Source: Freepik.com IN ALLIANCE WITH © Navigating Vietnam Entering Uncharted Waters: A course correction might be in order December 27, 2017 IN ALLIANCE WITH Navigator Report Table of Contents Executive summary ............................................................................................................................................. 4 Vietnam’s economy is on a tear ........................................................................................................................ 6 In a sweet spot with high value exports leading the charge ............................................................................................ 6 Inflation creeping up but still subdued despite loose monetary conditions and rising commodity prices ........................ 7 Strong fundamentals have, however, masked lingering problems in the banking system and the slow pace of SOE reform ............................................................................................................................................................................. 7 2018 Outlook: Steady state ................................................................................................................................ 8 Global monetary policy will not become tight, just less loose.......................................................................................... 8 Vietnam’s economy to sustain growth momentum in 2018 ............................................................................................. 8 Beyond 2018: We boil Vietnam’s medium-term growth story down to three key macro themes ............. 11 Theme 1: Continued FDI-led industrialization driven by both “New Economy” and traditional industries ..................... 11 Theme 2: Robust consumption growth driven by Vietnam’s burgeoning middle class and tourists .............................. 12 Theme 3: growing trade – 2018 will be a milestone year for Vietnam’s ongoing trade integration................................ 14 Despite our bullish outlook on growth, there are some building macroeconomic risks .......................... 17 Credit expansion is far outpacing GDP growth ............................................................................................................. 17 External risks are rising in importance due to Vietnam’s growing trade integration and reliance on FDI ...................... 19 Stock market review: A stellar show but not without its quirks................................................................... 23 A large-cap rally pushed the stock market to a decade-long high ................................................................................. 23 2017 saw a quantum leap in market liquidity ................................................................................................................ 25 Foreign investors were a key driver of the market this year .......................................................................................... 26 Total market cap surged, supported by new listings ..................................................................................................... 28 The rise in the VN-Index has only partially been driven by earnings growth, with multiple expansion being a significant contributor. .................................................................................................................................................................... 29 Large caps drove the market’s PE expansion this year ................................................................................................ 29 Stock market outlook: Mid cap names are worth looking at in 2018 ........................................................... 31 Derivatives products will support market sentiment ...................................................................................................... 32 SOE divestments and IPOs will continue to be important market catalysts but the best new listings might be behind us already .......................................................................................................................................................................... 32 “Black Swan” events pose a growing risk to our 2018 stock market outlook................................................................. 34 2018 looks positive for the stock market, but 2017’s performance will be a tough act to follow .................................... 35 Vietnam’s prospects for graduating to MSCI emerging market status in 2020 .......................................... 36 There are still multiple barriers to Vietnam’s upgrade to emerging market status but liquidity is no longer one of them36 Argentina and Saudi Arabia may be upgraded soon, and provide additional insight about Vietnam’s further requirements ................................................................................................................................................................. 37 There are benefits to Vietnam’s delayed EM upgrade .................................................................................................. 38 An EM upgrade is a necessary supporting factor for the market, given the increased complexity of the investment landscape ..................................................................................................................................................................... 39 Banking: Bright outlook driven by loose monetary policy, new growth engines and a clearer legal framework .......................................................................................................................................................... 40 MILITARY COMMERCIAL JSB (MBB) ......................................................................................................................... 55 VIETNAM PROSPERITY JSCB (VPB) ......................................................................................................................... 57 LIENVIET POST BANK (LPB) ...................................................................................................................................... 59 Real Estate: The Real Estate bull market can continue for a couple more years ...................................... 61 NAM LONG INVESTMENT CORP (NLG)..................................................................................................................... 74 Consumer: Surging demand but increasingly darwinian ............................................................................. 76 PHU NHUAN JEWELRY JSC (PNJ) ............................................................................................................................. 87 www.vndirect.com.vn 2 IN ALLIANCE WITH Navigator Report Automotive: The calm before the storm ......................................................................................................... 89 Aviation: A fantastic long-term growth story but expect competition to intensify .................................... 94 VIETJET AIR JSC (VJC)............................................................................................................................................. 100 Ports & maritime shipping: Riding on the coattails of the fta and fdi bonanza ........................................ 103 VIET NAM CONTAINER SHIPPING JSC (VSC) ........................................................................................................ 107 Dry bulk shipping: A recovery scenario is on the horizon ......................................................................... 111 Materials: We like the steel sector because it is a broad play on the economy but we are bearish on cement .............................................................................................................................................................. 116 HOA PHAT GROUP (HPG) ........................................................................................................................................ 120 Power: A broad play on industrialization ..................................................................................................... 122 POWER CONSTRUCTION JSC NO.1 (PC1) ............................................................................................................. 129 Agriculture: Recovering and restructuring .................................................................................................. 133 LOC TROI GROUP (LTG) .......................................................................................................................................... 141 www.vndirect.com.vn 3 IN ALLIANCE WITH Navigator Report EXECUTIVE SUMMARY Vietnam’s economy is on a tear led by “snowballing” FDI inflows, growing trade integration and sustained highs in consumer confidence. GDP grew by 6.8% this year on the back of a 14.4% expansion in industrial production, an 8.4% rise in consumption and a 21.1% surge in exports. Inflation remains subdued despite estimated credit growth of 19% while the Dong has been one of the most stable currencies in the region, facilitated by a trade surplus of US$2.7 billion and an estimated current account balance of US$1 billion at 2017 year end. We expect close to 7% GDP growth to be sustained into 2018 on the back of continued loose monetary policy and a pick-up in public spending. An estimated 44.4% increase in registered FDI this year should fuel export growth over the next 2-3 years, provided that global demand stays robust. We