Market Comment
Ismael Pili
Head of Research
MARKET UPDATE & OUTLOOK
The VNI was one of the worst performing markets globally as of 1H22 with its 20.1% decline but has slightly
recovered since and as of August 17th recovered 6.5% from June month-end close. The factors of global Inflation
(supply chain disruptions, Russia-Ukraine conflict, China lockdown/reopening impact), the Fed’s monetary
tightening (higher rates, QT), and recession risk weighed on Vietnam as it did global equity markets, although for
a while, it seemed that Vietnam’s domestic retail investors were ignoring these issues as reflected by the VNI
faring relatively well up to 1Q22 (the VNI was down a mere 0.4% QoQ to 1,492.15 from YE21’s 1,498.28).
Fig 10: VNI and ADT
VN Index (pts)
Investigations on
regulatory breaches in
real estate & stock
market
2,000
1,800
Daily Turnover
(USD mn)
2000
1800
1600
1400
1200
1000
800
600
400
200
0
1,600
1,400
1,200
1,000
800
600
Mar-20
Apr-20
May-20
Jun-20
Jul-20
Aug-20
Sep-20
Oct-20
Nov-20
Dec-20
Jan-21
Feb-21
Mar-21
Apr-21
May-21
Jun-21
Jul-21
Aug-21
Sep-21
Oct-21
Nov-21
Dec-21
Jan-22
Feb-22
Mar-22
Apr-22
May-22
Jun-22
400
Source: Bloomberg
Local sentiment started to sour following the announced investigations over regulatory irregularity by
companies in the real estate sector and potential transgressions by key officials in the stock market that was
further exacerbated by the unwinding of margin positions. The VNI’s sharp 19.7% QoQ drop in 2Q22 was the
second sharpest pullback behind the COVID-affected quarter of 1Q20 (at -31.1% QoQ).
In terms of sector performance, IT, Utilities, and Consumer Discretionary were able to post gains. Interestingly,
within Financials, Banks fared relatively better with its 18.5% correction vs the VNI’s 20.1% decline in 1H22.
Fig 14: Sector performance (%)
Fig 15: Sector weight (%)
Financials
Information Technology
9.1
Utilities
6.2
Consumer Discretionary
Consumer Staples
6.0
Industrials
Consumer Staples
-12.6
Health Care
-15.5
Real Estate
-21.9
Financials
-22.7
Communication Services
Energy
Industrials
Materials
Source: Bloomberg
-24.0
-30.6
22.6
11.6
8.9
Utilities
7.7
Materials
7.6
Consumer Discretionary
Information Technology
Energy
-25.6
-28.4
34.1
Real Estate
3.0
2.1
1.5
Health Care
0.7
Communication Services
0.1
Source: Bloomberg
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Classified: Public
Market Comment
However, the main drag to the index factoring in the sector weights against its performance were financials, real
estate, materials, and industrials.
Fig 16: Sector contribution to the VNI performance
Utilities
0.2
Consumer Discretionary
0.1
Information Technology
0.1
Communication Services
0.0
Health Care
-0.1
Energy
-0.4
Consumer Staples
-1.3
Industrials
-2.8
Materials
-3.0
Real Estate
Financials
-5.0
-7.8
Source: Bloomberg
•
A risk-off environment
A risk-off environment was certainly evident (more so in 2Q22), and for the most part, reflected in the higher
beta sectors seeing a sharper correction in the first half (Financials, Energy, Real Estate, Industrials). This is to be
expected in a down market, where ‘defensives’ tend to do better. Conversely, one should expect higher beta to
outperform in a rising market.
Fig 12: Sector beta vs 1H22 performance
Financials
Energy
Information Technology
Real Estate
Industrials
Materials
Consumer Staples
Consumer Discretionary
Health Care
Utilities
Source: Bloomberg
Beta YTD
Total Return (%)
1.3
1.2
1.1
1.1
1.0
0.9
0.8
0.7
0.6
0.6
-22.7
-25.6
9.1
-21.9
-28.4
-30.6
-12.6
6.0
-15.5
6.2
The prevailing risk-off sentiment can further be captured by the better 1H22 performance of the VN30 (large
caps) at -18.5% outperforming the VN70 (smaller (not necessarily small) cap companies) at -29.1%. In a risk-off
mode, SMIDs (small-midcaps) are often avoided, as investors gravitate towards bigger cap blue-chip companies.
