sector watch

Transcription

sector watch

R E S E A R C H
&
I N V E S T M E N T
A D V I S O R Y
SECTOR WATCH
March 2010
Research & Investment Advisory
Saigon Securities Inc.
SECTOR WATCH
EXECUTIVE SUMMARY
2009 was another unprecedented year in terms of stock performance as well as economic
recovery. VNindex ended the year 2009 at 494.7; below its October peak of 625.02, but still
represents an impressive return of 58% for the year. The dynamic forces behind the strong equity
market performance in 2009 were the stimulus package which helped boost credit & GDP growth
and the launching of many successful margin lending programs via various brokers that helped
add more liquidity to the market. Regarding economic recovery, facilitated by the large-scaled
government’s stimulus package and resilient domestic consumption, the Vietnamese economy
has managed to recover from the worst slowdown in decade in 2009, making it one of the twelve
countries in the world that experienced positive GDP growth and the fastest growing nation
among its Southeast Asian peers.
While we are bullish on the Vietnam’s long-run growth potentials we are cautious about on-going
path of the economy in 2010 post economic crisis. Our biggest concern is that private sector’s
resilience and dynamics would be undermined by the crowding-out effect of the growth-biased
economic policies in favor of the state-owned sector. Additionally the return to the optimal longterm growth path may be hampered due to slow restructuring process across the economy in the
absence of expected creative destruction in the past few years. The monetary and fiscal policies
in 2010 will help to ensure the economic growth rate on one hand and to stabilize the macro
balances on the other hand. The government will have to walk a fine line to keep inflation at 7%
and GDP growth rate at 6.5%, which may lead to changes in macro policies. We expect 2010
GDP to grow at 6.1%, lower than the government’s target of 6.5%. We also forecast CPI to be
about 9%, higher than the government’s expectation of 7%.
We expect the credit market to normalize in the second and third quarter and may return to the
tightening mode in late of the third quarter when massive sales of public debt instruments may dry
up banking liquidity. We believe base rate will likely increase to 9% in coming few months and
hike to 10% at most by year end. Base rate will be likely changed as cap on deposit rates only in
2010.
Trade deficit and balance of payment risk will continue to persist in 2010 though we expect
weakened currency and associated measures, such as applying maximum interest rate
applicable on USD deposits of economic entities, help to stabilize these issues. We expect
another 3-4% depreciation of VND against USD for the rest of the 2010 after the most recent
currency adjustment.
In our view, the course of monetary policy continues to be the dynamic driver of the stock market
in 2010. We believe the stock market will likely to take off when banks manage to attract
sufficient and sustainable deposits for their lending activities, and inflation shows signs of being in
control as this is the preliminary condition for the SBV‘s ‘green light’ on accommodating credit
growth to achieve GDP growth target. And as usual earnings and valuation will also play an
important part in determining the stock market’s direction. For all companies under our coverage
we expect 2010 revenue to grow by 17% and net profit to grow 12%. Diluted EPS growth for 2010
will be at -7% which yields a 2010 PE of 11x. This PE is rather attractive given the growth
potentials of the country. For 2010 we believe sectors such as banks, consumer goods,
consumer discretionary and services, fisheries, natural rubber, information technology, real
estates are worth considering for investments.
2
Sector Watch
March 2010
TABLE OF CONTENT
SUMMARY .................................................................................................................................................... 2
ECONOMY .................................................................................................................................................... 4
EQUITY MARKET ......................................................................................................................................... 8
SECTOR FOCUS: ....................................................................................................................................... 14
Banks ...................................................................................................................................................... 14
Building Materials and Fixtures ............................................................................................................ 20
Brick............................................................................................................................................. 21
Cement ........................................................................................................................................ 24
Construction Steel ....................................................................................................................... 27
Plastic construction pipes ............................................................................................................ 30
Coal Mining ............................................................................................................................................. 33
Commodity Chemicals (Natural Rubber) ............................................................................................. 36
Consumer Goods (F&B Products) ...................................................................................................... 40
Electricity ................................................................................................................................................ 46
Farming & Fishing ................................................................................................................................. 50
Fisheries ...................................................................................................................................... 50
Livestock feeds ............................................................................................................................ 52
Seeds .......................................................................................................................................... 54
Insurance ................................................................................................................................................ 57
Oil & Gas ................................................................................................................................................. 60
Pharmaceuticals..................................................................................................................................... 63
Real Estates Holding & Development .................................................................................................. 66
Technology & Telecom .......................................................................................................................... 76
Marine Transportation(Dry Bulk Shipping) ......................................................................................... 81
Transportation Services (Port Operation services)............................................................................ 83
APPENDIX SSI COVERAGE LIST: ............................................................................................................ 88
March 2010
Sector Watch
3
ECONOMY
MACRO-ECONOMY REVIEW OF 2009 AND OUTLOOK FOR 2010
2009 REVIEW: MODERATE RECOVERY ON STIMULUS PACKAGE
The large-scaled government‟s stimulus package and resilient domestic consumption helped the
Vietnamese economy to recover from the worst slowdown in decade in 2009, making it one of the
twelve countries in the world that experienced positive GDP growth and the fastest growing nation
among its Southeast Asian peers.
Since export and FDI performed poorly in the first few months of 2009, domestic consumption became
a focus in an effort to save the economy from a severe stagnation. A huge stimulus package was
quickly implemented in both fiscal and monetary areas in February 2009. Interest subsidy lending
scheme helped to revive a slump in credit activities that started from late 2008 and prolonged to the
beginning of 2009. It provided 400 trillion VND working capital flow at low rates for the economy and
induced a booming credit growth of 37.7% in 2009. Reduction and reschedule of income tax for SMEs
as well as rebate of value added tax for 20 major consumers goods valued at 20,000 billion VND
were introduced to stimulate business activities and consumption. Public expenditure increased
40.5% year over year in budget allocation for public investment. Such expansionary fiscal stance
resulted in a record budget deficit of 6.9% GDP.
Figure 1: Public investment growth and fiscal
deficit
Public investment growth (%)
35%
Figure 2: 2009 monthly credit growth
2009 Monthly credit
growth
% Fiscal deficit/GDP
30%
6.00%
25%
5.00%
20%
4.00%
15%
3.00%
10%
2.00%
5%
1.00%
12/09
11/09
10/09
09/09
08/09
0.00%
07/09
-10%
06/09
2009 E
05/09
2008
04/09
2007
03/09
2006
01/09
2005
02/09
0%
-5%
Sources: GSO, MOF, SBV
It is noted that private sector with saving pools also proved resilient throughout the tough time, posting
a 11% increase in value of good consumed as represented by retail sales growth in real term for
2009. Private investment increased by 13.8%, accounting for 39.5% of the total investment.
Figure 3: Private investment and real retail sales
growth
Private investment growth
Figure 4: Relative share of investments by
ownership
private investment
Retail sales growth in real term
45%
public investment
FDI
60.0%
40%
35%
50.0%
30%
40.0%
25%
30.0%
20%
15%
20.0%
10%
10.0%
5%
0.0%
0%
2006
2007
2008
2009
2005
2006
2007
2008
2009
Source: GSO
4
Sector Watch
March 2010
Since stimulus package kicked in and resilience of the private sector evolved more apparently from
the second quarter, the YoY GDP growth climbed from the low of 3.1% in 1Q09 to 4.4% in 2Q09.
Compared to 1Q‟s performance, the GDP growth rates almost doubled to 6% and 6.9% respectively in
3Q and 4Q when recovery in FDI and export accelerated moderately compared to the first half.
Particularly on FDI with a total USD 10 billion disbursement of which roughly 75% from external
partners shown that the fear on collapse of FDI was over-blown. Full year GDP growth for 2009
reached 5.3%, higher than many had anticipated. Industrial production growth also improved in line
with the recovery of export activities and local demand, posting a 7.6% annual growth rate for the year
compared with the growth rate of 2.1% in the first quarter. Government stimulus, loosened credit, and
low input cost environment contributed greatly to the growth of the construction sector, which grew
12.1% year over year in 1H09 and 7.6% for the full year.
Figure 5: VN’s sectoral growth performance
Figure 6: Comparative GDP growth performance
Vietnam
12%
Thailand
Philipines
Indonesia
10%
10%
8%
6%
Agricultural, Forestry,
Fisheries
8%
Industry, Construction
6%
Services
4%
4%
2%
2%
0%
0%
2005
2006
2007
2008
2009
2005
2006
2007
2008
2009
Sources: GSO, IMF
CPI decreased sharply from 23.2% in 2008 to 6.8% in 2009 due to subdued aggregate demand.
However, inflation pressure has built up quickly toward the end of 2009 as commodities price
rebounded in line with the global economy recovery and local booming credit growth fed into
burgeoning demand expansion in the second half.
Trade deficit lingered in 2H09 as the economic recovery and import demand gained pace. Trade
deficit jumped by 80% from 4.6 billion USD in 1H09 to 8.3 billion USD in the 2H09 if excluding one-off
export of gold and jewelries in 1Q09. It is noted that 90% of trade deficit turnover had come from
Chinese partners and 90% of imported turnover are materials and machineries.
Surging trade deficit led to mounting devaluation pressure on the local currency. The remittance flow
of USD 6.6 billion expected to finance trade deficit has not come into effect since money receivers
with devaluation expectation in mind have not sold USD to banks to match demand in the official FX
market. Low interest in VND from February to August of 2009 exacerbated devaluation pressure on
local currency. As a result, VND was devalued by 8% in 2009 and subsequently a 3.3% more in
February 2010.
2010 OUTLOOK: Testing time for balanced macro-policy and resilient private sector
We are bullish on the Vietnam‟s long-run growth potentials which are solidly built upon increasing
educated labor forces within the golden population structure and rising middle income classes with
diversified and deepened consumption modes, dynamic and innovative entrepreneurship supported
by government‟s structural reforms. In a post-global crisis and short-run context; however, we are
cautious about on-going path of the economy. Our biggest concern is that private sector‟s resilience
and dynamics would be undermined by the crowding-out effect of the growth-biased economic
policies in favor of the state-owned sector. Additionally the return to the optimal long-term growth path
may be hampered due to slow restructuring process across the economy in the absence of expected
creative destruction in the past few years.
March 2010
Sector Watch
5
For 2010, the Vietnamese government has set targets of a 6.5% GDP growth and 7% CPI growth
among other economic indicators. Yet given the above-mentioned concern, our forecast for the
economy in 2010 is a bit more conservative compared to the government‟s guidance though we rely
on more positive assumption over the external economic condition. IMF‟s latest World Economic
Outlook report expects the global economy and trade to grow by 4.1% and 5.3%, respectively, lend
supports to our bets on export and FDI, which are anticipated to grow 8% and 18% respectively in
value conducted term. In 2009, export volume actually rose by 20% and when exporting price
gradually recover on stable growing pace of demanded volume, we expect a 12% growth of export
turnover in 2010. Export sector also enjoys continued support from the government with lending
scheme and gradually weakened currency. FDI implementation is also anticipated to recover to the
pre-crisis level as financing conditions for FDI industrial projects are back to normal. Clearly, the
traditional competitive advantages of Vietnam in labor cost and political stability are now weighing
more on international industrialists in light of weakened currency and prolonged political fighting in
regional peers.
Domestic consumption growth in 2010 is expected to be slightly better than 2009‟s performance on
the backdrop of upbeat employment outlook coupled with cautiously improved expenditure
expectation due to concern on rising prices. Consumers‟ mood is clearly shown in a recent consumer
survey in Hanoi and Hochiminh by which 60% of respondents is confident about job prospect in 2010,
35% of respondents expects to raise their spending and 39% of respondents expect to trim their
expenditure in compared with their consumption in 2009.
Investments in both public and private frontiers may experience relatively mild growth in 2010
compared to 2009. Given normalized future corporate earnings due to rising input costs and high
lending interest rates associated with stimulative policy withdrawal compared to abnormal earnings
growth in 2009, private investment is not expected to perform strongly in 2010. There will be two big
th
political -social events that will have impact on the economic activities and stock market: The 11
Party Congress to be organized in Jan 2011 with the preparation sessions prolong from May of this
year until end of the year and the festival to celebrate 1000 years of Thang Long – Hanoi which is
organized in early October. Interestingly, what we see from the state‟s budget plan is that: the
investment expenditures does not have high growth as compared to those of 2009 (roughly 11.3%);
however the expenditure on socio-economics, defense, public security, public administration, party
and unions increased 24.6% from 269 trillion VND in 2009 to 335.5 trillion VND in 2010. Challenges
in selling government bond to sufficiently finance huge demand for infrastructure expenditure;
however, place a heavy hurdle for pushing up public expenditure
All things considered, we expect 2010 GDP to grow at 61.%. We expect CPI to be about 9.2% due to
increases in major input costs from both internal factors such as coal and electricity and external
factors such as gasoline and commodities. Companies will likely pass some of these higher costs to
buyers due to improvement in purchasing power and higher income. Given the cautious consumers‟
confidence and the moderate rebound in aggregate demand guaranteed by normalizing monetary
stance we do not think inflation will reach double digit.
From a monetary policy perspective, the first quarter credit conditions have been naturally tightened
at a quicker pace than targeted by SBV. SBV seems to be making contradictory moves to curb
inflation pressure while easing over-tightened credit market to support the government‟s growth
target. Given the SBV‟s attempt, we expect the credit market to normalize in the second and third
quarter and may return to the tightening mode in late of the third quarter when massive sales of public
debt instruments may dry up banking liquidity. We expect base rate will likely increase to 9% in
coming few months and hike to 10% at most by year end. Base rate will be likely changed as cap on
deposit rates only in 2010.
Trade deficit and balance of payment risk will continue to persist in 2010 though we expect
weakened currency and associated measures, such as applying maximum interest rate applicable on
6
Sector Watch
March 2010
USD deposits of economic entities, help to stabilize these issues. We expect another 3-4%
depreciation of VND against USD for the rest of the 2010 after the most recent currency adjustment.
It‟s worth noting that balancing macro-policy plays a crucial role in managing inflation, trade deficit and
currency issues and build up a foundation for strong and sustained growth in the long-run. If the
government focuses in stabilizing those prolonged issues, growth may be slower than target in 2010
but it helps to move the economy sustainably toward the potential growth track.
There are risks to our assumptions. The first down-side risk is associated with below par growth
paths of major advanced economy that may lead to slower-than-expected recovery in export sector.
The second down-side risk may come from the unsolved structural mismatches in banking system
that may squeeze lending supply, push up interest rates and slowing down the economy. These risks
may subdue GDP growth and lead to softer inflation for the economy in 2010.
There are also upsides to our assumptions. The first upside for our forecast may be attributed to a
possibility that private investment and consumption will be stronger than our expectation due to huge
saving pools of Vietnamese that can provide more rooms for broadening consumption or investing
into sounded and innovative investment projects. The second upside to our forecast is continued
growth-favored policy with both increasing expansionarny fiscal and monetary measures. This
particular issue is closely related to the balanced macro policy, which the consistent policy should
clearly define priorities for macro-situation in 2010. These risks will push up both GDP growth and
inflation for the economy in 2010.
