1,020 points towards end- 2019.

28 Covered Warrant: new investment product suitable for risk-seeking investors

List of warrants issued

Issuance Strike price Issued price Successful Market price of Underlying Maturity Conversion Warrant name Maturity volume (VND/ (VND/ distribution underlying stock code date ratio (warrants) warrant) warrant) rate stock* (VND)

MBB MBB/3M/SSI/C/EU/Cash-01 3 months 16/09/2019 1:1 3,000,000 20,600 1,900 100.0% 21,300 PNJ CPNJ01MBS19CE 3 months 10/09/2019 5:1 1,000,000 78,800 1,700 100.0% 73,600 HPG CHPG01MBS19CE 3 months 10/09/2019 2:1 2,000,000 22,900 1,200 100.0% 23,350 MWG MWG/BSC/EU/Cash-01 3 months 09/09/2019 4:1 1,000,000 88,300 2,000 100.0% 91,400 HPG M_HPG_VPS_CA_T 3 months 12/09/2019 2:1 1,500,000 23,200 1,500 31.7% 23,350 HPG HPG.KIS.M.CA.T.2019.01 6 months 11/12/2019 5:1 3,000,000 41,999 1,000 0.0% 23,350 VNM VNM.KIS.M.CA.T.01 6 months 14/12/2019 10:1 5,000,000 158,888 1,200 0.0% 123,100 FPT FPT.VND.M.CA.T.2019.01 3 months 11/09/2019 2:1 2,000,000 45,000 1,900 36.3% 45,150 MWG MWG.VND.M.CA.T.2019.01 6 months 11/12/2019 4:1 2,400,000 90,000 2,990 17.1% 91,400 MBB MBB-HSC-MET01 6 months 17/12/2019 1:1 1,000,000 21,800 3,200 1.0% 21,300

*Data as at 24/06/2019 Source: VNDIRECT

• Covered warrant has officially been listed and traded on Vietnam's stock market since 28 Jun 2019. Currently, there are seven licensed securities companies offering nine warrant codes as shown in the table above. According to the State Securities Commission, investors have ordered 39.4% of the covered warrants issued during the first IPO in mid-June. 29 Covered Warrant: new investment product suitable for risk-seeking investors

Investing in covered warrant has many advantages compared to direct investment in stocks However, investment in covered warrants has some risks

High profitability Solvency lost by issuers Maximum loss identified beforehand High leverage Easy transaction Maturity in three to 24 months Low investment capital requirement Underlying stock price fluctuates Unlimited foreign ownership Possibility of losing capital

Covered warrant brings several benefits to investors, issuers and Vietnam’s stock market:

• For investors: Covered warrant provide a new investment product with high leverage and low initial capital requirements. It can be used to hedging and help diversify the overall portfolio.

• For issuers (securities companies): Covered warrant is expected to attract high demand from investors and could become a significant source of revenue for securities companies in the near future.

• For stock market: Covered warrant helps Vietnam stock market perfect financial product portfolio to meet the requirements and standards which set by market-ranking organization (MSCI, FTSE,...), therefore boosting the upgrading process to emerging market of Vietnam's stock market. Covered warrant also promote liquidity of underlying securities thanks to hedging activities of issuers. 30 Technical outlook: bullish view towards end-2019

• After the increasing period from the beginning of January to the mid-March 2019, the VN-INDEX entered a correction phrase from mid-March until now. • However, the Fibonacci threshold (50%) of the previous rising wave is still secured. The 935-940 of index is the psychological resistance area. • The VN-INDEX showed sign of bottoming out while market liquidity signaled an improvement in Jun. • The probability of market's recovery is higher than the probability of the market's decline in the second half of this year. • If the VN-INDEX surpass the 965-970 resistance level, the VN-INDEX could reach the 1,000-1,030 points level in the second half of 2019.

31 PERFORMANCE OF VNDIRECT RESEARCH’S TOP PICKS

Current YTD related recommendati YTD performance performance (versus Performance from Related performance VNINDEX Current price Target price on (*) VNINDEX) latest update (versus VNINDEX) Annualize return anualize return LPB 7,900 12,200 ADD -14.1% -22.3% -16.8% -12.6% -27.9% NLG 29,150 35,500 ADD 14.1% 5.9% 0.1% -0.7% 27.8% ACV 84,800 105,000 ADD -5.8% -14.0% 0.4% -5.9% -11.4% QNS 30,100 43,900 ADD -12.7% -20.9% -13.6% -14.4% -25.1% LTG 23,000 38,300 ADD -11.5% -19.7% -23.3% -23.0% -22.8% VCB 71,300 73,800 HOLD 33.3% 25.1% 6.9% 7.8% 65.6% MBB 21,150 34,000 ADD 11.7% 3.5% -0.7% -0.5% 23.1% VPB 19,400 21,200 HOLD -2.8% -10.9% 6.3% 4.3% -5.4% TCM 27,850 32,300 ADD 31.8% 23.6% -2.3% -1.8% 62.7% HPG 23,000 26,600 ADD -3.4% -11.6% -12.1% -10.7% -6.7% PVT 16,450 21,000 ADD 4.8% -3.4% -0.9% -2.1% 9.4% STK 23,900 25,200 HOLD 77.0% 68.8% 3.6% 4.1% 151.9% AAA 18,750 25,300 ADD 27.6% 19.4% -10.5% -5.5% 54.4% PNJ 74,300 94,900 ADD 6.5% -1.7% -0.9% 0.6% 12.8% VTP 137,500 111,000 REDUCE 50.3% 42.2% 26.4% 20.1% 99.3% ACB 29,200 39,500 ADD 0.0% -6.3% 0.0% -0.6% 0.0% PVS 23,500 25,000 HOLD 13.5% 15.3% 4.4% 3.6% 52.0% MSH 60,100 62,500 HOLD 17.8% 19.4% 0.3% 0.8% 69.3% MWG 94,700 118,800 ADD 17.2% 17.3% 17.2% 17.3% 86.0% POW 15,000 18,334 ADD 5.3% 5.3% -3.2% -1.5% 27.4% TCB 21,000 27,400 ADD 1.2% 0.6% 1.2% 0.6% Average 32.1% 16.2%

Data as of Jul 01. 2019. Performance of ADD recommendations at beginning of 2019 and stocks initiated in 2019. (*) YTD: year to date performance. For stock initiated in 2019, YTD performance is calculated since the initiation report. Related performance: Performance of the stock minus performance of VNINDEX in the same period Annualized return: Returns of the stocks and VNINDEX converted to annualized data. Chapter 3

Sector Outlook

33 Sector and stock picks

• Retail – VRE, MWG

• Industrial Property – KBC

• Logistics – GMD

• Consumer – VNM

• Banks – MBB, ACB

• Technology – FPT

• Residential Property – NLG, VHM

• Oil & Gas – PVS

• Power – POW, PC1

• Aviation – ACV, HVN

• Textile – TCM, STK, MSH

34 Retail In the spotlight

35 1H19 review: Strong spending on the back of consumers’ optimism

Consumer confidence index rebounded back to the 129-pt level following the spending pressure during Retail sales growth picked up in 1Q19 Retailers continued to expand their space Tet holiday (Sources: VNDIRECT, Nielsen) (Sources: VNDIRECT, GSO) (Sources: VNDIRECT, Savills)

930,000 15.5% 3.0 16.0% 130 129 129 14.0% 900,000 14.0% 2.5 124 125 12.0% 122 870,000 12.5% 2.0 120 10.0% 120 840,000 11.0% 1.5 8.0%

115 810,000 9.5% 6.0% million sq m sq million 1.0 780,000 8.0% 4.0% 110 0.5 2.0% 750,000 6.5% 105 0.0 0.0% 720,000 5.0% 1Q18 2Q18 3Q18 4Q18 1Q19 1Q18 2Q18 3Q18 4Q18 1Q19 100 Quarterly retail sales (VNDbn, lhs) Retail GFA in Hanoi (lsh) 1Q18 2Q18 3Q18 4Q18 1Q19 Growth (% yoy, rhs) Retail GFA in HCMC (lhs) Retail GFA in HCMC growth (% yoy, rhs) • Consumer confidence index was back on track in Q1, driven by positive job prospects, improved financial Retail GFA in Hanoi growth (% yoy, rhs) security and increased readiness to spend (Nielsen). • Strong spending resulted in the surge of retail sales in Q1 (+13.6% yoy) with on the contribution of F&B sales (+13.5% yoy), household goods sales (+12.7% yoy) and clothing and apparels sales (+12.1% yoy). • Correspondingly, retailers also expanded their footprint especially in the urban cities (Hanoi and HCMC) to ride 36 the retail boom. 1H19 review: Consumers’ behaviours become clearer

Shopping centres surpassed department stores to rule the Grocery retailing surged with the focus on small-scale Vietnamese shoppers increased their visits to modern modern shopping era in HCMC stores small-scale format (Sources: VNDIRECT, Colliers International) (Sources: VNDIRECT, Euromonitor) (Sources: VNDIRECT, Nielsen)

25.17 1,000,000 75.0 25 25.0

800,000 60.0 20 18.86 22.0

600,000 45.0 15 19.0 9.47

sq m sq 10 8.81 400,000 30.0 16.0 monthper times million sq m sq million 4.50 3.26 VNDm per sq m sqVNDmper 5 200,000 1.24 2.20 2.45 13.0 15.0 0 0 - 2014 2015 2016 2017 2018 10.0 0.0 2014 2015 2016 2017 2018 Retail podium Department store Retailing floor area (lhs) Sales per retailing area (rhs) 2010 2018

• Shopping centres are on the rise as a one-stop destination for shopping experience, entertainment and F&B services, which are more enticing than department stores with limited selection of goods and services. • Convenience stores and mini-mart/food stores to pick up a shift by Vietnamese consumers in grocery shopping preferences towards convenience, hygiene and better service. 37 1H19 review: The farewell of few big players

Summary of retail brand losers and survivors in 2018-19 (Source: VNDIRECT, COMPANY WEBSITES )

• 1H19 has seen many foreign retail chains stumbled due to the intensified competition Retail chain Shop&Go Vinmart+ Auchan Bach Hoa Xanh Parkson Vincom and fast-evolving consumer preference in Vietnam. Origin Singapore Vietnam France Vietnam Malaysia Vietnam • This can be ascribed to rigid Type of business Convenience store Minimart Supermarket Mini-food store Department store Shopping mall business models, limited financial capability or the lack Network 87 stores (before 1,786 stores 18 stores (before exit) 469 stores 10 department stores 66 malls (as at 1Q19) acquisition) (at its peak) of investment in R&D and network expansion. Status • Acquired by Vingroup • Organic store • Closing down all • Launched 46 • Closed down 5 • Launched 3 new (VIC) in Apr 2019 expansion of 32 stores in Vietnam stores in 1Q19 department shopping malls in • Survivors of the competition • Converted to Vinmart+ stores in 1Q19 • Transferred • Planned to open stores in 2015- 1Q19 bear similar traits including • Completed ownership to 230 stores more 2018 • Planned to open rapid expansion, good acquisition of Shop & Saigon Co.op in 2019 10 more new malls Go and Zakka (+54 in 2019 market insight and the ability stores) to secure prime locations.

Commentary on • Limited financial • Robust financial • Weak brand • Handpicked • Focused only on • Different types of the business capability health backed by VIC recognition due prime store upper-class malls targeting • Lacked competitive • Ability to secure to secluded store locations leading consumers suitable consumer differentiation tailored prime locations with locations to residential • Solely offering class product portfolio and parking area • Targeted upper- areas shopping • Included sitting area • Offered own brand class consumers • Quickly adapted services entertainment and products while locating in to consumer's • Limited tenant F&B services middle-income taste portfolio • Diversified tenant residential areas mix 38 Outlook: Winners take it all

• Further the heat in 1H19 in terms of retailer expansion, we expect retail Retailers sped up expansion in 5M19, led by Dien May Xanh and Vincom Retail (VRE) enhanced its footprint steadily, far market in Vietnam would continue its Bach Hoa Xanh, chains of Mobile World Corp (MWG) surpassing its foreign-owned competitors (Sources: VNDIRECT, COMPANY WEBSITES) (Sources: VNDIRECT, COMPANY WEBSITES) strong performance in 2H19, given the intensified competitions between retailers and the shifting in consumer preferences. • In particular, VRE is a clear beneficiary of one-stop shopping centre trend thanks to its extensive mall coverage across the country, which are tailored for different consumer classes. • FRT is expected to rebound in Q2 due to better iPhone margin and larger contribution from high-margin accessories segment. MWG is still the market leader, with double-digit revenue and earning growth in 5M19. • Particularly, Bach Hoa Xanh saw Despite concern about the slowdown of both the mobile and significant improvement with consumer electronics markets, MWG and FRT still enjoyed earning growth in 5M19 successful expansion to provincial (Sources: VNDIRECT, COMPANY WEBSITES) areas around Ho Chi Minh City Net revenue Net profit (HCMC) and enhanced average Store expansion growth growth monthly sales per store (+76% yoy). Retailers Product category FY18 5M19 FY18 5M19 FY18 5M19 Growth % % % % stores stores % MWG Consumer electronics - Grocery 30.4% 15.4% 30.5% 39.0% 2,187 2,371 8.4% 39 FRT Consumer electronics - Pharmacy 16.0% 8.0% 20.0% 7.0% 544 579 6.4% Stock picks: MWG and VRE

Given their positions as the current leading companies to ride both retail trends of shopping centres and mini-food stores, we choose Vincom Retail JSC (VRE VN) and Mobile World Corp (MWG VN) as our stock picks for 2H19.

