Vietnam Outlook 2017

Long Tran Head of research

Please feel free to contact me at

E Longtt@bsc.com.vn

P +84 4 39352722 (118)

M +84 906 959 034

S rongbeo

BSC

Content List

• Top pick: IPO/OTC/Listed 03

• Investment themes (5) 06

• Top Questions in 2017 (7) 08

• Stock market outlook 19

Top stocks pick: Listed stocks

• FPT: Cheap valuation, defensive; Catalyst: FOX listed on Jan 2017 (VND 580 billion @ book value ~ Market Value VND 3000 billion ~ 15% FPT’s current market capital)

• VNS: out of favor, overreacted about Uber & Grab, cheap Valuation (PER 6.95x), Catalyst: Uber & Grab fall

• PVI: hedged with rising rate, cheap valuation (P/B), demand recovery from oil & gas company, Catalyst: divest Pvi sunlife and PVI tower and issue share for strategic partner.

• REE: Defensive, cheap valuation, out of favor; Catalyst: PPC and JPY/VND

• BCC: cheap valuation (EV/ebitda: 5x), EURO loan pay back (early 2018); catalyst EURO/VND fall and Vicem IPO (mother company)

• CTI: Cheap valuation, growth in toll; Catalyst: Long Thanh and the quarry mines (2mill/year)

• PVS: Defensive with diversified activates, cheap valuation; Catalyst: oil Price

• MWG: cheap valuation, high growth, retail sector;

Top stocks pick: IPO/new listing/OTC

• BSR: Huge market cap, improving business result, good hedge for rising newlisting

• SaWaCo: defensive, Catalyst: water price, water shortage

• VEAM: longterm demand, cheap compare to their subsidiaries' value, Catalyst: automobile sale rise.

• ACV: longterm demand growth, infrastructure & defensive ; Catalyst: fee raise

• PLX: cheap valuation, longterm demand growth; catalyst: listing

• HVN: longterm demand growth, ; Catalyst: B777 sale and A350 sale & lease back (similar stocks: VietJet)

• PC1: longterm demand growth, cheap valuation;

• SAB: longterm demand growth, fair valuation to peer ; Catalyst: State divestment

Top stocks pick: Bottom Fishing

• VGT: TPP fails, textile export decrease, cheap P/B adjusted; Catalyst: export, divestment & listing new subsidiaries. (similar stocks: TCM, EVE)

• VSC: TPP fails, export slowdown, cheap valuation again, longterm growth still attractive (similar stocks: GMD, PHP, CDN) catalyst RCEP

• LAS: cheap valuation, out of favor due to fertilizer price down, Elnino and china export; catalyst VAT 0% and demand increase thanks to vegetable rise (similar stocks: BFC)

• VNM: longterm demand growth, valuation getting cheaper; Catalyst: milk powder top

Increasing challenges sectors:

• Bank: anti corruption, NPL, dilution ; catalyst: FOL rise

• Tire: natural rubber & oil price rise faster than demand

• Cable/plastic: plastic & copper rise

Investment themes

6

New Kids on

the block

hunting for

bargain in

OTC & IPO

Divestment &

FOL will

dominate in

2016 – 2017

No country for

old man,

Bottom fishing

TPP sectors &

old undervalue

stocks

Raw material

rise Buy Oil &

Gas and

material stocks

Local grow

oriented.

Low Beta

and organic

growth

1 2 3 4 5

You don’t want to be any where else

Source: BSC, Blackrock

Emerging economies

• China Slowdown

• ASEAN election year

• Commodities price recovery

Developed economies

• FED hike and Mr Trump

• Election year in EU

• Brexit

Geopolitical risks

• Conflict and violence

(Russia, East Sea, IS)

• Cyber Security

Vietnam

• USD/VND

• Fiscal Policies

• FTA & investment (TPP)

BSC’s relevant reports: Brexit before & after, Lanina, Oil, commodity

Top Question for 2017 “Global, macro and market”

8

1. Could divestment & new listing sink the market?

Divestment on state-owned enterprises and listing tided to IPO have strong influent to the stock market 2016.

• Divestment in Sabeco, Habeco, FPT, FPT telecom, VNR, BMI, BMP, NTP, HGM, SGC, VIID in 2016 – 2017

• Number of state own companies to be IPO and divest is around 1100 (2016 to 2020)

Long term potential:

• Stock market capitalization of Vietnam will probably exceed $ 100 billion in 2017 and target $ 200 billion in 2020.

• Greater stocks help attracting large investments, upgrading emerging markets.

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180

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700

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900

DNNN CPH

Short term effect:

• OTC and IPO divert the cash flow for listed stock market.

• Not all new listing are hidden gems, OTC rush have side effect.