Fig 13: Vietnam indices performance: VN30 outperformed VN70
10%
0%
-10%
-18.5%
-20.3%
-21.7%
-29.1%
-20%
-30%
-40%
VNI
Source: Bloomberg
VN30
VN70
VN100
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Market Comment
Value on offer
•
By most metrics, the Vietnam market is cheap. On prospective FY22E, PER is 11.4x and EV/EBITDA is 11.6x –
both well below their 5-year average.
Fig 17: PER (x)
Fig 18: EV/EBITDAR (x)
24
20
22
18
20
16
18
14
16
12
14
10
12
8
10
8
2017
2018
2019
2020
2021
6
2017
2022
Source: Bloomberg
2018
2019
2020
2021
2022
Source: Bloomberg
The valuation discount to Thailand, Indonesia and Philippines (TIP) or ASEAN has also expanded.
Fig 19: PER discount to TIP and ASEAN
Fig 20: PER discount to TIP and ASEAN
50
120%
40
100%
80%
30
60%
20
40%
10
Y11 Y12 Y13 Y14 Y15 Y16 Y17 Y18 Y19 Y20 Y21 Y22F 10Y
Avg.
% Discount to TIP
Y11 Y12 Y13 Y14 Y15 Y16 Y17 Y18 Y19 Y20 Y21 Y22F
VNI
% Discount to ASEAN-5
Source: Bloomberg
•
0
20%
TIP
ASEAN-5
% Discount to TIP
0%
% Discount to ASEAN-5
Source: Bloomberg
Growth on offer
In terms of net profit growth, consensus estimates have been declining and stood at 16.1% at end-Jun22 – still
higher than its ASEAN peers, save for Indonesia. In our view, the market is overly discounting the downside to
earnings. In our view, it is difficult to fathom earnings trending even lower in light of the country’s strong
economic growth prospect.
Fig 21: Consensus EPS revisions for FY22E
Fig 22: Net Profit Growth (%)
32%
250
200
150
27%
100
50
22%
0
-50
17%
12%
Jan-22
Feb-22
Source: Bloomberg
Mar-22
Apr-22
May-22
Jun-22
VN
ID
MY
PH
SG
TH
2021
36.8
163.8
41.9
46.6
198.1
122.2
2022F
16.1
26.6
(5.8)
11.3
5.1
(4.5)
2023F
20.5
7.0
10.8
21.2
14.9
10.2
Source: Bloomberg
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Market Comment
Our current internal net profit growth forecast for our coverage universe for FY22E is 27.7% YoY and 27.4% for
FY23E. Undoubtedly, these estimates will see further revisions as we go through the second half, though we think
consensus has greater scope to raise their estimates than ours.
The notion that earnings growth tends to lead markets played out in 2021, as earnings growth more or less
matched the VNI’s rise – the market’s ascent was a function of earnings rather than multiple expansion. It is
more inconceivable that multiple expansion will buoy the market this year, and as such, the earnings growth
outlook suggests one can be more constructive for the second half of this year in terms of the index’s
performance. Still, confidence and liquidity is still needed, and in that regard, the market is still dominated by
domestic retail investors wherein improving sentiment could lead to higher ADT that would be supportive of a
market ascent. In fact, in the past month the domestic sentiment has been buoyed by the strong 2Q22 GDP
growth, controlled inflation and growing acceptance of continued investigations into violations. This has
translated into improved ADT (USD666mn as of August 12th) but is still below the record levels reached in 2021.
Fig 24: VNI vs ADT: Higher turnover supportive of a rising market
1,600
1,400
1,200
1,000
800
600
400
200
0
ADT in HOSE (USDmn)
VNINDEX
Source: Fiinpro
•
A focus on growth, higher beta
Overall, one can argue that most stocks are cheap, and as such, our focus would be less about relative value. For
us, the robust economic growth outlook for this year (and 2023) lead us to favour companies with a strong
earnings growth outlook coupled with a higher beta.
Risks to the market
•
US inflation. Though inflation has likely peaked in June with various commodities or materials off its peak
due to slowing demand, easing supply constraints, and recession risk, the global nature of oil, commodities,
and some food products amidst heightened geopolitical tensions suggests that falling prices is by no means
certain. Should high inflation persist, tight monetary conditions will likely find capital flows seeking the
higher yields back in the US.