Peers Comparison (as of 24/06/2019) (Sources: VNDIRECT, BLOOMBERG)

Target Market cap EPS growth (%) P/E (x) P/B (x) ROE (%) ROA (%) Company Ticker Recom. D/E (x) price (VND) (US$m) FY19F FY20F TTM FY19F TTM FY19F TTM FY19F TTM FY19F Vincom Retail JSC VRE VN ADD 42,000 3,450 16.8% 19.1% 33.4 28.6 2.8 2.8 8.8% 10.1% 6.3% 6.7% - Mobile World Corp MWG VN ADD 118,800 1,744 25.6% 20.5% 12.8 10.9 4.0 3.4 36.0% 35.5% 11.5% 12.3% 0.4 Phu Nhuan Jewelry JSC PNJ VN ADD 94,900 705 19.5% 14.6% 15.3 11.8 4.1 3.6 29.1% 29.5% 19.4% 18.1% 0.4 FPT Retail JSC FRT VN NR NA 169 13.8% 15.1% 11.5 10.1 3.4 2.9 35.0% 29.9% 7.7% 6.9% 1.7 Digiworld JSC DGW VN NR NA 38 27.6% 22.0% 7.4 6.1 1.1 1.0 15.5% 16.3% 7.2% 7.0% 1.0 Average 1,221 20.7% 18.3% 16.1 13.5 3.1 2.7 24.9% 24.3% 10.4% 10.2% 0.9 Median 705 19.5% 19.1% 12.8 10.9 3.4 2.9 29.1% 29.5% 7.7% 7.0% 0.7

40 Vincom Retail JSC (VRE)

Current Price Target Price Dividend Yield Recommendation Sector VND34,900 VND42,000 0.3% ADD RETAIL Stock info INVESTMENT HIGHLIGHTS

Market cap (US$m) 3,450 ▪ VRE solidified its position as Vietnam’s leading retail real estate developer with 66 shopping malls across 38/63 provinces as at end 1Q19. Comparing to 1Q18, total gross floor Daily value 30 day (US$m) 3.6 area (GFA) has expanded 23.4% yoy, built in 45 Vincom Plazas (accounting for 52% of total P/B TTM (x) 2.8 GFA), three Mega Malls (27%), six Vincom Centers (17%) and 12 Vincom+ (4%). P/E TTM (x) 33.4 ▪ Nationwide network to cater to different consumer classes. The four shopping mall formats are developed to match the demand of high- to low-income residential areas. We Key ratios 2017A 2018A 2019F expect the high-class Vincom Center and middle-class Vincom Plaza to be the main revenue NP growth (%) -16.8 18.6 16.8 drivers, contributing over 70% of total leasing revenue in 2019-20F. EPS growth -33.6 18.6 16.8 ▪ Leverage from Vingroup’s (VIC VN) ecosystem. Besides a strong financial support from (%) VIC, VRE could also secure prime locations inside Vinhomes’ residential complex. In the GPM (%) 50.8 39.9 44.2 period FY2020-21F, VRE would continue to set up three Vincom Mega Malls inside Vinhomes’ (VHM VN) mega projects, adding 160,000- 200,000 sq m of GFA. Assets / 1.6 1.4 1.4 Equity ▪ Earnings growth of 16.8% is expected for 2019, based on 32.1% leasing revenue growth Current ratio 1.6 1.1 0.7 and 6.5% pts GPM expansion in inventory property sales, on the back of 13 new malls launched in 2019 and the delivery of higher-margin low-rise shophouses. ROAE (%) 6.1 9.1 10.1 ▪ We initiate an ADD rating on VRE with target price of VND42,000/share, translating to a ROAA (%) 7.1 6.3 6.7 20.3% upside and FY2019 P/E of 34.8x. 41 Mobile World Investment Corp (MWG)

Current Price Target Price Dividend Yield Recommendation Sector VND90,700 VND118,800 1.7% ADD RETAIL Stock info INVESTMENT HIGHLIGHTS

Market cap (US$ m) 1,744 ▪ MWG is regarded as the largest and most successful retailer in Vietnam. Daily value 30 day (US$ m) 3.1 ▪ Legacy chains to remain the mainstay of MWG’s business in FY2019. Dien May Xanh P/B TTM (x) 4.0 (DMX) is expected to alone contribute 19.1% to MWG’s total revenue growth of 25.1% in P/E TTM (x) 12.8 2019 thanks to 150 new stores and full-year operations of the stores opened in 2018, in our forecast. ▪ Bach Hoa Xanh is the management’s ace for future growth. We expect three factors Key ratios 2017A 2018A 2019F underpinning a better performance of BHX in 2019: 1) a perfected winning store opening NP growth (%) 40.0 30.4 20.1 formula, 2) a rapid but plausible store opening target (700 stores by end-FY19), and 3) gross EPS growth -30.0 25.8 25.6 margin expansion (by 2.3% pts per our estimates). As of May 2019, BHX has recorded (%) ▪ BHX’s successful expansion in 5M19. The firm has launched 140 stores since the GPM (%) 16.8 17.7 17.8 beginning of the year, with focus on the Mekong Delta and southeast provinces (32% total Assets / 3.9 3.4 2.9 stores). With better capability to open large stores (~300 sq m, a monthly revenue of Equity VND2.3bn) in provincial areas, BHX has doubled the number of large stores in five months to Current ratio 1.2 1.3 1.4 boost overall average monthly sales per store of BHX chain to VND1.4bn (+75% yoy). ▪ We initiate an ADD rating on MWG, with target price of VND118,800/share, translating to ROAE (%) 45.3 38.7 35.5 a 31.0% upside and FY2019 P/E of 14.1x. ROAA (%) 11.7 11.3 12.3 42 Industrial Property Ready to take off

43 Huge demand for industrial property triggered by investment diversion to Vietnam in 1H19

Robust demand for industrial land strengthened occupancy rate even when capacity expands at end-1H19 Surging demand raised average industrial land rents in 1Q19, especially in Bac Ninh, Tay Ninh (Source: MPI of Vietnam) provinces (Source: JLL)

60,000 76% 160 35% 180 20% 74% 160 18% 140 30% 50,000 72% 16% 120 140 70% 25% 120 14% 40,000 100 12% 68% 20% 100 80 10% 30,000 66% 15% 80 60 8% 64% 60 6% 20,000 10%

40 m/term US$/sq 62% m/term US$/sq 40 4% 20 5% 20 10,000 60% 2% 58% 0 0% 0 0% 0 56% 2013 2014 2015 2016 2017 2018 1H19 Net leasable area (ha) (LHS) Occupancy rate (RHS) Land rents (LHS) yoy growth (RHS) Land rents (LHS) yoy growth (RHS)

Some major foreign-invested projects relocated from China in 1H19 include: 1) A US$280m ACRT’s steel radian tire manufacturing project in Phuoc Dong IP (Tay Ninh province) owned by SIP. 2) A US$260m electronic equipment and multimedia audio products manufacturing project, invested by Goertek Co in Que Vo 2 IP (Bac Ninh province) owned by KBC. 3) A US$200m electronics project invested by Meiko Vietnam Co. in Thach That IP (Hanoi) owned by Ha Tay 44 Development JSC. 2H19: Healthy demand growth expected, with FDI relocation trend to Vietnam

Summary of how we arrived at our shortlist of “high potential” sectors for Importance of success factor by export sector and potential ASEAN trade- ASEAN to benefit from the trade war (Source: VNDIRECT) war beneficiaries by sector (Source: VNDIRECT)

Machinery/ Plastics/ Rubbers Textiles/ Transportation Electrical Footwear& (Automotive) Headgear

How big Is the addressable market for ASEAN exporters (China’s current exports to US)?

How does ASEAN currently stack-up versus China in exporting to the US?

Is ASEAN’s relative market share of exports to the US small enough to allow for market share Yes Yes Yes Yes gains from China (<0.5)?

How sizable is ASEAN’s existing manufacturing base in the sector (for domestic + exports)?

How contained is the competitive threat from other regions ex-ASEAN in gaining export market share from China?

Overall attractiveness rating

The U.S.-China trade war bolsters Vietnam’s position as an alternative sourcing hub: Vietnam to gain share in electrical/machinery and textile exports while Thailand could boost electrical and auto part exports over a longer term.

45 2H19: Healthy demand growth expected, with FDI relocation trend to Vietnam

Key new supply (ha) in 2021-23F to meet rising demand (Source: Colliers The occupancy rates and land rents in economic zones would be further supported International) in 2H19 amid flat supply (ha) (Source: JLL)

80,000 Industrial park name Province Supply (ha) 70,000 67,014 Nam Dinh Vu Hai Phong 1,842 Hai Phong Internation Gateway Port Hai Phong 520 60,000 Dinh Vu Hai Phong 541 46,240 46,652 46,652 50,000 43,317 VSIP Hai Phong Hai Phong 507 Trang Due Hai Phong 364 40,000 Phu Xuyen Ha Noi 488 30,000 Thach Oai Ha Noi 480 20,000 Hiep Phuoc phase 3 Ho Chi Minh City 800 Phuoc Dong phase 2 Tay Ninh 798 10,000 Prodezi Long An 400 0 Cam My Dong Nai 600 2017 2018 2019F 2020F 2021-23F

46 Stock picks: We put KBC on our watch list

Industrial property peer comparison

EPS growth P/E (x) P/B (x) ROE ROA TP (local Market cap Company Ticker ADTV Recom. D/E (x) curr) (US$m) FY19F FY20F TTM FY19F TTM FY19F TTM FY19F TTM FY19F (US$m) INVESTMENT & IND BCM VN EQUITY 0.07 NR N/A 1125.6 -18.8% N/A 12.4 12.4 2.1 1.7 4.4% 11.3% 1.3% 3.4% 1.5 VIGLACERA CORP J VGC VN EQUITY 1.22 NR N/A 403.1 -8.0% 10.2% 15.1 15.3 1.5 1.4 9.7% 9.4% 3.7% 3.1% 0.3 SONADEZI CORP SNZ VN EQUITY 0.05 NR N/A 358.7 19.2% N/A 16.2 9.1 1.8 1.0 9.0% 12.0% 2.8% 4.9% 0.6 KINH BAC CITY DE KBC VN EQUITY 1.18 ADD 17,800 286.3 9.3% 21.0% 10.7 7.7 0.7 0.7 7.1% 8.6% 3.8% 5.5% 0.3 VIETNAM URBAN & IDC VN EQUITY 0.10 NR N/A 256.2 -9.0% N/A 17.1 17.3 1.7 0.3 10.7% 4.5% 2.5% 1% 0.7 SAIGON VRG INVES SIP VN EQUITY 0.07 NR N/A 163.6 47.0% N/A 21.5 16.8 3.3 2.7 15.5% 19.1% 2.0% 2% 0.2 ITACO ITA VN EQUITY 0.54 NR N/A 123.2 342.2% N/A 31.1 7.9 0.3 0.3 0.9% 0.7% 0.7% 3% 0.1 SONADEZI CHAU DU SZC VN EQUITY 0.26 NR N/A 84.3 40.1% N/A 25.2 18.0 1.7 1.6 6.8% 9.4% 4.1% 4% 0.8 NAM TAN UYEN NTC VN EQUITY 0.63 NR N/A 92.2 -63.6% N/A 4.6 12.2 3.6 2.8 95.9% 32.3% 15.1% 5% 0.0 INDUSTRIAL URBAN D2D VN EQUITY 0.31 NR N/A 61.7 37.9% N/A 12.9 13.1 2.8 2.3 23.2% 23.5% 6.5% 7% 0.0 LONG HAU CORP LHG VN EQUITY 0.21 NR N/A 40.2 5.2% N/A 6.1 5.0 0.8 0.7 13.6% 15.5% 7.5% 9% 0.1 TAN BINH IMPORT TIX VN EQUITY 0.04 NR N/A 36.7 1.8% N/A 8.0 10.3 1.1 1.0 15.2% 13.0% 10.1% 9% 0.0 SONADEZI LONG TH SZL VN EQUITY 0.12 NR N/A 35.8 25.5% N/A 10.1 7.5 1.4 1.2 14.3% 18.1% 6.4% 7% 0.0 HIEP PHUOC INDUS HPI VN EQUITY 0.00 NR N/A 35.5 -147.9% N/A 11.2 13.1 1.1 0.9 10.7% 7.7% 2.5% 2% 0.6 TIN NGHIA INDUST TIP VN EQUITY 0.10 NR N/A 32.3 11.8% N/A 7.4 7.1 1.6 1.3 22.4% 20.3% 15.7% 15% 0.0 VINH PHUC INFRAS IDV VN EQUITY 0.00 NR N/A 21.5 5.4% N/A 6.4 7.0 1.9 1.6 35.1% 28.3% 10.4% 10% 0.0 BINH LONG RUBBER MH3 VN EQUITY 0.02 NR N/A 21.4 -61.2% N/A 4.6 11.7 2.3 2.5 51.4% 26.6% 12.7% 5% 0.2

Average 14% 16% 13.0 11.3 1.8 1.4 20% 15% 0.1 5.6% 0.3 Median 5.4% 15.6% 11.2 11.7 1.7 1.3 13.6% 13.0% 4.1% 4.9% 0.2

We favour industrial property stocks with sizable NLA available for leasing, strategically located industrial parks, healthy profitability and ADTV of over US100,000, namely Kinh Bac City Development Corporation as we believe they will be the first beneficiaries of the strong demand for industrial property leasing. This demand will result in positive earnings growth. 47 ​Kinh Bac City Development Corp (KBC)

Current Price Target Price Dividend Yield Recommendation Sector VND14,200 VND17,800 0.0% ADD PROPERTY Stock info INVESTMENT HIGHLIGHTS

Market cap (US$m) 286.3 ▪ Leading northern IP operator with second-largest land bank. KBC is expected to capture the growing demand for industrial properties fostered by increasing FDI poured into Daily value 30 day (US$m) 1.2 Vietnam’s northern region in the medium term as the firm offers key fundamentals: 1) an P/B TTM (x) 0.7 iconic brand name with hi-tech tenants as its Que Vo and Trang Due IPs are the local P/E TTM (x) 10.7 manufacturing hubs of South Korean multinational giants; 2) ownership of the second-largest land bank (864ha) among the northern listed players. Key ratios 2017A 2018A 2019F ▪ Residential property is driving revenue growth in FY19-20F. Residential property NP growth (%) 4.9 27.6 9.3 business could be a key driver of KBC’s revenue growth in FY19-20F, with its revenue CAGR forecast of 312% in FY19-20F. Its proportion of total revenue will be about 36-38% in FY19- EPS growth 4.9 27.6 9.3 (%) 20F based on: 1) FY19 revenue of VND1,281bn (+1,275% yoy), driven by the delivery of a combined 7.1ha land lots in Phuc Ninh and Trang Due townhouse projects; 2) FY20F GPM (%) 51.6 58.5 49.3 revenue of VND1,585bn (+24% yoy), backed by the handover of 9ha in those projects. Asset turnover 0.08 0.15 0.19 ▪ Stellar outlook with net profit CAGR of 15% in FY19-20F. KBC is expected to deliver a (x) CAGR of 29.3% in revenue and 15% in net profit over FY19-20F. Revenue from land sales Financial 1.9 1.9 1.9 would stay flat yoy in FY19-20F as Que Vo and Trang Due IPs have reached full occupancy leverage (x) at end-18, but the company also gets new contribution from Nam Son Hap Linh IP in 2H19. ROAE (%) 7.3 8.6 8.6

ROAA (%) 4.3 5.5 5.5 48 Logistics

On the runway

49 2H19 outlook: Port operation is key beneficiary of trade diversion

Vietnam’s seaport cargo throughput posted a Vietnam’s container throughput by port (‘000 TEUs) is Trade diversion has spurred container throughput possitive momentum (‘000 tonnes) (Source: VPA) growing fast (Source: VPA) via port (‘000 TEUs) in 4M19 (Source: VPA)

20,000 5000 700,000 4000 600,000 15,000 500,000 3000 400,000 10,000 2000 300,000 5,000 200,000 1000 100,000 0 0 0 2014 2015 2016 2017 2018 4M18 4M19 Da Nang and others in Central Hai Phong and others in North 2015 2016 2017 2018 Da Nang and others in Central Hai Phong and others in North Cai Mep-Thi Vai ports Cat Lai and HCMC ports Containers Tanker Bulk Transhipment Cai Mep-Thi Vai ports Cat Lai and HCMC ports

• Seaport cargo throughput steadily increased at CAGR of 12.3% in 2016-18, backed by a growing trade volume and expansionary manufacturing output, of which container throughput and bulk cargo delivered higher CAGR at 12.8% and 13.9%, respectively. • Hai Phong ports and Cai Mep Thi Vai ports have captured a higher proportion of container throughput via port during 2014-18. They reaped over 50% market share of total container throughput via port in 2018 thanks to two internationally-recognised deep-sea ports, Cai Mep and Hai Phong International Terminal. • A strong diversion of trade flow to Vietnam in 5M19 has brought great benefit to port operation. Container throughput recorded a higher yoy growth in 5M19 at 10.7% vs 9.5% in the same period last year. 50 2H19 outlook: Port operation is key beneficiary of trade diversion

The market size of air cargo throughput via port (‘000 tonnes) to grow strongly Tan Son Nhat and Noi Bai airports share a combined 95% of Vietnam‘s air cargo (Source: ACV) throughput ‘000 tonnes (Source: ACV)