• Market structure unstable every time new stock listing (top 10, 20 will heavily changed)

2016:

Divestment and new listing might not sink the market but it will create big fluctuation -> Hedge by choosing the right cubs and not forget to bottom fishing if old tigers be lower than their value (theme 1 &2)

1. Could divestment sink the market in 2017? No Name Mkt Cap

1 Mobifone 3.662

2 HVN 2.716

3 Thaco 2.273

4 PLX 2.124

5 Masan con 1.965

6 Viejet 1.571

7 BSR 1.540

8 PV Power 1.188

9 Veam 980

10 TCB 772

11 PV Oil 479

12 VPbank 424

13 VIB 422

14 VGT 347

15 FOX 302

Sum 20.766

No Ticker Mkt Cap Weight

1 VNM 8.01B 12,58%

2 VCB 5.6B 8,59%

3 SAB 5.57B 8,51%

4 GAS 5.09B 7,70%

5 VIC 4.87B 7,45%

ACV 2.5B

6 CTG 2.46B 3,76%

7 BID 2.13B 3,29%

8 ROS 2.17B 3,29%

9 MSN 2.16B 3,26%

10 BVH 1.74B 2,69%

11 HPG 1.6B 2,45%

12 NVL 1.56B 2,39%

BHN 1.25B

13 MWG 1.05B 1,57%

2. Could FDI inflows slow down?

The market over reacted with TPP, Trump… leave “FTA” stock be in attractive valuation again -> time for bottom fishing (theme 3)

2012 2013 2014 2015 2016E

Manufacturing (%) 69.8 77.2 75.9 64 69

Real Estates (%) 15.1 13 7.3 11.5 9.7

Others (%) 15.1 9.8 16.8 24.5 21.3

FDI disbursed (USD bil.) 10.5 11.5 12.4 14.5 16

FDI registered (USD bil.) 13 21.6 20.2 22.7 19.1

• FDI is expected to flow stably into Vietnam thanks to

• Solid FDI flows from Japan, Singapore and Korea (53% of total weight)

• JPY and KRW potential further depreciation

• FDI flows strongly to manufacturing than to real estates

• Chance of switching FDI from China to Vietnam

• New trade agreements such as RCEP, FTAs with EU

• Affected industries: direct (textile, aquaculture, agriculture), indirect (logistic, seaport, industrial real estates)

3. Could Real Estate Bubble in 2017?

• Low chance of real estate bubble in 2017 because:

• Credit growth slowdown

• Higher lending criteria due to Sbv restriction

• Growth of low-medium cost housing supply

• Stable lending rates

• Affected industries: further divergent performance of Real Estate firms while many face challenges in 2017

2013 2014 2015 2016E

Credit growth (%) 12.51 14.16 17.29 18

Credit growth for real

estates (%) 15.4 19.3 26 9

Short-term deposit

over mid-long term

loan ratio (%) 43.1 45.4 31 33

GDP (%) 5.42 5.98 6.68 6.2

More positive with material firm than real estate firm -> reduce real estate holding, increase material holding (Cement)

4. Could inflation out of Government control?

• Inflation is under pressure in 2017 due to

• Commodity price rebound

• Higher USD and Fed rate hikes

• Domestic pressure from education, healthcare expense adjustment

• Potential higher electricity, fuel and building material price

• Potential higher inflation at 4.5%-6% can affect rates. Government may think twice about education, healthcare expense adjustment plan.

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72

74

76

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82

84

86

88

90

Commodity price rebound in 2016

BCOM…

High inflation can lead to higher rate, raw material can go up -> hedge by buying energy stocks& insurance stocks (theme 3 & 4)

5. Political black swan?

2016 full of Black swans, how about 2017:

• Important elections in EU (German, France and Netherlands), China and Asean countries.

• Possibility of political power shift, stronger protectionism and populism

• Affected industries: export-oriented industries to USA and EU

0 20 40 60 80

Public finance

Economic issues

Terrorism

Immigration issues

Most importing issues in EU public (%)

Ending 2015 Beginning 2015

Keep your eye on the political events in 2017, and be more caution with export sectors -> focus on the local oriented sector (theme 5)

6. Fed hike and foreign investment ? Foreigner cash flow has led the market in recent years, and will it also be the mainstream in 2017.

• Fed raising interest rates makes foreign capital outflow from the frontier market

• The groups immediately affected such as ETF, Pnotes.

