Vietnam's stock market outperformed the region's stock markets in 2013 (+20%) and in the first 2 months of 2014 (+16.2%). Market liquidity increased sharply from US$60m per day in 2013 to roughly US$100m in the first 2 months of 2014. With the total market cap of US$55bn for both Hanoi & Hochiminh Exchanges, Vietnam has gained more attention from investors, especially foreign institutional ones (foreign investors currently own 28% of Vietnam listed stocks). Below is Saigon Securities' summary of Vietnam’s progress in the macro area and the themes expected for 2014, which we deem to be the engines behind the market movement recently and in the future.
4 themes of Vietnam Macro in 2014
- Double-goal strategy: Supporting growth while maintaining macro stability:
Five years ago in 2009, the Vietnam government initiated the so-called “4% lending rate subsidy” stimulus package which ushered in a period of easy, accessible credit that ultimately failed to support sustainable GDP growth. Core problems such as inflation, the depreciation of the Dong, bad debt, etc, began to emerge in 2010, and by 2011, the government found themselves fully submerged in the crisis. 2012, and well into 2013, was a period of assessments of the damages done and methods of amending those damages. Solutions such as comprehensive banking restructuring and equitising state owned enterprises (SOEs) were gradually proposed, ratified, signed into law and implemented in 2013. This brings us to date, with the 2015 deadline of completing comprehensive restructuring before the Party Congress in 2016, we think that 2014 would serve as an important stepping stone to accelerate the long-awaited reform – or in short, a year of ”less talking but more walking”.
In 2014, the government will continue to advocate its double-goal strategy: supporting growth while maintaining macroeconomic stability (GDP growth at 5.8%, CPI around 7%, VND depreciation at 2% at most, budget deficit at 5.3% of GDP, credit growth at 12%-14%, maintain deposit rate stability and lower lending rate for priority sectors). It seems that the Vietnamese government will be more inclined to promote pro-growth measures in 2014 as local businesses cannot bear the brunt of another prolonged reform. The end of the 5-year plan (2011-2015) is within arm’s reach and the government needs to salvage and implement some of the previously announced reforms.
- Accelerating SOEs restructuring:
SOEs restructuring were plagued with delays in 2013, and we expect that a number of 2013 IPOs would be carried over to 2014, including Viglacera (glass & ceramics), Vinatex (textile and garment) and Vietnam Airlines. A number of new IPOs were announced including ACV (Airport Corporation of Vietnam, owner of all the major airports in Vietnam, including Tan Son Nhat, NoiBai and primary investor of the Long Thanh Airport mega-project), and a number of the Ministry of Transport’s CIENCO (Civil Engineering Construction Corp, No 1-4-5-6, which are all major contractors for most of the public infrastructure projects, and the first one to go IPO would be Cienco 5 on March 25). The new regulation that stipulates the listing of stocks within one year after an IPO would entice investors’ participation. Other developments in 2014 would include SCIC (State Capital Investment Corp) and SOEs’ non-core business divestment, where the Ministry of Finance might issue a decision that permits SCIC and SOEs to sell state’s assets below book value. Anyway it should be a big job, as about 432 SOEs need to be privatized in 2014-2015 (2011-2013: less than 100 SOEs equitised deal to be completed).
- A year of loose infrastructure spending:
With Vietnam’s poor infrastructure score against ASEAN peers, it is conspicuously rational for the government to direct its focus onto upgrading Vietnam’s infrastructure system. Two important sectors include transportation and energy, with capital expenditure plan to increase by 33.3% and 11.7% respectively in 2014. It is estimated that Vietnam needs approximately US$167bn – similar to Vietnam’s current GDP - in the next ten years for infrastructure investments (source: ADB), and this leaves Vietnam with a dilemma: to stay competitively fit against its ASEAN peers Vietnam needs to enhance and improve its infrastructure, but with investment needs exceeding available funding it will also need to accurately identify and execute the most viable projects. However, it should be noted that infrastructure investment is a long term strategy and its multiplier effect could potentially translate into significant growth in the coming years, but not immediately in 2014.
- Funding source: Foreign investors remain an extremely imperative part of the equation
Large-scale infrastructure projects, banking sector reform and more aggressive IPOs raise the question of funding sources. Public investment will remain identical in 2014 (nearly US$13bn, similar to 2013’s level). The government expects higher credit growth in 2014 (target 12-14%, but our estimate is higher at 15% - because of a soft-landing for the banking sector), and seemingly factors behind higher credit growth are not only consumer credit (as in 2013) or SOEs, but also private investment. Foreign investors remain an extremely imperative part of the equation, not just FDI (2013 high commitments might result in better disbursements in 2014), or FII (with foreign ownership limits extending for both bank and non-bank institutions), but ODA would become an integral source of financing. It is reported that undisbursed ODA reached US$15bn so far, and the government has set aside roughly US$1bn as counter-capital for 2014 with detailed distribution sent to all provinces, so it signals more disbursement of ODA for 2014.
6 themes of Vietnam stock market in 2014
- The economy has bottomed out and with macro stability ensured all the elements are in place for upsides ahead.
- Given the gradual economic recovery and on-going reforms which triggered positive catalysts for the market, market valuation re-rating is envisioned for 2014.
We believe the VN Index could increase 17%-20% as compared with 2013-end (which closed at 504.6). This then renders the notion that the VN Index might reach 590-600 by the end of this year. If we add a 5% dividend yield, the average total return from Vietnam equity market will be 23% in 2014.Our forecast is based on 2014 EPS growth at 7%. We expect market PER will be re-rated from the level of 10.7x in the beginning of the year to 12x – 13x by end of this year, powered by gradual economic improvement and the on-going reforms which will trigger positive catalysts such as FOL extension, new IPOs or banks’ M&A etc
- Time to revisit the banking sector?
In 2013, given serious challenges facing the banking sector, investors shied away from bank stocks and this corresponded with our consistent view of 'Sector Underweight' so far. We believe the time is prime to revisit the sector in 2014, although not immediately, but possibly by end of 1H14. After nearly 2 years of being head-over-heels with challenges, management at most of the banks have now taken on a very conservative approach and most have decreased operating expenses by reducing staff, salary cuts and organisational restructuring to improve operational efficiency. Developments in retail banking and consumer finance are the choices for many banks to compensate for NIM reduction.
- Top line growth will be stronger in 2014, margin expansion will trail that of 2013
2013’s average sales/net profit growth of 62 companies under SSI coverage are 10% and 19%, respectively. In 2013, margin expansion was supported by significantly lower interest rates, lower input costs and operating expenses while top line growth was quite weak, corresponding with the overall weak economy. In 2014, our forecast on revenue growth is better than 2013 while margin will stabilise with support from lower CIT (from 25% in 2013 to 22% in 2014), no more salary cuts and slightly lower interest rate in 2014. 2014’s average sales/net profit growth of 62 companies are projected at 14% and 10%, respectively. 2014 median EPS growth is 9% (2013: 0%) while 2014 dividend yield is 5% (similar to 2013’s level).
- Industrial & Infrastructure related sectors are our favorites this year.
- Turnaround stocks are sexy.
As the economy has bottomed out, different sectors will exhibit different turn-around phases. We believe that the Consumer sector has already bottomed out in 1H13 while Banking, Property and a number of commodity sectors have not yet reached their bottom. For turnaround companies, we would like to note that their valuations are still very high as they have just transitioned from 'loss' to 'profit-making' status and their balance sheets remain under pressure to a certain degree. Those stocks, mostly mid and small cap, will attract investors' attention, especially that of retail investors in 2014.
The author of this article is Phuong Hoang, head of research, Saigon Securities. [email protected]