9,000 1,800 8,000 1,600 7,000 1,400 6,000 1,200 1,000 5,000 800 4,000 600 3,000 400 2,000 200 1,000 0 0 2017 2018 2015 2016 2017 2018 2019F2020F 2030F Tan Son Nhat Noi Bai Da Nang

• Air cargo throughput is expected to maintain a CAGR of 16.6% in 2015-19F, driven by growing trade volumes of electronics/computers and aqua-products. • Tan Son Nhat and Noi Bai airports are still the key beneficiaries of the trade diversion even though they have been utilised over capacity, given their strategic locations. 51 2H19: Transportation service is still driven by road mode

Strong investment growth (%) in road infrastructure will leverage Road mode accounted for 78% market share of total transportation cargo by road mode in upcoming years (Source:BMI) transportation freight in 2018 ‘000 tonnes (Source:GSO)

2,000,000 10

1,500,000 8 6 1,000,000 4 500,000 2 0 2013 2014 2015 2016 2017 2018 0 2018E 2019F 2020F 2021F 2022F 2023F Railways Road Inland waterway Maritime transport Aviation transport Road Railways Airports Ports, harbours, waterways

Low proportion of containerships and a lack of VLLC vessels hinder Downtrend in Baltic tanker rate index is not supporting maritime transportation freight growth (Source:VPA) maritime transportation mode (Source:Bloomberg) Vessel count share at end-2018 DWT capacity share at end-18 Clean Dirty 1400 tanker tanker Containershi 40,000-80,000; <10,000; 19% ps; 4% 1200 vesselsvessels; ; 21% 1% 13% 1000 Bulk 800 cargo 10,000- vessels; 20,000; 600 9% 13% 400 General cargo 20,000- 200 vessels; 30,000; 47% 0 73% 04-Jan-16 04-Jan-17 04-Jan-18 04-Jan-19 52 2H19: Distribution services are growing

E-commerce sales are growing fast. Warehouse capacity (sq m) by each player at end-2018 Source: "Digital in 2017: Southeast Asia" Report Source: 2018 Logistic report by MOT

4.5 4.0 3.5 3.0 2.5 2.0 US$bn 1.5 1.0 0.5 0.0 2015 2016 2017 2018 2019 2020 2021

‒ Demand for distribution services including warehouse, forwarding and fulfillment are growing in tandem with trade activities. ‒ E-commerce prospect bolsters demand for warehouse and distribution centres. 53 We are keen on port operation segment with stock pick GMD

Port operation peer comparison Source: VNDIRECT

EPS growth P/E (x) P/B (x) ROE ROA TP (local Market cap Company Ticker Recom. D/E (x) curr) (US$m) FY19F FY20F TTM FY19F TTM FY19F TTM FY19F TTM FY19F

GEMADEPT CORP GMD VN NR N/A 333.2 -70.7% 18.0% 11.6 14.5 1.3 1.2 11.3% 9.0% 7.1% 5.5% 0.3 VIETNAM CONTAINE VSC VN NR N/A 75.2 -3.1% -1.0% 6.3 6.0 1.0 0.8 17.2% 16.5% 11.1% 12.6% 0.1 DINH VU PORT DVP VN NR N/A 65.9 -18.0% N/A 5.5 N/A 1.4 N/A 26.0% N/A 24.2% N/A 0.0 DONG NAI PORT JS PDN VN NR N/A 53.0 4.5% N/A 10.2 N/A 2.5 N/A 26.2% N/A 14.0% N/A 0.5

Average -21.8% 8.5% 8.4 10.3 1.5 1.0 20.2% 12.8% 14.1% 9.0% 0.2 Median -10.6% 8.5% 8.3 10.3 1.3 1.0 21.6% 12.8% 12.5% 9.0% 0.2

We have a positive view for port operation and distribution service segment, with our stock pick GMD, a private leading seaport in Vietnam. Its plan to triple seaport capacity helps GMD able to ride on the buoyant market. 54 GEMADEPT CORP (GMD)

Current Price Target Price Dividend Yield Recommendation Sector VND26,150 N/A 5.7% N/A Seaport Operation Stock info INVESTMENT HIGHLIGHTS

Market cap (US$m) 333 • Leading private port operator offering an integrated logistics services. GMD is the country’s biggest private port operator, holding the largest market share of 7.3% of Vietnam’s Daily value 30 day (US$ m) 0.6 cargo throughput. Nam Dinh Vu, Dinh Vu downstream container ports are located in Hai Phong P/B TTM (x) 1.3 city, the most buoyant northern industrial hub. It also provides services of comprehensive supply P/E TTM (x) 11.6 chain via integrated logistics systems. • Container seaport capacity to triple in 19-22F. GMD aims to be the largest deep-sea Key ratios 2017A 2018A 2019G container port operator by launching the Gemanlink port phase 1 in Cai Mep port cluster, Vung NP growth (%) 30.3 263.8 -70.7 Tau city with 1.5m TEUs p.a. in 2H20. Nam Dinh Vu port capacity would be expanded to 1m TEUs in 2H20 and to 1.5m TEUs in 2022F. Total container sea port capacity in 2022F would be EPS growth 30.3 263.8 -70.7 (%) 3.6m TEUs, tripling from the current level.

GPM (%) 25.8 35.8 N/A • Air cargo business drives profit growth of the logistic segment. The biggest investment in logistic business is Saigon Cargo Services JSC, of which GMD holds a 32% stake. It contributed Asset turnover 0.37 0.25 N/A an associated income of VND132bn in FY18, (+21% yoy), out of GMD’s total associate income (x) of VND133bn. Financial 1.7 1.7 N/A leverage (x) ROAE (%) 8.8 30.2 N/A

ROAA (%) 4.7 17.4 N.A

2019 NP growth decreases by 70.7% due to the lack of one-off financial 55 gains of VND1,578 realised from the stake sales in GMD-CJ logistic company in FY2018 Fast Moving Consumer Goods - FMCG Gradually improve

56 FMCG 1H19 – Better than expected

FMCG consumption posted positive growth rates in all five product groups, backed by high • FMCG sales value posted a consumer’s confidence robust growth in both urban and (Source: Kantar World Panel) rural area in 4M19, driven by higher sales volume. • Personal care was the fastest growing sub-sector in urban area (+12.3% yoy), while dairy was the strongest growing sub-sector in rural area (+17.0% yoy).

Urban area Rural area 57 Top listed FMCG producers recorded strong revenue growth

• MCH: GPM 1Q19 reduced Most top FMCG producers posted accelerated yoy growth in 1Q19, aligning with the recovery of FMCG sharply by -4.9% pts yoy due to consumption price increase of 3 main material including wheat (+4.8% yoy), (Source: Fiinpro) pork (+22.3% yoy) and chili (+20.0% yoy). Net sales growth GPM SG&A as % revenue NPM • KDF: GPM 1Q19 increased by Producer Product category 1Q18 1Q19 1Q18 1Q19 1Q18 1Q19 1Q18 1Q19 11.2% pts yoy, recovering to the VNM Diary-Beverage 0.6% 8.8% 45.3% 46.7% 21.1% 22.4% 22.1% 21.2% level of 56.8% thanks to getting MCH Packaged food-Beverage 74.9% 5.8% 48.2% 43.3% 24.5% 21.1% 22.9% 21.6% rid of dumpling and processed SAB Beverage 4.6% 19.6% 24.9% 23.5% 9.9% 9.2% 14.8% 13.8% meat business and focusing on QNS* Packaged food-Beverage -12.8% 25.2% 25.5% 23.6% 13.5% 14.6% 11.8% 7.7% its core ice-cream business. KDF Packaged food -17.8% 23.4% 45.6% 56.8% 48.7% 47.7% -4.8% 6.7% • QNS: 1Q19 GPM of soymilk LIX Home care 20.0% 0.1% 18.5% 21.6% 11.3% 13.2% 5.8% 6.7% segment rose by +5.4% pts yoy TAC Packaged food 10.4% -22.0% 11.8% 13.8% 8.3% 11.0% 3.0% 2.9% thanks to lower soybean price (- VOC Packaged food 0.7% -43.1% 3.3% 1.5% 2.6% 3.5% 7.5% 10.3% 12.4% yoy). However sugar segment’s GPM declined by 11.7% pts yoy due to lower sugar price and sugar In our observation, there are two major common trends among producers: production, leading to overall GPM reduced by 1.9% pts. • Product premiumisation was a key trend in FMCG industry, leaving an impact on sales in both urban and rural areas. Only companies with the strongest brands and top-tier R&D ability could push sales in 1Q19. • TAC and VOC: 1Q19 revenue hit by lower global cooking oil • Producers’ gross margins were affected by FMCG material price changes. trend (Soybean oil -9.6% yoy, palm oil -16.8% yoy).

58 Stock picks – Vietnam Dairy Product JSC (VNM) is our top choice

We like VNM due to belief that companies meeting the We raise our outlook for FMCG sector in 2H19 as its 1H19 following requirements will benefit from FMCG positive performance turned out to be more positive than expected growth trend in 2H19

We believe business results of FMCG producers will continue • Owning top tier brands to be shaped by three trends: • Have strong R&D capability Premiumisation maintains its key position for growth in • Have delivery network covers both urban and rural area both urban and rural areas. • Have price of main materials that are in stable/down FMCG material prices will continue to fluctuate, leaving • • trend or have power to pass cost increasing to a mixed impact on producer’s gross margins. customers. • Higher spending on advertising and promotions will weigh on operating margins, given tougher competition is expected.

59 We believe VNM should benefit from the broad strength in consumption while its current valuation is fairly attractive to offer an entry point

Target EPS growth (%) P/E (x) P/B (x) ROE (%) ROA (%) Dairy product Market cap Ticker Recom. price D/E (x) producers (US$m) (VND) FY19F FY20F TTM FY19F TTM FY19F TTM FY19F TTM FY19F

Inner Mongolia Yili 600887 CH NR N/a 29,662 3.6% 16.1% 30.9 29.0 7.7 6.6 24.7% 23.4% 13.0% 14% 0.0 China Mengniu Dairy 2319 HK NR N/a 15,229 21.6% 20.7% 34.2 26.7 4.2 3.6 12.7% 14.2% 4.9% 6% 0.5 Vietnam Dairy Product VNM VN ADD 151,000 9,389 2.0% 7.2% 23.0 22.3 7.6 7.8 34.4% 38.3% 28.0% 28% 0.1 Yakult Honsha Co 2267 JP NR N/a 10,377 4.2% 8.6% 30.2 28.3 2.9 2.7 9.9% 10.0% 5.6% 7% 0.3 Morinaga Milk Industries 2264 JP NR N/a 2,051 38.9% -19.5% 15.7 11.2 1.3 1.2 8.6% 11.2% 3.3% 5% 0.6 Bright Dairy 600597 CH NR N/a 2,032 4.1% 4.1% 40.0 29.3 2.5 2.4 6.3% 8.8% 2.1% 4% 0.6 Quang Ngai sugar QNS VN ADD 43,900 518 2.4% 7.0% 8.1 7.8 1.9 1.6 25.2% 20.7% 16.5% 15% 0.3 Vitasoy 267 HK NR N/a 5,027 0.1% 0.1% 56.1 47.9 12.4 11.1 22.9% 24.7% 12.6% 17% 0.0

Average 9,286 9.6% 5.5% 29.8 25.3 5.1 4.6 18.1% 18.9% 10.8% 12% 0.3 Median 7,208 3.8% 7.1% 30.6 27.5 3.5 3.2 17.8% 17.4% 9.1% 10% 0.3

(Sources: Bloomberg, VNDIRECT)

60 Vietnam Dairy Products JSC (VNM)

Current Price Target Price Dividend Yield Recommendation Sector VND123,100 VND151,200 3.6% ADD FOOD & BEVERAGE Stock info INVESTMENT HIGHLIGHTS

Market cap (US$ m) 9,389 • Sales growth will accelerate, driven by product mix upgrade and new products launch. In 2019, Vinamilk will continue upgrading the UHT milk segment, baby food segment and yogurt Daily value 30 day (US$ m) 4.0 segment, which altogether contribute 77% of revenue. We expect VNM success in product mix P/B TTM (x) 15.9 upgrade and new product launch thanks to its absolute brand penetration and effective marketing P/E TTM (x) 23.4 campaign. We estimate VNM revenue growth to accelerate in 2019 to reach VND57.2tr (+8.8%yoy). • Vinamilk’s 100% organics brand will be the key for future growth. In 2019-21 period, the Key ratios 2018A 2019E 2020E number of organic cow heads will jump from 1,000 to over 20,000, leading to rapid growth of the NP growth -0.1 3.8 9.5 UHT milk segment, with CAGR estimated at 11.7%. (%) • Rapid growth expected but OPM under pressure. In 2019-21, VNM will invest heavily in EPS growth -0.1 3.8 9.5 developing three milk farms and may have to upgrade its Mega factory in order to enhance (%) production, which will lead to higher depreciation. Additionally, global whole milk powder prices have GPM (%) 46.8 46.3 46.3 increased 2.7% yoy in 5M19, which will create pressure on GPM. As a result, we forecast VNM’s NPAT will grow 3.8% yoy in 2019, with FD EPS at VND6,111. Asset turnover 1.42 1.35 1.34 (x) • We like VNM for its strong brands, exclusive distribution network and capability of upgrading its products. We reckon VNM share price will reach VND151,200 in the next 12 months, implying Financial 1.47 1.51 1.58 upsize of 22.8%, by using multiple method with peer’s average P/E of 24.7x applied on 2019 FD leverage (x) EPS. ROAE (%) 41.4 39.9 40.3 ROAA (%) 28.3 26.4 25.5 61 Banks Neutral outlook on the back of a tightening monetary policy

62 1H19 wrap-up: Credit growth decelerated, profit growth slowed

Credit growth decelerated on SBV directives NIM moved sideway despite retail lending (Sources: SBV, VNDIRECT) expansion (Sources: Stoxplus, VNDIRECT)

NIM 8,000 9.0% 10% 8.2% 7.9% 4.0% 8% 6,000 7.8% 7.3% 6% 4,000 3.0% 4% 2,000 2% 2.0% 0 0% 2015 2016 2017 2018 1Q19 6M15 6M16 6M17 6M18 6M19 ACB BID CTG HDB Total credit (VNDtr - LHS) Credit growth (% ytd - RHS) LPB MBB SHB TCB VCB VIB

Credit cost declined as provision cycle tapered Net profit growth slowed after peaking in 2017-18 off (Sources: Banks, VNDIRECT) (Sources: Banks, VNDIRECT)

1.47% VND bn 50% 1.50% 5,000 250% 1.45% 40% 1.39% 1.39% 4,000 1.36% 1.40% 150% 30% 3,000 1.30% 1.35% 20% 2,000 1.30% 50% 10% 1.25% 1,000 0% 1.20% 0 -50% 2015 2016 2017 2018 1Q19 VCB CTG TCB BID MBB VPB ACB STB HDB TPB VIB SHB LPB Provision expense/Pre-provision profit (% - LHS) 1Q18 (LHS) 1Q19 (LHS) 1Q18 yoy growth (RHS) 1Q19 yoy growth (RHS) Credit cost (% - RHS) 63 2H19 outlook: Modest NIM expansion at best

Deposit rates started rising in 4Q18 Ratio of short-term funds used for medium/long-term loans (Sources: Banks, VNDIRECT) (Sources: Banks, VNDIRECT)