Country M12(M USD) Q IV (M USD) 2016 India (875) (4,232) 3,277

Indonesia (264) (1,357) 1,268

Japan 5,939 23,843 (39,535)

Phillipine (196) (674) 78

Korea 1,017 838 10,252

Taiwan 173 -3,479 10,782

Thailand (219) (1,777) 2,009

Pakistan (132) (243) (322)

Vietnam (70) (134) (380)

Foreigner can keep net sell so keep your eye on hot money including ETF and Pnote. This can be net off with State divestment -> wait for bottom fishing (theme 3)

7. Could speculative stocks sink the market?

Stock exchange start have huge speculative cases in 2016. These shares have low floating and climb high before free fall (up to 90%). Including:

(1) Problems of management/fault: TTF, HHS, TMT

(2) New shares to raise capital 3x 8x for listed: ROS

Call margin could affect the market especially during sensitive time (ETF) -> be more selective with new stocks

How news and macro policies affect sectors

Sectors

Ma

rin

e

tra

nsp

ort

Re

al e

sta

te

Co

nstr

ucti

o

n

Ce

me

nt

Texti

le

Ele

ctr

icit

y

Ph

arm

ace

ut

ica

l

Pla

sti

c

Tir

e

Ba

nk

Ste

el

Aq

ua

cu

ltu

re

Su

ga

r

Oil &

ga

s

Fe

rtiliz

er

Ru

bb

er

Ce

ram

ic

tile

s

IT

Se

ap

ort

Au

tom

ob

ile

Insu

ran

ce

Milk

Material

recovery (+) (-) (-) (-) (-) (+) (+) (+) (+) (-) (-)

Fed hikes (+) (+) (-)

USD/VND (-) (+) (-) (-) (+) (-) (+) (-) (+)

Euro / Brexit (+) (-) (+) (-) (-)

Japan/ JPY (-) (+) (-) (-)

China / RMB (-) (-) (-) (-) (-) (-) (-) (-) (+)

Interest rate (-) (-) (-) (+) (-) (-) (+)

TPP Risk (-) (+) (-) (-) (+) (-) (+) (+) (-) (-)

Key take away points

• Inflation can rise -> interest rate, hedge by buying insurance stocks

• The market over reacted with TPP, Trump, FDI… leave “FTA” stock be in attractive valuation zone again -> time for bottom fishing

• Real estate bubble ? Not yet but More positive with material firm than real estate firm -> reduce real estate holding, increase material holding

• Political black swan? Possible then keep your eye on EU, China

• Divestment and new listing sink the market ? Not really but they will inflate the market to USD 100 bil and can lead to short term mismatch demand vs supply

• FED hike and foreign net sell? Can continuous then keep your eye on hot money (ETF and Pnote)

Stock market Outlook Alpha seeking rather than Beta

19

What happened last year ?

Source: Bloomberg, BSC Research

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90

95

100

105

110

115

120

125

130

01/16 04/16 07/16 10/16

BCs Index LargeCap IndexMidCap Index SmallCap IndexPenny Index

Macro: GDP short, CPI met target, rate down, USD up 1.2%; TPP fail. How's about the market ?

• Vnindex up 14.7% but 7.5% thanks to SAB, ROS

• Large Cap and Mid cap out perform Blue chip while penny free fall

• VN Market cap rise 28% to USD 80 billion. Upcom market cap 5x

• Liquidity only rise 18% to USD 125 mil daily

• Foreigner net sell USD 380 mil (~ USD 300 mil VIC USD 100 Mil VNM). ETF net sell USD 150 mil

• P/E & P/B rising & Margin lending rise too

Key take away points

• New PM want to support growth and push privatization, prove that he is more Pro-business. Party leader carry anti corruption campaign.

• Vietnam is look a lot like a turnaround stock with new leaders, restructuring plan and receiving huge foreign investment (start slow but improve fast)

• Valuation multiples at 5 year high and still in a correction to the mean. Market earning can rise faster than 2016 thanks to recovery of oil price and agriculture.

• Liquidity can slightly down due to foreign net sell, the possibility of inflation and rate hike and margin lending not as abundant as 2016.

• In medium term, Stock market will have new kids on the block thanks to IPO, divestment and listing process is pushed;

• In short term, Q1 should be slow due to early Tet holliday, Q42016 result is not very impressive

15,60

12,37

14,33

8

13

18

Vnindex P/E Avg -1.65Sdtv Avg +1.65Sdtv

Avg Avg -1Sdtv Avg +1Sdtv

Fearless forecast 2016 -2018: Valuation

• PE index broke the downtrend since 2014 and above the +1.65 SD and tend to correct to +1.28 SD

• Short term correction or accumulation are likely to continuous.

• Earning 2017 can rise 10% - 15%

• Long term view, Vietnam market is still deeply discounted compare to peers in Asean.

• 2017:

• Bull case: P/E 15.6 (+1.65 SD) ~ 750

• Base case: P/E 14.33 (+1.28 SD) ~ 658

• 5 years average : P/E 12.37

Source: BSC

752,03 621,88

699,31

880,58

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500

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900

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1200

01/15 07/15 01/16 07/16 01/17 07/17 01/18 07/18

Bear Bull Average

Fearless forecast 2017 -2018 • Vnindex is the biggest loser compare to

Asean stock markets. Vnindex broke 8 year high of 680 points.

