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Dec 27, 2017

Entering Uncharted Waters: A course correction might be in order

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IN ALLIANCE WITH

CONFIDENTIAL

Executive summaryA course correction might be in order


Executive summary: Economy

▪ Vietnam’s economy is on a tear led by “snowballing” FDI inflows, growing trade integration and sustained highs in

consumer confidence.

▪ We expect close to 7% GDP growth to be sustained into 2018 on the back of continued loose monetary policy and a

pick-up in public spending.

▪ Rapid credit growth and growing infrastructure bottlenecks could have an inflationary impact towards the end of 2018

and into 2019. With credit growing at nearly three times the pace at which GDP is growing, there is a risk of inflation

picking up to levels that might get the SBV a little edgy, particularly into 2019.

▪ The rapid growth in consumer finance has democratized access to credit but also risks fueling a rapid rise in

household debt levels. While we applaud the reallocation of credit away from the SOEs and “white elephant” real

estate projects and towards individual retail borrowers and homebuyers, an estimated 59.0% rise in consumer debt

over the course of 2017 is a cause for concern.

▪ The risk of Black Swan events is rising: armed conflict with North Korea or a hard-landing in China pose a greater

threat to Vietnam than before owing to its growing trade integration and dependence on FDI-fuelled growth.


Executive summary: Stock market

▪ The VN Index’s stellar rise in 2017 masks the idiosyncratic nature of the market rally. Large caps drove the entire PE

expansion in the market, with a 30% expansion in the VN30 trailing P/E multiple while mid and small-cap valuations

moved sideways.

▪ We remain cautiously optimistic on the stock market’s performance into 2018 as continued strong earnings growth

across the listed universe could be countered by a contraction in large cap multiples.

▪ Vietnam’s upgrade to Emerging Market status is still a few years away but inclusion on the MSCI EM watch list could

be a positive catalyst.

▪ We advocate a “bottoms-up” approach to investing in the stock market in 2018 with a particular focus on the mid-cap

space which is trading at half the PE multiple of the large cap space. We are bullish on select Banking, Consumer,

Materials, Power, Transportation, Logistics, and Agriculture stocks for 2018. We also place the Automotive and

Maritime Shipping Sectors on our watch-list.

▪ The tsunami of upcoming IPOs will continue to shape the market but we feel that most of the best new listings are

already behind us and SOE IPO valuations look expensive.

CONFIDENTIAL

Macroeconomic ReviewVietnam’s economy is on a tear


In a sweet spot with high value exports leading the charge

▪ 2017 GDP growth surprised on the upside at 6.81% (1Q: 5.15%; 2Q: 6.28%, 3Q: 7.46%, 4Q: 7.65%). The main

drivers for this GDP growth acceleration were: (1) the recovery of the agriculture sector (+2.9% vs +1.4% in 2016); (2)

Robust manufacturing growth (+14.4% vs 11.9% in 2016); (3) Global trade expansion which fueled strong export

growth (+21.1%); the services sector (45% of GDP) grew by 7.4% in 2017, the fastest pace in the last five years.

▪ The economy is relying more on the FDI sector for growth amidst the decline in crude oil production (mining sector

contracted by 7.1% in 2017).

▪ Manufacturing was the top contributor to the country’s growth, growing by 14.4% in 2017. Samsung and Formosa

contributed 5.43 and 0.19 percentage points, respectively to growth.

Vietnam’s GDP growth was the highest in Asia (%) GDP growth by sector (YoY, 2011-2017)

-

02

04

06

08

Vie

tnam

Chin

a

Ph

ilippin

es

Ma

laysia

Indonesia

Th

aila

nd

Sin

ga

pore

Develo

pin

g A

sia

2017 2016

-10.00%

-5.00%

.00%

5.00%

10.00%

15.00%

20.00%

2011 2012 2013 2014 2015 2016 2017

Agriculture Mining Manufacturing Services

Source: GSO


Export mix continuing to shift to higher-value products

Exports composition (2013-2017E) (%)

Source: GSO

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2013 2014 2015 2016 2017E

Agriculture Electronics Textile, footwear and bags Other manufactured products Minerals Other


Inflation was subdued despite rising commodity prices and loose monetary policy; credit allocation improved

▪ In 2017, the CPI rose 3.5% vs 2.7% in 2016. About half of inflation was driven by price adjustments for public services

and goods.

▪ The benign inflation outlook provided the SBV room to further implement monetary easing to support growth.

➢ In July 2017, the SBV reduced policy rates (-0.25 percentage points) and lowered the short term lending rate for

the VND to some priority sectors.

➢ In August 2017, the government raised the credit growth target from 16-18% to 21-22%.

▪ Credit growth was estimated at 19.3% in 2017 vs 18.2% in 2016. The increased funding for infrastructure build-outs to

attract FDI inflows and home mortgage loans were the main drivers of credit growth.

Change in Vietnam’s CPI (%YoY) Credit growth by sector (%)

.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

01/2

016

02/2

016

03/2

016

04/2

016

05/2

016

06/2

016

07/2

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08/2

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09/2

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10/2

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06/2

017

07/2

017

08/2

017

09/2

017

10/2

017

11/2

017

12/2

017

Core CPI Headline CPI

Source: SBV, GSO

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2012 2013 2014 2015 2016 2017E

Other Consumer finance Construction Manufacturing


A trade surplus and robust FDI inflows supported the BOP

• Exports benefited from global economic growth, but remained highly dependent on the FDI sector (70% of total exports).

• Export value was US$213.8 bn (+21.1% YoY); Import value was US$211.1 bn (+20.8% YoY). The trade surplus was

US$2.7 bn vs US$2.1 bn in 2016.

• South Korea surpassed the US, the EU and ASEAN for the first time to become Vietnam’s second largest trade partner,

after China.

Trade growth (2007 – 2017) Top five trade partners (trade value, US$ bn)

-20.00%

-10.00%

.00%

10.00%

20.00%

30.00%

40.00%

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Export growth Import growth

Source: Customs

71.89091.075

43.440

61.13947.172

50.61329.705

32.96513.493

15.168

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50

100

150

200

250

300

2016 2017

China Korea USA Japan Taiwan


FDI is increasing and also “broadening” in terms of focus

• Vietnam received US$35.9 bn in registered FDI in 2017 (+44.4% YoY). Three new thermal power projects

accounted for up to 20% of total registered capital. FDI disbursement remained strong (US$ 17.5 bn, +10.8%

YoY).

• The trade surplus, robust FDI inflows and US$ cash flow from state divestments supported the overall balance of

payments and FX reserves hit a record high of US$51.1 bn in 2017.

Registered FDI by sector (% of total) FDI Inflow (US$ bn)

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10

20

30

40

50

60

70

80

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Registered FDI Disbursed FDI

Source: GSO

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2014 2015 2016 2017

Manufacturing Utilities Real Estate Retail Mining Other


2017 Review: A strong show but increasing reliance on FDI

▪ Vietnam’s economy is accelerating with growth underpinned by strong fundamentals; however there is growing

reliance on the FDI sector.

▪ Robust FDI inflows are driving investment and spilling over into consumption through job-creation and wage growth.

▪ A widening trade surplus, strong foreign investment flows and forex cash proceeds from state divestments have

strengthened FX reserves, providing ammunition to combat future currency pressures.

▪ Limited fiscal space and the slow progress of SOE reforms and equitization have led to sluggish public investment,

increasing the burden on monetary policy to support economic growth in the absence of fiscal expansion and slowing

productivity growth.

CONFIDENTIAL

Macroeconomic OutlookSteady State


2018 Global Outlook: Monetary policy will not become tight, just less loose

• The global economy will be bolstered by a continued non-inflationary US and European recovery, with both regions

look set to continue growing strongly next year. Meanwhile, China’s economy should see a manageable slowdown.

• Interest rates will rise in developed countries, but most economies will be able to handle this given that monetary

policy normalization should proceed at a gradual pace due to low inflation expectations.

• The Fed has begun tapering its QE program and the ECB is planning to follow in its wake but global monetary policy

is unlikely to change dramatically.

World economic growth (%) Policy rate expectations (%)

0

1

2

3

4

5

6

7

8

US EU Japan UK China India ASEAN-5

2016 2017E 2018F

Source: IMF

-0.5

0

0.5

1

1.5

2

2018M

1

2018M

3

2018M

5

2018M

7

2018M

9

20

18M

11

2019M

1

2019M

3

2019M

5

2019M

7

2019M

9

20

19M

11

2020M

1

2020M

3

2020M

5

2020M

7

2020M

9

United States Euro area United Kingdom


Vietnam’s economy to sustain growth momentum into 2018

• We expect GDP growth of 6.6% to 6.8% in 2018, driven by 12.0% manufacturing growth on the back of continued

FDI inflows and 8.2% consumption growth, supported by record high consumer confidence.

• Policy makers will make stability a top priority in 2018, and focus on a few key policy initiatives such as: (1)

accelerating SOE reforms, especially IPOs and state divestment progress; (2) supporting the private sector to help it

shoulder the burden of meeting economic growth targets; and (3) reversing the recent slowdown in public

investment.

• Inflation to tick up but stay at a manageable level: (core inflation: 2.1% ; headline inflation: 4.6%), the rise in food

prices during 2018 are a cause for concern; oil prices should have a limited impact on inflation.

• Trade surplus to be sustained by FDI-led export growth: We forecast a trade surplus of US$2-3 bn for 2018.

• Policymakers will continue to be supportive with continued loose monetary policy and expansionary fiscal

policy expected in 2018. Public investment is likely to pick up after sluggish disbursements during 2017, and public

debt to GDP will rise to 63.9% in 2018, up from 62.6% in 2017.

• The VND will continue to be relatively stable: We project a maximum depreciation of 2% against the USD in

2018.

• The unwinding of quantitative easing measures by the Fed is unlikely to have a pronounced impact on

Vietnam as FDI accounts for 89.5% of total capital inflow versus only 10.5% for FII (“hot money”).


We see three major themes that will define Vietnam’s medium-term growth story beyond 2018

• Theme 1: Continued FDI-led industrialization driven by both the “New Economy” and traditional industries

• Theme 2: Robust consumption growth driven by Vietnam’s burgeoning middle class and tourists

• Theme 3: Growing trade as Vietnam gets more deeply integrated into global supply chains through a slew

of free trade agreements


Theme 1: Continued FDI-led industrialization driven by both the “New Economy” and traditional industries

• The strong connection between economic growth and the growth of the export-oriented manufacturing sector will

continue in 2018, as Vietnam is gaining popularity globally as a leading high-tech manufacturing location.

• LG Display will begin operating its OLED display manufacturing operation. Meanwhile, Samsung continues to

expand its business in Vietnam to protect its OLED market share in the TV market. The steel industry will be another

driving force (Hoa Phat – Dung Quat steel project to double steel production capacity by early 2019).

• The 68% expansion in refining capacity this year can enable the country to rely less on imported petroleum products,

as 70% of future demand will be met domestically through both the existing Dung Quat and new Nghi Son refineries.

FDI Inflow (US$ million) and key electronics categories output growth (%)

Steel and petroleum products output growth (%)

Source: GSO

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

70%

-

5,000

10,000

15,000

20,000

25,000

30,000

2012 2013 2014 2015 2016 2017E

Registered capital (Excluding Samsung & LG)

Registered capital of Samsung & LG

Phones ouput growth

TVs output growth

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

70%

80%

2013 2014 2015 2016 2017E 2018F

Steel products Petroleum products Crude oil


Theme 2: Robust consumption growth driven by Vietnam’s burgeoning middle class and tourists

Share of labor by key economic sector (%, 2005-2017E)

Retail sales growth and consumer loan growth (%)

Source: GSO

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Agriculture Manufacturing Services

.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

70.00%

.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

8.00%

9.00%

10.00%

2012 2013 2014 2015 2016 2017E

Retail Sales (ex inflation) (LHS) Consumer loan growth (RHS)

Sales of consumer electronics and home appliances (million units, 2011-2016)

Number of international tourist arrivals (000’s) and tourism revenue/GDP (%)

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5

10

15

20

25

30

2011 2012 2013 2014 2015 2016

Home appliacnes Electronics

.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

0

2000

4000

6000

8000

10000

12000

14000

2011 2012 2013 2014 2015 2016 2017E

# of international tourists (million) (LHS)

Tourism revenue/GDP (%) (RHS)


Theme 3: Growing trade as Vietnam gets more deeply integrated into global supply chains

• Effective in 2010; Mandates removal of 98.3% of

the import-export tariffs in 2018.

• Trade value up 1.8 times between 2010 and 2017.

• Total registered FDI stock: US$69.6 bn, around

60.7% from Singapore.

• Thai investors are dominating cross-border M&A

activity in Vietnam.

Vietnam – Korea trade value and growth (2010-2017E)

Vietnam – ASEAN trade value and growth (2010-2017E)

Source: Customs

-5%

0%

5%

10%

15%

20%

25%

30%

35%

0

10

20

30

40

50

60

2010 2011 2012 2013 2014 2015 2016 2017E

Value (US$ bn) (LHS) Growth (%) (RHS)

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

0

10

20

30

40

50

60

70

2010 2011 2012 2013 2014 2015 2016 2017E

Value (US$ bn) (LHS) Growth (%) (RHS)

• Effective in 2015, trade value was up 1.7 times

during 2015 and 2017.