•
A stronger USD. Related to the persistence of high interest rates in the US is a high USD. A strong USD tends
to be a negative to emerging markets, whether it’s due to imported inflation, capital outflow, or higher debt
servicing by countries with dollar-denominated debt.
•
High domestic inflation. Not only would higher prices dampen consumption and raise a business’ operating
costs, it could lead to higher interest rates that raises debt servicing cost that lowers profitability, or lower
credit growth that could affect access to financing by corporates.
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Market Comment
•
•
New COVID outbreak. With various countries experiencing a new bout with the BA.4 or BA.5 omicron
variant, such an outbreak in Vietnam could slow the pace of business activity and thus lower corporate
profitability. A lock-down though is unlikely to repeat.
Anti-corruption investigations. Recent investigations on corruption cases, including at party committees and
agencies, is long-term positive for the country and market in terms of bolstering its image as a place to do
business, but may create short-term nervousness for investors.
STOCK & SECTOR SELECTION IS MORE IMPORTANT THAN EVER
We believe the second half of the year will still be fraught with heightened uncertainty with high volatility. Much
of the market direction will hinge on how well the US is able to control its inflation, and the ensuing adoption by
the Fed of a less aggressive monetary stance (i.e., a slower hiking pace, if not a halt) and reduced worries that the
Fed will overtighten policy.
While the VNI has lost 20% of its value as of Q2 2022, opportunities for upside have not disappeared as reflected
by select sectors and companies faring well. There is greater value in selection, be it on a single stock or a sector
basis. Choice of investments matters a lot more than it did during the post pandemic stimulus-fueled rally. The
quality of analysis matters a lot more than it did in a bull market. To this end, our team conveys their current
2H22/2022 outlook.
AVIATION:
Investment view: We maintain our cautious view on the aviation sector. Despite a strong recovery in domestic
passenger volume that has already surpassed its pre-COVID level, airlines are still struggling to pass on higher
fuel prices to customers. The government has kept the current ceiling prices for domestic tickets and does not
allow airlines to add fuel surcharges to the tickets, which reduces the effectiveness of the ticket reflecting the
increase in fuel price.
In the aviation service space, airports are still offering a discount to the service fees to airlines. Labour shortage
could be an issue for the sector, as the salary cuts during the pandemic have not been fully reversed, while some
of the (previous) staff have switched to other sectors.
Net profit of the sector is expected to improve gradually to VND3tn in FY23E from a loss of VND7tn in FY22E,
while the valuation for FY22E and FY23E are at 23.9x and 12.1x EV/EBITDA, as we expect a strong recovery in
passenger volume in the next two years.
Downside risks: A slower return of international passenger recovery, regulatory price control to tame inflation,
and jet fuel prices.
BANKS:
Investment view: We forecast a 2022E 32% YoY net profit growth for the banks under our coverage on the back
of higher margins (+8bps YoY), higher fees (+18% YoY) and lower credit costs (provisions/assets -40bps YoY). We
believe current valuations have fallen into an attractive territory as Vietnamese banks are trading on a 12M
forward PER of 8.3x and PB of 1.5x on prospective 12M ROE of 21.5%, which is 2.5 SD and 1.5 SD below its 5-year
average, respectively, while their ROEs have improved to a 5Y high and are forecasted to stay at 20% in the next
three years.
Downside risks: A potential default due to the tightening of corporate bond issuance, though we believe such an
impact to the sector is minimal.
CONSUMER DISCRETIONARY:
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Market Comment
Investment view: We maintain a bullish view on the sector’s earnings growth in FY22-FY23 thanks to the
recovering discretionary spending and the sector leaders’ market share gains over smaller players. We expect
our top picks will be able to protect margins from the rising input costs given their strong bargaining position vs
manufacturers and strong pricing power vs consumers.
That said, gross margin, and thus net margin, will still contract YoY (especially for the consumer electronic goods
companies) in 2H22 given the overstocking activities in 1Q22 that is leading to sales clearances and last year’s
high base that benefited from the supply shortage. Although there seems to be negative impact from high
inflation, we still forecast strong profit growth in FY22 of up to 60% for our top picks. In terms of valuation, we
believe our top picks are in attractive territory with 3-year PEG of under 1.0x and our expectations of doubledigit growth post FY22.
Downside risks: Higher-than-expected inflation, ineffective store expansion (for the retailers), and business
restructuring.