% 7.0% 40%

6.6% 35%

6.2% 30%

5.8% 25%

20% month month deposit rate

- 5.4% 6 15% 5.0% 10%

5%

0% VCB CTG BID MBB STB VIB VPB MBB TPB ACB HDB BID TCB SOCBs Private ACB TCB STB TPB banks

• Asset yield improved on the back of retail lending acceleration. • However, deposit rates are under upward pressure due to a rising competition to attract depositors and the U.S.-China trade war. • State Bank of Vietnam’s intention to further cut the ratio of short-term funds used for medium/long-term loans from 40% currently to 35% in 2020 and 30% in 2021 will increase competition for medium/long-term deposits. • The pass-through of higher deposit rates to higher lending rates will be limited as the government wants to keep lending rates stable. 64 2H19 outlook: Fee income growth to remain strong; NPLs are increasing

Contribution of fee income to TOI has consistently increased NPL is increasing across the banks over the years (Sources: Banks, VNDIRECT) (Sources: Banks, VNDIRECT)

100% 4.0% 13.0% 10.5% 11.7% 13.5% 15.4% 11.1% 90% 3.5% 7.1% 7.6% 7.9% 10.4% 80% 9.1% 9.5% 3.0% 70% 2.5% 60% 50% 2.0%

81.9% NPL ratio 40% 79.9% 80.4% 77.4% 75.1% 78.4% 1.5% 30% 1.0% 20% 0.5% 10% 0.0% 0% VPB VIB SHB STB BID EIB TCB CTG HDB LPB MBB TPB VCB ACB 2014 2015 2016 2017 2018 1Q19

Net interest income Net fee income Net other income 4Q18 1Q19

• Robust fee income growth is projected for FY19F, driven by income from bancassurance and payment services. • Non-performing loans (NPLs) are increasing across the banks, with the system-wide NPL ratio edging up to 2.0% at end-1Q19 from 1.9% at end-FY18. • New NPLs today are more related to private investment and retail lending. The NPL ratio will be the highest at the banks with aggressive retail lending expansion, especially in consumer finance. 65 Stock picks: Our top picks are MBB and ACB

Banking peer comparison

Target Market Banks Ticker Recom. price cap EPS growth (%) P/E (x) P/B (x) ROE (%) ROA (%) (VND) (US$m) FY19F FY20F TTM FY19F Current FY19F TTM FY19F TTM FY19F Vietcombank VCB HOLD 73,800 11,376 7.5% 17.0% 20.5 20.1 3.7 3.3 24.7% 22.1% 1.5% 1.4% BIDV BID n/a n/a 4,683 6.0% 60.2% 15.2 18.1 2.1 1.7 13.5% 13.5% 0.6% 0.6% Vietinbank CTG n/a n/a 3,348 10.7% 83.3% 14.5 14.5 1.1 1.1 8.0% 9.9% 0.5% 0.6% Techcombank TCB ADD 27,400 3,071 10.5% 15.1% 8.6 7.8 1.4 1.2 16.8% 16.6% 2.7% 2.8% VPBank VPB ADD 21,200 1,992 2.3% 23.4% 7.1 6.3 1.3 1.1 19.7% 19.7% 2.2% 2.2% Military Bank MBB ADD 34,000 1,891 24.6% 16.0% 7.4 6.4 1.2 1.2 19.4% 21.2% 1.8% 2.0% Asia Commercial Bank ACB ADD 39,500 1,546 15.9% 15.8% 7.0 6.3 1.6 1.4 26.4% 24.8% 1.7% 1.7% HDBank HDB n/a n/a 1,098 18.3% -5.8% 9.2 8.8 1.7 1.5 17.5% 19.7% 1.4% 1.4% TienPhong Bank TPB n/a n/a 797 0.8% 36.4% 9.7 8.4 1.7 1.6 18.9% 20.2% 1.5% 2.0% Vietnam International Bank VIB n/a n/a 530 8.8% 39.2% 4.3 4.9 1.2 1.0 23.3% 22.2% 1.8% 1.7% LienViet Post Bank LPB ADD 12,200 295 0.8% 18.7% 8.3 7.2 0.6 0.6 8.8% 10.1% 0.5% 0.6%

Average 9.6% 29.0% 10.2 9.9 1.6 1.4 17.9% 18.2% 1.5% 1.5% Median 8.8% 18.7% 8.6 7.8 1.4 1.2 18.9% 19.7% 1.5% 1.7%

• We prefer banks with the following characteristics: 1) good exposure to, and strong ability to capture, the opportunities from retail lending and non-interest income activities; 2) well-positioned to offset the challenges of rising funding costs and lower credit growth quota; 3) good asset quality to buffer against the risks of rising system-wide NPL ratio. 66 Military Joint Stock Commercial Bank (MBB)

Current Price Target Price Dividend Yield Recommendation Sector VND21,300 VND34,000 1.8% ADD BANKING Stock info INVESTMENT HIGHLIGHTS

Market cap (US$ m) 1,891 ▪ Founded in 1994 with the initial objective of providing financial services to military-related corporations, MBB is actively redirecting its focus from wholesale to retail banking. Daily value 30 day (US$ m) 1.4 P/B TTM (x) 1.2 ▪ Having the second highest NIM in the sector at 4.6% thanks to its sector leading CASA P/E TTM (x) 7.4 of 33.9% as at end-1Q19. High CASA makes MBB better immune from rising interest rates. ▪ Expansion into retail banking will improve NIM. MBB is actively expanding retail and SME lending, with individual loan book CAGR of 37% over FY15-FY18; the newly established Key ratios 2017A 2018A 2019E MCredit gives MBB a foothold in the lucrative consumer finance segment. NP growth (%) 21.2 76.6 22.4 ▪ Dynamic strategy to boost fee income: We project a 26.5% CAGR in fee income over EPS growth 17.7 79.4 24.6 FY19-21F, driven by banking digitalisation, bancassurance and cross-selling of products (%) through its partner network. NIM (%) 4.1 4.5 4.8 ▪ Prudent risk management evinced by a clean balance sheet. MBB has the third-lowest CIR (%) 43.3 44.7 43.0 level of distressed assets in the sector as at end-FY18 (at 1.3% of total loans) and a decent provision buffer, with end-1Q19 loan loss reserves (LLR) of 96.5%. NPL (%) 1.2 1.3 1.5 ▪ We recommend an ADD on MBB with a target price of VND34,000/share, translating to a FY19F P/B of 1.9x. At the current price, MBB is trading at a P/B of 1.2x, lower than the ROAE (%) 12.9 20.1 21.2 industry average of 1.6x. ROAA (%) 1.2 1.8 2.0 67 Asia Commercial Bank (ACB)

Current Price Target Price Dividend Yield Recommendation Sector VND29,500 VND39,500 0.0% ADD BANKING Stock info INVESTMENT HIGHLIGHTS

Market cap (US$ m) 1,546 ▪ Found in 1993, ACB has built a strong brand name and customer base in retail banking: ACB has the second-largest market share in individual lending and the third-largest market share Daily value 30 day (US$ m) 0.7 in individual deposits among the private banks as at end-FY18. P/B TTM (x) 1.6 P/E TTM (x) 7.0 ▪ Large retail customer base enables a strong fee income franchise: Fee income contributed 10.7% to total operating income in FY18, the fifth-highest among listed banks. ▪ The bank recently launched various initiatives to expand its customer base as part of Key ratios 2017A 2018A 2019E its strategy to grow fee income and increase CASA. NP growth (%) 59.8 142.5 15.6 ▪ Healthy balance sheet thanks to conservative lending: ACB has one of the lowest real EPS growth 62.2 143.6 15.9 estate exposures and unsecured lending portfolio. As at end-1Q19, ACB has the lowest NPL (%) ratio among listed banks, at 0.7% vs. the average of 1.7%, and the second-highest loan loss NIM (%) 3.4 3.5 3.6 reserve (LLR) at 158.1%. CIR (%) 54.4 47.8 48.0 ▪ Upside catalyst: ACB is considering an exclusive bancassurance partnership, which could benefit the bank with sizable upfront agency fee. NPL (%) 0.7 0.7 0.8 ▪ We recommend ADD for ACB with a target price of VND39,500/share, translating to FY19F P/B of 1.8x. ACB is currently trading at 1.6x, equal to the industry average of 1.6x. ROAE (%) 14.1 27.7 24.8 ROAA (%) 0.8 1.7 1.7 68 Technology

Increasing demand tailwinds

69 Increasing demand for outsourcing & integrated system

Global digital transformation market size is expected to be 4x Vietnam ranked 5/50 on Business Process Outsourcing (BPO) in higher than that of IT service market by 2022 2019 - 1 place higher compared to 2017 Rising acceptance of the usage of (Sources: A.T.Kearney Global Services Location Index) (Source: IDC 2018) digital technologies across industries will trigger more demands for traditional outsourcing. Vietnam is on the verge of digital transformation, driven by 6 key areas: - Public sector - Banking and fintech; - Smart building; - Infrastructure; Vietnam is still a preferred outsourcing destination with Vietnam’s software industry is developing strongly with a high competitive labor cost than neighbors growth rate in sector revenue (US$ mn) - Healthcare (Source: Agileengine) (Source: MIC) - Education

70 Increasing tailwinds in telecommunications

Vietnam is on the top 14 countries with highest number of Rapid expansion of Internet fixed broadband subscribers and Internet users significant transition from Copper to Fiber broadband 5G is the new catalyst in the (Source: Internet World Stats) (Source: VNTA, MIC) making. Vietnam set an ambitious plan to adopt 5G since 2020 which will likely result huge demand for new services including network virtualization, and various services related to network distribution.

VNPT, FPT and Viettel – Big Three dominated the Vietnamese Level of awareness and trust on Internet service providers in Internet fixed broadband market Vietnam (Source: MIC) (Source: Institute for Brand and Competitiveness Strategy)

71 Enormous demand for IT personnel

The number of software staffs has increased rapidly in line with their salary in recent years. The leading IT training universities in Vietnam (Source: MIC) (Source: Internet)

According to the Ministry of Information and Communications, Vietnam is expected to need about 1.2 million human resources in the IT sector by 2020; however, the number of employees in shortage is predicted to be up to 500,000 people, Thus, human resources in IT sector in 2020 only meet 58% of the actual demand. We believe that the demand for IT staff as well as their average salary will continue to go up in the upcoming years. 72 Stock picks: We like FPT as one of the leader in global outsourcing and domestic telecommunications

ICT peer comparison (Source: Bloomberg, Data as at 24 June 2019)

Market cap TTM NP TTM EPS P/E (x) P/B (x) ROE (%) ROA (%) Company Ticker D/E (x) (US$m) growth (%) growth (%) TTM FY19F TTM FY19F TTM FY19F TTM FY19F We choose FPT’s peers in the KDDI CORP 9433 JP 60,376.5 7.9 10.0 10.6 10.5 1.6 N/A 15.5 14.4 8.9 8.2 0.3 two main segments, namely CHINA TELECOM-H 728 HK 40,211.2 13.8 13.0 12.9 12.5 0.8 0.8 6.3 6.3 3.2 3.4 0.3 TELSTRA CORP TLS AU 31,809.3 (18.9) (7.7) 14.7 18.6 3.1 3.1 21.7 16.4 7.2 6.4 1.2 Telecom and Software & IT TELEKOMUNIKASI TLKM IJ 27,873.3 (12.6) (18.6) 21.3 19.4 3.8 4.0 18.2 20.0 8.7 10.9 0.4 Services. MAXIS BHD MAXIS MK 10,849.9 (24.3) (20.0) 27.0 26.8 6.3 6.1 23.5 23.0 8.4 8.7 1.1

Telecom INTOUCH HOLDINGS INTUCH TB 6,378.1 (3.9) 7.5 18.2 16.4 5.7 5.6 34.9 36.3 20.1 22.5 0.2 Telecom peers are companies GLOBE TELECOM GLO PM 5,729.0 29.3 24.4 14.6 14.4 3.9 3.7 29.1 28.0 7.3 8.0 2.0 which also provide wired PLDT INC TEL PM 5,446.0 22.2 41.7 15.0 11.4 2.6 2.2 17.2 19.5 3.9 4.9 1.5 Internet broadband as their Average 1.7 6.3 16.8 16.2 3.5 3.6 20.8 20.5 8.5 9.1 0.9 main business line. Median 2.0 8.8 14.8 15.4 3.4 3.7 20.0 19.8 7.8 8.1 0.7 Software & IT Services peers TATA CONSULTANCY TCS IN 123,249.1 21.9 23.8 27.4 24.3 9.3 8.2 35.2 35.4 27.9 27.1 0.0 are top IT outsourcing INFOSYS LTD INFO IN 46,975.2 (3.9) (0.3) 21.0 19.0 5.0 4.7 23.7 25.1 18.7 19.8 0.0 WIPRO LTD WPRO IN 24,732.5 12.4 18.5 19.0 16.9 3.0 2.9 17.1 17.3 11.3 11.5 0.2 companies in leading BPO HCL TECH LTD HCLT IN 21,102.2 6.5 8.6 14.7 13.3 3.5 2.9 24.8 23.9 18.1 17.6 0.1 countries. TECH MAHINDRA LT TECHM IN 10,346.6 13.1 12.6 15.0 13.4 3.2 2.7 22.0 21.6 13.5 14.6 0.1 L&T INFOTECH LTD LTI IN 4,288.8 36.3 35.0 19.5 18.3 6.1 5.1 34.6 31.0 25.2 23.6 0.0 HEXAWARE TECHNOL HEXW IN 1,695.7 13.0 17.0 19.9 18.0 4.8 4.2 25.6 25.0 19.9 19.4 0.0 NIIT LTD NIIT IN 250.0 39.6 38.6 19.9 4.6 2.1 0.8 11.2 10.1 6.0 N/A 0.2 CYIENT LTD CYL IN 897.8 18.0 17.9 13.2 11.5 2.4 2.1 19.5 19.5 13.1 13.3 0.1 CHINASOFT INTL 354 HK 1,199.0 26.6 25.2 11.0 11.6 1.3 1.4 12.9 12.9 7.4 8.1 0.4

MPHASIS LTD MPHL IN 2,590.2 28.2 30.8 17.3 15.7 3.4 3.1 20.0 21.3 15.0 16.2 0.1 Software & IT Services & Software MINDTREE LTD MTCL IN 2,285.2 32.3 33.6 21.0 17.4 4.8 4.0 24.9 24.0 19.1 20.1 0.0 L&T TECHNOLOGY S LTTS IN 2,627.8 51.3 49.3 23.6 21.4 7.3 5.9 34.7 29.7 25.2 21.5 0.0 Average 22.7 23.9 18.7 15.8 4.3 3.7 23.6 22.8 17.0 17.7 0.1 Median 21.9 23.8 19.5 16.9 3.5 3.1 23.7 23.9 18.1 18.5 0.1

FPT CORP FPT VN 1,315.1 (9.6) (12.5) 11.1 13.4 2.3 2.3 21.9 23.9 10.2 10.7 0.5 73 FPT Corporation (FPT)

Current Price Target Price Dividend Yield Recommendation Sector VND45,150 N/A 4.2% NON-RATED TECHNOLOGY INVESTMENT HIGHLIGHTS Stock info ▪ Technology plays a crucial role in FPT’s globalisation strategy. In 5M19, the Techno segment’s PBT Market cap (US$ m) 1,315.1 reached VND 702bn, up 45.3%yoy and fulfilling 36.3% of the 2019 plan, thanks to the main driver - software outsourcing. We believe that the demand for software outsourcing is still high and FPT can benefit from that. Daily value 30 day (US$ m) 2.9 ▪ Digital transformation service - future growth motivation. Revenue from this service accounted for 20% of P/B TTM (x) 2.3 the software export turnover in FY2018 and 2016-18 CAGR was 57.7%. With a series of cooperation P/E TTM (x) 11.1 agreements with large international corporations, it is expected that digital transformation service’s revenue will contribute 50% to the software export turnover in five years.