• Korea surpassed the US for the first time to

become Vietnam’s second largest trade partner,

after China in 2018.

• Huge investments in Vietnam made by large

Korean conglomerates, total registered FDI stock:

US$57.7 bn.


• Import tariffs across multiple product categories will be

decreased to 0% in 2018 as per commitments under

existing FTAs.

• The CPTPP will likely be ratified in February 2018 and

take effect from 2019, and the FTA Vietnam – EU will

follow the same schedule.

• Vietnam is currently negotiating the most important

trade pact in the ASEAN region (RCEP).

Percentage of import tariff lines that will be removed in 2018 by FTAs

Source: MUTRAP, MoiT

Theme 3: 2018 will be a milestone year for Vietnam’s ongoing trade integration

98.260%90.00% 86.00% 86.00%

71.00%62.200%

41.780%

AT

IGA

AC

FT

A

AK

FT

A

AA

NZ

FT

A

AIF

TA

AJF

TA

VJE

PA

WTO

MFN2006

WTO

MFN2014AFTA 2007 AFTA 2018 ACFTA 2007 ACFTA 2020 AKFTA 2007 AKFTA 2021

Agriculture 23.5 21.0 4.4 0.8 17.3 1.2 23.1 3.3

Fish, fishery products 29.3 18.0 4.7 0.0 9.9 0.0 29.3 0.0

Petroleum 3.6 3.6 5.6 5.6 15.2 11.7 8.4 1.4

Wood, paper 15.6 10.5 2.1 0.0 12.9 0.3 15.7 1.1

Textile 37.3 13.7 4.3 0.0 27.3 0.6 33.4 0.3

Leather and rubber 18.6 14.6 5.2 3.1 12.5 1.0 17.6 3.6

Metal 8.1 8.1 1.5 0.0 7.9 0.9 8.3 1.2

Chemical 7.1 6.9 1.8 0.3 5.8 0.0 7.1 0.8

Cars/ transportation equip. 35.3 35.3 29.2 3.8 41.9 19.6 43.0 36.1

Machinery 7.1 7.1 1.2 0.0 6.6 1.4 7.4 2.0

Electric machinery/equip. 12.4 9.5 2.5 0.0 11.1 0.8 13.2 2.3

Mineral 14.4 14.1 1.7 0.0 13.1 4.7 14.1 2.1

Other manufactured products 14.0 10.2 2.0 0.3 11.1 0.0 13.8 0.4

Total average 17.4 13.4 4.5 0.6 14.4 2.3 17.0 4.1

The tariff reduction schedule for select imported product categories: past and future tariffs (%)


We see four major risks to Vietnam’s medium-term growth

• Risk 1: Rising Leverage – credit expansion is far outpacing GDP growth

• Risk 2: A slowdown in global GDP growth – Vietnam’s growing trade integration makes it more vulnerable

• Risk 3: Volatility in global capital flows – this will impact the stock market more so than the economy

• Risk 4: “Black Swan” events such as a conflict with North Korea or a hard landing in China


Risk 1: Credit expansion is far outpacing GDP growth

• Public debt rose to VND3,130 trillion, or USD138 billion, by the end of 2017, equivalent to 62.6% of GDP. Although

this only represents a one percentage point decline from 2016 levels, the total amount of public debt is expected to

increase by 9.3% in 2017.

• Credit has been rising consistently since the second half of 2014 due to loose monetary policy. The private credit to

GDP ratio is estimated at 131.2% in 2017.

• Total debt to GDP ratio is expected to stand at approximately 193.8% as of the end of 2017, moving up the rankings

of Asia’s most leveraged economies.

Real GDP growth vs. loan growth (%YoY) Total debt to GDP (2016) (%)

Source: GSO

0%

5%

10%

15%

20%

25%

Q12014

Q22014

Q32014

Q42014

Q12015

Q22015

Q32015

Q42015

Q12016

Q22016

Q32016

Q42016

Q12017

Q22017

Q32017

Loan Growth GDP Growth


Risk 2: A slowdown in global growth is overdue…

Recessions Durations (months) Expansions Duration (months)

1948-49 11 1949-53 45

1953-54 10 1954-57 39

1957-58 8 1958-60 24

1960-61 10 1961-69 106

1970 11 1970-73 36

1973-75 16 1975-80 58

1980 6 1980-81 12

1981-82 16 1982-90 92

1990-91 8 1991-2001 120

2001 8 2001-07 73

2008-09 18 2009-? 102 so far

Averages: Averages:

1854-1919 22 1854-1919 27

1919-45 18 1919-45 35

1945-2009 11 1945-2009 58

The recovery/expansion cycle in The US (1948-current)

Cumulative nominal GDP post-recessions

100

110

120

130

140

150

160

170

180

190

200

1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41

Quater since trough

1949-53 1954-57 1958-60 1961-69

1970-73 1975-80 1980-81 1982-90

1991-2001 2001-07 2009-?

50

100

150

200

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300

1990

1991

1992

1993

1994

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1997

1998

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2000

2001

2002

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2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

Advanced economies

Emerging market economies, excluding China

China

Gross debt-to-GDP ratio by region (%)

• A weak relationship between growth and inflation

• Large central banks are moving forward with their

normalization cycles

• Global debt has hit a new all-time high


…and could impact Vietnam given its rising trade linkages

16.3% of total exports

16.1% of total imports

Japan is the largest export market

CPTPP





Germany is the largest export market



Thailand is the largest export market



China and Korea: the largest export markets


Risk 3: Volatility in global capital flows could impact the stock market and spillover into the real economy

Forecasted cumulative monthly emerging market portfolio outflows due to FED reversal (US$ bn)

Cumulative net inflows to Vietnam’s stock market: 2007 to YTD 2017 (US$ million)

-1000-900-800-700-600-500-400-300-200-1000

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Flows impact of Fed policy expectations

Flows impact of Fed balance sheet reduction

Fed balance sheet reduction (right scale)

0

500

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1500

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Jan

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• An earlier-than-expected rise in the global cost of capital could create more volatility in foreign portfolio flows into

Vietnam’s stock market and negatively impact the progress of SOE IPOs/divestments.

• The cumulative net inflow from foreign portfolio investors into Vietnam’s stock market over the period 2007-2017 was

1.5 times the level realized over 2007-2011 .

• There will be a substantial reduction in portfolio flows into emerging markets due to the US monetary policy

normalization after the second half of 2018.


Risk 4: A North Korea conflict would be highly disruptive

Top markets for Vietnamese electronic products exports, share of total (%)

Top source countries for electronic product imports into Vietnam, share of total (%)

• Korean investment in Vietnam has been a major engine of growth for Vietnam.

• Bilateral trade ties have likewise been growing continuously, particularly between 2013 to 2017, with Korea

remaining Vietnam’s second-largest source of imports and fourth-largest export market.

• The “risk-off” global investor sentiment sparked by any war would lead to a flight from riskier asset classes such as

frontier market equities and this could further impact Vietnam’s currency and stock market.

CONFIDENTIAL

Stock Market ReviewA stellar year but not without its quirks


Stock market review: A stellar year but not without its quirks

VNINDEX from 2000 to 2017: Approaching a historical peak Source: VNDIRECT

VNINDEX Yearly Performance

949.93

1137.69

0.0x

10.0x

20.0x

30.0x

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0

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1,000

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2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

VNINDEX (LHS) VNINDEX TTM P/E (RHS)

23.3%

-66.0%

56.8%

-2.0%

-27.5%

17.7%22.0%8.1%6.1%

14.8%

44.2%

-80%-60%-40%-20%

0%20%40%60%80%

VNINDEX 2017 Performance

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Volume VNINDEX


The market was driven by a broad-based rally in large cap stocks

• The top 7 movers contributed to 64% of the total increase in the VN index in the first 11 months of the year. The biggest contributors were VNM (12.8% of total index gain), SAB (12.6% of total index gain) and VIC (12.2% of total index gain), collectively adding 35 points to the index.

• Meanwhile, 96 decliners over the period only knocked 8.6 points off the index.

VNINDEX's top movers: YTD 11M2017 price change (Source: VNDIRECT calculation)

Index performance by Tier 11M2017(Source: VNDIRECT calculation)

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VN

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VNINDEX VN30 VNMID VNSML


2017 saw a quantum leap in market liquidity

▪ Market liquidity surged by more than 60% with large caps dominating flows, led largely by foreign buying

▪ Retail investors jumped on the large-cap bandwagon leading to a reallocation of capital out of the small cap space and into large caps

Average daily trading value (2007- 11M2017)(Source: VNDIRECT calculation)

VNINDEX average daily trading value by tier(Source: VNDIRECT calculation)

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2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

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$mn

VNIndex HNX UPCOM Total

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VN30 VNMID VNSML Other

US

$m

n

2016 (LHS) 2017YTD (LHS) % change (RHS)

Foreign net buying by tier over 2017 (US$ m)(Source: VNDIRECT calculation)


Vietnam’s stock market liquidity is catching up to regional levels

▪ Vietnam's ADTV recently surpassed the Philippines, but still lags behind other emerging markets

Average daily trading value (2007- 11M2017)(Source: VNDIRECT calculation)


Foreign investors were a key driver of the market this year

Foreign monthly net transaction value during 2017Source: VNDIRECT

Top 5 Foreign net bought and net sold sectors: Net Flow (US$mn) Source: VNDIRECT

Foreign net transaction value during 2007-2017Source: VNDIRECT

Total foreign trading value and contribution to market liquidity Source: VNDIRECT

-500

50100150200250300350

US

$m

n

Top 5 net foreign

bought sectors

Top 5 net foreign

sold sectors

-50

0

50

100

150

200

250

300

Jan17

Feb17

Mar17

Apr17

May17

Jun17

Jul17

Aug17

Sep17

Oct17

Nov17

US

$m

n

The surge in Nov 2017 trading value was

due to the listing of VRE

1,121

363189

832

109214

321178 111

-269

1,190

-400-200

0200400600800

1,0001,2001,400

US

$m

n

0.0

5.0

10.0

15.0

0%

5%

10%

15%

US

$bn

Total foreign trading value (Sell and buy)

Contribution of foreign trading to total market trading value


Total market cap surged, supported by new listings

▪ Vietnam’s stock market capitalization has grown considerably, recently reaching 71.6% of GDP. The total market cap of the 3 exchanges jumped by 71%, with the market cap growth of existing stocks accounting for 42% points and stocks listed in 2017 contributing the remaining 29% of the stock market capitalization gains.

Number of stocks above US$1bn in market capSource: Bloomberg, VNDIRECT

Vietnam's total stock market capitalization (2009-11M2017)Source: GSO, VNDIRECT

Title:

Source:

Please fill in the values above to have them entered in your report31.6% 33.4% 32.6% 32.8% 32.3% 33.1%35.7%

43.2%

71.6%

0%

10%

20%

30%

40%

50%

60%

70%

80%

0

20

40

60

80

100

120

140

160

US

$b

n

Total Equity Market Cap (LHS) New listed's marketcap (LHS)

Market cap to GDP (RHS)


Large caps drove the market’s PE expansion this year

▪ Large caps (VN30) were responsible for the PE expansion of the market this year, while the PE of mid caps and small caps flat-lined

▪ Mid-caps are now trading at a 50% discount to large caps on a PE basis

VNINDEX movement and historical P/E (TTM) Source: VNDIRECT

Title:

Source:


7

9

11

13

15

17

19

21

23

May15

Jun15

Jul15

Aug15

Sep15

Oct15

Nov15

Dec15

Jan16

Feb16

Mar16

Apr16

May16

Jun16

Jul16

Aug16

Sep16

Oct16

Nov16

Dec16

Jan17

Feb17

Mar17

Apr17

May17

Jun17

Jul17

Aug17

Sep17

Oct17

Nov17

VNINDEX P/E VN30 P/E VN-MID P/E VN-SMALL P/E


Mid cap names are worth looking at in 2018

▪ We do recognize that large caps in frontier markets deserve to trade at a premium to the rest of the market.

▪ But the PEG ratio of large caps in Vietnam is an astounding 88% higher than that of mid-caps.

▪ Large caps don’t look particularly overvalued relative to regional peers, after accounting for earnings growth; a dramatic correction is unlikely

▪ Mid-caps saw a contraction in the PEG ratio in 2017, as capital flowed-out into large caps; this could reverse partially in 2018.

▪ We therefore see upside in the mid cap space but advocate selectivity.