Major macro-indicators for the Vietnamese economy
2006
2007
2008
2009
2010 E
GDP growth
%
8.23
8.48
6.23
5.3
6.1
Retail sales growth in real term
%
12.1
9.3
6.5
11
11
%
22.7
21.9
29.5
-9.7
12
%
22.1
39.6
28.3
-14
15
Trade deficit
Bn USD
4.02
10.36
12.77
10.41
12.6
Total FDI disbursement
Bn USD
4.1
8.1
11.5
10
11.8
Total investment/GDP
%
42.3
45.6
44.6
42
41
Credit growth
%
35.8
53.5
25.2
37.7
25
CPI on 12 month average
%
7.4
12.1
23.2
6.8
9.2
Trade
Growth rate of export turnover
Growth rate of import turnover
Sources: GSO, MPI and SSI Research estimates
March 2010
Sector Watch
7
EQUITY MARKET
POST-CRISIS MACRO CHALLENGES PRESENT GOOD OPPORTUNITIES
TO BUY?
STOCK INDICES PERFORMANCE
Sources: Reuters, SSI Research
VNindex ended the year 2009 at 494.7, below its October peak of 625.02, but still represents an
impressive return of 58% for the year. The dynamic forces behind the market‟s strong
performance in 2009 were the stimulus package which helped boosting economic activities and
pro-growth monetary policy. It‟s also inevitable not to mention the launching of many successful
margin lending programs via various brokers, which helped adding more liquidity to the market.
Looking into 2010 we believe the course of monetary policy continues to be the dynamic driver of
the stock market and how much liquidity SBV will inject into the systems. As usual earnings and
valuation will also play an important part in determining the market‟s direction. Followings are
our thoughts on some of these issues:
MONETARY POLICY CONTINUES TO BE MARKET’S DYNAMIC DRIVER.
Until the CPI growth decelerates and becomes stable, we believe that SBV will continue
providing sufficient liquidity for banks. At the same time SBV will push them to pursue a cautious
lending policy to avoid bad debts and adverse impact on inflation. Regarding the question how
long inflation pressure can be managed, what we observe from past years is that inflation starts
to reflect the impact from monetary policy in 6-9 months.
At the end of 2009 and early 2010, lending rate to companies was offering at 16-18% pa. As
domestic and global demand have not picked up strongly along with high input cost and high
lending rate, companies will certainly see profit margin squeezed in 2010. Thus at this high
lending rate, companies are unlikely to borrow unless they are seriouly in need of capital.
Consequently, we believe SBV would naturally want banks to surpress the lending rate to a
more acceptable level. An acceptable lending rate can be attained at a low deposit rate, which
certainly take some time to achieve.
Another monetary issue of 2009 is that there was a gap between credit growth (high) and deposit
growth (low). As a result, in 2010 banks will need some time to reverse the gap, i.e. to attract the
deposit back to the banking system before their lending starts flowing to the economy strongly.
With the above issues we believe the stock market will likely to take off when banks attract sufficient
and sustainable deposit for their lending activities and inflation stabilization being the preliminary
condition for the SBV‘s ‘green light’ on accommodating credit growth to achieve GDP growth target.
As monetary policy has close relationship with fiscal policy, one issue for 2010 will be also the
country‟s high budget deficit, planned to be 6.2% of GDP. High budget deficit will be the
motivation for the Government to proceed their equitization in 2010 as well as issuance of
government bonds. One of the implications that we want to note is that the equitization of large
8
Sector Watch
March 2010
corporations like Mobiphone will attract large flow of money from the stock market, especially
from institutional investors while the issuance of government bonds to cover public expenditure
can attract the money flow out of banking system as noted by our economist, which are not
favourable for the stock market in general.
2010 EARNINGS AND VALUATION
Of the companies that we cover, which accounts for 62% of the total market capitalization, 2009
revenue growth was 17% for non-financial companies and 20% for all companies, much higher
than our expectations. Some reasons include a number of companies in our coverage list
booked sales of asset in 4Q09 such as SJS, VST and all coal companies had high revenue
growth as a result of TKV‟s increase in imposed profit margin. Net profit growth in 2009 was
70% for non-financials companies and 63% for all companies. Strong 2009 net profit growth was
driven by low input costs, lower tax rate, and last but not least impressive return on equity
investment or revaluation of land. Excluding non-recurring income, 2009 core operating profit
grew by 30% for non-financial companies, still an impressive number.
Looking into 2010, we expect stable sales growth from these companies as the economy is
steadily improving, specifically revenue will grow by 16% for non-financial companies and 17%
for all companies. Some companies had very strong performance in 2009, such as Utilities,
Construction plastics, Real Estates, or Cement, which set a high bar for revenue and profit
growths in 2010. Factors that contributed greatly to net earnings in 2009 seem to be going in
reverse direction in 2010. As the subsidized interest rate program is no longer available
companies are facing higher interest expenses in 2010. Material costs have also increased
since 4Q09 adding more pressure to companies‟ profit in a number of sectors. We also feel it‟s
prudent not to expect gains from equity provision reversal in 2010. Thus, combining all factors
we expect core operating profit to grow roughly at 18% and net profit to grow 5% for nonfinancial companies, and 12% for all companies under our coverage in 2010. The upside to this
estimate is that if the market turns in another good performance like 2009 our estimates will have
to be revised up quite a bit as financial income plays a large role in non-recurring income for
companies in Vietnam.
It‟s inevitable not to talk about bonus share and dividend share issues when discussing
Vietnamese stock market. It seems that investors have created a serious attraction towards
bonus share and dividend share issuances and this attraction can be described by the allure of
something for nothing. Share prices of companies that announce bonus share or dividend share
issuances usually move up once word leaks out or an announcement is made. During the 2H09
the bonus share fad had a dramatic effect on market sentiment. Taking share dilution into
account, we expect 2010 diluted EPS growth for the companies under our coverage to be -7%.
Based on closing of February 26th, 2010 this yields a 2010 PE of 11x for companies in our
coverage as a whole, which is quite attractive considering the good growth potential of the
country relative to its peers.
Sources: Bloomberg, SSI Research
March 2010
Sector Watch
9
CONCLUSION & RECOMMENDATIONS
The macro policies in 2010 will help to ensure the economic growth rate on one hand and to
stabilize the macro balances on the other hand. This poses a lot of challenges to monetary
policy which is the market‟s dynamic. Consequently, we believe it is very likely that market
liquidity in 2010 will not be as strong as it was in 2009.
In this perspective as well as earnings outlook for 2010, followings are some of the sectors
and stocks that we believe worth considering for investment. Please refer to the more detailed
discussion on each sector in the part that follows.
Exports & FDI: Performance of these sectors will benefit from the on-going recovery of
the world economy, which facilitates the pick-up in world demand for commodities as well
as other goods and services. In 2010, exporters will experience positive impact from the
,recent and further VND depreciation. Attractive sectors include fisheries and natural
rubber. While the former will likely show substantially improved performance after a hard
year in 2009, the latter also expects decent growth this year given the very strong uptrend
of natural rubber price, especially since late 2009.
Consumers discretionary and Consumer services: We observed an abnormally high
travelling and tourism demand during Lunar New Year weeks and believe the festival to
celebrate the 1000 years of Thang Long – Hanoi in early October with many cultural –
social events nationwide will create more demand for travelling, which will benefit
companies in the sectors of retailing, taxi and telecommunication.
Consumer staples companies (F&B): Thanks to retail price inflation and healthy volume
growth as well as consumers‟ rising willingness to spend more on F&B, stronger demand
will make room for ample revenues growth in 2010: dairy sector (15-20%), confectionery
sector (10-15%), vegetable oil sector (at least 10%). Besides, major players have also
become more experienced in material cost management and many have engaged in
hedging material price for this year since 2009 year-end, effectively shielding the bottom
line from price risk. Furthermore, the debt burden of such companies is not high (10-20%
of total assets), thus financial expense will not go through a surge despite the stormy
environment of rising lending interest rates at the moment. Therefore, we believe that
companies with high transparency, adequate corporate governance and significant
investments into future development (both production and distribution capacity) will
continue to be safe bets during 2010.
Banks: Due to the macro-economy risks and the volatility of monetary policy, this sector
was not favored since second half of 2009. Banking stocks have underperformed the
market by approximately 15% in the last 6 months. Though the challenges are still ahead,
opportunities for banks are arising. Demand for banking services will pick up along with
the recovery of economy. Lower credit growth in 2010 will be offset by widened interest
margin thanks to more flexible deposit and lending rate. Earning growth of the sector will
be sustained as 2 key earning drivers including interest income and fee income will
continue their momentum in 2010. The picture will be brighter in a longer term when the
economy fully recovers. Investment in banking stocks at this moment is a good choice for
a long term horizon.
Real estate: There exist some segments in which companies may expect to sustain their
performance although the RE industry as a whole may still has downside risk through
2010. Those segments are residentials for mid-come end-users, sale of land, and
commercial RE (retailing space). In comparison to the other segment in the RE industry,
the three segments have not substantially reached by developers/investors to this point.
Consequently, demand still exceeds supply and players in the segments may see some
room for growth in the next few years.
IT & Telecommunication: With Software outsourcing segment expected to recover
strongly (app. 30% growth) together with the economic recovery, 3G techonology & web
2.0 creating new demand for digital content segment to further emerge, and big telecom
firms expanding overseas, it is very likely that this sector will draw a lot of attention in
2010.
10
Sector Watch
March 2010
SUMMARY ON SECTORS’ 2010 OUTLOOK & STOCK PICKS
No
Sector
Downsides
Banks will return to revenues
from interest thanks to (i) stable
credit growth and (ii) improved
interest margin.
1. Slower credit growth owning to
two factors (i) high lending rate
reduce demand and (ii) tightened
monetary policy. 2. Non-interest
incomes will decrease because (i)
the closure of gold trading floors
and (ii) smaller waves in stock
market
VCB,
STB,
High lending rate, limited state
investment
VHL,
DTC, VIT
(1) Inflation and competition (2)
Fixed costs escalation with the
completion of new projects; (3)
Foreign exchange loss.
HOM
High competition
HPG
1
Banking
2
Building Materials & Fixtures
(1) short supply of clay bricks and
tiles as the government is
1. Bricks & banning out-dated manual kilns,
tile
(2) granite demand has great
potentials both in domestic and
export markets.
Demand remains strong on the
back
of
the
government's
2. Cement
prioritizing
infrastructure
development.
(1) steel price may change yet
still
shifts
upward
(2)
3.
Infrastructure development being
Constructio strategic factor attracting foreign
n Steel
investments in the long run (3)
1000 years Thang Long great
festival at 2010 year-end
3
4
5
March 2010
4
Constructio
n Plastic
Pipes
(1) Pickup in demand from the
construction sector (2) Increase
in selling price to transfer higher
cost to buyers
Coal
International coal price uptrend,
domestic coal price increase
Commodity
ChemicalNatural
Rubber
F&B
Analyst
picks
Upsides
(1) Good sales market outlook
given demand growth coupled
with potential supply tightness;
(2) On-going price highs, and
favorable price trend expectedly
continue, possibility of further
positive earnings surprises; (3)
VND depreciation
(1) Room for sales growth: dairy
sector (15-20%), confectionery
sector (10-15%), vegetable oil
sector (at least 10%) thanks to
retail price inflation and healthy
volume growth; (2) Imported
products
continue
to
lose
advantage over domestic brands
in dairy and confectionery
subsectors; (3) Government‟s
constant efforts to promote
domestic valuable brands in
FMCG sectors
Sector Watch
(1) Rising input costs: plastic
resins, electricity, transportation
cost, etc.(2) Higher interest rates
and VND depreciation weigh on
financial expense
(1) The level of increase of coal
price to electricity producers may
be limited, (2) TKV policy in terms
of imposed profit margin
NTP
NBC, THT
(1) Declines in tapping volume of
listed companies (2) Heavy
dependence on world's NR price,
hence downside risks when
unexpected shocks hit the market
and adversely impact on selling
price
DPR, PHR
(1)
Harsh
competition; (2)
Volatility of material price and FX
rates; (3) Quality management
risks; (4) Lesser demand for
sweet and high-fat products.
VNM,
BBC
11
No
Sector
Upsides in 2010
Downsides in 2010
Not much upside potential in the
short term. Yet the recent retail
electricity price would put less
pressure to lower the selling price
when the companies renegotiate
the power purchase agreement
with EVN.
(1) Reliance on current power
plant with not much potential of
additional capacity expansion, (2)
investment in power projects
takes time, (3) Power production
much
dependent
on
EVN
mobilization, rather than on real
market demand-supply and EVN
would still hold a dominating
power in negotiating the selling
price with power generators
6
Electricity
7
Farming & Fishing
(1) Demand for fisheries would
pick up in 2010 in line with the
1. Fisheries
global economic recovery. (2)
VND depreciation
2. Livestock
Price uptrend
Feeds
3. Seeds
8
9
10
11
12
Insurance
Oil & Gas
service
Strong and steady growth rate
from 15-20% pa for the next 3
years as (1) supply is still limited,
(2) companies are continuously
investing to expand production
capacity; (3) active supporting
policy
of
government;
(4)
Common trend of restructuring
product line to focus on exclusive
varieties that have higher profit
margin
(1) Growth in insurance premium,
(2) higher interest rate level
benefits income from financial
activities
Drilling
sector:
(1)
Strong
domestic demand: (2) Drilling rate
is stable
Oil & Gas transport:: DQR in
operation
(1)
Sound
demand.
(2)
companies active in restructuring
Pharmaceut
product
portfolio
towards
icals
increasing weight of high-margin
product lines
(1) FDI uptrend given recoveries
in investor nations; (2) Hanoi to
th
celebrate its 1,000 anniversary
this year: a positive catalyst and
driver for growth in RE industry.
(3) "Land raiders" rich in cash
may appear when RE prices
move down into attractive zones
Real Estate of low prices; (4) More interested
parties (consulting companies,
investors) coming to Vietnam; (5)
Higher entry barriers caused by
regulatory issues helps play down
competition;
(6)
Traditional
investment in gold may not be
lucrative, bringing investors back
to RE products.
(1) Raw material shortage, (2)
domestic competition, (3) Market
barrier: IUU, classification of
catfish
(1) higher cost of input due to a
heavier import tariff on some
main feed ingredients effective
from 1/1/2010 (2) difficulties in
import of feed ingredient with
world price volatility and in buying
USD for import
Analyst
picks
VSH
HVG,
MPC,
ABT
DBC
(1) Unfavorable weather; (2)
moderation competition from
imported seed from China and
Thailand.
NSC, SSC
Industry competition affects profit
from insurance activities
PVI
(1) VND Depreciation put burden
on debts; (2) Difficult to ensure a
high efficiency rate
(1) Still very low margin business,
low ROE; (2) Does not look good
on financial stand;
Inflation and increase in oil price,
which will increase price of input
material while selling price under
state control
DMC, IMP
(1) Tighter monetary policies to
wind down speculators' activities,
freezing transactions and pushing
RE prices down in multiple
segments.(2) More competition
given a growing number of
products coming out in several
segments, which can cause price
war among developers. (3) Many
propertiers have been overpriced,
driving down demand. (4) High
price
in
comparison
other
countries losing its attractiveness
to foreigners; (5) Costly and timewasting land compensation may
pull back approved projects (6)
Inflating costs;
SJS, DIG,
BCI, ITC
Sector Watch
March 2010
No
Sector
12
Technology
13
Dry bulk
shipping
14
Port
Operation
Services
March 2010
Analyst
picks
Upsides in 2010
Downsides in 2010
Estimated growth rate to be 30%
in 2010.
