Update on Vietnam’s Trade in 8M2019

According to Customs’ data, Vietnam’s total trade value reached USD 340 Bln in 8M2019, up 8/9% YoY. Export growth was 8.7% YoY while import growth stood at 9.2% YoY. The trade balance surplus was USD 5.2 Bln, slightly below last year’s USD 5.4 Bln. We want to point out three things, including 1) Trends of export and import growth, 2) Trade balance with US and China, and 3) FX rate movement.

Major trends in the pharmaceutical sector

Healthcare expenditures are financed by three sources: government healthcare plan, private insurance, and out-of-pocket payments. We expect the proportion of social health insurance to become bigger and bigger in Vietnam, as it happened in China. The fact that social health insurance only covers expenditures in the hospital will limit the growth of the retail market. Circular 02 issued in 2018 with the purpose to control drugs’ origin and limit prescription drugs abuse at pharmacies is and will continue to impact negatively the revenue of the pharmacy channel. Because of that, we believe that the ETC channel (hospital and clinic) will have higher growth than the OTC channel (pharmacy) in the coming years.

Reducing the central bank rate will help to stabilize the economy

We assume that cutting the central bank rate is more likely to stabilize mobilizing interest rate, especially short-term rates, than lower bank’s lending and mobilizing rates. This is probably because commerical banks have to meet capital and liquidity regulation as well as prepare capital for seasonal business at the end of the year.

SBV has, suprisingly, reduced the central bank rates by 25 bps last Friday. While macroeconomic targets including inflation, exchange rate, and GDP growth are still in-line with the government’s targets, we suppose that cutting the central bank rates to stabilize interest rates was the thing to do.

We notice that above one-year term mobilizing rates have bottomed out in 2016 and 2017 and increased in 2018. Shorter-term rates has started to increased in 3Q2019 by 15 bps. We think the movement reflect liquidity and capital regulation controls via lower maximum ratio of medium and long term loans from short-term funding and via apply Basel II.

Unfavorable conditions have priced in

As the unfavorable conditions have priced in 1H2019 results, we expect that the bottom line will experience a significant improvement in 2H2019 and especially in 2020 due to (1) increase in the Urea sales volume (2) retrospect in the tariff. As a result, we recommend to BUY with the target price of VND16,400 per share.

FPT – Result Update Report

FPT is trading at a trailing P/ E of 12.5x. We believe this is a low valuation considering the ability to maintain a CAGR of approximately 20% over the next five years. The main growth driver will come from software outsourcing. The contribution from the education sector will also drive earnings.

GMD – 1H2019 Recurring profit surged attributed by strong JV gains growth

GMD‘s1H2019 audited results posted a flat revenue growth while PATMI decreased by 81% due to last year’s financial income from logistics segment divestment. Excluding extraordinary factors, core EBT raised by 29% YoY, mainly driven by associates' profits (+ 124% YoY) and EBIT (+ 20% YoY). Accordingly, 1H2019 EBIT’s upswing was supported by (1) positive growth in cargo throughput in the South and Central ports of GMD and (2) selling expenses cut. Notably, EBIT margin expanded sharply by 393 bps YoY and reached 23.7%.

Life Insurance Sector – Prudent growth to adapt to the low G-bond yield environment

According to the Insurance Association of Vietnam (IAV), total gross life premiums in 6M2019 were VND 48,134 bn (+28% YoY), lower than the growth rate of 32% during 6M2018. New business premiums came at VND 14,759 bn, up 15% YoY, much lower than 32% for the same period last year.

US Small Businesses Are Still Optimistic

The National Federation of Independent Businesses (NFIB) August survey shows that small businesses in the US remain optimistic about the short-term outlook. The NFIB Small Business Optimism Index fell 1.6 points to 103.1 but remains high (see Figure 1). Optimism fell because fewer owners expect better conditions in the coming months.

TNG – Update on Business Results

Although we do not exclude the possibility that the trade war will bring further unintended negative effects, we believe that in the short term, it is still possible to consider investing in firms fulfilled orders, improving their peformances such as TNG. For 2019, Rong Viet Securities expects its revenue and NPAT to be VND 4,200 bn (+ 16% YoY) and VND 210 bn (+ 17% YoY) respectively, corresponding to an estimated EPS of VND 3,378 per share.

ACV – Draft proposal of Ministry of Transport on assignment of management, use and exploitation State-owned aviation infrastructure assets

The stock price of ACV (UpCom) plummeted in today's trading session (-9.6% DoD) and was the second consecutive decline, more than 12%, of this stock after the media mentioned Ministry of Transport’s proposal to the Prime Minister to approve the Project on assignment of management, use and exploitation of State-owned aviation infrastructure assets. In particular, the proposal to re-nationalize ACV stated in the proposal may cause investors to react negatively, due to changes in expectations about the State's divestment schedule at ACV as well as the will to implement the plan to list on HOSE of ACV, which have been the main catalysts for stock price. At present, this proposal is subject to PM’s approval, which will likely be announced in the remaining months of 2019. However, we think this proposal is difficult to implement due to lack of a clear mechanism, and especially when ACV's current share price is nearly 5 times higher than the average IPO price. We will update our recommendation and valuation after the formal decision of the PM.

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.