PEG ratio changes of VNINDEX and its components over the last 12 monthsSource: FiinPro, VNDIRECT calculation

P/E and PEG ratio of Vietnam and peersSource: Bloomberg, VNDIRECT calculation

Title:

Source:


1.01x

1.45x

0.77x

1.19x

0.88x0.83x

1.00x

0.34x

0.0x

0.2x

0.4x

0.6x

0.8x

1.0x

1.2x

1.4x

1.6x

VNINDEX VN30 VNMID VNSMALL

Nov-17 Nov-16

Title:

Source:


2.85x

3.81x

1.45x 1.30x1.01x

1.28x

1.80x2.08x

0.0x

0.5x

1.0x

1.5x

2.0x

2.5x

3.0x

3.5x

4.0x

4.5x

12.0x

14.0x

16.0x

18.0x

20.0x

22.0x

24.0x

P/E LHS PEG (RHS)


Derivatives products will support market sentiment

▪ We expect the futures market to triple in 2018 in term of transaction volume.

▪ Covered warrants will be available beginning in January 2018, which may further promote the participation of foreign investors.

Vietnam's VN30 Futures market Aug 17- Nov 17Source: VNDIRECT

700

750

800

850

900

950

1000

0

5,000

10,000

15,000

20,000

25,000

Aug 17 Sep 17 Oct 17 Nov 17

Total VN30 Future contracts matches (LHS) VN30 Index (RHS)


2018 looks positive for the stock market, but 2017’s performance will be a tough act to follow

We are cautiously optimistic about the market’s performance during 2018

▪ The macroeconomic environment will continue to be positive. We are projecting 6.6 - 6.8% growth for next year, driven by strong manufacturing growth, loose monetary policy, and a pickup in public spending.

▪ Market valuation is not cheap anymore: The VNINDEX is trading at a trailing P/E of 18.9x and the VN30 is trading at a trailing P/E of 22.0x; this compares with a 19.6x average trailing P/E for regional stock markets.

▪ Some market-wide multiple contraction is possible but a continued market uptrend should be supported, nonetheless, by strong earnings growth. We forecast around 17-20% EPS growth across our coverage universe.

▪ The government is trying to accelerate the IPO process for SOEs and this could result in some landmark listings next year including PVPower, PVOil, BSR and Genco 3.

▪ State divestments from BHN, BMP, BMI, FPT, and VCG should also be received with strong interest.

▪ The current large premium on large cap stocks combined with the huge supply of large cap equities into 2018 might weigh on large cap valuations; we remain a bit concerned about the market’s ability to absorb all this new supply especially given the steep price-tags being placed on key SOE IPOs.

▪ A large cap correction, if it occurs, is unlikely to be dramatic in light of the strong earnings outlook.

▪ We do not predict a broad rally across the mid-cap space but do advocate bottom-up stock selection in this space due to its huge discount to the overall market.

▪ The VNINDEX should easily surpass 1100 points but the picture, thereafter, gets more murky due to dependence on the pipeline of new listings.


MSCI emerging market inclusion is still a while away but inclusion on the watch-list is imminent and could be a positive catalyst

Vietnam has the potential to be classified as an emerging market by June 2020 at the earliest.

▪ Continued foreign ownership limitation removal would be a catalyst, although this is not completely mandatory, as seen in the case of other emerging markets/markets currently being reviewed.

▪ Access to English information is a barrier for an EM upgrade.

▪ Argentina and Saudi Arabia are being reviewed, though they have similar barriers as Vietnam ( FOL and access to English information); this bodes well for Vietnam.

▪ Vietnam’s liquidity is approaching emerging market levels, and is already higher than Pakistan’s at the time of its inclusion last year. Vietnam’s liquidity is well ahead of other frontier markets, such as Romania and Sri Lanka.

▪ The improvement of free float for large caps stocks could increase Vietnam's weighting in MSCI emerging markets in the future.

▪ Until an EM upgrade, Vietnam’s increased weighting in MSCI frontier markets could be a short term perk, if Argentina is upgraded before Vietnam, allowing Vietnam to be the 2nd largest country in MSCI frontier markets.

▪ The deepening stock market and quantum improvements in liquidity make it highly likely that Vietnam will be at least placed on the MSCI watchlist relatively soon; this would be a big sentiment-booster.

▪ Markets such as United Arab Emirates, Qatar, and Pakistan prove that Vietnam’s stock market could rally over 30%, post an actual upgrade to EM status.


Black Swan Events like war with North Korea do post downside risks to our 2018 stock market outlook

A conflict in the Korean peninsula would negatively impact Vietnam’s economy, as S. Korea and Vietnam have become more closely aligned

▪ In a recent report, Moody’s estimates that every 10% decline in South Korea’s GDP would lead to a 0.7%-1% drop in Vietnam’s GDP if there is conflict on the Korean peninsula.

▪ Korean investment in Vietnam has been a major engine of growth for Vietnam recently, with cumulative FDI at USD57.5 billion (18.1% of total registered FDI in the period from 1988 to 2017).

▪ A stoppage in Korean imports into Vietnam due to war could disrupt the whole supply chain and threaten Vietnam’s exports particularly in high-value added categories like consumer electronics.

▪ South Korea is also an important export market for Vietnam. We project that Vietnam’s total exports to South Korea will be around US$14.6 billion this year, accounting for around 6.5% of Vietnam’s GDP and 7.1% of Vietnam’s total exports.

▪ We also think that the “risk-off” global investor sentiment sparked by any such war would lead to a flight from riskier asset classes such as frontier market equities and this could further impact Vietnam’s currency and stock market.

▪ Events such as South China Sea tensions and Brexit can be considered as precedents, although they are by no means the most accurate benchmarks, as this conflict would instead have a long term economic impact. This would translate to a longer and, potentially a deeper, sell-off.

CONFIDENTIAL

ConsumerSurging demand but increasingly Darwinian


Surging demand driven by rising incomes and confidence

Vietnam's consumer expenditure (US$bn)

Source: EuromonitorVietnam’s average disposable income per household (US$)Source: Euromonitor

Vietnam’s consumer confidence continued to improve..

Source: Nielsen

Title:

Source:

Please fill in the values above to have them entered in your report26132907

31143352

35403683

38223997

41804363

4530

0

500

1000

1500

2000

2500

3000

3500

4000

4500

5000

2010 2011 2012 2013 2014 2015 2016F 2017F 2018F 2019F 2020F

Title:

Source:


36.4 41.3 45.3 50.1 54.1 57.8 61.6 66.1 70.7 75.5 80.3

43.852.6

60.267.5

73.879.4

84.891.1

97.4103.6

109.3

0

20

40

60

80

100

120

140

160

180

200

2010 2011 2012 2013 2014 2015 2016F 2017F 2018F 2019F 2020F

Urban consumer exp. Rural consumer exp.

Title:

Source:


102

104

106

108

110

112

114

116

118

Q1/16 Q2/16 Q3/16 Q4/16 Q1/17 Q2/17 Q3/17

…making it one of the most optimistic APAC nations.

Source: Nielsen Q3/2017

0

20

40

60

80

100

120

140


We see 3 key trends shaping Vietnam’s consumption landscape

• Customers are gradually beginning to switch from unbranded products to branded products

• Organic products are a new trend

Growing health-consciousness is driving demand for healthier products and greater discretion in product selection.

• Shopping habits have also changed, with consumers switching from traditional wet markets to more modern shopping channels such as super markets, convenience stores and online shopping.

• The penetration of modern retail in Vietnam is still the lowest in the region, at just under 5.0%.

Rising penetration of modern retail

• Websites, online payment systems and smartphone applications have all provided an opportunity for consumers to consume products and services from the comfort of their homes or offices.

Increasing consumer preference for speed, convenience and comfort in the consumption experience.


Low modern retail penetration leaves plenty of headroom for sustained growth in modern format footprint

Modern and traditional grocery retail growth 2016A - 2021ESource: VRE, Euromonitor, EIU, Colliers

Modern grocery retail sales as a share of total grocery retail sales by value in 2016 (%)Source: VRE, Euromonitor, EIU, Colliersa

Number of hypermarkets/supermarkets by grocery chain

Source: Euromonitor, Companies, VNDIRECT Research

Title:

Source:


4.9%

17.2%

30.3%

41.7%

46.2%

71.7%

0%

10%

20%

30%

40%

50%

60%

70%

80%

Vietnam Indonesia Philipines Malaysia Thailand Singapore

Title:

Source:


13.4%

9.7% 9.5%

7.9%

3.6%3.1%

7.3%

5.1%

7.1%

3.7%3.2%

1.8%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

Vietnam Philipines Indonesia Thailand Malysia Singapore

Modern grocery retail CAGR Traditional grocery retail CAGR

Half pageColumnNumber of convenience stores by chain

Source: EIU, VNDIRECT Research

0

200

400

600

800

1000

Dec-16 Oct-17

Title:

Source:


0

10

20

30

40

50

60

70

80

90

100

2012 2013 2014 2015 2016 10M2017

Co.oP Mart Vinmart (VIC) Big C

AEON Citimart AEON Fivimart LotteMart


2017 Consumer review: Rapid network expansion fueled the growth of listed retailers

Net profit growth of listed retailers during 9M2017

Source: Companies

Revenue growth of listed retailers during 9M2017

Source: Companies

Title:

Source:


-10.0%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

0

10,000

20,000

30,000

40,000

50,000

60,000

PNJ TAG MWG FPT Retail

VND

bn

9M2016 9M2017 Growth (YoY)

Title:

Source:


0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

-200

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800


VN

Db

n

9M2016 9M2017 Growth (YoY)

Number of retail stores by listed retailer

Source: VNDIRECT Research

Title:

Source:


-

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

2012 2013 2014 2015 2016 10M2017

MWG VIC FPT PNJ TAG

Number of stores by mobile phone retail chain

Source: VNDIRECT Research

Title:

Source:


-

200

400

600

800

1,000

1,200

2012 2013 2014 2015 2016 10M2017

Thegioididong (MWG) FPTShop (FPT)

Vien Thong A


2017 Consumer review: retailer gross margins were buoyed by growing economies of scale and improving operational efficiency

Title:

Source:


0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%


9M2016 9M2017

EBITDA margin 9M2016-2017 of listed retailers

Source: CompaniesGross margin 9M2016-2017 of listed retailers

Source: Companies

Slight margin expansion helped further support impressive profit growth among listed retailers in 2017:

▪ PNJ: Margin increased as results of over 25% SSSG and improvements in its distribution system.

▪ TAG, MWG, FPT retail: GM increased thanks to growing scale economies, which led to larger discounts from suppliers.

▪ MWG: An 80% increase in labor costs impacted EBITDA margins in 2017.


2017 Consumer review: Volume growth did not feed through to the bottom lines of F&B producers

9M2017 EBITDA margin of the top listed F&B producersSource: Companies

9M2017 Net revenue and net profit growth of the top listed F&B producersSource: Companies

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

VNM SAB MCH BHN QNS

9M2016 9M2017

Except for VNM, the top 5 largest F&B producers witnessed a decline in EBITDA margins, which led to a deceleration in bottom line growth. This occurred despite volume growth, and resulted from the following factors:

▪ Ramp-up of sale promotions and advertisements to combat with the increasing competition.

▪ The rebound in the prices of select agricultural commodities (wheat, soybean, beef, whole milk powder) also limited margin expansion.


Consumer stock picks: We like PNJ

Valuation versus returns on capital of the ten largest Vietnam listed consumer companies versus regional peers.

Source: Nielsen

VNM

SAB

MWGMCH

BHN

QNS

VCFTLG

Thaibev

F&N

CP

Robinson

URC

PNJ

KDC

-

10.00

20.00

30.00

40.00

50.00

60.00

0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0%

P/E

TT

M

ROE Q3/2017 TTM

Stay selective in the consumer space:

▪ Valuations have been rising considerably and several popular names already look fairly valued from a medium-term perspective, particularly in a regional context.

▪ We like PNJ due to its dominant market position. Even though the company’s valuation is not cheap at the moment, its prospects are clearer, as compared to MWG.

Note: bubble size represents market cap as of December 21


Phu Nhuan Jewelry JSC (PNJ)

Current Price Target Price Dividend Yield Recommendation Sector

VND130,900 VND143,700 1.37% HOLD Retail

INVESTMENT HIGHLIGHTS

▪ PNJ is speeding up the expansion of its stores. PNJ was operating 261

stores as of the end of November 2017 (+19.8% YTD) and plans to increase this

to 300 by Q2 2018. If the current pace continues, PNJ might reach the ambitious

target of 300 stores by early FY18, earlier than its original plan of FY19. The

successful private placement (acquired by Dragon Capital and Vinacapital) worth

nearly VND1,000bn in July 2017 allowed PNJ to raise cash to fund its

aggressive store expansion plans.

▪ 2018 SSSG may not remain as high as in 2017 (22% for 9M2017), but the

12% target is achievable and will help boost retail sales. The impressive

SSSG figures in 2017 were a result of (1) poor performance in 2016 sales per

store and (2) restructuring in merchandise/logistic department. Therefore, SSSG

in 2018 will likely return to the historical norm of 12%.

▪ Impressive earnings growth will continue in 2018. During 2017, we estimate

that the company’s net revenue will grow by 28.8% (VND11,028bn) and net

profit will reach VND791bn (+75.7%), 31% higher than the company target

(VND600bn). We expect this strong growth trend to continue into 2018, with

topline growth of 19.3%. We project that retail revenue, which has very favorable

margins, will grow by 35%, which will lead to a 44% rise in net profit

(VND1,140bn).