Telecom: Big firms
expands businesses overseas;
broadband
internet
sales
accounting for bigger portion; 3G
technology further boosts the
demand for digital content & data
service segment in the long term.
Software outsourcing: Better
demand as global economy gets
better.
(1) Freight rate is rising, (2)
Demand picks up
(1) Better export activities (2)
Investment
in
equipment,
simplifying customs procedures &
reducing loading/offloading time
and thus increasing the actual
capacity
of
the
ports;
(3)Depreciation of VND as
revenue is calculated in USD
Demand for 3G in 2010 and 2011
still weak due to high fee, lack of
network availability & limited
value added services, making big
investment for 3G infrastructure
of telecom firms at risk; Business
expansion overseas embeds
operational risks and more
competitions; Higher domestic
competition in broadband internet
segment
FPT
Rising cost, debt in USD
VST
Limited capacity for some existing
port
operators
resulting in
possible slower growth in the
coming years.
GMD,
VSC
Sector Watch
13
SECTOR: BANKS
Linh Nguyen
Director of Investment Advisory
linhndh@ssi.com.vn
2009 REVIEW
Monetary policy in 2009 was more stable than that in 2008 but some issues emerged at
the end of the year
Stability of monetary policy in 2009: In 2009, Vietnam‟s monetary policy was more stable
compared to the year of 2008.
In 2008, Vietnam experienced doubled crisis with hiking inflation earlier the year, resulting in the
monetary tightening, and then global economic recession, resulting in losened monetary policy.
In 2008 the SBV had to make 8 adjustments in the prime rate; 5 in the reserve requirement ratio
and interest rate; 3 in the exchange rate band and 2 in the interbank exchange rate.
In 2009, the SBV just made 2 adjustments for the prime rate, the first was from 8.5% to 7% in
February and the second was from 7% to 8% in December. Refinancing and rediscounting rates
were changed 3 times, down in January and April and up in the beginning of December.
Required reverse ratio decreased once since March. Exchange rate was changed twice,
th
extending from +/-3% to +/-5% since March 24 and narrowing from +/-5% to +/-3% since
th
th
November 26 . Interbank exchange rate recorded only one adjustment, +5% in November 26 .
Some problems arose: Although the monetary policy was more stable, the adjustment in late
November caused negative impacts and impaired market‟s confidence as prior to the adjustment
the government constant signaled that the prime rate would be kept unchanged. Trade deficit
pressure on exchange rate and the rising of inflation risk forced SBV to swiftly change monetary
policy: balancing between growth and macro-economic stability instead of supporting growth.
This alteration led to administrative decisions such as ending short-term interest rate subsidy on
st
December 31 2009 (previously this subsidy was decided to prolong to the end of 1Q 2010),
lowering 2010 credit growth target to 25%, requiring 7 state-owned corporations to sell their USD
and allowing exporters to borrow foreign currency again.
Interest subsidy package resulted in a much higher than targeted credit growth rate for
the year, causing pressure on interest rate policy
Interest subsidy package stimulated credit growth: The key component of Government‟s
economic stimulus package was the interest subsidy package, which helped the credit growth
recover rapidly. Disbursement of interest-subsidized loans stimulated credit growth in one hand
and helped many enterprises overcome difficulties and reduce bad debts in the other. Stateowned commercial banks with dominant market share play the major role in disbursing this
package.
At the end of the year, interest-subsidized loans hit 446,000 billion VND, in which loans of stateowned commercial banks‟ and central people credit fund‟s were 275,000 billion VND, loans of
joint-stock commercial banks were 108,000 billion VND, loans of foreign banks‟ branches and
100% foreign-invested banks were 21,000 billion VND and the remaining of 8,000 billion VND
was from financial companies.
Credit growth was much higher than target and deposit growth: Credit growth, according to
the SBV‟s report, was 37.7% at the end of 2009, much higher than the initial target of 21%-23%
and the revised target of 30%. This is the second highest growth in the last 5 years.
Credit growth also exceeded deposit and money supply growth. Total money supply in 2009 rose
26% and total deposit advanced 27%, 10% lower than credit growth. This gap put more pressure
on deposit rate. Since the middle of 2009, commercial banks started competing with each other
by increasing interest rate continuously. Vietnam Banking Association tried to reach an
agreement among banks in order to stabilize deposit rate many times but in fact no bank fully
committed to that.
14
Sector Watch
March 2010
Deposit rate hikes: From July to November, commercial banks continuously raised VND deposit
rate. New peaks recorded from 9% to 10% to 10.5%/year and even higher. “Interest rate curve”
did not exist in some periods banks applied the same rate for almost all terms.
st
Right after the prime rate rise from 7% to 8% on December 1 , all commercial banks increased
deposit rate, up to 10.5%/year (excluding promotion or indirect bonus). Given this situation, SBV
sent a notice to inspect any bank with deposit rate from 10.5% per year. Banks immediately
quoted maximum interest rate at 10.49%. In fact, however, deposit rate was still over 10.5% for
large deposit.
As a consequence, interest margin was narrowed: the tension in the 2H09 narrowed interest
margin of banks. The spread of around 3.7% between deposit and lending rates in 2008 fell to
just about 1% in 2009.
Credit growth by far surpassed deposit growth
and created pressure on interest rate
Deposit rate rose in the second half of 2009
Disbursement of interest subsidized loans rose
quickly earlier the year and supported credit
growth
The main portion of interest subsidized loan
disbursement belongs to state-owned
commercial banks
Source: SBV
The volatility in FX, stock and gold markets continued to offer banks both opportunities
and risks.
 FX market: 2009 was the second consecutive year that the FX market witnessed drastic
movements owning to weaknesses of Vietnam‟s economy. The tension appeared since 2Q
when many enterprises held back their USD, causing demand-supply mismatch. This issue
continued to the end of the year.
 The majority of commercial banks quoted USD bid price equal to ask price. Official USD
price broke the high of 18,000 VND; in black market, USD at times was up to nearly 20,000
VND. Official interbank exchange rate was devaluated 5.7% while unofficial exchange rate
March 2010
Sector Watch
15
was devaluated over 10%. Once again, exchange rate tension created chances for
commercial banks with strong USD position to gain profit, especially in 4Q.
 Stock market: The recovery of the stock market in 2009 relieved the burden of big losses in
2008 for all banks. Since most of banks had securities arms and securities proprietary
trading activity, the 2 market rallies presented banks with good chances. However, it should
be noted that the strong correction at the end of the year made many securities companies
suffer losses in 4Q.
 Gold market: gold price, after a quiet period in 1H, increased sharply in the second half of
2009 to the record high in history. Domestic gold price was not only influenced by
international gold price but also controlled by local speculators. This was the reason for the
gap between the domestic and international gold price. For banks with gold trading floors
and gold proprietary trading activity, high gold price volatility in 2009 was the rare chance to
make money. But like stock market, the gold market was also very risky.
Banks’ profitability improved significantly
The crisis in 2008 hindered banks‟ performance. Falling credit growth, shrunk interest margin
together with the deep correction of the stock market took away profit of most banks. Many
banks did not meet the profit target and some reported negative growth. This lesson made banks
to be more cautious in defining 2009 profit target. However, 2009 turned out to be better than
expectation. Almost all banks exceeded their target, many of which had profit growth of over
50%.
Profit growth of banks in 2009 is divided into 2 periods. In 1H, banks‟ profit increased
significantly. Besides high credit growth, many banks earned high income from gold export and
reversal of provision for financial investments. However, in 2H 2009, banks‟ profit started to fall
due to increasing deposit rate, narrowed margin rate, slower credit growth and plunged stock
market in 4Q.
Foreign banks expanded operation
st
According to WTO agreement, since April 01 2007, foreign banks have been allowed to
establish 100% foreign-owned banks in Vietnam. But till 2009, the first 100% foreign-owned
banks: HSBC, Standard Chartered, ANZ, Shinhan and Hong Leong were granted license; in
which HSBC and ANZ quickly expanded their network.
Based on SBV‟s statistics, in Vietnam there‟re 45 branches of 33 foreign banks, 5 joint-venture
banks with over 20 branches, 5 100% foreign-owned banks, 8 non-bank credit institutions; and
56 representative offices of other credit institutions.
2010 OUTLOOK
Slower credit growth owning to two factors (i) weaker demand growth due to high lending
rate and (ii) tighter monetary policy.
 Lending rate rose significantly at the beginning of 2010. Although the ceiling rate of 12% is
still effective but actual deposit rate is around 10%-12%, pushing actual lending rate up to
14%-19%. This is contrast to the situation in early 2009 as interest subsidy package pulled
down lending rate to just about 6.5%.
Commercial banks are lobbying to re-apply loan-related fees, a way to legalize interest rate
over the ceiling level. Moreover, there are many proposals to withdraw the ceiling rate so that
interest rate can freely move to reflect the market supply and demand. Hence, lending rate
will likely remain high throughout 2010.
 Pressure on VND and inflation concerns resulted in the adjustment in monetary policy at the
end of 2009. And the trend of tightening monetary policy will continue in 2010. Targeted
credit growth of the Government for 2010 is 25% compared to 37.7% in 2009. Real credit
growth may be higher than 25% but the message of “macro stability” is clear. Moreover,
16
Sector Watch
March 2010
loans will be also prioritized for production and limited for risky investments including real
estate, securities and consumption to avoid formation of asset bubble.
Non-interest income will decrease because of (i) the closure of gold trading floors and (ii)
smaller waves in stock market
 In 2008, many commercial banks opened gold trading floors which promised high and stable
income. However, this expectation quickly faded due to the Goverment‟s new regulation that
put an end to gold account trading activity. Accordingly, March 31st 2010 is the deadline to
close all gold trading floors. Gold trading activity on oversea accounts is also limited.
 Securities investment in 2009 gained a great amount from reversal of provision but this
source will be not considerable in 2010. The recovery from the bottom of the stock market
created strong wave, a great chance to make profit from securities investments. Coming to
2010, the situation is different. The growth of the stock market in 2009 resulted from the
change from extreme pessimism owning to the crisis to gradual optimism as the economy
signalized recovery. The stock market in 2010 will have to gather support from the speed
and quality of economic recovery that‟s not been obvious yet. If speed and quality of
recovery are not as good as expected, the market will likely go sideways instead of a surge
expected by many investors.
2010 profit picture – when non-interest income shrinks, banks will return to interest
revenues on the back of (i) stable credit growth and (ii) improved interest margin.
 At the end of 2009, commercial banks had to slow credit growth down due to pressure of the
SBV, especially in December (December credit growth was just 0.87% compared to 37.7%
of the whole year). Coming to 2010, commercial banks have been re-launching their lending
programs. SBV set the target credit growth of 25% for 2010. Though the actual credit growth
were usually far different from target in recent years, we can expect that SBV will have to
keep credit growth at around 2010 target to both support economy growth and control
inflation.
 Low deposit growth compared to credit growth pushed deposit rate up and narrowed interest
margin in the late 1H09. In 2010, there‟re dramatic changes in interest rates. Deposit rate is
around 10%-12%, while lending rate is around 14%-19% (over the ceiling but SBV has not
made any intervention). Therefore, interest margin in 2010 will be better than in 2009.
Inherent risks of Vietnam banking system which are (i) bad debts and (ii) corporate
governance
 The crisis in 2008 increased NPL. SBV announced NPL ratio in 2008 of 3.5% compared to
the figure of 2% in 2007. At the end of 2009, NPL was down to 2.2%. Nevertheless, the
situation of real bad debt in Vietnam was not as simple as the figure showed. Vietnamese
commercial banks use many ways to reverse debts to cover overdue debts. Loans for real
estate investments are substantial. Given the real estate market has stagnated since the end
of 2009, the risk from NPL from property investment is highly likely.
 A common phenomenon of Vietnam joint-stock commercial banks is that the majority of
ownership in banks is held by one or a small group of shareholders. The banks which
originated from state-owned banks are still 90% owned by the government. Other banks are
majorly owned by state-owned corporations or a group of high net worth individuals. In the
last years, there are many cases in which major shareholders influence banks‟ activities for
private purposes and damage other shareholders‟ benefit. Commercial banks previously
known as state-owned ones are also governed by the state to indirectly control the monetary
market. In any case, the benefit of minority shareholders are least protected.
Many banks will go listed in 2010 to raise capital. Banking will be the sector that influence
the index.
After a long period of having just 2 banks listed (ACB and Sacombank), in 2009 the market
welcomed more 4 newly listed banks: Vietcombank, Vietinbank, Eximbank and SHB. Except for
March 2010
Sector Watch
17
SHB as a small bank, the others are leading banks in Vietnam with large business scale and
market share.
At the end of 2009, a series of other banks were preparing for their official listing in 2010,
consisting of MB, SCB, OCB, DaiABank and Western Bank. With minimum regulated chartered
capital as 3,000 billion VND at the end of 2010, some commercial banks choose to go listed to
raise additional capital.
With large chartered capital and bigger number of banks (approximately 10 banks), bank stocks
will strongly drive the index. However, the role of market leading movers possibly still belongs to
some traditional stocks.
1Q10 forecast
In 1Q10, banks tend to put more lending above ceiling rate, thus interest spread will be
improved. However, low deposit growth and long holiday kept credit growth lower than
expectation. This results in low interest income growth. Income from gold will reduce significantly.
Income from securities investment won‟t be able to exhibit much positive surprise as the stock
market is going sideways and chance for a surge in March is very low. For these reasons, QoQ
profit growth in 1Q will be relatively low.
COMPANIES IN FOCUS
VCB
CTG
ACB
STB
EIB
Total asset 2009
255,944
226,580
171,957
104,060
71,393
Total asset 2010
305,202
262,530
198,663
136,108
92,811
Total asset growth 2009
15.3%
21.3%
50.6%
52.0%
48%
Total asset growth 2010
19.2%
15.9%
15.5%
30.8%
30%
Net profit 2009
4,455
2,189
2,195
1,675
1,144
Net profit 2010
4,689
2,501
2,432
1,951
1,316
Net profit growth 2009
75.6%
21.3%
-0.7%
75.4%
61%
Net profit growth 2010
5.2%
14.3%
10.8%
16.5%
15%
ROE 2009
26.1%
13.4%
22.8%
15.9%
8.5%
ROE 2010
20.5%
13.7%
21.0%
15.0%
9.1%
ROA 2009
1.7%
1.0%
1.3%
1.6%
1.6%
ROA 2010
1.5%
1.0%
1.2%
1.4%
1.4%
PE 2009
12.5
16.1
12.9
9.4
17.8
PE 2010
11.6
14.8
11.7
9.1
15.5
PB 2009
3.5
2.2
2.9
1.5
1.5
PB 2010
2.6
2.0
2.4
1.2
1.4
49,000
31,400
36,500
23,500
23,100
Price
Sources: company’s financial statements, SSI Research
Vietcombank: Vietcombank‟s profit grew 71% in 2009. Besides strengthening their main
earning drivers, Vietcombank succeeded in reducing bad debts and provision-for-credit-risk loss.