Key ratios ▪ The contribution of FPT IS will be noticeable. In 2018, 20 million patients were served through FPT.eHospital 2017A 2018A 2019G and 40 million train tickets sold via FPT’s electronic system, showing that FPT IS's products are performing NP growth (%) 37.0 -8.3 15.6 effectively. The forthcoming big deals in e-Government, Smart transportation and Banking & Finance IT system are expected to accelerate FPT’s revenue growth. EPS growth 50.2 -12.4 15.6 ▪ Integrating new added value for customers in the telecom segment. Revenue and PBT in 5M19 reached (%) VND 4,039bn (+17.6%yoy) and VND 631bn (+8.5%yoy), respectively. Faced with fierce competition, FPT has GPM (%) 21.3 22.7 N/A supplemented new add-ons to attract users such as FPT Play, Voice Remote... We expect FPT’s Telecom segment revenue to grow at a CAGR of 14% in the next five years. Asset turnover 1.3 1.7 N/A (x) ▪ Education is a strategic puzzle in FPT’s long-term ecosystem. PBT of the education sector in FY2018 soared 103.3% and PBT margin reached a record high at 36%. In 2018, FPT officially completed the general Financial 0.9 0.4 N/A education system by acquiring primary and secondary schools capable for teaching 2.000 students, a step leverage (x) expected to provide high-quality human resources in the long term. ROAA(%) 9.2 12.9 N/A ▪ Relatively attractive compared to peers. FPT is trading at TTM P/E of 11.1x, much lower than its peers. As an underlying stock for covered warrant, the share deserves a re-pricing. ROAE (%) 23.8 28.6 N/A Residential Property Shinning North, Dimming South

75 Remarkable 1Q19 condo sales in Hanoi

HCMC condo market performance (Source: CBRE Vietnam)

Ho Chi Minh City (HCMC) • Supply of new condos in HCMC fell 52% yoy in 1Q19 due to the messy process of obtaining construction permits. • Despite healthy take-up of projects launched in 2018, transaction volume declined 36.3% yoy in 1Q19 due to lower primary supply • We expect primary supply to improve significantly in 2H19 on the back of new launches of sizeable projects such as Vinhomes Grand Park, Akari, Reamen City and Sunshine City. Hanoi Hanoi condo market performance (Source: CBRE Vietnam) • New supply and sales volume jumped yoy in 1Q19 as Vinhomes (VHM VN, Not rated) launched two mega projects Ocean Park and Smart City. • Transaction volume of Hanoi condos surged 42.3% yoy in 1Q19 thanks to ample supply and strong demand from first- home buyers.

76 Primary condo price increased at all segment

HCMC average condo price (US$ psm) (Source: CBRE Vietnam)

Ho Chi Minh City (HCMC) • Luxury condo price hit a record high (+24.4% yoy) in 1Q19 due to the launch of Centennial project in late 2018. • The price of high-range condos picked up slightly by 8.7% yoy while prices of other segments remained range-bound

Hanoi • T-Place apartment, a luxury project priced at c.US$6,000 psm, was launched in 1Q19. That triggered a 70.8% yoy surge in the luxury Hanoi average condo price (US$ psm) segment price. (Source: CBRE Vietnam) • Other segments enjoyed healthy price growth, up 12.2-18.1% yoy.

77 We believe the draft of home loans regulation is not worrisome

Average 75 sq m condo value and maximum LTV for each risk weight basket from the draft circular. (Sources: VNDirect, CBRE, SBV) Impact from new banking regulation draft: • According to the State Bank of Vietnam’s draft circular, the risk weight ratio of collateral asset will be raised from 50% to 150% for housing loans each valued above VND3bn, and to 100% for loans valued VND1.5-3.0bn. • Banks would likely offer lower loan-to-value (LTV) ratios for high-end home purchases, while mid-range and affordable condos would still enjoy the maximum 70% LTV ratio upon new guidance from the draft. • Speculator’s participation stood at 3.1% in terms of condo volume and below 10% for landed property in 2013-17 (Savills). We forecast a minor drop in high-end property sales if the law is imposed in the future. HCMC regulatory environment: • The number of approved projects kept falling, plunging 67% yoy in 1Q19 (HoRea), and which continued to shadow the market supply outlook in short- and mid-term. • Listed developers have planned most of their new HCMC-based project launches in 2H19, but gave no warranty if there would still be any delays.

78 Stock picks: We are still bullish on NLG and laud VHM’s strategic pivot into the mid-end segment

Peer comparison (Sources: Bloomberg, VNDirect)

Target Market P/E (x) P/B (x) ROE (%) ROA (%) We like developers who meet the following price Cap key criteria: Company Name Ticker Recom. (VND) (US$m) TTM 2019F 1Q19 2019F TTM 2019F TTM FY19F D/E (x) Vinhomes VHM VN NR NR 11,435 17.7 16.0 6.2 5.4 57.0 31.6 16.7 12.2 56.9 1. About to launch projects which already Novaland NVL VN NR NR 2,314 15.7 17.9 2.7 2.5 20.8 15.5 5.6 4.8 75.7 have construction licence, or land-use Khang Dien House KDH VN HOLD 25,800 552 15.7 11.9 1.8 1.3 12.2 11.6 8.5 8.4 (12.6) right (LUR) certificates, or have a high Phat Dat Real Es PDR VN NR NR 364 13.4 N/A 2.4 N/A 19.7 N/A 6.2 N/A (5.4) likelihood of securing them in 2H19; Nam Long Group NLG VN ADD 35,500 304 7.1 8.7 1.4 1.2 21.6 11.2 9.9 8.3 (20.7) Van Phu Invest VPI VN NR NR 288 15.9 N/A 3.0 N/A 20.6 N/A 8.1 N/A 85.7 2. Having material exposure to mid-range Dat Xanh Group DXG VN NR NR 284 5.6 5.3 1.3 1.1 25.1 21.1 9.3 10.1 21.4 and affordable condos as these Hai Phat Invest HPX VN NR NR 228 11.8 N/A 2.1 N/A 19.4 N/A 6.5 N/A 70.4 segments are driven by real end-user demand; Simple average 12.9 11.9 2.6 2.3 24.5 18.2 8.8 8.8 33.9 3. Buffered by a healthy financial position Simple average (excluding VHM) 12.2 10.9 2.1 1.5 19.9 14.9 7.7 7.9 30.6 (low leverage, strong liquidity) to counter Median 14.6 11.9 2.2 1.3 20.7 15.5 8.3 8.4 39.1 the risk of tight credit flow to the real estate market as discussed in our Note: all prices are based on the closing prices on 24 Jun 2019. All estimates for Non-rated (NR) stocks are based on Bloomberg consensus estimates. initiation report.

79 Nam Long Investment JSC (NLG)

Current Price Target Price Dividend Yield Recommendation Sector VND29,500 VND35,500 1.8% ADD REAL ESTATE Stock info INVESTMENT HIGHLIGHTS

Market cap (US$m) 304.0 ▪ 1Q19 result highlights - NLG reported a sharp 38.4% yoy decrease in 1Q19 revenue amid weaker handovers (-42% yoy). However, net profit soared 569% yoy to VND145bn thanks to Daily value 3m (US$m) 1.2 a one-off gain from Dai Phuoc project which was acquired in the quarter at a purchase price P/B TTM (x) 1.4 lower than the book value. 1Q19 net profit formed c.15.5% of NLG’s FY19 net profit P/E TTM (x) 7.1 guidance, which was in line at c.16.3% of our FY19 forecast as deliveries would fall in 2H19F upon NLG’s construction schedule of the existing projects. Key ratios 2018A 2019F 2020F ▪ Rosier 2H19F outlook thanks to presale boom. New presales in FY19 will come mainly NP growth (%) 42.2 16.8 10.7 from Waterpoint, Akari (delayed since 2018), and Mizuki Phase 2, based on the company’s EPS growth 34.4 4.5 10.7 pipeline. These projects are at the final stage of approval as all LURs have been obtained. (%) Planned presales should reach VND6.74tr including the BCC project, up 53% yoy. This GPM (%) 42.2 36.8 38.9 excludes newly-acquired projects due to a lack of details. ▪ Delivery will be back-loaded in late FY19F. We expect the company to have VND4.4tr Asset turnover 0.4 0.3 0.2 (x) handover value (including BCC projects) in FY19, an increase of 228.6% yoy. FY19 net profit may touch VND842bn (+16.8% yoy) with contributions from irregular income and land Financial 2.3 2.0 1.8 leverage (x) transfer profit from Akari. ▪ Maintain Add with a key risk to our call being a potential increase in mortgage rates which ROAE (%) 19.2 16.8 15.9 would curb buyer appetite for mid-range condos. ROAA (%) 8.8 3.3 0.2 80 Vinhomes JSC (VHM)

Current Price Target Price Dividend Yield Recommendation Sector VND79,500 N/A 0.0% NON-RATED REAL ESTATE Stock info INVESTMENT HIGHLIGHTS

Market cap (US$m) 11,435.5 ▪ Colossal land bank will anchor pipeline for more than 15 years. Vinhomes’ (VHM) total landsite including the land being acquired is 16,400ha, located in eight cities of Vietnam, Daily value 3m (US$m) 2.9 which highlights its powerful land acquisition capability. As much as 91% of its total land bank P/B TTM (x) 6.2 has not yet deployed, including mega projects like Cu Chi, Green Ha Long and Long Beach. P/E TTM (x) 17.7 ▪ A giant enters the mid-range housing market. Vinhomes Sapphire brand has been initiated at Ocean Park-Hanoi, while another is planned in District 9 of HCMC at the end of Key ratios 2016A 2017A 2018A this year. VHM has six Sapphire projects on table now and an expected total GDV of NP growth (%) 59.4 107.3 909.7 VND675tr (US$28bn) would be booked in FY19-24F. EPS growth 59.4 107.3 142.2 ▪ Aggressive launch schedule for FY19F. The company will launch four projects in Hanoi, (%) three in HCMC, and one in Hai Phong this year. Key new launches are Gallery, Galaxy, and GPM (%) 33.2 39.7 25.1 Grand Park. Presales will be pushed harder at Ocean Park, and Smart City (Sportia) after their launches in late 2018. In 2019, total launch NSA is targeted at 8.6m sq m (+132% yoy) Asset turnover 0.2 0.4 0.3 (x) with total targeted presales of VND140tr (+107% yoy). Financial 6.7 11.2 4.3 ▪ Scoping potential up-rating. The successes of launching mega projects in Hanoi and leverage (x) HCMC this year may gradually remove market doubtfulness on the feasibility of its substantial pipelines in the next 15 years. In other words, up-grade in pipelined mega projects’ RNAV ROAE (%) 26.3 58.8 72.3 could trigger the stock re-rating. ROAA (%) 3.9 5.2 16.8 81 Oil and Gas Big leap expected for 2020

82 Changing extraction economics demands that crude oil prices range from US$60-US$70/bbl over the medium-term

Extraction cost of new oil supply up to 2021 Oil supply-demand balance and Brent crude oil price (Sources: Rystad Energy) (Sources: IEA)

Break-even cost, US$/Bbl 120 Oil sands

100 Russia Ultra- deep water 80 Offshore RoW Deepwater shelf Required break- 60 Offshore even Shelf Shale oil range Middle 40 East Middle East 20

0 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 2021 supply from new wells, Mbd

Short-term oil price appreciation could be supported by the extension of OPEC+ output cuts, the continuation of Iranian oil sanction, and impacts from additional supply disruptions (Venezuela and Lybia). However, we expect long-term oil price to stabilise on the back of slower global growth and higher oil extraction cost as current shallow-water oil fields (lower cost) are getting depleted. 83 We maintain our forecast of US$60-70 Brent crude price during FY19-22F

Brent crude oil price forecast (Sources: BBVA, EIA) US$/bbl BBVA (as at Apr) Bloomberg survey (Apr) EIA (as at Jun) • Typically, there are large 85 discrepancies in general expectations of crude oil prices for the 2019-2022F period by 80 international institutions. • Historically, yearly crude oil price forecasts from international 75 institutions are unreliable. • In our view, Brent crude oil price 70 will stay above US60$/bbl. during the next four years, which is also 19-22F average the necessary break-even 65 Brent oil price threshold required for the majority at US$65/bbl of new crude oil supplies in the medium term. 60

55

50 2018 2019F 2020F 2021F 2022F 84 Current oil price level is favourable for the large upcoming oil exploration and drilling projects

Key oil and gas projects in the medium term (Source: VND Research) • Large oil and gas (O&G) projects Projects Description 2017 2018 2019 2020 2021 have been placed in the pipeline to • Part of Block 07/03 in Tu Chinh – • Recovery: c.45.3m bbl of crude oil, c.4.8 bcm of meet domestic demand amid Ca Rong Vung May basin , Southern VN natural gas and c.2.3m bbl of condensate . declining supply (outputs of existing Do • Ownership: Repsol (55%), Peal • Currently suspended due to geopolitical issues oilfield could decrease 15-30% per Energy (25%), PVEP (15%), Pan • Development capex: c.US$1.2bn year from 2019), therefore creating Pacific Petrol (5%) opportunities for O&G companies.

• Located in blocks 05-1b and 05 -1c in • The current oil price level puts Nam Con Son basin, water depth • Recovery: c.75.7m bbl of crude Vietnam in a good position to step Sao Vang oil, c.9.6 bcm of natural gas Dai Nguyet ~120m. up exploration after years of • Development capex: c.US$1.1bn • Ownership : Idemitsu (35%), Nippon subdued investments. The average Oil (35%), and Inpex (30%) oil extraction cost in Vietnam is around US$45/bbl., below • Located in Malay – Tho Chu basin , • Recovery: c.75.7 bcm of consensus forecasts for Brent natural gas, c.14m tons Block B – water depth ~80m. crude oil prices of US$65- of condensate O Mon • Ownership : PVN (42.9%), PVEP US$70/bbl in 2019. (26.8%), Mítui Oil (22.6%) and PTTEP • Development capex: (7.7%) c.US$6.7bn • Sector risks include further delays in project development (due to • Based in Deepwater block 118, 80km geopolitical disputes in the East • Recovery: c.150 Ca Voi off the coast of central Quang Nam bcm of natural gas Sea or financial difficulties). Xanh province • Development capex: • Ownership: ExxonMobil (85%), PVEP c.US$10bn (15%) 85 In operation In schedule In suspension Stock pick: We like PVS as it could be the first beneficiary of Vietnam’s exploration scale-up

Our short view on oil and gas stocks

• We believe that the oil price recovery over the course of 2017 and in 1H18 PVS • PVS, as an offshore EPC contractor, would be the biggest beneficiary of the resumption of Positive has already created some momentum upstream capital expenditure both domestically and globally. PVS will participate in almost all for a resumption of exploration and key oil and gas projects in Vietnam such as Sao Vang Dai Nguyet, Block B, Su Tu Trang Phase production work, which should pick up 2, etc. in addition to overseas projects such as Gallaf-Al Shaheen (Qatar). the pace soon in 2019-20F. • We like oilfield service stocks such as • PVD has recently secured regional drilling work for most of its rigs. As Vietnam needs to scale PVD Positive PVS, as they would be the major up oil and gas exploration activities quickly, we see PVD securing more domestic projects in the beneficiaries of the expected recovery medium term. Charter rates for offshore drillers are also likely to improve with Brent oil prices in Vietnam’s upstream activities. still expected to exceed US$60/bbl in the coming years. • We put PVD on our watchlist, as PVD could benefit from improved charter GAS • The quick depletion of cheap gas supplies will put upward pressure on GAS’s input cost. Neutral Meanwhile, we see little room for GAS to increase their output prices, due to a flat outlook for rate in the regional market on the back crude oil prices in the short-to-medium term. of warming market conditions. However, risks relating to debt recovery and the idleness of the deep- PVT • We expect the company’s transportation volume to grow along with higher oil and gas Positive water PVD V rig renders the stock less consumption in Vietnam. Stable operation of Nghi Son refinery plant would boost PVT’s volume attractive. in terms of crude oil and oil products such as gasoline, diesel and LPG. Oil prices above US$60/bbl are also beneficial to PVT’s FSO business.