Key ratios 2016A 2017E 2018E

NP growth (%) 20.8 53.1 43.7

EPS growth (%) 20.8 67.3 37.4

GPM (%) 16.5 17.6 19.2

Asset turnover (x) 2.6 2.8 2.7

Financial leverage

(x)

2.3 1.7 1.5

ROAE (%) 32.0 35.0 33.8

ROAA (%) 13.7 19.9 23.3

Stock info

Market cap (VNDbn) 14,150

Daily value 30 day (VNDbn) 29.3

Foreign ownership (%) 49.0

State ownership (%) 0.0

P/E TTM (x) 21.9

P/B TTM (x) 5.9

CONFIDENTIAL

Real EstateThe Real Estate bull market can continue for a couple more years


The bursting of the last real estate bubble led to a massive correction in prices, leaving enough room for a sustained rise

• Average property prices dropped by 40-50% in 2013, from the peak of the 2008-2009 bubble.

• The deep correction in prices and the Darwinian market consolidation that followed laid the foundation for a sustained

and more solid, multi-year upcycle.

• Better allocation of credit within the real estate sector and a favorable interest rate regime bode well for a continued

uptrend.

Savills property price index and absorption rate (HCMC)

(Source: Savills)


Massive demographic shifts are underpinning property development

Urban population by region (million people)

(Source: World Bank)

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050

China

Hongkong

Japan

Korea

Singapore

Malaysia

Philipines

Indonesia

Thailand

Vietnam

India

Australia

New Zealand

“Golden Population Period” by country in Asia Pacific region: 1960-2050

(Source: Savills)

Average household size 1989-2014

(Source: Savills Vietnam)


Abundant credit to the real estate sector has spurred the recovery but this is slowing

Credit to real estate and average lending rate

(Source: SBV, VNDIRECT)

Growth in credit to the real estate sector spurred

the recovery in transaction volumes

(Source: Savills, General Statistic Office, VNDIRECT)

• Banks primarily lent to developers and speculators in the period leading up to the last property bubble.

• Starting from the end of 2010, the government tightened monetary policy to mitigate the risk of run-away inflation,

pushing interest rates to touch an all-time high.

• From 2013, mortgage rates have gradually decreased in line with a gradual easing of monetary policy, which helped

improve the affordability of new homes for the masses.

• Subsidized programs for affordable housing have helped the chronically underserved bottom tier of the market.

• New caps on % short-term funds used for long-term loans led to a sharp fall in credit growth to RE since 2016


Improvement in infrastructure is catalyzing new project development

HCMC’s metro development masterplan (line no.1

is under construction)

(Source: CBRE)

Hanoi metro line development

(Source: CBRE)

• The metro lines in HCMC and Hanoi will create new commuting routes, help expand the cities outwards and create

new mixed-use development opportunities in areas near the lines by triggering a shift from private vehicles to public

transportation and thereby creating large retail catchment areas.

• Demand for condominium projects in close proximity to these infrastructure projects has been rising faster than the

rest of the market in the past few years.


Ring road construction is helping expand urban areas, outward

HCMC’s ring road development masterplan (red

lines, under construction)

(Source: vneconomictimes)

Hanoi: upgrading of ring roads to create better

connectivity between districts

(Source: CBRE)


Better regulation mitigates the risk of a future property market crash

• Homebuyers are being offered more protection

• Since July 2015, the new Housing Law raised the equity capital required for developing projects to a minimum

of VND20 billion to raise market entry barriers and flush-out weak developers

• Developers are also not allowed to receive any payment from homebuyers until they complete the building’s

foundation

• New Housing law and Tax law ensures that the government does not exclude low income Vietnamese

• Value added tax applied to social housing projects is set at 5%, compared to the normal average of 10%

• Corporate income tax rate has been reduced by 50% to 10% to encourage developers to build more supply

• 20% of the total site area of each project must be used for social housing development (strictly enforced for

site area > 10ha)

• Amended housing law has made it easier for foreigners to buy property in Vietnam.

• Between 2009 to June 2015, there were only 126 pink books granted to foreigners. However, this has

increased to 1,000 as of July 2017

• Vietnam Housing law 2014 (took effect since July 2015) allows foreigners to buy up to 30% of the apartment

units in a particular project, and a maximum of 10% of the townhouses/villas of a project


No signs of a property bubble yet: A gradual moderation is underway

Length of cycle (year) by country

(Source: VNDIRECT)

RE credit allocation shifting away from developers

and to buyers

(Source: VNDIRECT)

• We believe that the current property cycle will last longer than the previous three cycles.

• There is a lower degree of speculation as reflected in the small current spread between the primary and secondary

market price, relative to historical levels.

• There is currently a better allocation of credit within the real estate sector and favorable interest rates.

• Developers are now focusing on end-users and products are more affordable.


Muted FDI and remittance flows into the real estate sector relative to the past are another indication that the market is far from overheating

Registered FDI into the real estate sector vs. total

FDI registered 2004-2017

(Source: GSO, World Bank, VNDIRECT)

Total remittances into Vietnam and share of total

flowing into Real Estate

(Source: World Bank, IMF)

• According to the Foreign Investment Agency (FIA), registered FDI into the real estate sector reached USD2.5 billion

(+237% YoY) during the first 11 months of this year.

• FDI into real estate remains rather subdued both in absolute terms and as a share of total FDI. This is another

“sanity check” and confirms our belief that the property market is far from a repeat of the heady days seen in 2008

and 2009.


Slowing growth in credit to the real estate sector and rental yield compression in the high end segment are creating some headwinds

• Vietnam’s property prices are still rising but at a slower pace as the developer-built market size is large enough and

products are now well-matched with end-user demand.

• Credit growth to the real estate sector decelerated in 2017. New regulations will limit the ability of banks to continue

lending to the real estate developers at the brisk pace seen in the last few years.

• Decline in rental yields limits the growth of the high-end segment.

Quarterly transaction volume and average selling price by segment in HCMC

(Source: Savills Vietnam)


Developers are shifting their focus to the mid-range segment

Mid-end apartment affordability

(Source: VNDIRECT

based on GDP/capita of HCMC 2016)

Affordable apartment affordability

(Source: VNDIRECT

base on income/month of middle class according to

BCG (USD 720/month))

• The high-end segment is now oversupplied

• There is a strong demand for mid-end products due to the burgeoning young middle class

• Infrastructure build-outs are enhancing the feasibility and affordability of mid-range developments

• The mid-range segment offers favorable margins as compared with the affordable segment

Average household income (USD/year) 24,000

Monthly salary (USD/month, x2 persons) 2,000

Months of income/year 12

Average price USD/sqm 1,500

Unit size (sqm) 70

Unit price (USD/unit) 105,000

House price/income 4.38

% of borrowing 70%

No. of months 120

Interest rate (%/year) 8% 10% 12%

Monthly mortgage payment (USD) 892 971 1,055

Monthly payment as % of income 45% 49% 53%

Average household income (USD/year) 17,280

Monthly salary (USD/month, x2 persons) 1,440

Months of income/year 12

Average price USD/sqm 1,000

Unit size (sqm) 55

Unit price (USD/unit) 55,000

House price/income 3.18

% of borrowing 70%

No. of months 120

Interest rate (%/year) 8% 10% 12%

Monthly mortgage payment (USD) 467 509 552

Monthly payment as % of income 32% 35% 38%


Real Estate stock picks: we like NLG

• Transaction volume will remain high in 2018-2019

thanks to high demand and re-orientation of supply

towards the mid-to-affordable end of the market

• The recent relaxation of foreign ownership regulations

in the housing market will continue to have an impact

on investor and developer sentiment, which will

continue to attract more FDI into the housing market

• Increasing confidence among homebuyers’ on strong

economic growth and rising incomes as well as

improving product affordability will continue to support

absorption rates

• More developers are shifting their focus to the mid-

range segment which still has sizeable visible

demand and huge latent demand from end-users.

• Buyers will place more emphasis on construction

quality, supporting facilities and amenities, as well as

the surrounding environment when choosing their

homes.

• Developers are expected to race to fulfil these

expectations which will have a net positive impact on

product quality across the board

Real estate outlook for 2018: Favorable conditions

to persist Stock picks: we like NLG

• We like developers that have a solid project pipeline

of affordable-to-mid end apartments and landed

property products, including VIC and NLG.

• VIC: We like this stock given its successful

exaction track record and huge undeveloped

land bank; but it is not a real-estate pure-play.

• NLG: The company is one of our top picks as

it is the most successful listed affordable

housing developer in Vietnam and is moving

upmarket NLG is a long-term buy in our

opinion as the company looks quite fairly

valued at present


Nam Long Investment Corporation


VND31,900 VND31,850 1.6% HOLD REAL ESTATE


• Prospective land bank acquisition could be a catalyst in 2018. NLG

revealed plans to acquire two land parcels with total area of 33ha,

located in the east of HCMC.

• For 2017, we pencil in 38.6% YoY growth in revenue and 58.2% YoY

growth in NPATMI, mainly driven by the sale of land.

• 2018 earnings will grow even with conservative assumptions for

Hoang Nam. In the base case, we forecast revenue for the year of

VND 4,444bn (+26.5% YoY) and NPATMI at VND 570bn (+4.5%

YoY), translating into an EPS of VND 3,369/share.

• The company has revealed plans to its shares on the Singapore stock

exchange and will concurrently prepare 2 financial statements in

compliance with IFRS and VAS, starting from 2018. Under IFRS the

inventory will be marked-to-market and therefore we expect investors

will have a valuable reference point to gauge the fair value of the

company.

• Our valuation does not include certain potential projects (1ha Areco,

43ha in Can Tho city, 33ha in eastern HCMC, Water Point).

Stock info



Foreign room (%) 1.0


P/B TTM (x) 1.4

P/E TTM (x) 9.4


NP growth (%) 67.3 58.2 4.5

EPS growth (%) 66.6 43.0 4.5

GPM (%) 32.5 37.7 31.8

Asset turnover (x) 0.45 0.54 0.62

Financial leverage

(x)2.39 2.34 2.15

ROAE (%) 14.7 19.5 17.0

ROAA (%) 6.1 8.3 7.9

CONFIDENTIAL

BankingBright outlook, driven by loose monetary policy, new growth engines and a clearer legal framework


Vietnam’s banking system is continuing to recover, facilitated by loose monetary policy

NIM of top-tier banks improved in 9M2017

System-wide NIM flat but CIR has fallen sharply… … leading to strong profit growth in 9M2017

-10%

0%

10%

20%

30%

40%

50%

ACB BID CTG LPB MBB STB TCB VCB VPB SHB

2016 9M2017

Banks saw strong loan growth in 9M2017

Title:

Source:


0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

8.00%

9.00%

10.00%

VPB MBB TCB ACB BID CTG VCB

Q3 TTM/2016 Q3 TTM/2017

25.4%

11.5%

79.1%

-3.5%

69.0%

43.5%

61.1%65.7%

72.2%

91.9%

-20.0%

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

0

1000

2000

3000

4000

5000

6000

7000

8000

9000

VCB CTG VPB BID TCB MBB ACB HDB LPB SHB STB

Pre-tax profit (VNDbn) % growth (yoy)

36%

38%

40%

42%

44%

46%

48%

50%

0%3%6%9%

12%15%18%21%24%

IEA yield Cost of funds NIM CIR

Source: VNDIRECT, SBV, Company


We believe that Vietnam will be able to pursue 16-18% credit growth during 2018-2019 based on the following

factors:

▪ Credit growth has recently driven more by private businesses and consumers

▪ Broad-based economic growth, policy focus and the strategic reorientation of banks should support SME credit

appetite

▪ The Basel 2 implementation deadline delay to 2020 allows more time for banks to prepare themselves

▪ Credit growth to real estate developers decelerated in 2017 while appetite for lending to homebuyers is

increasing

Credit growth is accelerating once again but credit quality is better than in the previous credit up-cycle


SOE’s share of loan book on the declineCredit growth has reaccelerated since 2013

0%

20%

40%

60%

80%

100%

2012 2013 2014 2015 2016

SOE Private & SME Individuals

14.4%

8.9%

12.5%14.2%

17.2%18.7% 19.3%

0

2000

4000

6000

8000

0%

4%

8%

12%

16%

20%

24%

2011 2012 2013 2014 2015 2016 2017

Net loan to economy (VND tn) (RHS) Credit growth (LHS)


▪ Vietnam’s consumer lending industry enjoyed a robust CAGR of 37.8% in terms of outstanding loans over the

past 5 years

▪ Share of the total loan book grew from around 5% in 2012 to 11% in 2016, becoming the new engine for

overall credit growth

▪ Blistering pace of growth expected to be sustained at a CAGR of 27% through to 2020, due to:

(1) Growing propensity to borrow, rising per capita disposable incomes, and the currently low penetration of

consumer lending

(2) Clearer legal framework

Consumer finance is the new growth engine for the banking system

Source: VNDIRECT, Stockplus

Market share of CBs and Non-bank FCs based on

outstanding loan value at year-end 2016Consumer finance loan value (US$bn) & penetration