NPL ratio of Vietcombank declined from 4.6% in 2008 to 2.5% in 2009. However, this ratio was
still higher than the industry average of 2.2%.
Coming to 2010, income from reversal of provision for credit loss like 2009 seems to be
impossible. Vietcombank‟s major earning drivers from credit activity and FX business will
continue the momentum thanks to the recovery of economy and import-export activity.
Vietcombank‟s 2010 earnings is estimated to post a modest growth of 5%, while asset growth is
higher, 19%.
Vietinbank: Vietinbank in 2009 also had a high profit growth, 44%. However, like Vietcombank,
profit of Vietinbank mainly came from reduction of provision for credit loss. Income from main
activities reported low growth, 7%, pre-provision income actually declined 7% compared to 2008.
18
Sector Watch
March 2010
In 2010, credit growth of Vietinbank is likely to be kept under the industry‟s average growth
industry to implement the policy of the Government. Interest income and fee income are major
income of Vietinbank as the bank has not diversified its source of income well. Profit growth of
Vietinbank will decline in 2010 to around 18%, while asset growth will be around 15%.
ACB: ACB succeeded to gain back market share in 2009. Credit growth of ACB was as high as
85%, slightly below its 90% target, far from the industry average of 37.7% However, pretax profit
growth of ACB was just 10% and net profit of ACB declined 0.7%. The detailed financial report
and notes of 3Q and 4Q of ACB have not been public yet, thus we‟re unable to find out reasons
for ACB‟s low growth.
In 2010, one problem of ACB is the income from gold trading floor. The closure of gold trading
floor on March 31 will take away a stable and high source of income of ACB. ACB will have to
focus more on credit. Earning growth of ACB is estimated at 19%.
Sacombank: Sacombank is a typical example of growth thanks to economic recovery. In 2008,
Sacombank report negative growth, but when it came to 2009, Sacombank reported strong
growth in all fronts. Credit growth was 70%, exceeding their target. Net interest income growth of
Sacombank was above 100% which contributed to a pretax profit of 1,900 billion VND, or a 93%
YoY growth, far exceeding target.
In 2010, interest income will remain as key contributor to Sacombank‟s operating revenue.
Though Sacombank had to close its gold trading floors but this will have little impact on the
bank‟s bottom line as the gold trading floor was opened not long ago and its contribution is not
considerable. Profit growth of Sacombank in 2010 is estimated at 18%.
Eximbank: With a pretax profit of 1.532 billion VND, ROE of the bank in 2009 was just 8.5%,
lower than other banks. It will take Eximbank longer to fully utilize its advantage of equity base.
Main incomes of Eximbank in 2009 came from interest, fees and investment. Meanwhile, income
from FX declined sharply from 634 billion in 2008 to 134 in 2009.
In 2010, it‟s hard for Eximbank to make any leap. Estimated profit growth of Eximbank is be
around 15%.
March 2010
Sector Watch
19
SECTOR: BUILDING MATERIALS & FIXTURES
Induced by the low levels of building materials‟ prices and especially the government‟s stimulus package
which prioritizes basic construction, the construction market enjoyed a strong growth of over 11% in 2009.
As a result, the Building Materials & Fixtures Sector generally throve on the high demand from the
construction sector. We present here 4 sub-sectors in this sector, including: Cement, Bricks& tiles,
Construction Steel, & Construction plastic pipes.
Generally speaking in 2009, all these sub-sectors showed decent performance with sharp increases in
sales volume, which helped boost revenue. Except for many companies in Bricks & Tiles, most of those in
the other three sub sectors enjoyed substantially improved profit margin thanks to favorable output price &
input cost, which further magnified the growth of net profit. Most impressively, net profit figure more than
doubled in 2009 as in the cases of the cement producer Ha Tien 1 or pipes producers Tien Phong & Binh
Minh.
The outlook for 2010 of this sector remains rather positive given the demand for basic construction and
infrastructure development is still high in Vietnam, especially with the big number of on-going projects to
be completed; yet sales growth will likely slow down after a very strong year 2009 and with government
spending getting narrower. Regarding profitability, the steady uptrend in input costs will impact
substantially on cement and plastic pipe producers. Negative profit growth thus is expected for pipe
producers, and some cement suppliers especially those who have fix cost surge on commencement of
expansion projects. On the other hand, typical brick & steel producers may see improved margin by either
focusing more on higher profitable products (bricks and tiles) or raising selling price (construction steel),
thus considerable profit growth can be expected from efficient companies in these sub-sectors.
Currently, our stock picks for this sector include: Hoang Mai (HOM - cement); Tien Phong Plastic JSC
(NTP - plastic pipes); Viglacera Ha Long (VHL), Dong Trieu Viglacera (DTC), Viglacera Tien Son (VIT)
(Bricks and Tiles) and Hoa Phat Group (HPG - Steel). For more specific investment recommendations as
well as more details on each sub-sector, please see our discussions in the following parts.
20
Sector Watch
March 2010
(BRICKS & TILES)
Minh Nguyen
Research Analyst
minhnd@ssi.com.vn
2009 REVIEW
Mixed performance seen in different product segments: Overall, the Bricks & Tiles sub-sector had
decent performance in 2009 thanks to a rebound of construction sector. We believe sales volume of
listed companies picked up robustly given average selling price was lower than a year ago. However,
performance diverged among three segments in the sector:
Bricks and clay-roof tiles: Brick and clay-roof tile producers continued to be beneficiaries of a
short supply and the government‟s policy of banning out-dated manual kilns. In 2009, total
demand for this product was about 24 billion bricks while supply was only 22 billion. Meanwhile,
the government has been banning out-dated manual kilns, which accounts for about 50% of total
supply of the sub sector. Revenue and profit growth of companies in the sub-sector increased
35% YoY and 28% YoY, respectively. Although companies were trying to focus more on
products that have higher profit margin, net profit margin contracted due to lower price level in
2009 than a year ago.
Ceramic tiles: Ceramic tile producers continued to face difficulties on the back of fierce
competition and changes in consumers‟ preference. Domestic supply in the segment (258 milion
2
2
m annual) already surpassed demand (about 190 million m annual) (2008 figure), the segment
also witnessed fierce competition from China. Ceramic consumption has been gradually
substituted by granite especially in big cities given the latter has superior quality. Despite
revenue growing 69% YoY, net profit plunged 103% since fierce competition dampened selling
price thus contracting net profit margin.
Granite tiles: Domestic consumption of granite is following global path with the increasing
contribution of granite consumption to total tile consumption. There is only one granite producers
listed on Vietnamese exchanges which is Viglacera Tien Son which saw 67% YoY growth in
revenue and 285% growth in net profit.
Brick & Tile price movements in Hanoi
Brick & Tile price movements in Hochiminh
Source: Ministry of Construction
Brick & Tile price movements in Danang
Source: Ministry of Construction
March 2010
Sector Watch
GDP growth
Sources: GSO, companies’ financial statements
21
Construction YoY growth
YoY growth by segments*
Sources: GSO, companies’ financial statement
*Listed companies’ financial statements excluding Taicera and ChangYiH
2010 OUTLOOK
Upside potentials for clay products: Companies in this segment have an opportunity to
capture more market share with the receding out-dated manual kilns. Although the government
stated that it would ban all out-dated manual kilns before 2010, we believe it would take a long
time to do so given significant contribution of these kilns to total supply of the products.
Clay roof tiles will be earnings drivers: Companies are downscaling bricks production as this
product has low profitability and clay consuming. Besides, the government is also encouraging
unfired brick production to replace current building brick. We believe producers will focus more
on clay roof tiles which are more profitable (40% gross compared to 30% of bricks); therefore,
net profit margin is likely to be improved this year since selling price is expected to be stable.
Tile consumption is following global trend which favors granite over ceramic products:
Fierce competition will continue to squeeze ceramic producers‟ profitability. Moreover, current
contribution of granite in total tile consumption in Vietnam is only 14%, still low compared to
average 25-30% in the world; thus growth potential in domestic market for the segment is still
promising. Besides, developed countries tend to move factories to emerging country to take
advantages of cheap labor costs and protect environment. It creates opportunity in export
markets for domestic granite producers.
COMPANIES IN FOCUS
Company targets
VHL
DTC
VIT
Outstanding share
9,000,000
1,000,000
4,500,000
2010 Revenue bn VND
1,125
144
396
2009 revenue bn VND
1,042
120
344
YoY g rowth in revenue
8%
20%
15%
2010 Pre-tax profit bn VND
120
25
20
72
20.5
19.5
67%
20%
3%
2009 pretax profit bn VND
YoY growth
Sources: Companies’ financial statements, SSI Research
There are 12 companies in the sector listed on both exchanges, among which, we like Viglacera Ha
Long (VHL), Viglacera Dong Trieu (DTC) in brick and clay roof tile segment, and Viglacera Tien Son
(VIT) in granite segment.
Viglacera Ha Long is the biggest brick and clay roof tile producer in Vietnam with big capacity, solid
brand name, differentiated products, and access to high quality clay mine. VHL‟s production capacity
is 4-5 times higher than peers, but revenue is ten times higher due to superior quality allowing for
premium selling price. With expectation that selling price will likely to be stable this year, the company
sets an 8% growth in revenue which is mainly based on sales volume expansion from extending
tunnel length of existing kilns. The company also aims for 120 billion VND pre-tax profit in 2010,
equivalent to a 67% YoY growth. The growth in profit is based on cost cutting, involving policies to
22
Sector Watch
March 2010
employees and distributors. While we think the target for revenue is attainable, we are concerned
about the profit target given the following risks:
Selling price is difficult to raise but coal price tends to increase: Due to high profitability of the
business, low capital requirement and short investment time horizon, lots of new private kilns have
quickly turned up, creating intense competition in the market; therefore, it would be difficult to totally
transfer cost hike to customers, especially VHL is already selling its product at 50% premium in the
market. Meanwhile, coal price accounts for about 16% of total production cost and tends to escalate in
line with global trend.
The company‟s solid position in the market has been contributed by its policies to distributors and
employees. Reducing budget to employees and distributors will cause downside risk for the
company‟s sustainability.
While VHL is considered a growth stock, we like DTC for its high dividend payout policy. In 2009, DTC
paid 11,000 VND per share in dividend, putting the dividend yield at a high of 13% using the close price
th
86,000 VND of Feb 26 . Compared to VHL, DTC is inferior in terms of capacity, brand name, but it also
has access to high quality clay mine. The company is intensively investing to expand its capacity by 30%,
which will be completed in 2010. The company targets 20% YoY growth in both revenue and net profit in
2010.
Viglacera Tien Son‟s growth is promising given the positive prospect of granite segment. Ending FY2009,
VIT earned 30% YoY growth in revenue from core business and 265% in net profit. Better output market
in 2009 eased difficulty in working capital management thus lowering short term debt, coupled with lower
lending rate in 2009 thanks to interest rate subsidy program and low base rate, interest expense was
relatively lower in comparison with 2008. VIT targets 2010 revenue to grow 15% YoY due to higher
production capacity compared to 2009; however, the company only sets 2.6% YoY in net profit. The lower
projected net profit is set due to concerns of interest hike and 100% increase in VAT.
March 2010
Sector Watch
23
Minh Nguyen
Research Analyst
minhnd@ssi.com.vn
(CEMENT)
2009 REVIEW
Robust growth rate in cement consumption: In 2009, total cement consumption was 45.4 million
tons, grew 13.4% YoY. Growth rate was rather moderate in 1H09 with yoy growth of 6.6%. However,
demand for cement soared in the 2H with an impressive yoy growth of 20.3% due to unusually
favorable weather in 3Q this year echoed by the low-base effect.
Cement consumption
Cement consumption by regions
Source: VNCA
Growth diverged by regions: Cement consumption in the North was benefited from construction
boom in the region. Year over year growth rate sustained at two-digit since January and ended the
year at as high as 19%. By contrast, cement consumption was rather sluggish in the Centre and the
South, yet the market seemed to pick up strongly towards year-end and the two regions ended the
year with consumption grew 11% and 8% year over year, respectively.
Growth in cement consumption by regions
State investment outlay by regions
Sources: VNCA, GSO
Cost-side pressure has been accelerating: 2009 witnessed both electricity and coal prices
st
increase. Electricity price sold for cement producers was raised up by an average 7.5% on Mar 1
th
followed by a surge in coal price after two upward adjustments of 25% on Sep 30 and further 35% on
st
Dec 1 .
In response to the change in electricity price, Northern cement producers raised selling price by
30,000-40,000 VND per ton. By contrast, market condition in the South did not allow for similar action,
however, all cement consumption enjoyed 50% reduction of VAT which effectively further increase
selling price by 40,000-60,000 VND.
24
Sector Watch
March 2010
Nonetheless, escalated production cost caused by higher coal price has not been transferred to
buyers. However, we believe cement price will be raised up in 1Q10 to offset the coal price increase.
2010 OUTLOOK
Growth in cement consumption will be decent, yet not as high as this year: Given robust growth
rate this year was contributed by low base effect, favorable weather, aggressive state investment, and
also low interest, we believe these factors will substantially shrink this year thus the impressive growth
rate of 2009 will be hardly replicated. However, we still believe the sector will continue to be direct
beneficiary of construction and infrastructure growth, based on which we forecast 10-11% YoY growth
rate this year.
Increasing supply will intensify competition, while inflation pressure makes companies find it
more difficult to raise selling price: Several big projects are being completed in 2010, coupled with
projects commenced in 2009 which have not yet operated at full capacity, competition in 2010 will be
surely more intense. Fierce competition will compress cement producers‟ profit margin and companies
that have new projects coming onto stream will be more severely affected. Coal and electricity prices
are expected to increase in 2010 and will create more pressure on companies‟ profit margin.
Meanwhile, in order to curb inflation, the government may be hesitant to raise cement selling price.
Even if it is willing to, given VICEM only accounts for over 37% market share, increase in selling price
of VICEM members will reduce their competitiveness in the market.
COMPANIES IN FOCUS
Impressive performance last year:
Bim Son
But Son
Hoang Mai
Ha Tien 1
2009 Sales volume (mil tons)
2.94
1.7
1.56
2.63
Ha Tien 2
1.38
YoY growth in sales volume
16.7%
17.4%
21.0%
9.1%
22.6%
2009 Revenue (bn VND)
2,362
1,413
1,316
2,832
1,571
YoY growth in revenue
22.0%
18.2%
21.1%
11.6%
n/a
2009 Pre-tax profit
YoY growth in net profit
226
160
151
184
204
4.6%
32.2%
352.1%
132.9%
n/a
Sources: VNCA, Companies financial statement
Cement companies are direct beneficiaries of construction growth, thus witnessing impressive
growth in sales volume and revenue in 2009. Moreover, profit margin was widened for the most of
the time last year with an effective increase in selling price and cheap imported clinker (applied for
HT1).