86 Global oil and gas peer comparison

Target Market cap EPS growth (%) P/E (x) P/B (x) ROE (%) ROA (%) Company Ticker Recom. D/E (x) price (VND) (US$m) FY19F FY20F TTM FY19F TTM FY19F TTM FY19F TTM FY19F Gas distribution companies PV Gas GAS VN HOLD 91,600 8,589 -15% -7% 17.2 19.4 4.5 4.6 27% 23% 19% 17% 10.4 Indraprastha Gas Ltd IGL IN NR NA 3,135 17% 19% 25.8 22.4 5.0 4.2 21% 20% 15% 15% - Toho Gas Co Ltd 9533 JP NR NA 4,001 23% 3% 28.9 24.1 1.3 1.3 5% 5% 3% 3% 38.5 Petronas Gas Bhd PTG MK NR NA 8,409 1% -3% 18.9 18.8 2.7 2.6 14% 14% 10% 10% 24.9 China Gas Holdings Ltd 384 HK NR NA 19,885 NA 19% 18.0 16.2 4.4 3.6 26% 25% 9% 9% 92.9 PTT PCL PTT TB NR NA 45,646 12% 4% 12.9 11.3 1.6 1.5 13% 13% 5% 6% 41.2 Oil services companies PTSC PVS VN HOLD 25,000 476 15% 32% 9.5 9.2 0.9 0.8 10% 9% 5% 4% 7.2 Malaysia Marine Eng MMHE MK NR NA 296 104% 653% NA 255.0 0.5 0.5 -5% 0% -4% 0% 2.0 Yinson Holdings YNS MK NR NA 1,635 18% 42% 28.7 24.7 2.0 2.5 8% 8% 3% 4% 86.9 Sembcorp Marine SMM SP NR NA 2,302 114% 461% NA 298.0 1.3 1.3 -3% 0% -1% 0% 180.1 Hyundai Engineering 000720 KS NR NA 5,324 25% 8% 15.9 12.3 1.0 0.9 6% 8% 2% 4% 29.0 Keppel Corp KEP SP NR NA 8,800 1% 20% 14.7 12.5 1.0 1.0 7% 8% 3% 4% 65.1 Offshore drilling companies PV Drilling PVD VN HOLD 19,600 312 39% 30% 21.3 26.2 0.5 0.6 3% 2% 2% 1% 27.7 Velesto Energy Bhd VEB MK NR NA 595 226% 107% NA 100.0 0.9 0.9 -2% 1% -1% 1% 51.4 Sapura Energy Bhd SAPE MK NR NA 1,212 101% 158% NA 45.0 0.4 0.4 2% 1% 1% 0% 122.5 Transocean RIGN SW NR NA 3,802 -27% 42% NA NA NA 0.3 -15% -4% -8% -1% 76.1 Transportation companies PVTrans PVT VN ADD 21,000 196 8% -4% 6.8 6.5 1.2 0.9 17% 15% 7% 7% 58.1 Vietnam Petroleum TransportVIP JSC VN NR NA 16 NA NA 9.0 NA 0.3 NA 4% NA 3% NA 20.7 Vietnam Tanker JSC VTO VN NR NA 26 NA NA 6.2 NA 0.5 NA 8% NA 5% NA 41.6 Pakistan National ShippingPNSC Corp PA NR NA 50 NA NA NA NA 0.2 NA NA NA NA NA 9.6 Sources: Bloomberg, VND Research Eusu Holdings Co Ltd 000700 KS NR NA 178 NA 19% 15.5 19.6 0.9 NA 6% NA 1% NA 32.5 *Data as at Jun 24 Shipping Corp of India Ltd SCI IN NR NA 193 NA NA NA NA 0.2 NA -1% NA 0% NA 57.3 Average - Gas distribution peers 14,944 8% 6% 20.3 18.7 3.3 3.0 18% 17% 10% 10% 34.7 Average - Oil services peers 3,139 46% 203% 17.2 102.0 1.1 1.2 4% 6% 1% 2% 61.7 Average - Offshore drilling peers 1,480 84.7% 84.3% 21.3 57.1 0.6 0.5 -3% 0% -2% 0% 69.4 87 Average - Transportation peers 110 8.0% 7.6% 9.4 13.0 0.6 0.9 7% 15% 3% 7% 36.6 PetroVietnam Technical Services (PVS)

Current Price Target Price Dividend Yield Recommendation Sector VND23,200 VND25,000 5.3% HOLD OIL & GAS SERVICES Stock info INVESTMENT HIGHLIGHTS

Market cap (US$ mn) 476 ▪ High backlog value guaranteeing stable revenue stream in FY19-22F. Notable contracts include the on-going Sao Vang Dai Nguyet project (total contract value of c.US$850m), Gallaf Daily value 30 day (US$ mn) 2.8 Qatar (US$320m), LNG Thi Vai terminal (US$100m), Su Tu Trang Phase 2 (US$250m), Nam P/B TTM (x) 0.9 Du – U Minh, Blue Whale, and Block B – O Mon. Total backlog for the projects, while P/E TTM (x) 9.5 undisclosed in details, could amount to over US$2bn. ▪ Lower loss in the Seismic survey segment in 2019 as this segment has been dissolved at Key ratios 2018A 2019F 2020F end-2018. The segment incurred a gross loss of VND397bn in 2018. NP growth (%) 30.8 14.6 31.8 ▪ We forecast PVS to post sales CAGR of 20.6% and net profit CAGR of 24.6% in FY18- EPS growth 30.8 14.6 31.8 21F period. PVS’s M&C and FPSO/FSO segments are expected to benefit the most once the (%) planned O&G projects get kick-started. GPM (%) 7.6 11.6 11.2 ▪ We recommend a HOLD rating for PVS with target price of VND25,000, given that the Asset turnover 0.6 0.6 0.8 recent share price appreciation (+34.9% YTD) already priced in partly the awarded contracts. (x) At the current price, PVS is trading at a P/E of 9.2x on our forecasted FY19F EPS, which is Financial 2.1 1.9 1.9 much lower than regional peer average of 16.5x (excluding outliers). leverage (x) ROAE (%) 9.3 9.3 11.0 ROAA (%) 0.9 3.6 4.7 88 Power Growth with defensive attributes

89 Power demand extends robust growth

Electricity consumption growth remains robust at double- Installed capacity by source (MW) digit rate (Sources: VNDIRECT, MoIT) (Sources: VNDIRECT’s estimation)

Electricity consumption (m kWh) yoy change (%, RHS) 60000.0 53,691 55,801

48,900 20,000 16.0% 50000.0 18,000 14.0% 16,000 40000.0 12.0% 14,000 10.0% 12,000 30000.0 10,000 8.0%

8,000 6.0% 20000.0 6,000 4.0% 4,000 10000.0 2,000 2.0% - 0.0% - End-2018 As of 30/06/2019 As of end-2019F

Hydropower Coal-fired Oil-fired & Gas-fired Others Import Renewable

Vietnam’s electricity consumption has extended its growth this year, with an annual pace of 10.1% in 5M19, and we expect resilient growth in the upcoming years due to: 1) relatively strong manufacturing growth, and 2) a new wave of FDI into Vietnam following the U.S.-China trade war. The country’s national installed generation capacity is estimated at ~55.4GW as at end-2019, with additional capacity from solar power plants (~5,000MW), two coal-fired power plants (1,260MW) and one hydropower plant (220MW). Despite of a huge capacity addition from solar power plants, ensuring power supply stability and reducing power shortage are still difficulties of Vietnam power sector. 90 Challenges in fuel supply to thermal power producers continue to linger

Input cost of thermal power plants (Sources: VNDIRECT, BLOOMBERG)

600.0 140.0 Coal supply: 500.0 120.0 • Due to a thin supply of coal, TKV has to mix domestically mined coal with the 400.0 100.0 80.0 300.0 imported coal, resulting in a higher input cost for domestic coal-fired power plants. 60.0 200.0 40.0 • In addition, domestic coal-fired power producers have begun to self-import coal to 100.0 20.0 feed their plants. - -

• Despite lower global coal prices, there are still challenges to ensure sufficient coal

Jul-15 Jul-16 Jul-17 Jul-18

Oct-15 Apr-16 Oct-16 Apr-17 Oct-17 Apr-18 Oct-18 Apr-19

Apr-15 supply as 1) the import takes longer (two-three months), and 2) a long-term

Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 contract to guarantee coal supply and a hedging mechanism for importing coal has MFO ($/tonne) Thermal coal ($/tonne, RHS) yet to be established. • Domestic coal price increased by ~7%ytd in 1H19, and mixed coal price is ~10% Monthly coal imports by volume higher than domestic coal price. (Sources: VNDIRECT, CUSTOMS) Gas supply: m tonnes • The Wild Orchid field (0.7bcm p.a.) became operational in mid-Feb 2019, helping 4.5 partly offset supply declines from old gas fields. 4.0 • However, there was a problem with a gas compressor station operated by PV Gas 3.5 in 2Q19, triggering difficulties for gas-fired power producers. 3.0 2.5 2.0 1.5 1.0 0.5 0.0 Jan-18 Mar-18 May-18 Jul-18 Sep-18 Nov-18 Jan-19 Mar-19 May-19 91 Narrowing margin for hydro and gas-fired power plants

EVN’s purchasing electricity price GENCO3’s market electricity price (Sources: VNDIRECT, MoIT) (Sources: VNDIRECT, GENCO 3) Despite higher purchasing prices from the Vietnam 1600 1500 Electricity group (EVN), gross 1400 1400 1200 margins fell in 1Q19, especially at hydro and gas-fired power 1300 1000 800 plants. 1200 600 1100 400 This could be attributed by: 1) a 200 thin fuel supply which has 1000 affected thermal power output; 2) a low reservoir level that hit hydropower output; 3) a mobilisation by EVN of costly Gross margins of hydropower plants Gross margins of thermal power plants power source (solar, oil-fired) to (Sources: VNDIRECT, FIINPRO) (Sources: VNDIRECT, FIINPRO) meet high demand in the dry season. Coal-fired thermal Gas-fired thermal Diversified Prices on the competitive 59.0% 25.0% market are relatively stable, 58.0% 20.0% therefore, the profitability of

57.0% 15.0% selling power there has not improved as we expected. 56.0% 10.0%

55.0% 5.0%

92 We like POW because of its natural hedge against changes in weather condition or key input prices

Sector comparison Company Ticker Recom. Target price Market cap EPS growth (%) P/E (x) P/B (x) ROE (%) ROA (%) D/E (x) (local cur.) (US$m) FY19F FY20F TTM FY19F TTM FY19F TTM FY19F TTM FY19F Regional listed power plants 600578 CH Add 4.3 3,196.8 110.9 13.8 19.5 14.1 0.9 0.9 6.0 6.8 2.1 2.0 124.3 Beijing Jingneng Power Co - A JSW IN Hold 73.7 1,650.8 22.9 13.6 16.4 12.3 1.0 0.9 6.1 6.1 2.6 5.2 78.2 JSW Energy Ltd CESC IN Add 868.9 1,501.3 25.7 9.2 8.8 8.5 1.2 1.1 13.6 11.9 3.6 na 139.3 CESC Ltd 000543 CH NR na 1,225.7 70.2 31.0 13.7 10.4 0.8 0.8 4.5 6.9 1.7 2.9 76.7 An Hui Wenergy Co Ltd - A MLK MK Hold 1.0 1,207.4 13.0 5.8 14.8 16.7 0.7 0.7 4.4 4.1 1.0 0.9 228.1 Malakoff Corp Bhd RELI IN Add 560.0 231.5 na na na na 0.1 na na na (7.6) na 100.0 Reliance Infrastructure Ltd

Average 1,502.3 48.5 14.7 14.6 12.4 0.8 0.9 6.9 7.2 0.6 2.8 124.4 Median 1,363.5 25.7 13.6 14.8 12.3 0.9 0.9 6.0 6.8 1.9 2.5 112.2

Vietnam listed power plants PV Power POW VN Add 18,300.0 1,487.2 35.9 11.0 18.0 13.3 1.4 1.3 7.8 9.6 3.2 4.7 74.1 Power Generation Corp 3 PGV VN NR na 901.8 na na na na 1.1 na (6.3) na (0.8) na 605.8 Pha Lai Thermal Power Jsc PPC VN Hold 30,550.0 407.2 19.9 1.6 8.1 8.8 1.6 1.7 20.4 16.7 16.0 na 9.4 PetroVietnam Nhon Trach 2 Power Jsc NT2 VN Add 30,900.0 332.3 7.6 (11.1) 11.0 9.2 2.0 1.7 15.5 19.4 7.5 10.7 80.1 Hai Phong Thermal Power Jsc HND VN NR na 261.7 na na 14.4 na 1.1 na 7.8 na 2.9 na 127.4 Quang Ninh Thermal Jsc QTP VN NR na 202.7 na na 17.2 na 1.1 na 7.0 na 2.1 na 183.1 Vinh Son Song Hinh Hydropower Jsc VSH VN NR na 166.4 (32.5) 158.7 17.4 16.4 1.3 1.3 7.4 8.0 3.0 3.0 155.4 Central Hydropower Jsc CHP VN NR na 134.1 na na 13.6 na 1.7 na 13.2 na 7.5 na 55.6 Thac Mo Hydropower Jsc TMP VN NR na 119.1 na na 5.7 na 2.1 na 40.4 na 32.4 na 12.1 Southern Hydropower Jsc SHP VN NR na 94.5 na na 11.6 na 1.8 na 15.8 na 8.7 na 83.4 Thac Ba Hydropower Jsc TBC VN NR na 66.8 na na 9.1 na 1.7 na 19.6 na 17.8 na - Can Don Hydropower Jsc SJD VN NR na 61.3 na na 8.1 na 1.5 na 16.8 na 12.7 na 26.3 Mien Trung Power Inv & Dev SEB VN NR na 44.6 na na 13.5 na 2.7 na 19.3 na 9.3 na 61.7 Ba Ria Thermal Power Jsc BTB VN NR na 34.0 na na 28.6 na 0.7 na 2.4 na 1.4 na 43.8 Ninh Binh Thermal Power Jsc NBP VN NR na 6.9 na na 5.9 na 0.6 na 10.1 na 6.8 na -