CONSUMER STAPLES:
Investment view: We have a mixed picture for companies under our coverage in FY22-FY23. Even though the
valuations are looking attractive compared to historical levels, the growth outlook is not too promising given the
two headwinds: slower FMCG demand due to COVID-19 and higher inflation dampening mass consumer
demand as well as rising input costs (e.g., raw materials and logistics) that the companies cannot fully pass on to
consumers. In addition, the dominant market shares of the market leaders imply limited headroom for further
market share gains.
Downside risks: China’s reopening could lead to a surge in commodity prices (i.e., input of the FMCG
manufacturers), rising competition (e.g., TH Milk in dairy, Heineken in beer), and higher-than-expected inflation.
FISHERY:
Investment view: 1H22 results are expected to be outstanding due to the rising demand and higher selling price.
Russia accounted for more than 40% of the world's whitefish production, therefore, the Ukraine crisis led to the
shortage of global whitefish, especially in the US. As a result, customers moved their orders to fishery
companies in Vietnam. The gross profit margin expanded strongly since the selling price rose faster than the raw
material price. The outlook for 2H22 for the Fishery industry is still bright due to seasonality: usually, 2H has a
high demand for fishery products as it is the holiday season.
There is a chance that China will open its economy in 2H22, thus increasing orders for fish and prawns from that
market. However, we are not as positive about the 2023 outlook as the industry is cyclical. Also, it is currently
difficult for companies to hire employees, especially skilled workers. Another concern is the excessive stockpile
in export markets and inflation, which is expected to drive down the demand for premium food like fish and
prawns. The probability of the removal of tariff barriers with China in the US will also lower the demand for fish in
Vietnam.
Downside risks: diseases, high feed prices, labour constraints, high competition
INDUSTRIAL PARKS (IP):
Investment view: We remain bullish for the IP sector as our outlook over the medium and long-term is still intact
as Vietnam is still an attractive destination for FDI inflows (demand driver for IPs) due to the structural shift of
global manufacturing activities, political stability, relatively young and cheap labour force, reasonable land leasing
cost, a strategic geographic location that is close to China, and a long coastal lines with several deep seaports.
Currently, the FDI picture is healthy, as FDI disbursement posted a record high increase with its 8.9% YoY growth
to USD10.1bn in 1H22. We expect stronger FDI inflow in 2H22, as Vietnam accelerates the economic reopening
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Market Comment
and many international routes are resuming operations. The legal framework has improved with Government
incentives to shorten approval, administrative procedures by releasing Decree 35/2022/ND-CP (effective from
July 15 2022) removing IP establishment procedures, and giving the provincial People’s Committee more
authority to approve changes in location, area, and name of IP projects. Consequently, we expect approvals for
major provincial master plans would be better in the mid-term to meet the resilient demand.
With positive demand, industrial land rental rates are expected to increase by 5-10% per annum for the next
three years in the northern market and 8-13% per annum in the South. In the short and medium-term, we
believe IP developers with existing leasable areas will benefit from ongoing IP land price appreciation amid
limited supply and rising international arrivals.
Downside risks: Increasing land compensation could make slow process, drive up investment cost and land rental
prices. Longer-than-expected legal procedures.
OIL & GAS:
Investment view: We retain our Positive stance on the oil and gas sector given the high crude oil price level in
2022 and the improving outlook for domestic oil and gas services companies. This is dictated by the higher
chance that Block B O Mon will kick-off in 2H22, as well as the government’s determination to speed up other
domestic oil and gas projects (such as Blue Whale, Yellow Camel, Ca Tam) to improve the domestic energy supply
when global energy prices are elevated. There has been some progress on the Block B O Mon gas project, with
the market talking about the official kick-off of the project in 2H22, while the Blue Whale project has been
delayed.
The sector benefits in terms of sentiment from improving demand in Southeast Asia. Due to the lack of offshore
domestic oil and gas projects, companies have to bid for projects in nearby countries such as Southeast Asia.
Thus the Southeast Asia demand has some impact on domestic companies. Also, due to the low labor cost,
Vietnam services can compete by offering low prices for simple work. However, when the large domestic
projects mentioned above start construction, the VN services companies will generate more revenue, along with
the revenue from new thermal and renewable power plants. We expect the sector's net profit to increase by
101.7% and -8.3% for FY22-23E, while the PER for the sector are 20.2x and 10.0x for FY22-23E.