Yet 2010 outlook appears rather gloomy regarding profit performance
Bim Son
Cement
But Son
Cement
Hoang Mai
Cement
Ha Tien 1
Cement
* Ha Tien 2
Cement
2010 Sales volume mil tons
3.47
2.21
1.9
3.54
1.85
YoY Growth
18%
30%
22%
35%
34%
2010 Revenue bn VND
3,005
1,938
1,769
4,219
2,296
YoY rowth in revenue
27%
37%
34%
49%
46%
35
138
162
118
200
-85%
-8%
7%
-36%
24%
Pre-tax profit bn VND Bn VND
YoY growth
*
Company targets
Source: SSI Research
Our preliminary estimate for revenues and earnings of the five cement companies suggests high
growth of revenue due to widened capacity. However, escalation of fixed cost will dampen profit
margin of companies that have new projects completed in 2010.
March 2010
Sector Watch
25
Financial and depreciation expenses expectedly surge upon completion of the new
projects: Bim Son, But Son, and Ha Tien 1 all have new projects commenced in 2010. With the
completion of capital-intensive projects, fixed costs will be concerning if the projects fail to meet
desire capacity. Along with depreciation, exchange rate loss and interest expense are expected to
surge with current long term debt in EUR and USD.
Difficult to transfer cost to consumers: Coal price surged by nearly 70% in 4Q09 and tends to
further hike in 2010 in line with global coal price. Also, electricity price is expected to increase in
March. Although cement producers will likely to raise selling price in 1Q 2010 to offset the
increase in coal price, we believe further increase in cost may not easily be transferred to
customers because of the following reasons:

Previous fiscal and monetary cease create upside pressure of inflation, the government may
hinder selling price increase to curb inflation.

Over supply will dampen selling price which effectively squeeze profit margin
In the short and medium term, we like Hoang Mai Cement given its good fundamentals yet
in the long run, we believe Bim Son, But Son and Ha Tien 1 would have greate potentials if
additional capacity is well absorbed.
26
Sector Watch
March 2010
Phuong Hoang
Associate Director
phuonghv@ssi.com.vn
(CONSTRUCTION STEEL)
2009 REVIEW
Strong increase in sale volume, especially construction steel:
In 2009, the sector experienced impressive sale volume growth compared to 2008: According to
statistics from the members of Vietnam Steel Association, total construction steel consumption
reached 4,13 million tons in 2009, rising by 31,24% YoY. Sale volumes were 465,700 tons (up
21%) for steel pipe, and 610,900 tons (3% growth YoY) for steel plate. The strong result were
driven by the following factors:
(1) Economic stimulus program pushed up economic activities again, the companies benefited
from interest subsidy, tax exemption.
(2) Low average building material price, led to building activities‟ recovery in private sector. ( In
early 2009, steel companies sold out all inventory which had been bought at high price in 2008).
(3) Steel sector continued to be supported by the Government through raising import duty from
5% to 8% for steel billet, from 12% to 15% for finished construction steel; providing USD for
companies to import billet, steel scraps and some other materials for domestic production.
Construction steel consumption in 2009 (ton)
Construction steel production 2005-2010 (ton)
Source: Vietnam Steel Association
The price of construction steel in 2009 moved from the bottom of 7-9 million VND per ton at 2008
year-end to about 11,7 million VND per ton in late 2009. After the advancement in 2Q and 3Q of
2009, the price slightly fell since the end of 3Q yet re-gained at 4Q end. Because steel price was
in the uptrend in the whole year and consumption recovered, some companies boosted sale
volume. Futhermore, their profit margin also improved due to selling price being adjusted up
immediately while input materials had been bought at low price early in 2009. Due to this some
of steel companies were able to achieve high earnings growth in 2009.
Domestic steel companies have made new production investments, increasingly expanded
capacity, but the size was still small compared to the region, including Vietnam-Italy JSC (Steel
billet: capacity of 400,000 tons/year); Pomina (construction steel: capacity of 500,000 tons/year);
Hoa Phat Group (steel blast-furnace from iron ore: capacity of 350,000 tons/year). This is also
one reason for the industry‟s fierce competition in the coming time in addition to the threat of lowprice imported steel.
2010 OUTLOOK
In 2010, the steel sector is likely to achieve positive growth in 2010 thanks to (1) steel price may
fluctuate yet still in uptrend owing to the impacts of global steel/ore price and some increasing
st
input expenses. For example, VAT has advanced from 5% to 10% since Jan 1 2010, mazut
price increased in February and electricity price is raised from 1 March; We believe that average
March 2010
Sector Watch
27
construction steel price in 2010 will be at least 10% higher than 2009‟s average level. Steel
price‟s uptrend can help sustain/improve profit margin as well.
(2) Consumption volume also grows as a result of infrastructure development - the strategic
factor attracting foreign investments in the long run (note that 1000 years Thang Long big festival
is going to be held in Oct 2010 and a series of infrastructure projects in the North will have been
finished before the event). Sale volume growth is estimated to be at 15% in 2010.
However, high competition remains the issue for the sector in 2010.
1Q 2010: During this period, in our view, there is a high likelihood that global steel/ iron ore
general price uptrend will cause a rise in domestic steel price. Moreover, consumption will
perform well in 1Q and 2Q (can be lower in 1Q because of Tet festival‟s effects). In comparison
with 1Q09, 1Q 2009 was the time many steel companies had very low business results due to
falling into the bottom of the economic crisis. These are elements which can help steel
companies to have the chance of high growth in 1Q & 2Q 2010.
COMPANIES IN FOCUS
With above favourable factors, companies which have great production scale and effective distribution
in the sector such as Pomina, Hoa Phat, VIS performed satisfactory earnings in 2009 and their
prospect in 2010 looks rather positive.
HPG and VIS’s 2009 earnings
HPG
2008
VIS
2009
2008
2009
Revenue growth
48.3%
-3.0%
16.4%
21.0%
Profit after tax growth
31.4%
49.2%
498.8%
74.7%
Gross margin
15.0%
24.3%
14.9%
15.6%
Operating profit margin
12.1%
20.5%
12.7%
13.5%
Profit before Tax margin
12.2%
18.8%
8.9%
12.7%
Debt/Equity
13.7%
80.7%
212.4%
196.5%
Current ratio
3.1
1.2
2.0
1.4
Quick ratio
1.6
0.6
1.3
0.7
ROE
19.8%
24.9%
48.8%
51.8%
ROA
15.2%
12.5%
12.8%
15.1%
EPS
4,350
6,533
8,747
15,282
Sources: HSX, SSI Research
HPG: Hoa Phat Group
By the end of 2009, Hoa Phat continued to uphold big market share in steel production with 8.6%
of construction steel market, ranking fourth place in the sector and 13.9% of steel pipe market
share, standing at the second position. Hoa Phat has been very active to expand production
scale and new business lines and we believe that its fundamentals will be better after these
expansions. A range of new factories come into operation in 2010, including steel blast furnace
with the capacity of 350,000 tons, cement plant with capacity of 1 million tons, coke plant with
capacity of 350,000 tons and a number of real estate projects. Hence, 2010 revenue is likely to
grow rather significantly but EPS growth is expected to be flat. Although the management has
released a modest estimation of net profit growth at 1,409 billion VND, in our view, HPG can
obtain 1,544 billion VND and EPS is at 4,879 VND. At the price of 60,500 VND. HPG‟s PE 2010
is 8.4x. We believe that despite the market risk, HPG‟s prospect was rather good in the medium
and long term.
Pomina: Pomina is the leading construction steel companies with its market share of 14.3%,
almost equal to TISCO‟s 13.5% in the second place. In the South, Pomina has the dominating
33.5% market share. At the end of 2009, Pomina merged with Thep Viet Steel, raising total
construction steel roll capacity from 600,000 tons to 1,500,000 tons and steel billet capacity up to
500,000 tons. In an effort to keep the first place in the steel industry, Pomina continues to deploy
the project of steel billet with the capacity of 1 million tons and steel roll with capacity of 500,000
28
Sector Watch
March 2010
tons, which is expected to complete by 2011 year-end. By the end of 2009, Pomina estimates to
attain 800 billion VND of net profit (consolidated with Thep Viet Steel‟s profit), equivalent EPS at
about 4,938 VND per share. Compared to competitors in the sector, Pomina is at an advantage
of scale and modern technology (Italy technology), which helps save energy and reduce
production cost. At present, Pomina is in the process of preparing for its listing on the HOSE.
March 2010
Sector Watch
29
Huyen Thu Nguyen
Senior Analyst
huyenntt@ssi.com.vn
(PLASTIC CONSTRUCTION PIPES)
2009 REVIEW
Construction pipe companies started 2009 in a very conservative manner as 2008 had ended on a
negative note. Yet 2009 has turned out to be the best year ever for the sector due to demand pickup
on the back of construction market growth, favorable output prices and lower input costs. Again, the
last quarter exhibited certain profitability slowdown due to gradual uptrend in input prices throughout
the year.
Demand pick-up as construction activities grew strongly in the context of government’s
stimulus package and broad economic recovery. As mentioned, the construction and building
material markets during 2009 benefited from the government‟s stimulus package that prioritized
investments in basic infrastructure development. Besides, private construction (by both
households and real estate entities) was strongly encouraged by several incentives including
interest rate lows and relatively cheap building material prices. Overall, the construction sector
grew by over 11% in 2009, enabling leading plastic pipe producers to post very impressive output
growth of 25-35% after a rather flat year in 2008.
Strong sales market allowed companies to maintain high selling prices whereas
production input cost were at their lows, resulting in extraordinary level of earnings and
profit margin. After 5 price adjustments during 2008 ( 4 upward adjustments during 1H08
followed by just 1 cut in November), the higher selling prices were kept unchanged throughout
2009 while production input costs fell sharply, allowing pipes producers to enjoy abnormal profit
margin, particularly in 2Q09. On average, prices of main input plastic resins were about 30%
lower in 2009 compared to 2008. Thanks to that, sector leaders managed to post as high as 2630% net margin in 2Q09 and 21-22% for the whole year, while the normal level ranges around 1314%.
Effects of the gradual uptrend in market prices of plastic resins on profitability started to
show up in the second half, especially in the last quarter. The majority of production materials
(plastic resins such as PVC, HDPE) for this sector is imported, thus sector players are highly
exposed to volatility of the world‟s resin prices. After hitting the bottom in late 2008, resin prices
have generally been on a gradual uptrend throughout 2009. For example, market price of PVC
resin increased by 50-60% during 2009. As a result, profit margin of companies in the sector,
after peaking in 2Q09, started to edge down slightly in 3Q then fell sharply in the last quarter
when effects of higher resin prices were combined with surges in other cost factors, some
expected such as S&GA expenses, others unexpected for instance inventory provisional losses
(in the case of NTP).
2010 OUTLOOK
Sales market likely stays strong on the expectation that the construction sector continues
to thrive with the ongoing economic expansion yet sector’s output growth will likely be
modest (5-10%) given the high-base effect in the context of lessened supporting factors.
The need for infrastructure development and residential construction in the emerging economy of
Vietnam is still very high, which opens up a bright growth potential for the building materials
sector. Particularly in 2010, when the economy is expected to grow at a faster pace than in 2009,
the share of construction, given its essential role, should remain substantial. On the other hand,
many supporting factors in place during 2009 will be less strong with government‟s expenditure
and other stimulus measures less available, higher interest rates, less attractive building
materials‟ prices, etc. all things considered, we expect only a modest growth in sales output of
this sector in 2010 , about 5-10%, which is still satisfactory given the high base effect of 2009.
Such growth rate is in line with expectations of sector‟s leaders according to our survey.
Most production factors’ cost will be substantially higher than 2009’s average levels,
resulting in a considerable decline in profitability from the abnormal level of 2010. As
already mentioned, prices of the sector‟s major production inputs have gone up quite far from their
lows in late 2008 and early 2009. With the on-going global economic recovery, most basic
30
Sector Watch
March 2010
materials for production will continue to see an uptrend during 2010, yet more likely a gently
sloped one with occasional swings, in line with the expectedly gradual economic recovery
process. As we have moved far from the crisis trough, production input costs would substantial be
higher this year. Also, as most production materials of this sector are imported, recent VND
depreciations will create more pressure on the cost side for plastic producers, not to mention the
higher interest rates would also result in more financial expenses for those who borrow to finance
working capital‟s needs, a prevalent practice in the sector.
Overall, 2010 will hardly be as good as 2009 yet should still be a good year for this sector.
to sum up, the sales market outlook is still favorable and modest growth from the high base 2009
can be expected. Yet the cost side faces a number of upward pressures. This means the
extraordinary story of last year will be hardly repeated. Yet sector leaders who have proved to
enjoy substantial pricing power (capable of transferring higher cost to buyers in presence of good
demand) can still expect decent business performance, i.e. much better than historic levels
excluding the abnormal year 2009.
Chart 1: Yearly Sales Output (*)
Source: Companies, SSI Research
Chart 2: PVC & HDPE price trend
Source: Plastermart
(*): total output of sector’s leaders NTP & BMP (accounting for over 50% of total production)
COMPANIES IN FOCUS
In this part we brief about the 3 listed companies that specialize in plastic construction pipe production
including: Tien Phong Plastic JSC (NTP), Binh Minh Plastic JSC (BMP) and Dong Nai Plastic JSC
(DNP).
NTP: Advantages of NTP lie in the company‟s near-monopoly position in the North with around
70% of market share thanks to the long-standing brand name and distribution system, granting its
overall‟s leading position in the plastic sector country wide. Financial position of NTP has been
even more solidified after a year of outstanding performance in 2009 with a net profit growth of
over 100%. Tentatively for this year, the company targets a 5% growth in sales volume while profit
target is 250 billion VND (20% lower YoY), which is a satisfactory level as excluding 2009, net
profit of NTP reached just over 150 bil VND in 2008, after 4 years showing a CAGR of 11%. With
its pricing power, NTP has recently adjusted selling prices by 10% in response to the rising input
costs. Thus we believe the company is capable of out performing the mentioned target (by 5-6%
by our forecasts).
The southern factory of Tien Phong, a move to penetrate the Southern market through
establishing a joint venture with local partners in response to BMP‟s setting up a wholly-owned
factory in the North, incurred only a small loss in its first year of operation 2009, which was rather
better than expected. Further, the on-going relocation process of the current factory to the outer of
Haiphong city will take place gradually over a long time, which would not create operational
disturbances in the short term.
BMP: BMP‟s market position in the South is similar to that of NTP in the North, yet to a lesser
extent of about 30% market share as the market in the South is much bigger and more
March 2010
Sector Watch
31
competitive than in the North. After a difficult year in 2008 when BMP underperformed NTP in
terms of production and profit growth, 2009 saw a reversal as BMP posted a much more
impressive profit growth of 160%. The Northern BMP, after a losing year in 2008, has managed to
post modest profit this year. Though it will still be difficult to penetrate this traditional market of
NTP, Binh Minh‟s experience in a competitive environment may help them to survive and finally
succeed in the North. This year, the company targets a 10% growth in terms of sales volume,
which shows their positive view regarding the output market, yet net profit target is cautiously set
at 150 bil VND (40% lower YoY). After NTP, BMP has also recently adjusted up their selling
prices by about 8%, which probably has positive impacts on profitability.
