EQUITY STRATEGY ● EM ASIA
15 February 2019We remain positive on Vietnam
Vietnam remains an attractive market, in our opinion. Trade tensions should bring more FDI into
Vietnam and create more jobs as firms move manufacturing from China. The latest FDI data
corroborates anecdotal evidence we have been noticing for the past few months. A combination
of strong economic growth, stable currency, contained inflation and strong FDI flows should
help domestic equities. 2018 was also a year of domestic selling as investors worried about the
impact of trade tensions and knock-on effect of foreign selling in emerging markets on
Vietnamese equities. However this now seems to have played out and domestic investors’
sentiment should turn positive, boosting markets. Given these factors, we maintain our positive
stance on the market, despite valuations being slightly above their long-term average. We
believe earnings growth should provide some support to valuations.
Exhibit 1: FDI soared in January 2019 after
contracting for much of 2018
Exhibit 2: Consumption look strong with
robust retail sales
Source: CEIC, HSBCSource: CEIC, HSBC
Vietnam’s 12m fwd PE peaked in April 2018 at 21.3x, more than two standard deviations above
its average levels, but declined amidst the market selloff later in the year. Vietnam’s current 12m
fwd PE at 15.8x now represents only a small premium to its 5-year average of 15.3x. We think
2019 consensus EPS growth looks reasonable at 9.8%, while consensus is more bullish on
2020 earnings with growth pegged at 33.1%.
-5050
100
150
200
-5050
100
150
200
Jan-16Oct-16Jul-17Apr-18Jan-19
Total registered capital
Total cap: Manufacturing
New capital: Manufacturing
New registered capital
% y-o-y% y-o-y
0%
5%
10%
15%
20%
25%
30%
Jan-13Jan-14Jan-15Jan-16Jan-17Jan-18
Vietnam retail sales growth, yoy %
Vietnampositive
We remain positive on Vietnam
Combination of strong economic growth, low inflation and stable
currency bodes well for Vietnam equity market
Latest data corroborates anecdotal chatter of manufacturers moving
into VietnamEQUITY STRATEGY ● EM ASIA
15 February 2019
Exhibit 3: Market valuations and consensus EPS growth
Market 12m trl PE 5y avg PE Prem/disc 2019 EPS
growth
2020 EPS
growth
Vietnam 15.8 15.3 3.4% 10% 33%
Bangladesh 16.2 15.8 2.2% na na
Sri Lanka 8.4 13.2 -36.4% 8% 15%
Source: DSE, Bloomberg, Refinitiv, HSBC
Consumption looks robust, with retail sales growth at 18.6% y-o-y in December, its highest pace
since March 2018.In our view, there are two key patterns emerging in Vietnam. Firstly, rural
FMCG consumption is picking up in Vietnam while urban FMCG consumption has flatlined.
Secondly, discretionary consumption is doing better than staples. In the banking sector, credit
growth has moderated but asset quality has improved. Credit growth moderated to 14% in
2018, below the State Bank of Vietnam’s (SBV) target of 17%, down from 18.2% in 2017. Lower
credit growth has come along with an improvement in asset quality, with on balance sheet NPLs
falling to 1.89% in 2018 from 1.99% in 2017. NIMs haven risen to 3.3%, and are now close to a
5-year high. The reduction in NPLs, rising NIMs and reasonable credit growth have helped push
up ROEs of banks to a 7-year high of 17.6%. As for real estate, companies in the sector
continue to see good demand, although there have been some delays in projects due to issues
with land acquisition.
Vietnam’s dependence on exports for growth could make it vulnerable, if there is a broader
based global slowdown in trade due to escalation of trade tensions. Exports have been a major
engine of the economy in recent years but have already shown signs of slowing down. Investors
would need to be cautious if a major slowdown in global trade materialises. But, as we discuss
elsewhere in this note, trade tensions may actually lead to more foreign investment in Vietnam.
Another issue with the market is foreign ownership limits, which could limit investors’ ability to
own certain large stocks. However we believe there are several opportunities for foreign
investors if they are prepared to do a deep dive into Vietnam stocks, and look beyond some of
the popular names where further investment is not possible.
