Potential stocks in new indices

HOSE has announced the creation of three new indices including Vietnam Diamond Index, Vietnam Financial Select Index, and Vietnam Leading Financial Index. The Vietnam Diamond Index will include stocks that have limited foreign room and a reasonable PE ratio, and at least VND 2,000 bn ( USD 86 mn) in market capitalization.

Meanwhile, all consituents of both the Vietnam Financial Select Index and the Vietnam Leading Financial Index have to be in the VNFinancial Index. The Vietnam Financial Select Index will only includes financial stocks that have a VND 500 bn  (USD 21.55 mn) minimum in market capitalization and at least VND one bn (USD 0.04 mn) in daily trading value (*). The Vietnam Leading Financial Index requires financial stocks to have a minimum of VND 10 bn (USD 0.43 mn) in daily trading value (*) and at least 0.1% turnover.

(*) Daily trading value is the sum of put-through and order-matching value.

We expect HOSE to release contituents of indices in late October, helping local investment management companies to create ETFs. The SSI investment management company just said they are going to release an ETF to tracks either financial indices.

Based on HOSE methodology, we have estimated contituents and weights of potential stocks.

Corporate Bonds Investment in some Listed Banks

Banks are key players in the corporate bonds market with their large financial resources. In such context, strong investment in corporate bonds, especially high-interest bonds, is a method used by some banks to boost credit and achieve high yields on debt securities to improve NIM. However, expanding too quickly through buying bonds of businesses, especially in the real estate sector, is potentially risky, although the direct impacts on bad debt ratio or provision is not obvious yet. On the other hand, when bonds are redistributed to retail customers, the majority of individual investors are not able to assess the risks of this product as thoroughly as banks. It should be noted that the real estate sector is risky in nature, capital-intensive and is slowing down. As such, at the beginning of August, the SBV sent a warning letter to commercial banks regarding risk management in corporate bond investment activities. Accordingly, banks need to maintain a reasonable investment in corporate bonds in order to balance yields and risks, as well as protect benefits of the secondary investors of these bonds.

POW – Long-term Outlook Remains Attractive

PetroVietnam Power Corporation (HSX: POW) is the second largest power producer in Vietnam with a portfolio of 4.2 GW, representing 9% of total capacity of the national power system.  Gas-fired thermal power makes up the largest proportion of its activity with 64% of total capacity. Coal-fired thermal power accounts for 30% and hydropower for 6%. Having the majority of its capacity located in the South, a major consumption region, and mordern technology, the company has comparative advantages. This is especially true if the liberalization process in the power industry allows for more competition and offer opportunities for well run businesses to improve profitability.

In the short term, despite risks of policy changes and input material prices, the decline in depreciation and debt oustanding will help POW improve its earnings and cash flow. Furthermore, the Nhon Trach 3&4 project is expected to become the long-term growth driver, given that the shortage of electricity in the South is inevitable when many big projects are behind progress. We combine discounted cash flow and comparable methods to value POW. Based on that, we come to a target price at VND 17,900 per share, anticipating a cash dividend of VND 300 per share in the next 12 months. This translates to a 41% total return from the closing price on September 3rd, 2019. Therefore, we have a BUY on this stock.

TV2 – Core Business Remained Within Expectations

As the leading consulting subsidiary of Vietnam Electricity Corporation (EVN), TV2 has benefited from the parent company’s disbursement of major energy projects. 1H2019 saw strong growth in revenue (+212% yoy), as expected. Effectively, TV2 has just surpassed its whole year guidance of VND 1900 billion in revenue. However, TV2 did not manage to stabilize its gross margin, resulting in a modest earnings growth in 1H2019 compared to the same period last year (+15%).

Updates on LDG

Huge financial gain from full divestment from Suoi Mo, while residential revenue dropped in the 1H 2019. LDG posted net revenue of VND 355 billion (+117% YoY) and NPAT of VND 198 billion (+1,058% YoY); respectively completing 11% and 33% of the year targets. Residential sales shrunk 29% due to modest handovers in the 1H, mainly from Viva City and Viva Square. Meanwhile, financial income of VND 150 billion resulting from the full divestment in Suoi Mo – its non-core subsidiary, made up a major part of earnings. More projects are expected to be handed over in the 2H 2019, including the remaining parts of Viva City, Viva Square, Viva Park, Marina Tower and Loc Phat. Procedures for High Intela and West Intela are supposed to be done by October in order to fulfill the land-use-rights obligation. LDG can thereby sign the official contracts in these two projects.

DRC – We expect a rebound in 2019

Overall, we maintain our 12-month target price for the stock at 23,600 VND/share. This target price, combined with expected cash dividend of 1,000 VND/share in the next 12 months, yields a total return of 10% (calculated based on the closing price on 20 August). Therefore, we have an ACCUMULATE recommendation on DRC.

VPB – 1H 2019 Business Results Updates

1H 2019 saw a positive growth of consolidated performance with a normalized earning growth of 23.4% YoY. Continuing with the quality growth strategy, the parent bank decided to restructure its CommCredit to stabilize this segment’s impaired loans despite still keeping this as a long-term focus. As such, the parent bank’s growth slowed down and the consolidated growth in the first half was mainly driven by FE Credit who expanded credit strongly while managing better asset quality. We consider this a recovery sign of FE Credit which might support consolidated earnings growth going forward. However, we hold the view that the consumer finance business is still under policy risk and the outlook depends on the finalized regulation on cash loan tightening.

DIC (HSX: DIG) – Business update

The company targets 2019’s net revenue and NPBT of VND 2,900 billion (+11%YoY) and VND 550 billion (+28%). The main contributions will be from the deliveries of existing projects like the Phonenix and Gateway and a part of Nam Vinh Yen. Looking further into 2020-2021, key drivers will be from the deliveries of the Gateway and Nam Vinh Yen projects.

Where are the opportunities as PVD V is awarded a contract?

There is a rumor that PVD V has won a long-term contract in Brunei. This rig would operate next year after being in cold stacked mode for three years. This information is considered very positive and has pushed the stock price significantly. Especially, PVD V used to be the most profitable rig and contributed the most to the bottom line.

FPT - Valuation compared with other regional peers

We believe that FPT deserves a higher P/E, considering high and sustainable growth as well as better profit quality. On the other hand, foreigner ownership limit has always been a factor hindering the potential of the stock price, though, the fact that FPT is included in VN-Diamond Index or even further, the approved "Non-Voting Depositary Receipt" could solve this problem. However, it will take time for the market to revalue FPT, while in one year vision, we maintain our BUY recommendation for FPT, with target price of VND 64,000 / share.

Jackson Hole FED Summit: Challenges for Monetary Policy

Last week, there was an annual economic policy symposium hosted by the Federal Reserve Bank of Kansa City in Jackson Hole, Wyo. The FED chairman, Jerome H. Powell, delivered a speech on the FED’s question answering process throughout the last century. Although the market was a little bit disappointed by no clear signal of September’s next rate cut which has been priced in, we’d like to concentrate on FED’s policy-making process which is marked by changes in the assessment framework and toolkit to maximize employment and price stability, and sustain the expansion now.

SCS – Maintaining high growth pace

SCS's 1H2019 NPAT surged 15% YoY, mainly driven by incremental international cargo volume which was a result of new airline clients. Profit margin slightly reduced compared to same period last year as the company increased labor wages in late 2Q2018.