Average 288.0 7.7 40.1 13.0 11.9 1.5 1.5 13.1 13.4 8.7 6.1 101.2 Median 134.1 13.8 6.3 12.6 11.2 1.5 1.5 13.2 13.2 7.5 4.7 61.7 93 (Sources: VNDIRECT, BLOOMBERG, DATA AS AT 24 Jun 2019) PetroVietnam Power Corp – PV Power (POW)

Current Price Target Price Dividend Yield Recommendation Sector VND14,800 VND18,300 0.0% ADD Power Stock info INVESTMENT HIGHLIGHTS

Market cap (US$m) 1,487.2 • Potential power shortage could lead to higher sales volume. PV Power is one of the largest power producers in Vietnam, managing a diversified portfolio of eight plants with a total capacity of Daily value 30 day (US$m) 2.2 4,208.2MW. Most of its plants are operating in the south of the country. With a high possibility of P/B TTM (x) 1.4 power shortages in this region the upcoming years, we expect the utilization rate of POW’s thermal P/E TTM (x) 18.0 plants to gradually increase. • POW is well-positioned to excel in the competitive market. 1) Hydropower plants could face Key ratios 2017A 2018A 2019F unfavourable weather conditions (El Niño) in 2019F (thermal power only comprised 92.7% of POW’s NP growth (%) 107.8 -14.0 35.9 capacity in 2018); 2) the removal of the take-or-pay gas price could raise the costs for other gas-fired power plants, and 3) other new thermal power plants could boost electricity prices in Vietnam when EPS growth 107.8 -14.0 35.9 they enter the market from 2020F onwards. (%) • Lower depreciation expenses could trigger earnings to surge in 2019. Both Ca Mau 1 & 2 plants GPM (%) 16.6 13.7 15.8 have fully depreciated their assets in 2018, while a full depreciation of Nhon Trach 1 plant will be in Asset turnover 0.5 0.6 0.6 3Q19. This could help cut the depreciation expenses by about VND800bn, while power purchase (x) agreement (PPA) prices are unchanged, leading to a surge in gross margins in 2019. Financial 1.0 0.8 0.5 • Nhon Trach 3 & 4 plants could boost POW’s capacity by 36% once they come on stream. The leverage (x) two thermal power plants will have a total investment of US$1.4bn, with a capacity of 750MW each. ROAE (%) 9.0 7.8 9.6 They are expected to begin operation in 2022 (NT3) and 2023 (NT4), using imported LNG. ROAA (%) 3.7 3.3 4.7 94 Power Construction No.1 JSC (PC1)

Current Price Target Price Dividend Yield Recommendation Sector VND19,000 VND24,500 0.0% ADD Power Construction Stock info INVESTMENT HIGHLIGHTS

Market cap (US$m) 129.9 • Robust backlog for Machinery and Equipment (M&E) segment in 2019F. The third national transmission line ensures a bright outlook for PC1’s grid erection & installation segment in 2019. Daily value 30 day (US$m) 0.1 According to the company, the total backlog of the grid erection and installation segment is estimated P/B TTM (x) 0.9 at VND3,000bn at the end of 1Q19. P/E TTM (x) 6.2 • New power plants support a solid outlook for the hydropower segment. The Bao Lam A (46MW) and 3A (8MW), which came into operation at end-2017, helped double hydropower revenue in 2018. Key ratios 2017A 2018A 2019E Another four new power plants, with total capacity of 91MW, and a floating solar power plant NP growth (%) -22.3 96.9 -13.5 (100MW) will come on stream in 2019-23. • New real estate projects promise recovery from the real estate segment in 2020-22. PC1 EPS growth -37.5 96.9 -13.5 (%) launched the first sales of Thanh Xuan project in May 2019, while the company is working to secure a licence on groundbreaking of Vinh Hung and Thang Long projects in 2020. GPM (%) 15.2 16.9 15.0 • Earnings likely to bottom-out in 2019, maintain Add. We project net profit to fall to VND399bn in Asset turnover 0.6 0.8 0.7 2019F (-13.5% yoy), mainly due to lower net profit contribution from the real estate segment. (x) However, we believe PC1’s earnings could recover in 2020-21F thanks to: 1) the launch of new real Financial 1.2 1.1 2.4 estate projects; 2) a series of new hydropower plants coming on stream; and 3) a potential rise in leverage (x) M&E contracting volume due to the need of upgrading the national grid erection system. ROAE (%) 10.5 16.0 12.1 • A sum-of-parts method delivers a target price of VND24,500/share, implying an upside of 28.9%. ROAA (%) 4.8 7.2 5.4 95 Aviation

Crowded in the sky and on the ground

96 1H19 wrap up: Passenger growth slowdown extended after clocking phenomenal growth rate in the past

Vietnam air passenger traffic volume Northeast Asia tourists continue to surge in 6M2019 Sources: ACV, VNDIRECT Sources: Vietnam National Administration of Tourism, VNDIRECT

• In 5M19, passenger throughput grew 8.7% yoy (including int’l: 13.0%, domestic 6.2%), lower than the level of 27.6% seen in first 5M18. • In 6M2019, total tourist arrivals jumped 7.5% yoy. Northeast Asia countries, South Korea, Taiwan, Japan recorded high growth in inbound tourists thanks to new routes of Vietnamese airlines and visa preferences and tourism promotion. 97 Private investors eyeing airports infrastructure investments in Vietnam

Current capacity and expansion plan by key airports Sources: CAAV, Ministry of Transport, VNDIRECT

Capacity & pax througput as end-2018 (in million pax.) Capacity expansion pipeline Designed Designed 2017 pax. capacity Period of Airports IATA Code capacity Throughput utilization Upgraded capacity completion Tan Son Nhat International Airport (TIA) SGN 28.0 38.0 136% 45.0 2019-20 Noi Bai International Airport (NIA) HAN 25.0 26.1 104% 40.0 2020-23 Danang International Airport (DIA) DAD 10.0 13.0 130% Phu Quoc International Airport (PQIA) PQC 4.0 3.4 85% 5.0 2019-21 Cam Ranh International Airport (CRIA) CXR 6.5 8.4 129% Total 21 airports 95.0 103.4 109% Long Thanh International Airport LTI 100.0 Phase 1 25.0 2020-25 Phase 2 25.0 2025-35 Phase 3 50.0 2035-50

• Rapid growth and huge potential of Vietnam’s aviation industry has whetted the appetite of private investors to jump into airport infrastructure. • Three airport infrastructure projects have so far been developed by private investors, including Van Don, Da Nang and Cam Ranh international terminal. • We observe that several other airport infrastructure projects with private investment are 98 pending government approval, including those in Tuy Hoa, Dong Hoi, Cat Bi and Chu Lai. Increasing competition with fleet expansion and entry of newcomers

In 2018, Vietjet surpassed Vietnam Airlines to be the largest carrier by domestic • Vietnamese airlines are all racing to market share expand their fleets to capture the Source: Vietjet Air industry’s lasting growth, thus heating up competition. • Newcomers (Bamboo Airways, Air Asia, 100% Vietravel Airlines) will spur fierce 90% competition and further lower fares. 80% 70% • Bamboo Airways has gain around 4-5% 60% market share after four months since its 50% first flight in January 2019 (source: 40% Vietnam Airlines) 30% 20% 10% 0% 2011 2012 2013 2014 2015 2016 2017 2018 4M2019

Vietnam Airlines (HVN) Vietjet (VJC) Jetstar Pacific (HVN) VASCO (HVN) Bamboo Airway Other

99 Jet fuel price volatility might hurt airlines’ earnings growth

Jet kerosene prices (US$/bbl) vs. Brent crude price (US$/bbl ) Impact of jet fuel price on CASK by Vietnamese airlines Sources: EIA, Bloomberg Sources: EIA, Company reports, VNDIRECT

160 140 120 100 80 60 40 20 0 Jun 09 Jun 10 Jun 11 Jun 12 Jun 13 Jun 14 Jun 15 Jun 16 Jun 17 Jun 18

Jet Kerosene Price Brent crude price

Both VJC and HVN use fuel hedging strategies in a limited way and, therefore, a recovery in jet fuel prices will push the airlines to decide between: a) absorbing the increases at the cost of gross margin contraction, or 2) passing on the higher fuel costs to customers, thereby risking volume or market share to fall. Given the rising competition, the pass-through of any future recovery in fuel prices is unlikely to be dramatic. 100 Stock picks: Bets on ACV, monopoly airport operator, and HVN, Vietnam’s biggest carrier

Target Reco Market cap EPS growth (%) P/E (x) P/B (x) ROE (%) ROA (%) EV/EBIT Company Ticker price D/E (x) m. (US$m) DAR (VND) FY19F FY20F TTM FY19F TTM FY19F TTM FY19F TTM FY19F • We prefer ACV to airline LCC peers RYANAIR HLDGS RYA ID n/a n/a 12,767.7 -12.9 26.8 13.0 11.5 2.2 n/a 18.3 17.1 6.9 6.9 0.7x 7.3x stocks as the company is VIETJET AVIATION VJC VN n/a n/a 2,872.5 3.4 26.1 12.5 11.1 4.8 3.7 43.3 39.0 15.1 14.8 0.4x n/a less exposed to rising fuel WESTJET AIRLINES WJA CN n/a n/a 2,614.6 63.7 40.5 39.5 22.9 1.5 1.5 4.4 7.3 1.4 2.3 0.9x n/a AIRASIA GROUP BHD AAGB MK n/a n/a 2,218.6 n/a 6.3 9.4 14.6 1.1 1.6 11.1 11.1 3.8 4.6 0.2x 2.6x prices, while it could AIR ARABIA PJSC AIRARABI UH n/a n/a 1,321.4 n/a 6.3 n/a 8.9 1.0 0.9 -11.3 11.0 -4.9 5.6 0.8x 6.5x benefit from intensifying CEBU AIR INC CEB PM n/a n/a 1,055.8 93.6 19.3 9.1 7.2 1.2 1.2 14.0 17.4 4.7 6.3 1.3x 4.0x ASIA AVIATION AAV TB n/a n/a 648.4 1,246.1 66.7 n/a 20.2 1.0 1.0 -2.0 5.0 -0.7 2.4 0.7x 6.3x competition between AIRASIA X BHD AAX MK n/a n/a 230.3 105.4 100.0 n/a 76.7 1.2 1.6 -33.3 -4.9 -4.2 0.6 1.2x 1.7x regional airlines. Median 12.5 13.1 1.2 1.5 7.8 11.1 2.6 5.1 0.8x 5.1x Average 16.7 21.6 1.7 1.6 5.6 12.9 2.8 5.4 0.8x 4.7x • We like HVN among FSC peers airlines thanks to its full- AIR CHINA LTD-A 601111 CH n/a n/a 18,278.7 27.2 27.5 17.3 13.4 1.5 1.3 8.3 10.5 2.9 4.6 1.0x 5.1x range of services, such as CHINA SOUTHERN-H 1055 HK n/a n/a 11,979.3 84.1 33.3 17.0 8.8 0.9 0.8 5.0 9.1 1.2 2.5 1.6x 5.9x full-services carrier CHINA EAST AIR-H 670 HK n/a n/a 11,654.0 135.0 34.4 21.6 9.3 1.0 0.9 4.8 10.1 1.2 2.7 2.2x 6.5x SINGAPORE AIRLINES SIA SP n/a n/a 8,133.7 18.1 -2.8 16.1 13.5 0.8 0.8 5.2 6.2 2.4 2.8 0.5x 4.8x (FSC), low-cost carrier CATHAY PACIFIC 293 HK n/a n/a 5,944.2 94.6 19.0 19.8 10.2 0.7 0.7 3.8 6.9 1.2 2.5 1.2x 5.2x (LCC), regional and VIETNAM AIRLINES HVN VN ADD 53,800 2,612.9 22.0 35.0 27.1 25.1 2.9 3.1 13.4 15.3 2.7 3.1 2.1x n/a KOREAN AIRLINES 003490 KS n/a n/a 2,485.4 170.3 188.0 n/a 27.9 1.0 0.9 -7.7 4.4 -0.9 1.0 5.2x n/a chartered airlines, as well EVA AIRWAYS 2618 TT n/a n/a 2,246.9 -1.6 10.2 9.5 9.8 1.0 1.0 10.9 12.2 2.4 3.2 1.4x 3.5x as profitable non-airlines CHINA AIRLINES 2610 TT n/a n/a 1,778.1 110.0 -30.4 35.8 15.3 1.0 0.9 2.7 3.5 0.6 1.6 1.8x 4.1x GARUDA INDONESIA GIAA IJ n/a n/a 728.4 1,217.3 200.0 8.4 14.1 0.8 1.1 9.9 8.1 2.0 1.7 1.9x 1.8x assets (Jet petroleum, Median 17.3 13.5 1.0 0.9 5.1 8.6 1.6 2.6 1.7x 4.9x Catering, Ground Average 19.2 14.7 1.2 1.1 5.6 8.6 1.6 2.6 1.9x 4.6x services…) Airport Operator Peers AIRPORTS OF THAILAND AOT TB n/a n/a 35,171.5 12.1 8.2 41.8 39.2 7.5 6.8 18.7 17.9 14.4 14.3 0.1x 21.9x AIRPORTS CORP OF ACV VN ADD 105,000 7,965.5 11.8 17.9 32.4 29.4 6.0 5.1 19.7 20.7 11.9 12.8 0.5x 17.6x VIETNAM MALAYSIA AIRPORT MAHB MK n/a n/a 3,392.5 -23.1 15.6 40.6 26.6 1.7 1.6 4.2 6.6 2.0 3.2 0.6x 8.7x Median 40.6 15.3 1.0 1.1 5.6 8.6 2.0 2.6 1.7x 4.9x Average 38.3 20.5 2.3 2.1 7.8 10.3 3.6 4.4 1.7x 8.0x 101 Airports Corporation of Vietnam (ACV)

Current Price Target Price Dividend Yield Recommendation Sector VND85,200 VND105,000 1.1% ADD AVIATION Stock info INVESTMENT HIGHLIGHTS ▪ Airports Corporation of Vietnam (ACV) is the country’s monopoly airport operator. It now Market cap (US$m) 7,965 operates 22 such facilities nationwide, comprising 13 with international flights and nine for Daily value 30 day (US$m) 0.2 domestic routes. P/B TTM (x) 6.0 ▪ ACV is a broad play on the country’s buoyant aviation market, which has recorded a P/E TTM (x) 32.4 passenger throughput volume expansion at CAGR of 19.9% in 2013-17. ▪ We prefer ACV to airline stocks as the company is less exposed to rising fuel prices, while it would likely benefit from intensifying competition between regional airlines. Key ratios 2017A 2018A 2019E ▪ A stake divestment by the Ministry of Transport and a planned listing migration to the main NP growth (%) 55.1 51.3 11.8 bourse are key short-term catalysts. ▪ High return on capital and superior growth prospects justify valuation premium. ACV EPS growth 55.1 51.3 11.8 currently trades at a TTM EV/EBITDA of 19.2x, above the TTM regional peer average of 16.8x. (%) However, we believe the stock should trade at a significant premium to regional peers because: 1) GPM (%) 41.1 48.0 47.8 the company’s FY18-19F ROAE of 20.7-21.4% is much higher than the regional peer average of 16.0%; 2) ACV holds monopoly in Vietnam’s airport operation and we view that the risk of new Asset turnover 0.3 0.3 0.3 entrants is limited despite partial privatisation; and 3) Vietnam’s aviation market is the fastest (x) growing in Asia. Financial 1.9 1.7 1.6 ▪ We maintain Add rating on ACV with an DCF-based TP of VND105,000. leverage (x) ROAE (%) 16.4 21.4 20.7