4.7% 4.8%5.2% 5.7%

7.9%

9.8%

0%

2%

4%

6%

8%

10%

12%

0

5

10

15

20

25

30

2011 2012 2013 2014 2015 2016

VN consumer finance (US$bn) (LHS)

Consumer finance to GDP (%) (RHS)

3.6% 4.6% 6.6% 7.7%0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2013 2014 2015 2016

Non-bank financial companies Commercial banks


Fintech companies have recently emerged as a new threat to traditional lenders

Vietnam’s fintech landscape

But some traditional banks are applying technology faster than others and quickly grabbing the opportunities

created by fintech to improve customer experience and reduce operating expenses


▪ The system-wide reported NPL ratio rose to 2.9% in June 2017 from 2.6% at the end of 2016 led by strongerloan growth

▪ NPL clearing still relies on repayment by customers and internal resolutions, while the liquidation of collateralis still a challenge

▪ Resolution 42/2017/QH14 issued on August 2017 confers lenders with more power in collecting collateral,setting the framework for NPL pricing and trading through a market mechanism

▪ VAMC and 6 pilot banks have started ramping up NPL auctioning and seizing of collateral

▪ Several banks started to repurchase bad debt transferred to VAMC, signaling an improvement in financialcapacity

New policy measures should improve bad-debt handling process and recovery rates

Source: VNDIRECT, Company

Bad debt handling by method in 7M2017System-wide reported NPL% and VAMC bonds %

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

2012 2013 2014 2015 2016 Jun-17

Reported NPL % VMAC bonds/Gross loan

Repayment; 33.6%

Write-off; 26.3%

Sold to VAMC; 31.7%

Collecteral liquidation;

1.7%

Others; 6.9%


▪ Although Basel II will be implemented in 2020, major recapitalization is still a pressing need given continued

strong credit growth

▪ Our bottom-up analysis indicates that Vietnamese banks need to raise US$7.9bn in aggregate capital, of

which US$5.5bn is equity capital, to comply with Basel II standards

▪ FOL lifting is necessary to attract capital from foreign investors but the process will be slow

Major recapitalization is still a pressing need


CAR by bank shows a mixed pictureSystem-wide CAR has been falling

0

2

4

6

8

10

12

14

2014 2015 2016 Aug-17

System SOE-bank Private banks

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

ACB VPB TCB MBB CTG VCB BID STB

2016 2015

Note: System-wide CAR includes CAR of SOE-banks, private banks, foreign

banks and finance companies. Foreign banks and finance companies have

much higher CAR than SOE and private banks


Banking Sector Stock picks: We like VPB, MBB and LPB

▪ We like stocks with the following key characteristics:

(1) Good exposure and good capability to capture the opportunities arising from retail banking, digital banking,

consumer finance and fintech.

(2) Better capitalized and/or having a relatively good chance of being re-capitalized in the future

(3) Trading at a discount to the sector average

▪ Keep an eye on upcoming listings, as there are some promising names in the pipeline: Techcombank,

HDBank and TPBank

Source: Bloomberg, VNDIRECT

Banks TickerMarket cap

(VND bn)ROA FY16 ROE FY16 P/B FY17 P/E FY17 P/B FY18 P/E FY18

Vietcombank VCB 182,767 0.9% 14.7% 3.5 25.3 3.2 20.3

Vietinbank CTG 83,032 0.8% 11.8% 1.3 11.9 1.2 11.4

BIDV BID 81,536 0.7% 14.4% 1.7 16.6 1.5 14.3

VPBank VPB 60,495 1.9% 25.8% 2.2 8.8 1.7 8.7

Military Bank MBB 45,842 1.2% 11.6% 1.6 13.5 1.4 10.5

Asia Commercial Bank ACB 34,112 0.6% 9.9% 2.2 19.4 1.9 12.5

Vietnam International Bank VIB 12,415 0.6% 6.5% 1.8 20.9 1.6 18.3

Lienviet Post Bank LPB 9,402 0.9% 13.3% 1.0 6.6 0.8 6.0

Average 63,700 0.9% 13.5% 1.9 15.4 1.7 12.7

Median 53,168 0.8% 12.6% 1.7 15.0 1.6 12.0


Vietnam Prosperity Bank (VPB)


VND40,400 VND53,400 0.0% ADD BANKING


▪ Found in 1993, VPB ranks 10th in terms of assets. The bank listed

on HOSE on 17 August 2017.

▪ A top retail lender with exceptional growth and returns on

capital. The bank enjoyed a FY12-16 CAGR of 51% in net profit

and 22% in net assets. VPB has now entered the pantheon of the

top 5 commercial banks in terms of profitability with industry-

leading ROA of 1.9% and ROE of 24%.

▪ The 800-pound gorilla in the sunrise consumer finance sector.

Making a timely bet on the recent consumer lending boom in

Vietnam, FE Credit – VPB’s 100%-owned consumer finance

subsidiary – became the leading market player with 48.4% market

share in FY16 and solid PBT growth of 53%.

▪ Well equipped to ride consumer lending growth while

managing risk: (1) It is well capitalized with non-Basel II CAR of

16.7% and CAR under Basel II of 13.5%; (2) A more aggressive

bad debt write-off policy to help withstand the rise in NPLs; (3)

Superior risk management powered by technological innovation

▪ We recommend VPB with a target price of VND53,400/share,

translating to a P/B of 2.3x based on FY18 forecasts.


NP growth (%) 68.5 51.3 27.8

EPS growth

(%)

46.0 2.7 1.3

NIM (%) 7.6 8.8 9.5

CIR (%) 39.3 38.0 38.4

NPL (%) 2.9 2.9 2.9

ROAE (%) 24.8 24.6 22.2

ROAA (%) 1.8 2.3 2.6

Stock info

Market cap (VND bn) 60,495


Foreign room (%) 0

State ownership (%) 0

P/B TTM (x) 2.3

P/E TTM (x) 9.6


Military Joint Stock Commercial Bank (MBB)




▪ Founded in 1994 with the initial objective of providing financial

services for military-related corporations, MBB is the fifth largest

bank in terms of assets.

▪ High profit growth in 2018 and 2019 as the current

provisioning cycle is tapering-off. MBB actively provisioned for

VAMC bonds over 9M2017 to buy back all VAMC bonds in 2018. A

reduction of VAMC provision expense in 2018 and no VAMC

provisioning in 2019 will boost bottom line growth.

▪ Better positioned to pursue high loan growth. Relatively better

capital position (CAR 11.4%) and sufficient liquidity (LDR 69.3%)

will allow for strong credit growth in the coming years.

▪ Strong push into retail banking will improve its NIM. MBB has

the intention to acquire PGBank to expand its network; MCredit

gives MBB a foothold in the lucrative consumer finance segment.

▪ We recommend an ADD on MBB with a 27,700/share target

price translating to a 2018 P/B of 1.5x. At the current price, MBB is

trading at a P/B of 1.6x, lower than the industry average of 1.9x.


NP growth (%) 16.7 37.0 28.8

EPS growth

(%)

-0.4 35.1 28.2

NIM (%) 3.5 4.2 4.3

CIR (%) 42.4 41.0 42.0

NPL (%) 1.3 1.2 1.1

ROAE (%) 12.1 14.8 16.8

ROAA (%) 1.2 1.5 1.7

Stock info



Foreign room (%) 0


P/B TTM (x) 1.6

P/E TTM (x) 14.4


Lien Viet Post Bank (LPB)




▪ Founded since 2008, LPB is ranked 13th in terms of assets. The

bank listed on UPCOM on 5 October 2017

▪ Unique advantage on networks. With the right to access more

than 1,000 postal transaction offices (PTOs) and 10,000

transaction points nationwide, LPB is considered as the only

private JSC bank that has presence in all cities and provinces,

especially in remote and inaccessible areas.

▪ Good asset quality is reflected in its low NPL ratio and high

LLR ratio. As of 3Q2017, LPB was ranked 4th in terms of the

lowest NPLs (at 1.19%) and third in terms of the highest LLR (at

105.3%) among listed banks in Vietnam. LPB has consistently kept

its NPLs below 3%, even during the past banking crisis, despite a

low annual write-off rate of only 0.1% of the average loan book.

▪ Higher-than-average operational efficiencies. LPB posted

17.2% ROAE and 1.04% ROAA in 9M17, higher than the listed

peer average ROAE of 14.3% and ROAA of 1.01%.

▪ Attractive valuation: LPB is currently trading at 1.0x P/B, which is

a deep discount to industry average of 1.9x. We have a target

price of VND17,700 for LPB, translating to a FY18 P/B of 1.1x.


NP growth (%) 203.8 42.6 15.0

EPS growth

(%)

203.8 36.1 10.0

NIM (%) 3.5 3.8 3.9

CIR (%) 52.5 52.0 53.0

NPL (%) 1.1 1.1 1.1

ROAE (%) 13.3 16.3 16.0

ROAA (%) 0.9 1.0 1.1

Stock info



Foreign room (%) 0


P/B TTM (x) 1.0

P/E TTM (x) 6.7

CONFIDENTIAL

AutomotiveThe calm before the storm


We expect auto sales to surge this year after declining in 2017

Passenger car sales volume

(Source: VNDIRECT, OICA, VAMA)

• Uber and Grab were behind the 2016 auto sales growth but these tail winds might moderate in 2018

• Auto sales declined in 10M2017 – we suspect that this was because buyers postponed their purchases in

anticipation of price reductions in 2018 and beyond


Imminent reductions in import tariffs in 2018 will unleash a flood up pent-up passenger vehicle demand

Special consumption tax change

(Source: VNDIRECT)

Special consumption tax change

(Source: VNDIRECT)• In 2018, import tariffs on ASEAN cars will be

removed (currently 30%) under the ASEAN Free

Trade Area (AFTA) agreement

• The tariff exemption could help slash full prices by

~23%

• Most affordable car models should also qualify for a

Special Consumption Tax (SCT) reduction, and the

net effect should be a 3-4% reduction on the dealer’s

selling price.

• The combined impact of the tariff exemption and the

SCT reduction could help reduce total prices by

~25% for small cars.

• We believe that most brands will see a small price

reduction in 2018, with larger price reductions being

seen for a select few models that meet the ASEAN

localization criteria.

• We think that buyers have been delaying car

purchases this year in anticipation of falling prices.

Engine size (litre) Change (% pts)

2.0 or less -5%

Over 2.0 - 2.5 -

Over 2.5 and below 3.0 litre 5%

Over 3.0 litre -


Economic growth to support future demand for passenger cars

• The recent decline in automotive sales this year is an outlier, as this industry has historically had very strong growth.

• Vietnam’s middle class population is expected to grow rapidly over the next decade and this will fuel a rapid rise in

demand for a wide range of consumer durables.

• We believe that the demand for cars will continue to outpace GDP growth

• We expect passenger car sales to surge by 20% next year, exceed 225,000 units in 2018, a 50-60% rise over the

2017 full year ( projected volume based on extrapolation of 10M 2017 actual results); the main beneficiaries of this

growth will be car dealers with the most popular and affordable OEM brands in their portfolio.

Vietnam’s auto market has plenty of room to grow given strong GDP growth and low current penetration

(Source: OICA, VAMA, World Bank, VNDIRECT)


Automotive sector stock discussion: we prefer dealers to assemblers

Automobile company comparison

(Source: VNDIRECT)

Company Business model Main type of vehicle Source Distributed brand

Thaco Assembler & Dealer Passenger car, truck, & bus SKD Mazda, Peugeot, Kia, Thaco (truck & bus)

SVC Dealer Passenger car CBU and SKDHyundai, Toyota, Ford, Suzuki, Volvo, Chevrolet, Mitsubishi, Fuso,

Honda, Hino, Veam.

HHS Dealer Truck & Bus CBU Dong Feng

HAX Dealer Passenger car CBU and SKD Mercedes-Benz

HTL Dealer Truck & Bus CBU Datano, Hino, Shinmaywa

TMT Assembler & Dealer Truck & Bus CBU and SKD Tata, Sinotruk, Hyundai (truck)

CMC Assembler & Dealer Industrial vehicle CBU Komasu, Hitachi

CTF Dealer Passenger car CBU and SKD Ford

• Car dealers could be much less vulnerable to a future price war between assemblers and importers, as they can

quickly switch between selling Complete Built Units (CBU) and Semi Knocked-Down Units (SKD) cars.

• SCV and CTF are most exposed to this market trend, as they are distributing most of the low-end and medium-

range brands in the market.

• HAX has been performing well in the luxury car segment, as its car models such as E-class, C-Class, and SUV

models have recently received a positive response from customers.

• Thaco may suffer a decline in its sales, as some of its brands may be more price competitive when imported as

CBUs from factories in other regions.