2018 in review
As we enter the Year of the Pig, we look back at how Vietnam performed in 2018. Vietnam’s VN
index fell by -11.2% in USD terms in 2018 but managed to outperform MSCI Frontier Markets (-
19.1%) and MSCI Asia ex Japan (-16.3%).
Exhibit 4: VN index performance
Source: Refinitiv Datastream, HSBC
60
70
80
90
100
110
120
130
140
Jan-18Feb-18Mar-18Apr-18May-18Jun-18Jul-18Aug-18Sep-18Oct-18Nov-18Dec-18Jan-19Feb-19
VN Index (USD terms)
Apr: Q1
GDP growth
comes in at
7.4% yoy,
with Mfg
growing at
13.6%yoy
Apr: VN
index
reaches
peak
May:Vinhomes
raises 1.35bn
USD, in largest
fund raising in
Vietnam
July: Q2
GDP
growth at
6.7% yoy
Oct:Q3 GDP growth
accelerates to 6.8%
yoy, Mfg growth at
13.1% yoy
Jan:Q4 GDP
growth was
estimated at 7.3%
yoy, Mfg grew at
13.1% yoy
Nov:
Vietnam
ratifies
CPTPP
trade
agreement
Oct:
European
Commission
agreedto
terms of
EVFTA
Sep: FTSE
adds
Vietnam to
watchlist for
upgrade to
EM status
May: US imposes
anti dumping duty
on Vietnam steel
originating from
China
Jan:Credit growth slowed
to 14% yoy in 2018 down
from 18.2% in the
previous year
Jan:US
imposes
tariffs on
washing
machines and
solar panels
EQUITY STRATEGY ● EM ASIA
15 February 2019Vietnam had a strong start to 2018, rising around 22% by mid-April and then declining 25% in
the next quarter. The market was range-bound in 2H18. The volatility was driven by a
combination of factors, such as the reshuffling of money from the secondary market into IPOs
(Vietnam had two of the biggest IPOs in its history), profit-taking after a very strong bull run, and
a broader emerging market pressure as a result of global factors, such as a strengthening USD,
higher US yields and rising oil prices. We believe one of the main reasons was the fear of a
market decline by local retail investors who dominate the market, in anticipation of foreign
outflows. At the beginning of 2018, a stronger USD and US rate hikes weakened the appetite
for EM assets, including frontier markets. This was exacerbated by increased participation of
locals in derivatives market. Locals could now use the derivatives market (launched in August
2017) to position for a market decline.
GDP growth remained strong at the start of the year, with manufacturing in particular witnessing
strong growth. Continued strong growth, signing of free trade agreements, Moody’s upgrade of
Vietnam’s rating by a notch to Ba3 stable, and a possible FTSE upgrade to EM status were not
enough to boost markets, which trended lower towards the end of the year. Yet things were not
as bad as other frontier markets. Vietnam is the only market to have seen net positive foreign
inflows (USD1.88bn) in 2018 and inflows (0.06bn USD) have continued in January 2019.
Trade tensions and currency stability were particular concerns for investors, given VND’s
correlation with the CNY, and CNY weakness during the year. On both these fronts, Vietnam did
better than some people expected. The VND was relatively stable despite CNY weakness
during the year, while trade tensions may actually lead to more foreign investment in Vietnam,
which we discuss in more detail later in this note.
The outlook for Vietnamese equities and investor confidence in Vietnam in general should be
shaped by following key factors, in our view.
Macroeconomic environment, i.e. growth, inflation and currency
Trade tension and impact on Vietnam
Consumption trends
Banking sector credit growth and asset quality
SOE reforms and privatisation
Foreign ownership limits, i.e. access to foreigners
Real estate fundamentals
We look at each of these factors in details.
Macroeconomic environment
Strong growth, low inflation and stable currency: Vietnam finished 2018 on a strong note,
with GDP growth accelerating to 7.3% y-o-y from 6.9% a year earlier. The manufacturing sector
in particular showed strength into year-end 2018, despite a cyclical slowdown in electronics
trade and rising trade tensions globally. Meanwhile, the services sector continues to outperform
due to declining unemployment, rising wages, and expansion of the tourism industry. Concerns
over currency stability in 2018, due to the VNDs correlation to the CNY and trade links to China,
also proved to be overdone, with the currency depreciating only 2.1% vs the USD against 5.4%
for the CNY.。。。。。。