DNP: The company is of a much smaller scale than NTP and BMP (just around 10-15% of in
terms of output and sales) and their targeted market is mostly the project segment, unlike the
residential segment of NTP and BMP. Profitability and operating efficiency of DNP also trailed far
behind those of the sector‟s leaders, with a net margin of just 5% and ROE of less than 15% in
2009, compared to over 20% and 35% of the latters in 2009, respectively. Financial risk of DNP
appeared much more substantial relative to NTP and BMP , given the much higher level of debt
leverage at the end of 2009. In 2010, we learn that the company plans to double production
capacity thus strong sales and profit growth can be expected, yet we do not expect much
improvement in terms of operating efficiency. In general, most financial and performance
indicators of DNP prove far less good than those of NTP and BMP and the large gap looks likely
to persist for a very long time to come.
Comparative Data
Comparative Performance
2009A
Ticker
2009 YoY
Growth
Net
NP
Sales
36% 101%
NTP
Net Sales
(VND mil.)
1,491,848
Net Profit
(VND mil.)
310,724
EPS
(VND)
14,340
Net
margin
21%
36%
57%
Debt/
Equity
0.39
BMP
1,142,539
249,825
7,301
22%
30%
37%
0.02
39%
DNP
193,994
10,133
2,956
5%
6%
14%
1.06
1%
ROA ROE
2010E Growth
Net
Sales
16%
-15%
160%
14%
-18%
36%
n.a
n.a
NP
Multiples Valuation
NTP
Current Price
(26 Feb 10)
106,900
21,668,998
Exchang
e
HNX
BMP
63,000
34,769,192
HOSE
2,190
DNP
19,300
3,427,637
HNX
66
Valuation
No. of shares
Market Cap
(VND bn)
2,316
Current
P/B
4.2
Div
Yield
2.8%
2009
P/E
7.5
2010E
P/E
8.8
3.3
3.2%
8.8
10.7
0.9
7.8%
6.5
n.a
Sources: Companies, SSI Estimates
Stock Picks & Investment Recommendation
Generally speaking, we have always favored NTP and BMP over DNP for their much better
fundamentals. Regarding NTP and BMP, we like both companies as they are both leaders in their
own traditional markets who have significant pricing power. Profitability of both companies have
proved rather equally good. The near-monopoly position in the North is definitely one big
advantage of NTP. On the other hand, the more competitive environment in the South has
equipped BMP with a higher level of market dynamics and marketing professionalism, which we
believe is critical for very long term development.
While both NTP and BMP are both fundamentally strong companies, we find NTP more attractive
to consider investments at current price levels. There is likelihood that the company will pay more
cash dividend out of 2009‟s impressive earnings and/or follow BMP‟s act to issue bonus stock
after the coming AGM, which may create better liquidity and upward momentum for the stock
primarily because of psychological effects.
32
Sector Watch
March 2010
SECTOR: COAL MINING
Linh To
Senior Analyst
linhtt@ssi.com.vn
2009 REVIEW
Production and export. In 2009, Vietnam coal industry produced about 43 million tons of coal
(9.8% growth YoY), over half of which was exported (25.2 million tons, 28% growth YoY).
Despite the significant increase in coal export volume, export value declined by 7%, resulting
from the huge drop in world coal price. China remained the country‟s top coal importer,
accounting for 81% of total export volume, and 70% of total export value.
Better domestic coal sale price. There had been significant increase of coal price to domestic
industrial coal users, including electricity producers, cement, fertilizer and paper producers, who
had benefited a lot from lower-than-market price. Particularly, coal price sold to cement, fertilizer
and paper producers was raised by 25-30% in October 2009 and is now set lower than export
price by no more than 10%. Coal price sold to electricity producers was raised by 27% in March
2009 and is scheduled to continue to rise in 2010.
Profit margin raised from 2% to 3%. Imposed profit margin for coal mining companies was
originally set at low level of 2% (compared to 5% in 2008) in expectation of a difficult year 2009.
Improved market conditions including the increase in sale volume and sale price towards the
year end were the driving factor for Vinacomin‟s decision to raise margin to 3%. As a result, all
coal mining companies are expected to report very good operating profit in 4Q2009 compared to
the previous 3 quarters as the imposed profit margin was reset in 4Q. Note that the adjusted
margin will applied backward to the whole year, thus companies will report much better result in
4Q to ensure profit margin of the whole year to be 3%.
2010 OUTLOOK
2010 Production & Sales Target. In 2010, Vinacomin targets sales of 43 million tons of coal
(roughtly the same as in 2009), of which 25 million tons will be sold domestically (about 15%
growth YoY) and 18 million tons are exported, representing a 28% decline YoY. In compliant to
the Government‟s long term development strategy, coal export will be gradually reduced to
prioritize domestic energy supply.
Coal price outlook. Although there would be little growth of coal volume, we are positive about
coal price movement in 2010 both in domestic market and in export market.
 International coal price: Since the beginning of 2010, world coal price (as represented by
Newcastle coal price, Australia) has started to break out from the trading band of the whole
year 2009 and has increased by close to 30% compared to the 2009 average price. We
expect a 25-30% increase in average coal price in 2010 compared to 2009 level, resulting
from the world‟s economic recovery and strong demand for coal from China‟s thermal power
producers (Vietnam‟s main trading partner). The world price uptrend has already impacted
Vietnam coal industry as Vinacomin has decided to raise the minimum export price by up to
31% starting from Jan 2010.
 Domestic coal price. Recall that coal sale price to main domestic industrial producers
(including electricity, cement, paper and fertilizer producers) has been gradually adjusted to
market oriented level (from the previous below-market level). In 2010, coal sale price to
cement, paper and fertilizer producers will be set according to export price so that it will not be
lower than export price by more than 10%. With export price is expected to rise, so does coal
sale price to these users. With regard to electricity producers, although might not be able to
fully adjust to market oriented level (as this will cause substantial increase in production cost
of electricity industry and will impact negatively on inflation rate), a minimum of 28% increase
(equivalent to electricity price increase of 6.8%) is expected.
Long term demand for coal. As Vietnam will increasingly rely on thermal (coal-fired) power
plants for electricity generation, there will be a huge demand for coal. A certain amount of coal
will also be imported. Several coal-fired power plants will soon operate at full capacity, including
March 2010
Sector Watch
33
Hai Phong 1 (capacity of 600 MW), Quang Ninh 1 (600MV), Cam Pha (600MW). There are also
many large coal-fired projects from both EVN and Vinacomin in the longer term, driving demand
for coal in the future.
Imposed profit margin. For 2010, Vinacomin temporarily sets the imposed profit margin at 3%.
In our view, with the positive prospect of coal price, there is a possibility Vinacomin will raise
profit margin, as it did in 2009.
View for 1Q10. In 1Q10, electricity price has just been increased by 6.8% starting from 1 Mar
2010, hence coal price to electricity producers will be raised accordingly (likely by 28%), which
will certainly have positive impact on coal industry. However, this price rise will not be
immediately reflected in operating result of coal mining companies in 1Q and 2Q10, as imposed
profit margin will not be adjusted (if any) until the year end.
Chart 1: Coal price performance
Chart 2: Vietnam coal production and export
Sources: GSO, SSI Research
COMPANIES IN FOCUS
NBC: Nui Beo Coal JSC
THT: Ha Tu Coal JSC
TC6: Coc Sau Coal JSC
HLC: Ha Lam Coal JSC
MDC: Mong Duong Coal JSC
TDN: Deo Nai Coal JSC
TCS: Cao Son Coal JSC
In 2009, except for NBC, most of coal mining companies experience negative YoY profit growth
due to lower coal price, which leads to lower imposed profit margin (3% compared to 5%), and
no significant changes in sales volume. As mentioned above, all companies are expected to
report very good profit in 4Q09 compared to the first 3 quarters of the year, as the adjusted profit
margin started to apply in the fourth quarter. NBC stands out by having profit growth (6.4%) due
to growth in sales volume (about 4.8 million tons of coal compared to 3.7 million tons in 2008)
and good cost management, resulting higher profit margin (4.6%) than imposed profit margin and
margin of peers. THT also did well by beating investors‟ expectation - being awarded by
Vinacomin via incentive payment for its quality products/work in the year, and also due to
reversal of provision for inventory loss previously booked.
In 2010, with the production and sales target of the industry roughly the same as last year, there
would not be much growth in coal volume for mining companies. Imposed profit margin is now
temporarily set at 3%, same as in 2009, companies can only make profit growth by better
managing cost to beat imposed operating cost. We note that some companies will still receive
corporate tax reduction/exemption in 2010 (TC6, THT, TCS, TDN), thus will have tax advantage
over other companies. Moreover, there might be a chance that Vinacomin will raise profit margin
for 2010 due to better coal price movement both in domestic market and international market
(discussed above), which will drive up the companies profit. With the current sales/profit target of
companies, valuation of the companies looks very attractive, P/E2010 ranging from 4-7x (except
for MDC).
34
Sector Watch
March 2010
Risks involved in coal mining stocks are liquidity risk (liquidity is indicated by the average daily
trading volume over the last 3 months) and policy risk. Of the listed stocks, only NBC and THT
have relatively good trading liquidity. With regard to policy risk, as coal companies operate under
control of Vinacomin, every change in Vinacomin‟s policy in terms of volume or imposed profit
margin will directly impact coal mining companies‟ bottom line. Coal mining companies are also
notorious for retain a large amount of profit to welfare fund, which does not belong to
shareholders.
Of the listed companies, we favor NBC the most, followed by THT for its good liquidity.
 NBC: Nui Beo Coal is coal mining company with highest production/sales volume. NBC
targets sales of about 5 million tons of coal in 2010. The company‟s current coal reserve
exploited using open-cast method is expected to run out in the next few years, when NBC
would start underground method (unless Vinacomin assigns NBC with other open-cast coal
mines). In 2010, NBC no longer receives corporate tax reduction, hence bottom line will be
affected. At the current price, NBC P/E2010 is 6.7x.
 THT: Ha Tu Coal is a much smaller company in scale than NBC, with production/sales
volume of only about 2.2-2.3 million tons/year. In terms of coal reserves, as revealed in THT‟s
prospectus, the reserve amount of A and B level coal is quite low, which reduces the stock‟s
attractiveness for investment. In 2010, THT still receives 50% reduction in corporate income
tax. At the current price, THT P/E2010 is 7.1x.
NBC
TC6
THT
TCS
TDN
HLC
MDC
4,800
3,600
2,200
3,000
2,500
n.a
1,797,577
2,146,659
1,559,164
2,045,042
1,582,479
n.a
n.a
57,315
n.a
n.a
n.a
n.a
2009
Sales volume
Revenue
Profit before tax
83,157
57,771
63,226
82,679
Profit after tax
83,157
51,994
56,904
66,089
48,837
n.a
EPS 2009
13,860
5,199
6,253
6,609
6,105
n.a
n.a
2010 (Target)
Sales volume
Revenue
Profit before tax
CIT status
Profit after tax
EPS 2010
Valuation
Closing price
(26/02/10)
P/B 4Q09
5,080
3,685
1,745
3,860
2,830
1,785
1,320
1,964,609
2,355,922
1,460,189
2,164,071
2,012,612
1,210,536
911,592
56,724
68,514
42,680
63,020
58,320
35,511
2009-2010: 2009-2011: 2009-2011: 2009-2011:
2009: 100%
50% tax
50% tax
50% tax
50% tax
tax
reduction,
reduction,
reduction,
reduction,
exemption,
tax rate 20% tax rate 20% tax rate 20% tax rate 20%
From 2010:
From 2010: From 2012: From 2012: From 2012:
25%
25%
25%
25%
25%
25%, no
tax
reduction/
exemption
received
42,543
61,663
38,412
56,718
52,488
26,633
24,954
25%, no
tax
reduction
/
exemptio
n
received
18,716
7,091
6,166
4,221
5,672
6,561
2,864
1,549
47,200
25,300
29,800
25,500
25,000
20,800
18,400
1.6
1.4
1.3
1.2
1.5
1.1
1.7
P/E 2009
3.4
4.9
4.8
3.9
4.1
n.a
n.a
P/E2010
6.7
4.1
7.1
4.5
3.8
7.3
11.9
Unit: Volume: thousand tons; revenue & profit: million VND.
Note: P/B of HLC, MDC is of 3Q2009, liquidity.
Sources: Vinacomin, coal mining companies, SSIResearch.
March 2010
Sector Watch
35
Huyen Thu Nguyen
Senior Analyst
huyenntt@ssi.com.vn
SECTOR: COMMODITY CHEMICALS
(NATURAL RUBBER)
2009 REVIEW
Despite the gloomy outlook set out in the beginning, 2009 has turned out much better than expected
for Vietnamese‟s natural rubber (NR) sector primarily thanks to the strong run of NR price later in the
year. For the full year, export turnover of this sector settled at over the 1.2 bil USD on volume of
731,393 tons sold at an average price of 1.667 USD/ton, substantially higher than the estimated
figures set earlier of roughly 1 bil VND and 680,000 tons. In comparison with 2008, export volume
grew by over 11%, yet the 30% fall in average selling price caused overall export value to slide by
23.5% YoY. China remained the most important sales market for Vietnam‟s NR with nearly 70% of
total export.
NR price movements: after hitting a bottom in near mid-Dec 2008, NR price started a consistent
recovery, gradually at first (in about 7 months) then accelerated towards the year end of 2009.
More specifically, export prices of most Vietnamese NR grades started 2009 at the yearly lows
then kept moving up by over 100% to close at their yearly highs, which is in parallel with world NR
prices. Attributable factors include the world‟s broad economic recovery, particularly that of the
auto & tyre industry where China is the brightest spot, which triggered a pick up in demand for
NR, coupled with supply tightness on the grounds of active output & export cuts from major
exporters mostly in the 1H and adverse weather prevalent in the 2H causing occasional tapping
interruptions in top exporting countries. Oil price pick up also impacted on NR price recovery
through the perception that this resulted in higher production cost for synthetic rubber, a substitute
material.
Major sales markets: during 2009, Vietnam exported NR to 71 countries; fairly the same number
as in 2008 (73 countries). Of which, China, the world‟s biggest rubber consumer, remained the
No.1 output market for Vietnamese‟s NR with a whopping share of nearly 70% of total export
volume in 2009. Export volume to the Chinese market reached over 500 thousand tons, up 18%
YoY. Being much dependent on the Chinese market, while normally regarded a drawback of
Vietnamese NR sector, actually proved favorable when this market exhibited the most growth in
terms of NR consumption in 2009 (up over 4%) despite the world‟s overall decline (-5%) thanks
to the Chinese government‟s stimulus measures particularly on the auto industry (tax cuts on
truck purchases ,etc.). Some other export markets with positive volume growth include Malaysia,
Taiwan, Korea, India whereas declines were seen in other markets with less remarkable
economic recovery namely Germany, US, Japan, Russia.