Peer valuation

Automobile sector comparable valuation

(Source: VNDIRECT, Fiinpro)

Company Country

Market Cap

(US$mn)

TTM NPAT

growth

TTM EPS

growth ROA ROE D/E (x) TTM P/E (x) P/B (x)

Thaco* (Unlisted) Vietnam 1,025 12.2% 12.2% 14.6% 33.9% 1.3 N.a N.a

TMT Vietnam 393 -78.0% -78.0% 0.4% 2.2% 3.9 37.2 0.9

CMC Vietnam 29 110.1% 76.3% 2.6% 4.7% 0.6 9.4 0.4

Assembler average 482 745.1% 98.4% 5.9% 13.6% 2.0 23.3 0.7

SVC Vietnam 54 -59.3% -13.8% 3.0% 8.7% 1.2 12.1 1.4

HHS Vietnam 51 -29.4% -8.3% 2.3% 2.4% - 19.0 0.5

HAX Vietnam 39 31.5% -28.8% 6.4% 22.3% 2.9 11.8 2.5 HTL Vietnam 22 -17.7% -5.1% 4.5% 8.1% 0.2 26.3 2.2

CTF* Vietnam 17 140.0% 112.0% 4.5% 10.7% 1.3 15.4 1.8

Dealer average 37 13.0% 11.2% 4.1% 10.5% 1.1 16.9 1.6

(*) All data are based on The audited financial statement for the year ended on 31 Dec 2016

All prices are based on the closing prices on 21 Dec 2017

CONFIDENTIAL

AviationA fantastic long term growth story but expect competition to intensify


A swelling middle-class is spurring domestic travel

The middle and affluent class population of Vietnam could

reach 33mn by 2020, triple the level of 2012 (source: BCG)

Vietnam’s middle class population growth rate will be

the highest among ASEAN countries due to:

• High GDP per capita growth

• Lower income inequality and better wealth distribution

Baby boomers, accounting for 35% of the population,

will drive travel demand

APAC countries' GDP per capita growth rate (%), 2016

Source: World Bank

Gini score, available within 2013-2016

Source: World Bank

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

0

10

20

30

40

50

60

0

10

20

30

40

50

60

70

2012 2013 2014 2015 2016

Vietnam domestic tourist arrivals (millions)

Source: VNAT


Vietnam is becoming a popular regional tourist destination

Vietnam is growing in popularity as a tourism destination,

particularly among North East Asians:

• 2016: the number of foreign tourists arriving by air rose

by 23.1% to reach 8.5mn

• 2017: Foreign tourist arrivals by air grew by 32.1% YoY,

to touch 10.9mn. Total foreign tourist arrivals increased

by 29.1% to 12.9mn.

• Over the last two years, the proportion of Korea tourists

has increase significantly from around 12% in 2015 to

20% in 2017. China tourist arrivals accounts for 50% of

total tourists arrivals and the number is growing at

similar rates.

• Vietnam airlines have opened more direct routes to

several Korea and China destinations. This does not

only serve the inbound tourist flow but also meet the

demand of outbound domestic tourists.

We expect that the proportion of Korean and Japanese

visitors will rise in the future as Vietnam – South Korea and

Vietnam – Japan diplomatic relations continue to improve.

Foreign visitors are adding “icing-on-the-cake” Monthly foreign tourist arrivals in Vietnam

Source: VNAT

Number of foreign visitors, 2016

Source: ACV

0

0.2

0.4

0.6

0.8

1

1.2

1.4

Vis

ito

rs, m

illio

ns

Others China Korea Japan Taiwan

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

0

5

10

15

20

25

30

35

Vietnam Thailand Philippines Malaysia Indonesia

Mill

ions

Foreign visitors Growth


Vietnam’s aviation industry has a lot of room to grow

• Vietnam’s air travel penetration is the lowest among

APAC countries behind Indonesia, Thailand, and

Malaysia.

• Air travel penetration is closely correlated to

GDP/capital.

• However, the country’s GDP/capita growth rate is higher

than that of neighbors; This implies that Vietnam will

catch up to the regional level in terms of air travel

penetration.

• Vietnam’s difficult terrain and geography and

underdeveloped ground transportation infrastructure

imply that its air travel penetration will eventually be

even higher than its GDP/capita would warrant.

RPKs/capita is the lowest among APAC countries Air travel penetration, RPK/capita

Source: Vietjet

Air Travel Passenger Volume Growth

Source: ACV

0%

5%

10%

15%

20%

25%

30%

35%

40%

0

10

20

30

40

50

60

70

80

90

2012 2013 2014 2015 2016Passenger volume International growth

Domestic growth

Passenger volume, mn Passenger growth

VNIndo

TLCN

MY

SK

JP

Brunei

NZ

US

AU

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

0 10,000 20,000 30,000 40,000 50,000 60,000 70,000

RPKs/capita

GDP/capita


LCCs are using aggressive pricing to expand the market

• VJC is the leading LCC in Vietnam. Since its

establishment, the company has rapidly captured market

share.

• At the moment, around one-third of VJC’s passengers

are first time flyers. By the end of 2016, VJC accounted

for 42% of the domestic market, roughly equal to HVN.

The LCC segment attracts first time flyers Airlines’ domestic market shares, 2016

Source: VJC

0%

10%

20%

30%

40%

50%

60%

70%

80%

2011 2012 2013 2014 2015 2016

Vietjet Air Vietnam Airlines Jetstar Pacific

• Air Asia recently announced its entry into the Vietnam

aviation market in partnership with Hải Âu Aviation and

Gumin Ltd.

• The LCC will provide 30% of the JV’s charted equity

through its subsidiary, AirAsia Investment. The JV is

expected to launch operations in 2018.

• However, AirAsia Investment has not received the

investment license from the Ministry of Planning and

Investment. As a result, the launch date could be

delayed.

• Air Asia’s entry is likely to spur intense competition and

further lower fares, thereby boosting demand.

• LCC players are now starting to poach customers of

FSAs as evinced by rising ancillary revenues per pax;

this could prompt FSAs to also reduce fares.

However competition is heating up

VJC ancillary revenue/passenger

Source: VJC

0

50

100

150

200

250

300

350

2014 2015 2016 3E2017

Th

ousand V

ND

Ancillary revenue/passenger


Vietjet Air JSC (VJC)

Current Price Target Price Dividend Yield Recommendation Industry

VND139,200 VND147,000 1.6% HOLD AVIATION


• Passenger volume could increase by 24% on average over the

next three years thanks to: 1) increasing fleet size: the company

has received 17 new aircraft in 2017 and 13 and 11 new aircraft are

planned for 2018 and 2019 respectively; 2) the opening of new routes

will help fill up new seats: VJC is opening more routes to tier 2 and

tier 3 cities in China such as as Binhai, Changsha, and Nanjin.

• Modern aircraft will help the company to reduce operating cost

per ASK: VJC will deploy next generation Airbus Neo and Boeing

Max which burn 15-16% less fuel compared to the old equivalent

models. VJC has received one A321Neo in December 2017. The

company will receive 32 737 Max 200s in 2019 and 2020.

• We project that the company’s 2018 core net profit will reach

VND6,574bn (+92.4% YoY) mainly due to 1) higher ancillary

revenue/passenger, 2) solid RPK growth of 40-45% driven largely by

increasing Chinese tourist arrivals into Vietnam.

• Risks: 1) off-BS FX rate losses; 2) competition; 3) rising fuel price

• Valuation: VJC currently trades at 2018 EV/EBITDAR 6.2x which is

fair compared to regional peers which trade at around 6-7x

EV/EBITDAR. However, VJC has much higher medium term revenue

growth prospects so we see long-term upside to the current price.

Stock info


Daily trading value 30 day

(VNDbn)119.9



P/B TTM (x) 7.6x

P/E TTM (x) 19.1x


NP growth (%) 95.6 142.5 49.2

EPS growth (%) 93.5 -23.4 22.1

GPM (%) 12.7 17.9 22.8

Asset turnover

(x)

1.7 1.7 1.3

Financial

leverage (x)

4.8 3.6 2.7

ROAE (%) 68.7 77.4 60.2

ROAA (%) 14.3 21.8 22.5

*2017 negative EPS growth due to issuance of 10:4

stock dividend


Vietjet Air JSC (VJC)

• In the last week of December 2017, VJC has received a

new A321Neo (New Engine Option). The aircraft burns

15% fuel less than the Ceo (Current Engine Option).

VJC has started receiving new generation aircraft Expected fleet size, net of retirement

Source: VJC, VNDIRECT analysis

Ancillary rev % total rev (ex-aircraft sales) , 2016*

Source: VJC

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

*Note: VJC figure is based on 3Q2017 financial data

Model 2017 2018 2019 2020

A320 25 25 22 19

A321 27 35 35 42

A320Neo 0 0 0 0

A321Neo 1 6 17 17

737 Max 200 0 0 4 28

Total 53 66 78 106

• VJC’s ancillary revenue per passenger rose by 30% in

the first 9 months of 2017 but is still low by international

standards

.

Ancillary revenues still have room to grow

CONFIDENTIAL

Ports and maritime shippingRiding on the coattails of the FTA and FDI bonanza


The north of Vietnam has become an FDI magnet

• During the first ten months of 2017, the total amount of

registered FDI grew by 60.3% YoY to hit USD$28.2 bn.

• The manufacturing and processing industries remained

the leading sectors in attracting FDI, reaching USD13.8

billion, an increase of 7% YoY.

• Port operators in Hai Phong will greatly benefit from

emerging “cluster effects” in the Northern economic

triangle. The top FDI attracting provinces include Bắc

Ninh, Hà Nội, Nam Định, and Hải Phòng.

Ports in Hải Phòng continue to ride FDI inflows Newly registered and brownfield FDI projects, US$ mn

Source: FIA

Registered FDI in Northern Provinces, US$ mn

Source: FIA

Fastest growing product categories, Hải Phòng

Source: GSO

02,0004,0006,0008,000

10,00012,00014,00016,000

10M2017 10M2016

0

500

1000

1500

2000

2500

3000

3500

Bắc Ninh Hà Nội Nam Định Hải Phòng

Bắc Giang

Hưng Yên Hải Dương

10M2017 10M2016

0

50

100

150

200

250

300

Washingmachine

Monitors Fertilizer Rubber tires Steel alloy

% YoY change in output


Cargo throughput growth in Hải Phòng has been accelerating

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

2012 2013 2014 2015 2016

Mill

ion

s T

EU

CAGR 8.5%

CAGR 13.5%

Container throughput in the North

Source: VPA


Downstream ports are outgunning their upstream peers…

Comparison of port operators in Hải Phòng

Port Capacity

TEU pa

2015 2016 Note

Upstream 1,450,000 1,603,743 1,241,273 Disadvantageous position, lower handling rates

Greenport VSC 300,000 350,000 260,000 Lower handling charges, 8-10% less than VIP

Greenport

Nam Hải GMD 150,000 250,000 250,000 Still turning profit because of GMD's strong market

position

Đoạn Xá DXP 150,000 214,000 120,761 Next to Nam Hải but facing intense competition; less

container, more dry bulk handling (low margins)

PTSC Đình Vũ 100,000 265,357 n/a

Tân Cảng 128 300,000 135,000 209,394

Transvina 100,000 79,544 70,761

Hải An HAH 300,000 309,842 325,000 Most throughput is internally generated from its fleet of

4 vessels.

Downstream 2,700,000 1,854,654 2,612,056 Advantageous position, favored by liners

VIP Greenport VSC 500,000 0 350,000 Could be expanded to 800,000 TEU pa

Tân Vũ PHP 1,200,000 1,002,987 1,086,630 State-owned company, weak competitor

Đình Vũ DVP 500,000 574,635 649,224 Main client: SITC, solid revenue stream, full capacity

Nam Hải Đình Vũ GMD 500,000 277,032 526,202 Full capacity

Nam Đình Vũ 1 GMD Launch in 2018, 600,000 TEU pa


…by grabbing market share from upstream ports

Comparison of port operators in Hải Phòng

Bạch Đằng BridgeHoàng Diệu

Nam Hải

Đoạn Xá

Transvina

Greenport

Chùa Vẽ

128 Navy

Hải An

PTSC Đình Vũ

Đình Vũ

Tân Vũ

Nam Hải Đình Vũ

VIP Greenport

Nam Đình VũDownstream

Ship size up to 30,000 DWT

Traffic to shift to downstream ports


Vietnam Container Shipping JSC (VSC)


VND44,600 VND62,300 0.4% ADD LOGISTICS


• VSC is expanding VIP Greenport’s (VGP) handling capacity by a

third to 800,000 TEU by 2019 as VGP is almost operating at full

capacity as of the end of 2017. The company is establishing a back-

end logistics center and will purchase a new quay crane for the port.

The expansion requires VND122bn in capex and could generate

around VND200bn revenue of incremental container handling

revenue per year.

• We expect that the company’s net profit in 2018 will rise to

VND370bn (+36.1% YoY). Revenue is likely to rise only moderately

to touch VND1,480bn (+12.8% YoY) as VGP could reach its full

capacity of 600,000 TEU. However, we project that net profit margin

will improve by 4 percentage points to 24.3%, as VSC is

progressively paying down VGP-related debt.

