VSC –Q4/2019 Business Results: Better Than Expected Thanks To Profit Margins Improvement

VSC announced unaudited business results for 2019. While net sales rose 6% YoY to reach VND 1,793 Bn, PBT declined 12% YoY to VND 342 Bn. However, VSC still managed to surpass its 2019 PBT plan by 12% on the back of robust Q4/2019 results. Accordingly, Q4/2019’s PBT growth rate turned positive, up 10% YoY, following three consecutive quarters in the negative zone thanks to profit margins expansion, significantly lower interest expenses and a record of other income.

MBB – Updates on 2019 Business Performance

We see that MBB’s outlook can be impacted by some potential headwinds: (1) the dependence of NIM expansion on consumer finance, (2) the slowdown in insurance net income growth, while other service fee growth are more limited, and (3) high NPL formation rate and provision charges growth due to higher risk appetite. Meanwhile, some tailwinds still intact, such as the continuous expansion of consumer finance, high CASA and efficiency improvement. We forecast that these pros would allow the bank to maintain a high earnings growth of 25% YoY in 2020.

MBB is currently trading at VND21,150, equivalent to an attractive PBR 2020f of 1.1x. The stock price is 28.0% lower than our target price in 2020 Strategy Report (VND27,000). We reiterate our BUY recommendation on the stock.

Shrimp sector: Export prices will remain low due to oversupply and the Coronavirus outbreak

World shrimp production has recovered strongly since 2017 thanks to favorable weather and larger farming areas, in addition to strong farming reform efforts in some countries. Supply surplus has put more pressure on export prices. Export prices in 2018 and 2019 have reached a low since 2014 in June and July last year during the main harvest season. The price does not show any obvious signs of recovery.

MWG – Review on 2019’s business result

In 2019, MWG posted a positive result of full year revenue reaching VND 102,174 bn (18% yoy), 2% higher than our forecast and profit after tax reaching VND 3,836 bn (+33% yoy), 1% lower than our forecast.

Accounting for 82.5% MWG’s revenue, smartphones (43%) and electronics (39.5%) are still the main contributors, although foods, FMCG and others had increased their percentiles from 10% (2018) to 17.5% (2019).

Update on Vietnam’s economic growth

During the last three months, many significant events took place in various areas such as trade agreements (US-Sino Phase One and USMCA), geopolitical risks (Brexit and Trump’s Middle East peace plan) and unexpected natural disasters (Corona virus and Australia fires). Among those, the US-Sino Phase One deal and Corona Virus, originating in Wuhan, China, have played an important role in driving economic growth forecasts. The former delivered a silver lining for ASEAN+3 growth before the latter put some gloom on the global economic outlook and forced economists to reconsider revising down their forecasts.

The main criteria to be reclassified as an emerging market

Market reclassification is one of the positive factors for the Vietnam market. However, at present, Vietnam's stock market is facing restrictions on clearing and settlement. More specifically, Vietnam requires pre-funded trades although the settlement cycle is T + 2 because the authorities are worried that the market would collapse when failed trades occur.

Looking at some emerging markets in the region, we realized that failed transactions still occur frequently. However, generally these markets have a mechanism to limit the failure of transactions, while in Vietnam, we do not have a clear mechanism for this.

We believe that sooner or later Vietnam will loosen the regulations like other emerging markets and will make it easier for the market to be reclassified. However, this is unlikely to happen in 2020.

Overview of the tire industry in 2020

In 2019, global tire demand was expected to increase by 4.1%, reaching 3.0 billion tires. In terms of value, the industry's estimated revenue grew by 7% to 258 billion USD. The two main drivers for the industry’s expansion are (1) the rise in individual income in developing countries, which will lead to an increase in demand for transport vehicles, indirectly boosting the tire demand, (2) people use vehicles more often, so this created an increase in the demand for replaced tires. Motorcycle tires grew faster than automobile tires and was estimated to reach 900 million tires in 2019, an increase of 5.8% y/y. Although the growth rate is not high, at about 3.3% (approximately 2 billion units), car tires still accounted for the highest proportion of the industry (65% -70%). The demand for light trucks in industrializing countries is the main reason for the growth of automobile tires in 2019. Geographically, the Asia-Pacific market is the most active market and took over half of global consumption. China, Thailand, Indonesia and India had tremendous growth in the past year. In contrast, there was a slight decrease in tire demand in the Japanese market. Demand for tires from the rich and developed countries in North America and Western Europe has not changed significantly. The growth rate was around 1% (mostly came from the replacement market).

Update on HSG

For FY2019-2020, HSG’s targets are noticeably conservative, thus we forecast it is likely to exceed these, particularly in regards to net income. Based on HRC price of USD 450-480/ton, HSG expects its revenue and selling volume to remain at VND 28,000 billion and 1.5 million tons, while net income will grow 11% to VND 400 billion.

Regarding net income, we expect HSG can meet and even exceed the target due to the positive Q1/FY2019-2020 results and the favorable HRC price movement. In Q1/FY2019-2020, HSG’s net income (VND 170 billion) was equivalent to 42.5% of its FY2019-2020 plan (VND 400 billion).

NTP – Becoming a Cash Cow

We think the brand name Tien Phong Plastic Pipe can be described as a “cash cow” at the moment. After a period of constant spending on capex to raise capacity, NTP has started to see positive net cash flows by exploiting its vast capacity, developed distribution system and a relatively powerful position in the industry.

Fertilizer – 2019 preliminary results and opportunities for 2020

Due to difficulty in the plantation activities, the fertilizer industry is likely to end 2019 with declining business results as total sales volume dropped due weak demand. Profit margins continue to remain as low as in 2018.

Update On The Aviation Industry

In 2019, Vietnam's aviation industry continued to experience a healthy double-digit growth amid issues at some key airports. Overall air traffic volume was up 12% YoY and reached approximately 116 mn pax. Although the growth rate of international passenger traffic continued to outpace domestic passenger growth, the gap between the two has contracted. Domestic passenger volume growth rate was estimated at 11% YoY, picking up strongly from 6% YoY in 2018. We believe this was likely driven by new supply from brand-new carrier Bamboo Airways, following years of not prioritizing the domestic market by incumbents (VJC, HVN, and Jetstar Pacific). On the contrary, international passenger volume’s growth rate showed a moderate deceleration, up 14% YoY in 2019 vs 21% YoY in 2018. Though this growth rate was in line with the foreign inbound tourist arrivals by air of 15% YoY for 2019, we attribute this slowdown to the estimated sluggish int’l pax volume rise of only 5% YoY at Tan Son Nhat Airport (SGN), which accounts for over 40% of Vietnam’s int’l air passengers. Its runways and passenger terminals are experiencing serious overload issues. In the meantime, other major terminals such as Noi Bai (HAN), Cam Ranh (CXR) and Da Nang (DAD) all maintained double-digit growth in terms of international passenger volume at 14%, 25%, 23% respectively.

F.Beauty – FRT’s New Experiment

In late 2019, FRT launched F.Beauty – a health and beauty specialist chain, with the first store located in Hanoi. After Long Chau pharmacies, F.Beauty is the second step in the diversification strategy of FRT since its major market, smartphones, is now saturated.