Business Performance: Thanks to the recovery of NR price, especially the strong jump in the
second half- which is also the high season for tapping activities of the sector, NR companies saw
very strong performance during the last two quarters, thus closing the year on a very positive
note. Though the whole year result still exhibited negative YoY growth on lower average sales
price, it was actually much beyond initial expectations.
2010 OUTLOOK
Strong performance of NR price brings about a positive outlook for Vietnamese NR sector in 2010.
Consensus forecasts have it that NR price will be at least 30% higher on average in 2010 compared
to 2009. In terms of production, tapping volume is estimated to reach 770,000 tons and export volume
will be about 750,000 tons (including temporary imports for re-export). Export turnover for 2010 is
currently targeted at 1.5 bil USD, or nearly 25% higher YoY. Despite overall higher volume for the
whole sector, all listed NR companies will see certain declines in tapping volume during 2010, yet the
significant growth in average NR price would expectedly help them to see growth in their sales and
profit results.
NR price trend: demand growth spurred by broad economic recovery, particularly that of the
world’s major auto industries accompanied with possibly tight supply due to previous rubber tree
cutting and occasional adverse weather will support NR price this year. After some corrections in
early Dec 2009, NR price has resumed its uptrend and kept reaching new highs to almost touch
the peak of 2008 recently. Specifically for Standard Vietnam‟s Rubber, average spot export price
36
Sector Watch
March 2010
in Jan 2010 already exceeded 2.9 USD/ton, over 70% higher than 2009‟s average. Supporting
factors for NR price include strong demand (China, after a period of using inventory from
Shanghai warehouse, has come back to the physical market, also partly induced by the
government‟s import tax cuts on NR) in the context of very tight supply as it is now low tapping
season in main exporting countries. Current high price may not sustain throughout the year,
especially when world‟s supply seasonally increases after April and obviously, overly expensive
input costs will discourage production and demand. Yet overall, NR price has strong support this
year and a rough 35% growth on average is currently considered well within reach.
NR production: Higher production on a whole sector’s scale yet tapping declines expected for all
listed producers, which may be more than offset by favorable selling prices resulting in overall
revenue and profit growth. As part of the long-term master plan for the sector that aims at
reaching 800 thousand ha of NR in 2015, NR plantation area will be expanded by 30-40 thousand
hectares to reach 715 thousand hectares this year, whereas tapping volume is expected to
increase by 6.5% to 770 thousand tons. Export volume is also expected to go up to 750 thousand
tons, leveraged by the expected price growth, which backs a target of 1.5 bil VND for NR export
value in 2010.
2010 business performance: Regarding the group of listed NR producers only, they will all likely
see certain declines in tapping volume this year, yet we forecast that the growth in output price
will help offset such falls, enabling these companies to post revenue and profit growth of 5-15% in
a rather conservative scenario. More specifically on 1Q and 2Q, on one hand, the low season
factor due to the non-tapping period between Feb-early April means rather low contribution of
these first two quarters into full-year result (just 30-35% of yearly sales output). On the other
hand, the very good selling price effective for these periods will facilitate strong YoY growth,
especially the low base effect as average selling prices for 1Q and 2Q were also the year‟s
troughs will make the growth rate look very impressive. For instance, average export price in
Jan/10 more than doubled that of Jan/09.
Chart 1: World and Vietnam’s Export Price of
NR
Source: Reuters, Vietnam Rubber Association
Chart 2: Export Volume and Value of Vietnam’s
NR sector
Source: GSO
COMPANIES IN FOCUS
The following part provides some highlights including 2009 full-year business performance review as
well as 2010‟s outlook of the four listed NR companies including: PHR, DPR, TRC & HRC. We
assume a 35% growth in average selling price for all companies in 2010.
Phuoc Hoa Rubber JSC (Ticker: PHR)
PHR is currently the biggest NR company listed on the stock exchange. For 2009 full year,
unaudited net revenue and net profit of PHR came at about 1,068 and 261 billion VND, down 16%
and 23%, respectively, mainly as a result of the 25% decline in average selling price, yet much
better than the level of 200 bil VND pretax profit originally set for the year.
Looking into 2010, the expected growth in selling price will help offset the decline in tapping
volume (10-15%). From our current forecasts, PHR‟s revenue & net profit may grow by about
10% this year. Generally, despite their large size and rather good productivity, the long horizon of
March 2010
Sector Watch
37
declines in yearly tapping volume due to tree cutting and restructuring, high CIT expense and
asset valuation at time of IPO are some of PHR‟s drawbacks relative to peers.
Dong Phu Rubber JSC (DPR)
Dong Phu is the second largest of all listed NR companies. According to unaudited figures, net
sales and net profit for 2009 are over 648 bil and 217.6 bil VND net profit, respectively. Compared
to 2008, rubber sales probably fall by roughly 15% while net profit estimatedly dips by just 7%,
which appear the least severe of all listed NR companies. We also learn from the company that in
2009 DPR managed to overtake Tay Ninh Rubber JSC (TRC) to become the sector‟s most
productive company at 2.255 tons/ha cf. 2.23 tons/ha of TRC.
In 2010, the company is going to issue additional shares of 3 million units as private placements
for interested investment funds in this quarter 1, in expectations of raising some over 150 billion
VND. With just a small decline projected for tapping volume this year, the positive selling price
outlook will likely bring about decent revenue and profit growth in 2010. By our estimate, DPR
may report a net profit growth of over 15% this year. Of the four companies, DPR has been the
first mover in core business expansion and diversification into related areas.
Tay Ninh Rubber JSC (TRC)
TRC reported over 440 bil and 158 bil VND for net sales and net profit in 2009, respectively. This
implies a 20% decline in sales and profit compared to 2008. Earlier in 2009, when things were still
very difficult, TRC was the only rubber company that managed to maintain similar operating profit
margin thanks to its aggressive cost cutting. For 2009, TRC is still the one with the highest profit
margin of all listed NR companies, with DPR closely behind.
In 2010, according to our estimates, TRC may post over 25% growth in sales and 15% in net
profit this year. Though we really like TRC for their efficiency, their long term growth potential
does not look very secured given their current lack of potential investment projects. While DPR
and PHR already started expansion projects a couple of years ago, TRC is now still looking for
opportunities to invest in a good one.
Hoa Binh Rubber JSC (HRC)
Being the smallest of the four, HRC currently exhibits the lowest productivity as a consequence of
a big storm in 2006. For 2009, net sales and net profit stay at over 200 billion VND and 64 billion
VND, down 30% and 27% YoY, respectively. The yoy decline in sales and profit of HRC for 2009
was the most severe of the four companies as their cutting of over 500 ha led to a sharp fall in
tapping volume in 2009 compared to 2008 (nearly 10%, or 545 tons).
In 2010, we expect HRC to post some sales and net profit growth of 10-14%. Relative to others,
HRC‟s cutting and replanting plan appear much more significant thus the yearly fall in tapping
volume looks rather substantial. Regarding its investment activities, HRC currently has a wide
range of long-term equity investments in other companies and projects with a stake of 30% or
less, which has not come to the phase of generating much financial income. Other than that, HRC
has not undertaken any expansion project by itself, which makes growth potential of its NR
business look limited, especially given the current small size of HRC‟s plantation and the
scheduled decline in yearly tapping volume until 2016.
Stock Picks & Investment Recommendation
Ticker
Current Price Outstanding
(26 Feb)
Shares
2009
P/B
2009
P/E
2010
P/E
2009
Net Profit
2009
EPS
2010E
Net Profit
2010E
NP Growth
PHR
36,700
81,300,000
3.0
11.4
10.4
260,588
3,205
285,762
10%
DPR
60,000
40,000,000
2.9
11.0
9.5(*)
218,181
5,455
253,517
16%
TRC
69,000
30,000,000
3.3
13.1
11.2
158,426
5,281
185,430
17%
HRC
36,200
17,160,970
1.7
9.7
8.5
64,034
3,731
72,880
14%
(*): before the tentative additional issue of 3 million shares in 1Q10. After this, 2010E P/E of DPR would be
10.2x
38
Sector Watch
March 2010
Fundamentally speaking, we are now in favor the NR sector for their positive outlook this year
given the expectedly much better price trend. Also, listed companies of the sector usually enjoy
high profitability with very little risk of making losses from their business. They also generally
employ modest debt thus have low financial risks. On the other hand, it is noteworthy that
business performance of NR companies is highly dependent on the world‟s NR price trend, which
exposes themselves to certain risk, especially during times of economic shocks.
Of the four listed companies we cover, DPR and TRC suffer less from the issue of declining
tapping areas in the coming years relative to PHR and HRC. Thus we expect these two
companies to post better revenue and profit growth this year compared to their peers. Between
DPR and TRC, the former has advantage over the latter regarding business scale and on-going
expansion projects while the latter has proved a little more operationally efficient, especially
during difficult times. Yet TRC‟s stock price has been quicker to price in the positive outlook for
the company this year, making it current trade at substantially higher P/E multiples than DPR in
terms of both trailing and forward P/Es. All things considered, we think at current price levels,
DPR looks most reasonable to consider for investments.
March 2010
Sector Watch
39
SECTOR: CONSUMER GOODS
Linh Pham – Minh Ton
linhpp@ssi.com.vn
minhtnn@ssi.com.vn
2009 REVIEW
Dairy: The year 2009 started in a pessimistic mood and low sales for the whole industry, as the
melamine contamination lingered on clouding consumers‟ mind followed by a series of falsified
protein or fat content in many products. Then market conditions improved as such effects faded
away during the latter half of the year. Producers whose products were not involved or were
proved guiltless in those scandals quickly reinstated their market position and successfully
captured additional market share from troubled competitors. Industry competitive landscape has
become more oligopolistic since then. Besides, thanks to a longer 2009 summer with extra
sultriness boosting up stronger demand, 2H sales far outperformed expectations and big players
in the market enjoyed high revenues growth in the 20-40% YoY range during this period.
2009 continues to see retail inflation in dairy price without effective supervision, and the situation
did not necessarily have a close relationship with material price movements in the global market
for a while. During 1H, many local brands committed to price stability despite global dairy price‟s
uptrend until late April and subsequent easing, while foreign players were aggressively increased
their pricing in a series of small dose (4-7% each time). Yet since 2H, in line with our previous
forecast, as global material price had hiked by 60-70% in only a few months, all players joined in
a rapid retail price escalation especially during July and December. Price for some product lines
increased by 27-28% or even more. The pressure from media and tightening supervision from
authorities did not have visible effects and Vietnamese consumers continued to pay the world
record-high price for their dairy consumption.
Chart 1-5: Global material price movement in 2009 for F&B sector
Sources: USDA, IMF
Confectionery: As a result of economic downturn, tightened budget and nature of the business
which produces not yet necessities for daily life, consumption for the whole industry was not
strong during the year. Top players posted maximum sales growth of 15-20% while 20-30%
growth was common in previous year. After a pretty quiet 1H, as economic outlook lit up in latter
2009 and also thank to seasonality (Moon and Lunar Tet festival in 2H), market sentiment picked
up underlying adequate consumption, however a large number of big names still missed their
revenues target for the year. One special thing is that although Lunar Tet comes late in 2010,
first movers started their promotional campaigns very soon since October 2009: Some used
deep discount in both wholesale and retail sales (16-18%) with price spiraling downward in later
40
Sector Watch
March 2010
rounds. Others focused on consumer marketing and execution in the retailing market (increase
branding awareness, product availability, free gifts…) in order to push up trade sales. So despite
late Tet, many companies recognized higher sales in Q4 than Q3, which is not the norm for
years.
Major inputs‟ price escalation (dairy, sugar, shortening… except for wheat) initiated and sped up
since March, adversely hurt margin in Q2 as many companies were not ready to react. However,
since then fixed-price contracts were used extensively as a very effective hedge to cover
production cost for the whole 2H. Therefore, the bottom line in Q3 and Q4 was safely shielded
and big players posted pleasurable profit for the year.
Vegetable oil: Input price volatility and its vital effects on pricing and retail market continued to
be the main story of the subsector in 2009. In summary, oil price peaked in May/June 2009
increasing by 50-70% from the opening level of the year, corrected downward by 20-30% from
the peak in a very short period in late June, rallied again by approximately 30% to the peak in
July-August, slightly fell again and until now has been gradually edging up. Main players‟
behaviors tracked these movements closely: In 1H a certain level of mutual compromise among
producers to keep price at a high level and enjoy good margin was in place. However, as input
price dropped in early Q3, agreements vanished, competition got harsher, producers kept
copying competitors‟ promotional programs pushing output price lower again and again, and a
number of suppliers were willing to sell below cost to preserve their market share. In a twist,
since late Q3 and during Q4, input price recovered and the situation of 1H repeated, oil
producers have been able to raise output price and maintain good margin up to now.
Interestingly, after an eventful 2009, market share of major players remained close to the
beginning level of the year.
The possible equitization of Vocarimex (the state-owned company, being the parent, supplier
and also competitor to most players) is still far and not yet finalized. But autonomy for
Vocarimex‟s subsidiaries and associates slightly improved: they had more power in negotiation,
e.g. better FX rate for import, or restricted purchase from other suppliers on a competitive basis.
This resulted in a little healthier competitive environment for the whole industry.
2010 OUTLOOK
Dairy: Earlier in the year 2010, most players simultaneously raised output price by 10-15%
based on explanations about either global price uptrend or unfavorable FX situation. We see that
after this move, during the rest of the year retail price is very much likely to increase in two or
three times to the level 20% higher than opening price or more. In addition, we also believe that
supervision on dairy price this year will still idle leaving ample room for price rises, except for
actions towards cases that seriously affect or distort market conditions. Therefore, with
increasing dairy consumption almost guaranteeing solid volume, sales growth of 20% is pretty
natural for companies with good brand awareness and quality management. Moreover,
consumption budget for 2010 will also improve, facilitating a good market outlook for the whole
industry during the year especially for premium products.
Competition will remain harsh but in our opinion, more share of the market will gradually fall into
the hands of local producers along the government‟s constant efforts to promote domestic
valuable brands in FMCG sectors throughout 2010. Another issue is that currently dairy material
price is easing down a little bit, but consensus forecast is that the uptrend will resume and price
may increase slowly by approximately 10% until the end of the year. Quality of dairy companies‟
forecasting and correspondent hedging activities since ending 2009 up to now will decide the
profit story for the whole year 2010. Quality risk is also an important factor to look after, as
consumers‟ concern on food safety remains very sensitive and alerting.
Confectionery: From the demand side, 2010 will see consumption increasing in favor of fresh
cakes than traditional products such as cookies, crackers or snacks. In line with the trend,
bakeries selling products with very short term to expiry will play a more important part of the
distribution system, therefore companies with good logistics system and diversified production
portfolio that well captures this shift in consumption will gain more share in new market niches.
Products with convenient packaging served as quick breakfasts or lunches will also have an
ample growth along the fast pace lifestyle of young consumers. Moreover, candy consumption
will continue to retreat due to lesser demand for sweet and high-fat products in response for the
March 2010
Sector Watch
41
quest of a healthier life. Growth of the whole industry is expected to anchor around the 10-15%
range for the year.