• The container shipping industry’s prospects are finally

improving as liner order books have become leaner while vessel

scrapping has picked up momentum. The recovery will gradually

translate to higher throughput and slightly better handling rates.

• VSC’s valuation is attractive: VSC is currently trading at a TTM

EV/EBITDA of 5.6x, well below the peer average of 6.7x.

Stock info





P/E TTM (x) 9.7x

P/B TTM (x) 1.6x


NP growth (%) -5.3 3.9 36.1

EPS growth (%) -18.2 3.9 36.1

GPM (%) 36.6 31.6 34.8

Asset turnover

(X)

0.5 0.5 0.5

Financial

leverage (x)

1.6 1.6 1.5

ROAE (%) 17.8 17.0 20.3

ROAA (%) 11.3 10.6 13.0

CONFIDENTIAL

Dry bulk shippingA recovery scenario is on the horizon


Global dry bulk shipping shows signs of a turnaround

• The number of new built deliveries prior to 2017 has

dropped significantly. 2018 dry bulk supply may grow by

1.2%, while demand may increase by 2.7%.

• Demolition rate will maintain momentum, curbing fleet

growth. The average age of scrapped vessels at the end

of 2016 was 24.8 years, down from 27.6 years at the

end of 2014.

• As China’s appetite for high quality iron ore (62% Fe)

grows, both tonne mile demand and charter rates should

improve, especially for Capesize ships.

The industry appears to have finally bottomed Number of vessel deliveries each year, globally

Source: Clarkson Research

Orderbook by vessel class, no. of ships, globally

Source: Bloomberg

Cumulative no. of demolished ships since 2005

Source: Bloomberg

0

50

100

150

200

250

300

350

400

2012 2013 2014 2015 2016 2017E 2018E 2019E 2020E

Capesize Panamax Handymax Handysize

0

200

400

600

800

1000

1200

1400

1600

1800

2000

Dec-14 Jul-15 Jan-16 Aug-16 Mar-17 Sep-17


0

100

200

300

400

500

600

700

Dec-14 Jul-15 Jan-16 Aug-16 Mar-17 Sep-17



VOS is likely to be a strong beneficiary of the recovery

• The Vietnam dry bulk market is highly fragmented with a

lot of small players competing in the below Handysize

segment (<10,000 DWT) and a dozen of larger players

in the Handysize segment.

• There are only two players in the Handymax and

Panamax segment which are Vinalines and VOS.

• Among Vietnamese bulker companies, VOS has

significant bargaining power.

• As there are several power plants coming online in the

next few years such as Thái Bình 1, Thái Bình 2, Duyên

Hải 3, we could see VOS’s fleet becoming more active.

• VOS’s Handymax fleet is more likely to survive in this

low rate environment compared to Vinalines’ Panamax

fleet thanks to: 1) young age of around 11.9 years vs.

over 20 years for Vinalines’ Panamax fleet; this means

VOS’s Handymax fleet has lower operating and

maintenance expenses.

• Still operating at a loss (due to high D&A expenseses)

but is cashflow positive

• Trading at a discount to regional peers and likely to be a

big beneficiary of the recovering industry environment.

VOS is the 2nd largest dry bulk company in Vietnam Number of bulkers by ship size in DWT

Source: world-ship.com

Vietnam’s larges dry bulk companies

Source: VNDIRECT analysis

<10k 10k to 35k 35k to 59k >59k

Company Handysize Handymax Panamax Total DWT

Vinalines 5 4 2 455,561

VOSCO 5 4 0 325,713

Tân Bình Shipping 6 193,040

HTK Shipping 6 168,353

Total 22 8 2 1,142,667


VOS is trading at a discount to regional peers

Valuation of dry bulk shipping companies

Source: Bloomberg

Ticker CountryMarket cap,

US$ mn

Net profit

growth YoY

EPS

growth YoYROA (%) ROE (%) D/E

TTM

P/E (x)P/B (x)

EV/

EBITDA

VOS Vietnam 21.5 na na -8.5 -61.6 614.3 na 1.2 17.0

Malaysian Bulk Carriers Bhd Malaysia 201.1 na na -29.1 -56.3 70.1 na 1.8 37.0

Shipping Corp of India Ltd India 691.3 -77.5 -77.5 1.2 2.6 58.5 25.2 0.6 8.1

Cosco Shipping Hld China 9,158.8 na na -0.7 -4.1 137.8 na 1.7 24.6

Ningbo Marine Ltd China 835.8 -9.5 -9.6 2.2 4.9 82.9 40.7 2.0 na

Great Eastern Shipping India 921.6 -31.2 -31.2 5.2 11.0 82.2 7.8 0.8 4.9

Bumi Armada Bhd Malaysia 1,078.9 na na -5.1 -16.9 213.4 na 0.8 15.1

Diana Shipping Inc US 422.3 na na -5.8 -9.7 58.6 na 0.4 48.5

Dryships Inc US 367.0 -242.7 na -22.3 -40.7 39.6 na 0.6 na

Scorpio Bulkers Inc US 547.1 na na -5.3 -8.4 56.7 na 0.6 67.9

Star Bulk Carriers Corp US 703.8 na na -3.2 -6.2 97.5 na 0.7 18.1

Eagle Bulk Shipping Inc US 324.7 na na -20.8 -33.3 65.9 na 0.6 44.6

Average 1,272.8 na na -7.7 -18.2 131.5 24.6 1.0 28.6

Median 619.2 na na -5.2 -9.1 76.2 25.2 0.7 21.4

CONFIDENTIAL

MaterialsWe like the steel sector because it is a broad play on the economy but we are bearish on cement


Construction steel demand will be driven by the

following:

Real estate growth: The new supply of apartments (units

opened for sales) in Hanoi and HCMC grew by 28% YoY in

9M2017.

Infrastructure spending: The MPI expects that Vietnam will

require US$480bn capex over the next five years.

Infrastructure spending will rely more on the private sector

as ODA borrowings are becoming less available.

Steel prices will rise further due to 1) rising demand

while short-term additional capacity is limited, 2) rising

scrap prices.

Monthly construction steel sales volume

Source: VSA

New supply of apartments in Hanoi and HCMC

(units opended for sale), Source: CafeLand

Annual infrastructure spending (% of GDP)

Source: CBRE

0

0.2

0.4

0.6

0.8

1

1.2

Jan

16

Fe

b 1

6

Ma

r 16

Ap

r 16

Ma

y 1

6

Jun

16

Jul 16

Au

g 1

6

Se

p 1

6

Oct 16

Nov 1

6

Dec 1

6

Jan

17

Feb 1

7

Ma

r 17

Ap

r 17

Ma

y 1

7

Jun

17

Jul 17

Au

g 1

7

Se

p 1

7

Mill

ions tonnes

0

5,000

10,000

15,000

20,000

25,000

1Q2016 2Q2016 3Q2016 4Q2016 1Q2017 2Q2017 3Q2017

Low end Mid end High end

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

China Vietnam Indonesia Philippines Malaysia Thailand

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

China Vietnam Indonesia Philippines Malaysia Thailand

Construction steel will benefit from broad-based demand growth


Input prices should stay subdued for blast furnace operators

Low grade iron ore and hard coking coal prices may

stay soft (unlike scrap) due to: 1) China’s crackdown on

environmental issues; 2) supply of iron ore and coking coal

may outstrip demand as more projects come online in 2018

and 2019; 3) China is shifting to high-grade iron ore (62%

Fe) which requires less coking coal. Low-grade iron ore

(58% Fe) has become a lot cheaper compared to high-

grade iron ore.

Steel input raw material prices

Source: Bloomberg

Spot iron ore import into China, US$/tonne

Source: Bloomberg

0

100

200

300

400

500

600

Billet - CFR Southeast Asia, USD/t

Iron ore 62% Fe, North Chiina import, USD/t

Hard coking coal - CFR India Import, USD/t

Scrap - CFR East Asia Port, USD/t

0

10

20

30

40

50

60

70

80

90

100

01/17 03/17 04/17 06/17 08/17 09/17 11/17 12/17

58% Fe 62% Fe 62%-58%Spread

1020

1040

1060

1080

1100

1120

1140

1160

China's crude steel capacity, million tonnes

Source: Bloomberg


Domestic selling prices will remain firm, leading to margin expansion

We expect that construction steel prices will increase

by at least 10% in 2018 due to:

1) Increasing demand from real estate market and

infrastructure spending with no long steel capacity addition

during the year

2) Increasing prices of ferrous scrap, as Turkey and India

are increasingly hungry for scrap, which is the main input

for Vietnam’s steel makers.

Blast furnace steel makers will perform well

400

450

500

550

600

650

700

HPG 25mm rebar price, USD/tonnes

China 25mm rebar price USD/tonne

25mm rebar price of HPG and China average

Source: Bloomberg, Fiinpro


HOA PHAT GROUP JSC (HPG)


VND44,250 NA 3.3% NON-RATED MATERIALS


• The company’s revenue grew by 43% YoY during 9M2017,

reaching VND33,417bn thanks to 1) increase of rebar sales volume

by 31% YoY to 1.6mn tonnes and 2) increase of its selling prices by

more than 7% since the beginning of 2017.

• The Dung Quat Project (DQP) will be the main growth engine of

HPG. Phase one (completed in February 2019), will add 2mn tonnes

of rebar production per annum. Phase two (the end of 2019), will add

2mn tonnes of HRC production per annum. The total capex is around

US$2.5bn and 50% will be funded by debt. HPG expects each phase

to reach full capacity within two years. In 2018, HPG will first

complete part of the rolling factory of DQP, which will add 0.2mn

tonnes of rebar capacity.

• HPG will enjoy lower COGS per tonne compared to other

Vietnam arc furnace steel makers: Low-grade iron ore is becoming

cheaper as Chinese steel makers turn to high-grade iron ore, while

the scrap price is rising. HPG is using a mix of low and high grade

iron ore.

• Formosa Steel Corp (FHS) has started production but does not

post a major threat to HPG as the company has to set up a wide

distribution network and the process could take several years.

Stock info


Daily value 30 day (VNDbn) 174,034



P/E TTM (x) 6.6x

P/B TTM (x) 1.7x

CONFIDENTIAL

PowerA broad play on industrialization

www.vndirect.com.vn101

Industrialization and GDP growth are fueling electricity demand

• Electricity consumption will continue to grow on the

back of strong economic growth and continued

industrialization. We expect that it will grow at 10-12%

per annum based on an assumed average GDP

growth of 7% (revised Power Development Plant 7)

• Robust FDI into manufacturing and industrial activities

also fueled strong electricity demand: in 10M2017, and

the manufacturing sector attracted 48.7% of total newly

registered FDI

• Increasing demand for electricity will require a tripling

of current generation capacity over the next decade,

with an emphasis on coal and gas-fired plants until

2030.

Power consumption by sector, mn kWh (% of total)Source: EVN

52.1% 53.2% 52.7% 53.1% 54.1% 53.7%

37.3%36.1%

36.4%36.0%

35.3%35.1%

4.5%4.6%

4.7%4.7%

4.8%5.3%

4.9%5.0%

5.0%4.9%

4.4%4.3%

0

100,000

2010 2011 2012 2013 2014 2015Agriculture, Forestry and Aquaculture OthersCommercial & Hotels, Banks Administration & ResidentialIndustry and Construction

10.5%11.4%

9.3%

11.6% 11.7%10.8%

6.0%5.0% 5.4% 6.0% 6.7% 6.2%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

2011 2012 2013 2014 2015 2016

Electricity consumption growth GDP growth

Electricity consumption growth (%) vs GDP growth (%)Source: GSO


▪ The government is deregulating the power market in a phased manner: EVN is building the technical infrastructure

required for the operation of VWEM for its launch in 2019

o VWEM will remove the monopoly buying power from EVN and five power companies will be able to sign

contracts directly with power plants; large electricity buyers will be able to join the market as direct buyers

▪ Privatization of the power sector continues: PVPower, the second largest power generator after EVN, will undergo

an IPO auction on January 31st, 2018; EVN has also set a timeframe to privatize the three power generation

companies under it starting with Generation Company No 3 (GENCO 3) in 2Q2018

A phased liberalization of the power sector is underway

Vietnam power market deregulation scheduleSource: EVN

Pilot

Operation

Full

Operation

Pilot

Operation

Full

Operation

Pilot

Operation

Full

Operation

Vietnam Competitive

Generation Market (VCGM )

Vietnam Wholesale

Electricity Market (VWEM)

Vietnam Retail Electricity

Market (VREM)

2012 2015 2019 2021 2023


Increasing need to upgrade transmission lines

• The government is seeking to expand and upgrade the

country’s transmission lines to:

• Reduce the grid’s transmission losses as some

of the older lines have depreciated considerably

• Address the regional imbalance in electricity

consumption and generation capacity to

alleviate the chronic power shortage in the

southern part of the country

Transmission system expansion (PDP 7)Source: MOIT & EVN

Electricity transmission and distribution loss (% output)Source: World Bank

26,700 26,40023,550

34,966 33,888 32,750

2,746 3,592 3,7147,488

4,076 3,435

0

10,000

20,000

30,000

40,000

2016-2020 2021-2025 2026-2030

500kV substation (MVA) 220kV substation (MVA)500kV lines (km) 220kV lines (km)

10.2 9.2

8.9 8.9 8.67.9

0.0

2.0

4.0

6.0

8.0

10.0

12.0

2010 2011 2012 2013 2014 2015

Vietnam Indonesia ChinaThailand Germany South KoreaThe US


▪ We like PC1 due to the growing demand for expansion and upgrading of transmission lines, and

also for the following reasons:

o PC1 will benefit directly from the investment in the grid as a market leader in the power engineering sector

o Is shielded from unpredictable variables such as weather patterns, commodity prices (coal or natural gas) and

electricity selling price to EVN, unlike listed generation companies such as NT2 and PPC

▪ Within the upcoming waves of IPOs in the power sector, PVPower will be a suitable choice for

investors who are looking to bet more directly on electricity demand growth due to

o Its portfolio of multi-source generation plants which provide a natural hedge against commodity price exposure.

o Sizable potential capacity expansion planned in the next few years.

