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 Fishery products 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 Agriculture products Korea Thailand Indonesia US imports from China Machinery and 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.