Downside risks: delays in Block B O Mon, and a sharp correction of crude oil prices.
REAL ESTATE:
Investment view: The presales outlook still looks solid, with our strong presales forecast at +171% YoY in FY22E
coupled with the companies’ aggressive project launch plans. Mortgage lending is currently supportive to buyers
in light of reasonable interest rates and good credit availability from most commercial banks. In the short term,
we will see less land-banking activity as the funding source from the local corporate bond market has been
temporally disrupted by the government’s scrutiny, though we expect the local bond market to recover in FY23.
In our view, investor sentiment will still be weak in 3Q22, but could improve during the upcoming presales and
earnings peak season. We don’t expect 2Q22 and 1H22 sector profit to have a big YoY growth due to the lack of
property delivery from most developers and low transaction volume that would have buoyed profits of
brokerage companies. Therefore, we are not recommending increasing the weight on the sector until the end of
2Q22 to avoid the current short-term selling pressure from retail investors given the investigations in the local
bond market and possible stock manipulation concerns. After that, we think the sector will offer cheap valuations
in 3Q22 to serve as an appeal.
Downside risks:
The expected project launches could be delayed due to slow progress in obtaining permits or land clearance,
putting more pressure on the developer's cash flow.
Interest rates may increase beyond our expectation and threaten to reduce the property transaction and
property price this year.
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Market Comment
TEXTILES:
The industry experienced should see great results in 1H22 due to the post-COVID demand recovery in its export
markets. However, we have a guarded view on the Textiles industry in the short-term, but remain bullish over
the long-term. The industry is facing several headwinds. It is now difficult for factories to recruit workers, as FDI
electronic companies are considered more attractive in terms of remuneration, even though textile and garment
companies did raise salaries in its attempt to rectify this problem. Furthermore, companies cannot pass all the
rising costs of logistics and raw materials on to customers, thus negatively impacting gross profit margin. The
costs of raw materials are high because of China lockdowns and the Russia-Ukraine conflict. Raw material price is
expected to cool down once China opens its economy. 60% of raw materials in Vietnam are imported from China,
therefore, it will help increase the gross profit margin of textile companies in Vietnam.
Another headwind is inflation, which is tightening people's spending on consumer discretionary products. We
expect the number of apparel orders in 2H22 to be 40% lower than 1H22.
However, in the long-term, the industry outlook is promising as it is supported by FTAs. It mostly benefits those
companies who have high exposure to the EU market. Also, customers have been moving their orders from
China and other countries to Vietnam. There have been many factory capacity expansion plans to meet the
rising demand. A few textile companies are expanding to the real estate sector so it is forecasted that the
earnings of those companies will rise substantially in the upcoming years.
Downside risks: High raw material prices, high logistics costs, labour constraints
UTILITIES:
Investment view: We like the utilities sector given the strong organic demand for both electricity and water in
the long term. In 2022, electricity demand is expected to grow faster than in 2021 due to high vaccination rates
that will lead to increased overall activity, the reopening of the border, and the resumption of international
flights. We saw an increase year over year in terms of electricity production in 6M22 (+3.8% YoY), and expect this
trend to continue in 2022.
Power demand can only continually rise in conjunction with a country’s overall growth. In this regard, electricity
consumption growth is expected to increase in the next five years at an estimated rate of ~8-11% per year,
potentially pushing gross demand to more than double the current levels by 2030. Structurally, new capacity will
focus on renewable energy (solar, wind) given its attractive pricing mechanism. We think the average selling
price in the competitive generation market (CGM) will improve in 2022, given higher levels of natural gas,
thermal coal, and fuel oil prices coupled with stronger demand related to irrigation (which will reduce water
levels that in turn will diminish volume contribution from the lower costing hydropower plants). The impact on
companies with high CGM volume might be minor.
Regarding the water sector, we expect water demand to continue to grow at a CAGR of 7-10%, thanks to strong
FDI inflows and population growth. We expect the sector's net profit to increase by 9% YoY and 20% YoY for
FY22-23E. The PER for the sector are 15.7x and 14.4x for FY22-23E.
Downside risks: slow construction progress of transmission grids to absorb new (renewable) energy output and
power pricing (entailing the feed-in-tariff structure and power purchase agreements); Input supply and higherthan-expected cost (gas, coal, water); delays in gas field projects
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Market Comment
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