Power Sector stock picks: We like power infrastructure players more than generators


Power Construction JSC No. 1 (PC1)


VND39,000 VND42,100 n/a HOLD POWER


▪ Founded in 1963, PC1 is the market leader in power construction

and engineering and has diversified into three other businesses.

The firm was equitized in 2005.

▪ Market leader in industrial production: PC1 is the only company

capable of designing & manufacturing single steel poles 110kW,

220kV – 1,2,4 in the market, accounting for 40% of the market with

continually rising export sales. The two fully-owned steel

manufacturing factories have a capacity of 50,000 tons/year are

100% owned by PC1. Most recently, the company has partnered

with AG Ajikawa (AG) of Japan to tap into their large customer

portfolio worldwide.

▪ Dominant market presence: 34-38% market share in

transmission lines and substations engineering & construction

sector with an order back-log value of US$158.4mn

(~VND3,600bn); advantage in bidding for construction project

located in complex terrain due to advanced equipment and good

track record with EVN.

▪ The potential growth of power construction is still high:

According to the revised PDP 7, total investment for power grids

development approved by the government for 2016-2020 period is

US$9.5bn and for 2021-2030 is US$26.9bn.


NP growth (%) 24.0 -1.2 91.0

EPS growth (%) 24.0 -23.8 (*) 44.1

GPM (%) 17.5 15.3 19.1

Asset turnover

(x)0.8 0.7 0.8

Financial

leverage (x)2.3 2.3 2.3

ROAE (%) 17.8 13.1 20.3

ROAA (%) 7.8 5.8 8.9

(*) 40,189,928 shares were issued during 2017 as

stock dividend and a private placement

Stock info





P/B TTM (x) 1.8

P/E TTM (x) 16.0


Power Construction JSC No. 1 (PC1) (continued)


VND39,000 VND42,100 n/a HOLD POWER


▪ Expansion into hydropower will bring stable cash flows: With current hydro generation of 60MW, PC1 just

had another 2 plants (54MW total) to go online in November 2017. Another 2 plants with a combined capacity of

48MW in total will be built in 2018 and go into operation in 2019. Total licensed power capacity will reach 162MW.

PC1 is working towards making hydropower the second core business segment after electrical construction and

this should help compensate for the volatility inherent in its order book-based engineering business.

▪ Real estate segment is expected to contribute significantly to its 2018 results: Revenue from My Dinh Plaza

II of VND1.1trl (US$48.4mn) and EAT of VND216bn (US$9.5mn) will be booked in 2018. PC1 has completed

selling 70% of the project by the end of 2017. We believe complete sales of apartments will be possible by the

project’s favorable location in the West of Hanoi and My Dinh center.

▪ Valuation looks fair now but we still see long-term upside: The recent surge in the stock price has diminished

near-term upside, but we think the stock is still a good long-term bet as the fundamentals still suggest further

upside potential over the long-term.

CONFIDENTIAL

AgricultureRecovering and restructuring


2017 was a year of recovery for Vietnam’s agriculture sector

Monthly average change in export prices of key agricultural products (Jan 2015 = 100)Source: MARD, VNDIRECT

Export performance of key agricultural productsSource: MARD, VNDIRECT

Title:

Source:


0

20

40

60

80

100

120

140

160

180

Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17

Rice Coffee Rubber Cashew Pepper

10M16 10M17 %∆ 10M16 10M17 %∆

Coffee 1,518 1,182 -22% 2,757 2,707 -2%

Rubber 994 1,071 8% 1,260 1,799 43%

Rice 4,127 5,097 24% 1,856 2,287 23%

Tea 103 116 13% 169 186 10%

Cashew nuts 291 292 0% 2,332 2,892 24%

Pepper 159 192 21% 1,287 1,018 -21%

Vegetables and fruits N/A N/A N/A 2,008 2,865 43%

Cassava 1,327 1,310 -1% 232 223 -4%

Volumes ('000 tonnes) Value (US$ mn)

Agriculture production in 9M17 grew at a considerably higher rate than the same period last yearSource: GSO, VNDIRECT

Title:

Source:


0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

242,000

243,000

244,000

245,000

246,000

247,000

248,000

249,000

250,000

251,000

9M15 9M16 9M17

Value of agriculture sector in GDP at 2010 constant prices (VNDbn, LHS)

YoY growth (RHS)

9M2017 volumes and revenues of major fertilizer producers in VietnamSource: MARD, Company reports, VNDIRECT

Volumes ('000

tonnes) YoY growth (%)

Revenue

(VNDbn) YoY growth (%)

DPM 644 0% 6,546 4%

DCM 656 19% 4,343 35%

LAS 786 6% 2,832 -1%

BFC 519 10% 4,855 6%

NFC 152 10% 450 6%

VAF N/A N/A 914 4%

Fertilizer import 3,526 18% 21,497 16%

Fertilizer export 730 38% 203 34%


The agriculture sector is still plagued by problems

▪ Despite large export volumes, Vietnam’s agricultural

products are still at the low-end of the value chain.

▪ The dependence on a few select export markets

exposes exporters to demand and price fluctuations in

those markets.

▪ Fragmented farmland continues to hinder the

restructuring process, especially mechanization

▪ High yields for some key agricultural products (rice,

coffee) could be credited to the expansion of intensive

farming, which led to rising environmental costs.

Vietnam’s export market base is relatively concentrated for some commoditiesSource: GSO Nov 2017, VNDIRECT

Vietnam's fertilizer consumption per hectare of arable land is much higher than its regional peers and the world average Source: World Bank, VNDIRECT

Market Export product Proportion in product's total export

Rubber 63.1%

Rice 39.8%

Vegetables and fruits 75.6%

Cassava 87.7%

Fishery 17.4%

Cashew nut 36.4%

Pepper 19.3%

China

USA

Title:

Source:


-

100.0

200.0

300.0

400.0

500.0

600.0

2008 2009 2010 2011 2012 2013 2014

kg/h

a

China India Cambodia Thailand Vietnam World

Vietnam’s broken rice price trades at a discount to Thailand’sSource: FAO, VNDIRECT

Title:

Source:


250

300

350

400

450

500

550

600

650

2010 2011 2012 2013 2014 2015 2016

US

$/tonne, FO

B

Thai 5% Viet 5% Thai 25% Viet 25%


Changing food consumption patterns and efficiency upgrade requirements create an opportunity for the private sector

▪ Demand for agricultural products will be driven by

population growth and the continuous increase in

disposable incomes, not only domestically but also

in traditional export markets, eg. China.

▪ A changing consumption mix towards animal

proteins creates opportunities in animal husbandry.

▪ Future farming growth has to be driven by yield

improvements that do not compromise food safety;

this is boosting demand for high-quality fertilizers

and seeds

▪ Big companies are jumping on the agricultural

bandwagon to capture the growth potential and to

build integrated value chains

▪ Those that take the lead in consolidation of

fragmented segments and achieve large-scale

production might build a significant lead.

Share of household food expenditures by income quintile (%) (Source: GSO, VNDIRECT)

Daily consumption of select food types in East and Southeast Asia (kcal per capita per day)(Source: Jamora and Labaste 2015, World Bank)

Title:

Source:


0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Q1 Q2 Q3 Q4 Q5 Total Q1 Q2 Q3 Q4 Q5 Total

Rice Other cereals Animal products Aqua products Fruits and vegetables All other

2002 2014

*’Others’ includes principally sugar, other sweeteners, legumes, pulses,

nuts, other oils, spices, and animal fats.

2009 (actual) 2030 (projected) Change

Rice 889 850 -4%

Other Cereals 535 645 21%

All Meats 350 664 90%

Fish 54 79 46%

Milk 55 78 42%

Vegetables 74 111 50%

Fruits 160 280 75%

Edible oil 143 210 47%

Others* 434 273 -37%

Total 2,694 3,190 29%


Loc Troi Group (LTG)


VND43,500 VND66,200 6.9% ADD AGRICULTURE


▪ Market leader in the CPC segment with 21% market share, far

exceeding the second largest player with 8.3% market share. The

company has an extensive distribution network of 5,000 retailers

across the country.

▪ Best-in-class facilities in the seed segment with 3 modern

research centers and 7 seed factories that develop and supply OP

rice seeds and hybrid corn and vegetable seeds.

▪ Improving rice production efficiency and output quality via an

integrated value chain, allowing the company to leverage its

strength in the CPC and seed segments and enabling higher and

more consistent rice quality with controlled chemical residues. LTG

has also built strong relationships with farmers in the Mekong Delta

through a team of over 1,200 agricultural engineers.

▪ Capturing potential in the agriculture sector:

(1) CPC sales driven by growing demand for food and still limited

application of new technology in production

(2) Opportunities to expand its market share in the seed industry

following a shift from informal to formal channel due to demand for

higher quality seeds and substitution of imported products

Key ratios 2016A 2017E 2018F

NP growth (%) 8.8 25.8 18.4

EPS growth

(%)

7.2 25.8 18.4

GPM (%) 20.8 22.4 23.0

Asset turnover

(x)

1.2 1.3 1.3

Financial

leverage (x)

2.9 2.8 2.7

ROAE (%) 16.2 19.1 20.3

ROAA (%) 5.5 6.9 7.7

Stock info





P/B TTM (x) 1.4

P/E TTM (x) 7.5


Loc Troi Group (LTG) (continued)


▪ Capturing potential in the agriculture sector (continued)

(3) Rice segment growth continues to be driven by export markets, esp. China and Philippines

▪ Attractive valuation: 2017 and 2018 forward P/E are around 7.8x and 6.7x, which is fairly cheap given (1) its

leading market share in the CPC segment, (2) leading position in OP rice seed production, (3) expected

improvement in efficiency following the restructuring of the distribution network and recovery in the rice segment,

(4) a uniquely integrated value chain in the rice segment which is helping improve output quality


VND43,500 VND66,200 6.9% ADD AGRICULTURE

*HNG incurred losses in 2016 but made profit in 9M2017

Source: Stoxplus, VNDIRECT

Peer comparison

Company Country

Market Cap

($US mn)

TTM NPAT

growth (%)

TTM EPS

growth (%) TTM ROA (%) TTM ROE (%) D/E (x) TTM P/E (x) P/B (x)

HNG Vietnam 319.7 N/A* N/A* 2.4% 7.8% 1.4 8.9 0.7

PAN Vietnam 176.3 40.3% 16.7% 7.9% 10.6% 0.2 11.1 1.5

NSC Vietnam 74.1 31.9% 31.9% 13.0% 17.4% 0.1 8.6 1.8

HAI Vietnam 63.4 -24.6% -26.3% 3.0% 5.0% 0.4 14.4 0.7

SSC Vietnam 38.5 17.9% 17.9% 10.4% 12.5% 0.1 19.2 2.6

LTG Vietnam 127.4 16.4% 16.4% 6.4% 17.7% 1.3 7.4 1.3

Peer average 16.4% 13.3% 7.3% 10.7% 0.4 12.4 1.4

Peer median 24.9% 23.5% 7.9% 10.6% 0.2 11.1 1.5


This report has been written and distributed by Research Department, VNDIRECT Securities Corporation. Theinformation contained in this report is prepared from data believed to be correct and reliable at the time of issuance ofthis report. Unless otherwise stated, this report is based upon sources that VNDIRECT considers to be reliable. Thesesources may include but are not limited to data from the stock exchange or market where the subject security is listed,or, where appropriate, any other market. Information on the company(ies) are based on published statements,information disclosure and announcements of the company(ies), and information resulting from our research.VNDIRECT has no responsibility for the accuracy, adequacy or completeness of such information.

All estimates, projections, forecasts and expression of opinions contained in this report reflect the personal views andopinions of the analyst(s) responsible for the production of this report. These opinions may not represent the views andposition of VNDIRECT and may change without notice.

This report has been prepared for information purposes only. The information and opinions in this report should not beconsidered as an offer, recommendation or solicitation to buy or sell the subject securities, related investments or otherfinancial instruments. VNDIRECT takes no responsibility for any consequences arising from using the content of thisreport in any form.

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