ROAA (%) 8.7 12.4 12.8 102 Vietnam Airlines JSC (HVN)

Current Price Target Price Dividend Yield Recommendation Sector VND42,900 VND53,800 1.9% ADD AVIATION

Stock info INVESTMENT HIGHLIGHTS

Market cap (US$m) 2,612 ▪ The emergence of new commers are challenging the national carrier ‘s throne. HVN has the biggest domestic market share (55% in 2018) and also the largest fleet (110 aircrafts). These, Daily value 30 day (US$m) 0.7 combined the Vietjet Air (VJC VN) ‘s expansion with the arrivals of Bamboo Airways and Air Asia, have P/B TTM (x) 2.9 put HVN on the backfoot. P/E TTM (x) 27.1 ▪ Route expansion to Northeast Asia is the main growth driver in period 2019-21. Tourism between Vietnam and Taiwan, Korea, Japan has surged in the last two years (CAGR of 34% in term of total passengers), and the trend continued in 5M2019 with inbound tourists from these countries rising Key ratios 2017A 2018A 2019F 21.3%. Northeast Asia is HVN’s biggest international market, contributing 32% to the airline’s revenue NP growth (%) 15.4 -1.5 22.1 in 2017, and we expect the booming tourism from and to Northeast Asia will prompt HVN’s revenue to expand at a CAGR of 8.2% in 2019-21. EPS growth 15.4 -1.5 22.1 (%) ▪ We pick HVN for a long term bet on Vietnam’s booming airlines stories because HVN’s business model is well-positioned to compete and enjoy the country’s growing airlines industry, with FSC GPM (%) 12.9 12.7 12.4 (Vietnam Airlines), LCC (Jetstar Pacific) and regional/chartered airline (VASCO). Besides, high Asset turnover 0.9 1.1 1.1 contribution of non-airlines business with 27.7% of EBT makes HVN less vulnerable to fuel oil (x) volatilities. Financial 5.7 4.9 4.9 ▪ Listing on HOSE will help HVN’s stock become more noticeable for investment funds and ETFs. leverage (x) ▪ We initiate HVN with ADD recommendation, DCF-based target price of VND53,800/share. ROAA(%) 2.6 2.7 3.1

ROAE (%) 14.1 12.9 15.3 103 Textile and Apparel

Riding on the coat tails of Vietnam’s growing trade integration 104 Vietnam Textile and Apparel industry review

Vietnamese T&A exports growth has been driven by Vietnam is the fastest growing T&A exporter downstream garment production (2008-18) (Sources: VNDIRECT, WTO) (Sources: VNDIRECT, VITAS)

Vietnam is the world’s fastest growing Textile and Apparel exporter on the back of cheap labour and Free Trade Agreements (FTAs). While the US remains Vietnam’s top T&A export destination, Vietnam is diversifying its export footprint with a tilt to Asia, especially China (which Average monthly wage (US$) of low skilled, has the fastest growing apparel manufacturing sectors in 2017 amongst global T&A Vietnam T&A exports by key destination country market in the world with 2003-18 exporters (Sources: Trading economics) (Source: Vietnam Custom) CAGR of 10.8% in term of value).

14 Title: 12 Source:

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US$ bn US$ 6

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0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

United States Japan Korea, Rep. China Germany Others 105 A host of external factors will support the continued growth of Vietnam’s Textiles and Apparel export industry

China’s share of apparel exports to large markets is Vietnam is among the top-ranked source locations past its peak (rated by score, FY18) (Source: UNComtrade) (Source: USFIA)

th 90% Title: According to China’s 13 Five- 80% Source: 70% Year plan, the T&A industry will 60% realise lower annual growth of 50% 6.5% in 2016-20 vs 8.5% in 2011- 40% Please fill in the values above to have them entered in your report 30% 15 period. 20% 10% CPTPP and EVFTA may give 0% Vietnam T&A exports an

Japan EU US immediate lift, yet sourcing rule is a concern, since 74% of yarn is imported per year, while this US-China trade tensions are bound to improve Results of survey of US buyers’ planned changes in figure for fabric is 68%. Vietnam’s future T&A export prospects even in the T&A sourcing (in value terms) from Vietnam event of a trade deal (Source: Otexa) (Source: USFIA)

4% (0%) 4% Strongly increase 50 50%

Somewhat Increase US$bn

- 0% Stay the same 2001 2004 2007 2010 2013 2016 4M2019 Somewhat Decrease China T&A export value (LHS) 4% Strongly decrease Vietnam T&A export value (LHS) 0% 4% 3% 4% China T&A export shares in US market (RHS) 2015 2016 2017 2018 106 Vietnam T&A export shares in US market (RHS) Internal operations are being strengthened

Garment production methods and gross margin (based on our Production chains are being vertically integrated observations and T&A enterprises’ disclosure) (Source: VITAS) (Source: VNDIRECT)

We are seeing companies upgrading their production from Cut–Make- Trim (CMT) towards Free-On-Board (FOB) due to the increasingly integrated value chain of the Vietnamese T&A industry and the rising credibility of Vietnamese apparel exporters amongst global clothing and brand owners and retailers. 107 Stock picks: Industry’s positive outlook is likely to priced in for listed stocks. STK on the watch.

Textile & Apparel peer comparison (Sources: VNDIRECT, Bloomberg)

Target EPS growth Recom Market cap P/E (x) P/B (x) ROE (%) ROA (%) Company Ticker price (%) D/E (x) We like textile players that . (US$m) (VND) FY19F FY20F TTM FY19F TTM FY19F TTM FY19F TTM FY19F meet the following criteria: (1) Synthetic fiber manufacturers net beneficiaries of FTAs, STK STK VN HOLD 25,200 71.4 24.2 21.8 8.2 6.8 1.6 1.5 21.4 24.2 9.3 11.2 0.9x CPTPP and trade war due to Texhong Textile Group Ltd 2678 HK N/R N/A 1,063.6 16.6 18.8 6.3 5.2 1.1 0.9 18.4 20.6 6.8 8.3 1.1x the right export market footprint Vardhman Textiles Ltd VTEX IN N/R N/A 897.6 N/A 13.3 8.2 8.1 1.1 1.0 14.0 12.9 8.6 N/A 0.3x and a midstream or upstream Shinkong Synthetic Fibers 1409 TT N/R N/A 712.9 N/A N/A 8.5 N/A 0.8 N/A 8.8 N/A 1.7 N/A 0.5x value chain presence; and (2) Indo-Rama Synthetics INDR IJ N/R N/A 228.9 N/A N/A 2.8 N/A 0.6 N/A 24.1 N/A 10.0 N/A 0.5x have plans to either invest in a Daehan Synthetic Fiber 003830 KS N/R N/A 121.7 N/A N/A 2.9 N/A 0.2 N/A 8.4 N/A 7.1 N/A 0.0x new range of products or raise Hong YI Fiber Industry 1452 TT N/R N/A 89.7 (3.7) 17.0 14.2 14.6 1.1 N/A 7.7 7.6 7.1 7.0 0.0x existing production capacity. Average 12.4 17.7 7.3 8.7 0.9 1.1 14.7 16.3 7.2 8.8 0.5x Median 16.6 17.9 8.2 7.5 1.1 1.0 14.0 16.8 7.1 8.3 0.5x Most listed T&A companies surged in the 1H2019, which Apparel manufacturers made the valuation seems fair TCM TCM VN ADD 32,300 67.2 -1.8 17.6 7.3 7.2 1.2 1.1 18.2 19.2 8.6 8.2 1.0x compared to 2019 positive MSH MSH VN HOLD 62,500 124.3 19.7 19.0 5.7 6.2 3.0 2.3 43.8 38.6 15.1 15.2 0.8x prospect. In a longer term, we Viet Tien Garment VGG VN N/R N/A 121.6 55.9 15.9 8.0 5.1 1.8 1.3 22.0 26.0 9.4 9.0 0.1x still see upsides as some TNG Invm't and Trading TNG VN N/R N/A 52.1 N/A N/A 5.9 N/A 1.4 N/A 26.4 N/A 7.4 N/A 1.6x companies have plan to Viet Thang Corp. TVT VN N/R N/A 21.6 N/A N/A 5.8 N/A 0.8 N/A 13.5 N/A 6.1 N/A 0.8x increase the capacity, Garmex Saigon GMC VN N/R N/A 26.8 N/A N/A 4.7 N/A 1.5 N/A 36.9 N/A 14.1 N/A 0.9x especially STK with ambitious Nha Be Garment MNB VN N/R N/A 26.6 N/A N/A 15.1 N/A 2.1 N/A 13.6 N/A 1.8 N/A 4.8x target of raising total production Average 24.6 17.5 7.5 6.2 1.7 1.6 24.9 29.3 8.9 11.0 1.4x by 3 times in 2022. Median 19.7 17.6 5.9 6.2 1.5 1.3 22.0 26.0 8.6 9.0 0.9x Note: Forward/Forecast for Non-rated companies based on Bloomberg consensus 108 Thanh Cong Textile Garment Investment Trading JSC (TCM)

Current Price Target Price Dividend Yield Recommendation Sector VND27,000 VND32,300 1.9% ADD TEXTILES Stock info INVESTMENT HIGHLIGHTS

Market cap (US$ mn) 67.2 ▪ The only vertically-integrated textile manufacturer in Vietnam. TCM owns a near-complete production chain, including yarn, fabric and garments, allowing it to reduce its reliance on imported Daily value 30 day (US$ mn) 0.7 materials (yarn, fabric). P/B TTM (x) 1.2 ▪ We expect topline growth in FY19F to decelerate from FY18 levels while earnings could fall P/E TTM (x) 7.3 slightly. We forecast FY19F revenue to increase slightly by 1.8% to VND3,728bn, with garment revenue -1.5% due to (1) loss of Sears’ orders following its bankruptcy and (2) reduction in orders from Eddie Bauer (~10% of total revenue). EAT is estimated to decrease by 1.8% yoy to VND256bn, due to Key ratios 2017A 2018A 2019F slower topline growth and a high base effect due to one-off profits of VND48bn in FY18 from selling NP growth (%) 67.1 34.6 -1.8 land and revaluation of investments in SAV worth VND27bn. EPS growth 67.1 28.0 -1.8 ▪ Possibility of collecting Sears’ receivables is unclear. In Feb 2019, Sears was acquired for (%) US$5.2bn by a hedge fund of its former CEO, Edward Lampert, after filing for bankruptcy. TCM is waiting for judgments from US judges toward Sears’ receivables, which are worth about VND101bn. GPM (%) 15.7 18.5 19.0 According to management, they are able to collect a part of Sears' receivables. Thus, the company did Asset turnover 1.1 1.1 1.1 not increase the provisioning for Sears’ receivables in 1Q19 which were about VND78bn by end-FY18. (x) ▪ Construction of TCM’s Vinh Long dyeing factory will start in FY20F with expected CAPEX of Financial 3.0 2.7 2.5 US$30m and designed capacity of 5,000m of fabric/day. The factory will satisfy in-house fabric needs leverage (x) hence reducing outsourced expenses and potentially raising blended gross margin by around 160bp after the official launch due in FY22F. ROAA(%) 6.5 7.7 8.2

ROAE (%) 19.6 22.3 19.2 109 Century Synthetic Fiber Corp (STK)

Current Price Target Price Dividend Yield Recommendation Sector VND23,500 VND25,200 6.0% HOLD TEXTILES

Stock info INVESTMENT HIGHLIGHTS

Market cap (US$ mn) 71.4 ▪ Second-largest synthetic fiber manufacturer in Vietnam. STK’s current total capacity of 60,000 tons of yarn, makes it the largest Vietnamese synthetic yarn manufacturer, and it is ranked second-largest in Daily value 30 day (US$ mn) 0.05 the domestic market P/B TTM (x) 1.6 ▪ Strong 1Q19 bottomline growth thanks to lower operating expense. SG&A expense declined to P/E TTM (x) 8.2 3.0% of revenue in 1Q19 from 3.9% in 1Q18, lifting net margin to 8.6% from 6.8% on yoy basis. Net profit rose to VND52bn in 1Q19 (+29.4% yoy), or 21.2% of our estimate for FY19, which is in line with our forecast given Q1 is a low season. Key ratios 2017A 2018A 2019F ▪ Ambitious expansion plan would make STK the largest synthetic fiber manufacturer in Vietnam NP growth (%) 246.7 79.5 37.1 from FY22F. In 2019 AGM, Management shared a plan to triple its current capacity, making STK the EPS growth 246.7 79.5 24.3 largest synthetic fiber manufacturer in Vietnam. Total investment was estimated at VND3,745bn. (%) However, further details have not been disclosed therefore we have not taken the factor into our forecasts. STK has announced an investment of US$0.3mn in 2Q19F in a production line to produce GPM (%) 10.9 13.9 15.3 4,000 tonnes of colour yarn a year. Asset turnover 1.0 1.0 1.3 ▪ We downgraded to HOLD rating after a recent rally in stock price, despite positive outlooks from (x) (1) improving product mix, which will drive up gross margin and (2) attractive dividend policy of Financial 2.7 2.5 2.2 VND1,500/share (equivalent to 6.8% dividend yield). leverage (x) ROAA(%) 5.2 8.6 11.2

ROAE (%) 13.6 21.1 24.2 110 Song Hong Garment JSC (MSH)

Current Price Target Price Dividend Yield Recommendation Sector VND57,900 VND62,500 5.7% HOLD TEXTILES Stock info INVESTMENT HIGHLIGHTS

Market cap (US$ mn) 124.4 ▪ MSH is one of the largest Vietnamese garment exporters that focuses on contract manufacturing for upper-mid market global clothing brands including Calvin Klein, Tommy Hilfiger, Karl Lagerfeld, etc. Daily value 30 day (US$ mn) 0.16 With annual capacity of 60mn units, supported by 155 sewing lines and over 9000 workers P/B TTM (x) 3.0 ▪ A change in product mix with larger contribution from high-margin FOB apparel production is P/E TTM (x) 5.7 expected to be the near-term growth driver, since all its factories are currently running at full capacity. We expect the FOB business to contribute 78% of revenue in FY19F (up from 72% seen in Key ratios 2017A 2018A 2019F FY18), which will drive the company’s FY19F revenue to grow 9.5% yoy and FY19F blended GM to improve by 120bp. NP growth (%) 8.4 85.4 25.7 ▪ We project a FOB order value CAGR of 18.5% over FY18-22 on the back of a strong client base, EPS growth 11.0 85.4 19.7 including Haddad, Columbia, G-III and newly-signed Luen Thai. Our estimation is based on the (%) mutually-beneficial relationship and trust between these customers and MSH, proven by a 59.6% yoy rise in value of FOB orders by the customers in FY18. GPM (%) 17.2 20.1 21.3 ▪ Manufacturing capacity expansion is expected to be the long term growth engine from FY20F Asset turnover 1.4 1.6 1.5 onward. The new US$16-million-apparel factory Song Hong 10 (SH10) will start construction in Apr (x) 2019 and production in 2H2020. We forecast that a 25% increase in capacity will propel a 13.3% Financial 3.3 2.9 2.6 CAGR FY20-22 in revenue and a 19.5% CAGR in net profit. leverage (x) ▪ We downgrade to HOLD rating as the stock price has surged recently, despite bright prospects ROAA(%) 8.8 15.2 15.2 ROAE (%) 32.8 42.8 38.6 111 Disclaimer

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