• Since 2009, Asean stock market passed 2007’s top by a huge percentage.

• Indonesian index has increased the most, while Singapore performed the least.

• What if Vnindex can recover at the same speed as Asean indexes 2009 - 2012

• Let your imagination go wild:

• Vnindex 752 to 880 at the end of 2017

Source: BSC

The mega trends of Vietnam

• People getting richer. GDP maintain recovery rate of 6.5% from bottom average period 2011 – 2015 of 5.88%. GDP per Capital is expected to reach to USD 3,200-3,500 in 2020. Middle class will be double in 4 years

• Over 100 million people. The next 10 year we will have great demographic structure. Currently, Average age 30.8 years, the urbanization rate of 35%, workforce 52.84 million (56.5%).

• Over $ 200 billion market cap. The market capitalization is targeted to reach 80% GDP in 2020 from currently 42% GDP (USD 80 billion).

• The rise of Private sectors. More than 500,000 enterprises (90% total enterprises) contributed 40% of GDP, 30% industrial output, 80% turnover of retail goods and services. Boosting administrative reform and state divestment are key for new PM’s cabinet.

Cases to consider

Blue Chips: FPT, MBB, GMD, REE, BMP, MWG, ACV

Blue Chips for bottom

fishing:

HPG, HSG, PVS, VCG, SCR, VNM

Mid Caps: VSC, KDH, HBC, CMG, ITD, BFC, NT2, VNR, VGC,

VGG, CTI, DGC, DGL, RAL, BMI, NTP, VNS,

Mid Caps for bottom

fishing:

LCG, PVG, BCC, SAM, PPC, PTI, TNG, PVT, BHS,

NCS, TCM, LAS, DXG,

Small Caps: HDC, LIX, NET, CHP, SJD, VIP, PGS, ITC, CSV, PGC,

C32, SMC, BTP, PET, HAH, SHP

Caution: HAG, HNG, FLC, HVG, DRH, ROS, TCH

• 2016: Most stocks on our list is outperformed Vnindex.

• Out of favor stocks: REE, PPC, BCC, TRC, LAS, VGG, VNS, SHP can be interesting

• Low beta: PTI, PGI, BHS, BFC, CSV,

• Divestment: VNM, FPT, VNR, BMI, NTP, BMP, VCG

• New kids on the block: Sabeco, ACV, Habeco, VEAM, Vinatex, Vietnam Airlines…

Sector rating 2017 No Sector Rating 2016 Buy Hold/tracking

1 Steel Outperform HSG, HPG, NKG VIS, SMC

2 Construction Outperform CTI, PC1 CTD, HBC, FCN,

3 Oil & Gas Outperform PGS, PGC CNG, PXS, PVD, GAS

4 Technology Outperform FPT, CMG, ITD ELC

5 Sea Port Outperform HAH, VSC GMD, PHP

6 Power Outperform SJD, CHP NT2, BTP, PPC

7 Insurance Outperform BMI, PVI PGI, VNR

8 Tiles Market perform VGC VIT, CVT, TLT, TTC

9 Real Estate Market perform DXG, ITC KDH, SCR, VIC,

10 Beverage Market perform SAB VNM, HNM, VLC

11 Textile Market perform TNG, VGG, VGT TCM, EVE

12 Fertilizer Market perform LAS BFC, DPM

13 Cement Market perform BCC HT1, BTS

14 Automobile Market perform SVC, HTL, TMT

15 Plastic Market perform NTP BMP, AAA

16 Sugar Market perform BHS SBT, LSS, SLS, KTS

17 Tire Market perform DRC, CSM

18 Banking Market perform MBB VCB, ACB

19 Pharmacy Market perform DHG, IMP, DMC, DP3

20 Rubber Market perform TRC DPR, PHR

21 Marine Transport Market perform VTO, PVT GSP, VIP

22 Aquaculture Underperform VHC, HVG, FMC

• OUTPERFORM: Construction, Building materials (tiles, plastic, cable), Technology, Sea Ports, Textile, Electric power, Steel and Oil & Gas

• MARKET PERFORM: Real Estate, Plastic, Sugar, Tires, Cement, Automotive, Insurance, Banking, Pharmacy, Natural Rubber, Fertilizer, Dairy and Marine Transportation

• UNDERPERFORM: Aquaculture

Thanks for your supports and confidence in us

Long Tran Head of research

Please feel free to contact me at

E Longtt@bsc.com.vn

P +84 4 39352722 (118)

M +84 906 959 034

S rongbeo

BSC