From the supply side, market position of top players will not change in 2010, yet the gap will be
closing down as ambitious smaller producers are aggressively investing in production and
distribution capacities. Moreover, imported products will continue to lose advantages over
domestic brands in the mid-range segment due to effective revision of local players in branding,
packaging and quality. Foreign brands will only dominate in very luxurious or special product
lines (such as chocolate) in the high-end segment. Talking about cost management and lessons
learned from 2009, the practice of hedging in the context of global material uptrend will be a
focus of most producers, and we expect not better but more stable and uniform gross profit
margin for major companies across the sector.
Vegetable oil: Retailing market is expected to grow by at least 10% in term of volume during
2010 thanks to healthy growth of vegetable oil consumption and producers‟ efforts in exploring
new markets (rural areas, new niches...). However retail price trend is questionable as the major
influencing input price trend is very much volatile, so sales prospect is still unclear. In addition,
competition will get harsher because: (i) 2010 will see more players (both local and global names
who are independent of Vocarimex‟s regime) joining in the market; (ii) As of now, production
capacity of the whole industry is still far exceeding demand and many new plants are running
below full capacity at high depreciation; (iii) Due to the special industry structure, most players
are pretty well awared of others‟ promotional programs before market execution, so they can
easily duplicate or even design better schemes to fight for market share... Moreover, in this
industry market winner may be the one that have aggressive moves in revitalising and enhancing
their brands, yet profit maker must be the one that correctly forecasts input price movements and
successfully passes cost through retail price without hampering market share. Therefore, despite
being a very attractive and stable sector, we see vegetable oil industry will again go through a
volatile and unpredictable year in 2010 for all players.
During the year, 95% of material requirements will be imported (mostly palm oil), therefore
besides input pricing, FX volatility will still be the major risk. Firms can partially hedge FX risk by
negotiation with banks and supplier to maintain fixed rate for definite periods. Foreign investment
in extracted oil production facilities has increased, diversifying material supply base for oil
producers, at the same time Vocarimex‟s subsidiaries and associates are getting more autonomy
in material purchase on a competitive basis.
COMPANIES IN FOCUS
VNM: Vietnam Dairy Products Joint Stock Company
HNM: Hanoimilk Joint Stock Company
KDC: Kinh Do Corporation
NKD: North Kinh Do Food Joint Stock Company
BBC: Bibica Confectionary Corporation
TAC: Tuong An Vegetable Oil Joint Stock Company
Ticker
YoY
profit
growth
90.1%
ROA
2009
ROE
2009
Profit
2010E
2,375
YoY
sales
growth
29.3%
27.83%
35.59%
N/A
-9.2%
N/A
N/A
N/A
4.9%
N/A
13.25%
11.3%
9184.9%
13.90%
15.2%
176.7%
-10.6%
146.1%
Sales '09
Profit '09
VNM
10,614
HNM
317
KDC**
1,526
484.4
NKD**
767
88.3
BBC
633
57.6
TAC
2,645
29.1
2,869.9
2010
profit
growth
20.79%
10.40x
N/A
N/A
TBC
17.15%
375.7
-22.45%
13.12x
34.11%
80.2
-9.18%
8.18x
8.93%
11.45%
66.8
15.97%
7.27x
3.93%
12.37%
65.9
264.6%
8.94x
P/E
2010E
Sources: SSI estimates
Notes:
42
KDC**: base case estimate, profit upside in the good case is 38% from base case estimate from
possible sale of property.
NKD**: base case estimate, without possible extraordinary income from the revaluation of land use
right.
Sector Watch
March 2010
Overview and top picks:
Although F&B is usually considered a stable and attractive sector, many companies in our
coverage are having their own problems which add different levels of risks to their attraction and
act as obstables for investors to make long-term investment decisions. E.g:
 KDC is the market leader in the confectionery industry, but low transparency is a major
concern. Besides, the lack of focus in core business is also critical: Core profit made up only
42% of 2009‟s total income and earnings from securities investments and land revaluation
accounted for 58% of 2009 profit structure, raising concerns on whether such significant
earning may reoccur in 2010. Since late 2009, there have been rumors on KDC‟s possible
digestion of ownership in one of the current land lots in District 1 - HCMC, resulting in a profit
of approximately 200-300 billion to be recognized sometime in this year. Currently, we view
KDC as a multi-sector company at least during 2009 – 2011, with three main pillars being
confectionery, real estate and financials.
 NKD’s fundamentals and financial metrics are good, but the complex relationship within Kinh
Do group members and the possibility of an unfavorable deal structure in the coming merger
with KDC is never at ease. Despite the fact that the new entity after the merger will be much
bigger than NKD in terms of sales and profit, the timing and issues related to NKD
shareholder‟s interest not yet finalized remain a huge question mark inside investors‟ mind.
At the same time, after the merger most of NKD‟s cutting edges such as the healthy balance
sheet and informational transparency will melt in KDC‟s problematic balance sheet and
transparency issues. Accordingly, we believe that the merger news since late Q3/2009 has
been one of the main reasons that hampers NKD‟s possible rally and causes NKD‟s being
traded at a low P/E during the last few months, despite good fundamentals and impressive
earning growth of the company in 2009.
 HNM is operating in a very attractive industry (dairy), Q4/2009 sales reached the record high
level in the last one year and was only lower than the record high peak seasons in
company‟s history (Q2 and Q3/2008). This surge in sales coincided with the replacement of
the whole management, especially the new sales forces with experienced key personnels
from big FMCG players in Vietnam. We believe that HNM‟s distribution system is going
through a revolution to boost up efficiency, and this will be a good foundation underlying
2010 revenue growth target, which is a surprising 57.8% according to management
interview. But the risks of human resources‟ instability is in place. Moreover, an unclear
growth prospect is another concern, due to HNM‟s limited information on execution plans to
realize such ambitious target.
 TAC: thanks to the current favorable material price movements and special FX arrangement
in Q1 (palm oil material purchases from parent/supplier Vocarimex at interbank FX rate at
least during Q1, further term is still in negotiation), we believe that Q1 business results will be
really good in the vein of Q4-2009.This may pose significant trading opportunities. Also,
though news on the current land use right has a low chance to be released during 2010,
market belief on such potential earning, whether true or false, may produce very short-lived
upsides for TAC stock price in the year. However, despite such short-term advantages and
the incredibly high asset turnover (top of the industry), TAC‟s earning has been unreasonably
volatile and uncertain, and 2010 earnings will be very sensitive to unpredictable material
price movements, yet the company does not have any effective hedging method for material
import and does not plan to do so in near term. Moreover, TAC‟s corporate governance issue
(dependency on input purchase from parent/competitor Vocarimex) is not likely to improve,
except for the current deal on effective FX rate, hense the issue will still remain a distress to
stock price.
March 2010
Sector Watch
43
 Above these issues, all players in the sector always face general issues of the sector such
as material price risk, quality risks or FX exposure...
On top of that, our top picks for F&B stock in our coverage for 2010 remain the same as in the
previous Sector Watch report: VNM and BBC, with their solid asset structure, good transparency
and constant investments into the future. In addition, profit growth potential for these two
companies in 2010 is ample and – more valuable – pretty certain: for VNM is 14.67% and for
BBC is 15.97% (SSI estimate), resulting in safe and sound 2010 PERs (10.40x and 7.27x,
respectively) for long-term investments.
Key events/issues to watch for in 2010 for individual stocks:
VNM
HNM
UPSIDES
(i) Favorable market condition for ample sales
growth;
(ii) A complete hedge against material price
uptrend;
(iii) Possible digestion of coffee business at a
profit;
(iv) Investors‟ confidence on the prospect of
Megafactory.
(i) Extraordinary sales growth thanks to a new
and talented management team;
(ii) Subsequent earning surprises;
KDC
(i) Favorable deal structure in the merger with
NKD to form a new company with enlarged
business power;
(ii) Earning surprise from financial and real
estate portfolio (from digestion of ownership).
NKD
(i) Good profit growth from core business;
(ii) Possible revaluation of land use right in
Hung Yen and a new residential project.
BBC
(i) Extraordinary sales and core profit growth
(new plant‟s operation) in the 28-34% range.
(ii) Capital raising to finance the Northern
factory.
(iii) A safe hedge against material uptrend.
TAC
(i) Favorable FX negotiation and good Q1
earning;
(ii) Possible market‟s pricing in the revaluation
of land use right and a new commercial&
residential project.
DOWNSIDES
(i) Quality management risks;
(ii) The possibility of material price downtrend;
(iii) Tightening supervision on retail price;
(i) The instability of human resources and
resonance
among
management/board
members;
(ii) Quality management risks;
(iii) Material price volatility
(i) Competition; lack of a significant expansion
plan;
(ii) Efficiency in hedging for material price
volatility;
(iii) Lack of focus on core business;
(iv) Stagnancy in the property market;
(i) Unfavorable deal structure in the merger
with KDC;
(ii) Efficiency in hedging for material price
volatility;
(i) Heavy depreciation and increasing selling
costs in early years of the new Binh Duong
production lines;
(ii) Competition risk: brand recognition &
appreciation;
(iii) Low liquidity due to full room of foreign
ownership
(i) Uncertainty of FX arrangement for Q2-Q4 of
2010;
(ii) Lack of hedging method for material price
volatility;
(iii)
Investors‟
concern
on
corporate
governance;
(iv) Competition risks.
1Q performance: On the demand side, thanks to Tet - peak season and consumers‟ willingness
to spend more for F&B compared with that in 2009, market conditions have been favorable for
these companies and revenues growth is healthy in term of both price and volume. Especially,
dairy and vegetable oil producers have been easily raising their output price in 6-10%
installments without much impacts on demand, so YoY sales growth for Q1 in the 10-15% range
is much likely. On the other hand, due to the lesson learned about material price volatility during
last year, in late 2009 most companies engaged in hedging material price for this year via fixedprice contracts. Some even enjoy favorable FX arrangements in paying off their imports.
Therefore, production cost for 1Q2010 is not a big concern anymore. In addition, the borrowing
burden of these F&B stocks is not large (10-20% of total assets), thus financial expense will not
44
Sector Watch
March 2010
go through a surge despite the stormy environment of rising lending interest rates at the moment.
As a result, we believe that profit margin for F&B stocks in Q1 will significantly increase from
historical average. This will be a sound foundation for stock price upside as the prospect of Q1
business result comes into market, which may be just now.
March 2010
Sector Watch
45
Nga Quynh Nguyen
Research Analyst
nganq@ssi.com.vn
SECTOR: ELECTRICITY
2009 REVIEW
Power production grew by 12.86% YoY: 2009 total power production and purchased by EVN
reached 84.75 billion kWh, 3.55 billion kWh higher than the plan. Total commercial output was
74.76 billion kWh, a 12.86% increase YoY and surpassing the year‟s plan by 2.44 billion kWh.
Power output per capita reached 867kWh/year. Thus in fact, commercial output growth in 2009
more than doubled GDP growth (12.86% vs. 5.32%).
Continued investment in new power projects: In 2009, EVN put into operation power plants
with the total capacity of nearly 3,000 MW. However, the actual capacity addition to the electricity
generation system was lower as new power plants do not operate at full capacity right from the
start, but will gradually run each of the generating unit. Moreover, new power plants coming to
operation under went testing period during which the output was very low.
Additionally, EVN continued to invest in 40 power generation projects with the total capacity of
27,654MW, of which 19 projects are already in the implementation phase (total capacity of 7,303
MW) and 21 projects have completed investment registration procedure (total capacity of 20,351
MW).
Table 1: 2009 Power consumption by sector
Table 2: Monthly industrial production
120,000
35%
Monthly Industrial production
YoY growth
100,000
25%
80,000
15%
60,000
5%
40,000
-5%
20,000
-15%
0
-25%
Jan- Feb- Mar- Apr- May- Jun- Jul- Aug- Sep- Oct- Nov- Dec09
09 09 09 09 09 09 09
09 09 09 09
Sources: GSO, EVN, SSI Research
Increasing power demand: Although the economy was still facing challenges, positive signs of
recovery have been seen. In power consumption mix, industrial & construction make up over
50% and residential/office consumption account for over 40% and the proportion is increasing
over the years. Industrial production showed positive growth towards the end of the year.
Table 3: Monthly power production
Electricity production (bn kWh)
14
25%
YoY growth % (RHS)
20%
12
15%
10
10%
5%
8
0%
6
-5%
4
-10%
2
-15%
0
-20%
Jan09
Feb09
Mar09
Apr09
May09
Jun- Jul-09 Aug09
09
Sep09
Oct09
Nov09
Dec09
Source: GSO
46
Sector Watch
March 2010
Retail price rise: Retail electricity price was raised at an average of 8.92% on 1 Mar 2009.
However, the increase of retail electricity price did not have a direct and immediate impact on
business results of power generation companies as these companies are selling electricity to
EVN via long-term PPAs (Power Purchase Agreements) under fixed price.
Fuel price rise: Coal price for thermal power had been kept unchanged for a long time and had
been far below coal production cost. Since Mar 2009, together with retail electricity price
increase, coal price for thermal power companies also increased by 27% (but still equals only
65%-75% of coal production cost). Most of the coal price rise was offset by the increase in selling
price to EVN as thermal power companies have variable price adjusted by input prices, thus the
coal price rise did not directly affect companies‟ profitability.
Companies in the sector witnessed different business performance in the year 2009. While
thermal companies in the North (PPC, NBP) and hydro power companies in the South (VSH,
SJD) enjoyed high mobilization from EVN, hydro companies in the North (TBC) and thermal
power companies in the South (BTP) did not do as well. PPC, VSH reported record high power
production.
The reason for this was that unexpectedly high level of rainfall helped hydro power plants in the
central and south of Vietnam keep high level of water in the reservoirs and increase their
generation capacity. As hydro power generation is consider relatively cheap as compared to
other electricity generation sources and the power purchase agreement between EVN and power
companies does not state the specific electricity output to be bought annually by EVN, in the
Central and South of Vietnam, EVN bought more power from hydro power companies than from
thermal power companies. On the contrary, low rainfall level even during rain season in the
North, resulted in poor power output of hydro power companies and instead high mobilization
from thermal power companies.
2010 OUTLOOK
Q1 preview: Q1 is often the dry season for major hydro power companies, which results in low
power output from hydro power plants. Thermal power companies, on the other hand, will
epxectedly have quite good power output. However, in 2010 VSH, PPC and TBC are
renegotiating the Power Purchase Agreement (PPA) with EVN. There is high likelihood that PPA
will not be officially finalized in the 1Q10 and if so, these companies will book 1Q10 revenue
based on 90% of selling price stated in the old PPA. This might lead to lower than expected
operating profit for these companies in 1Q10. When the new PPA is renegotiated, companies will
readjust their 1Q10 revenue.
Possible difficulties in assuring power output due to low water levels in the Northern
reservoirs hence the need for quicker implementation of power generation projects: In
2010, EVN plans for commercial output to be at 85.14 billion kWh, increasing 13.88% YoY. EVN
considers 2010 a difficult year for the electricity industry, as power demand will continue to
increase especially during dry seasons, while water level in many reservoirs in the North: such
as Hoa Binh, Thac Ba or Tuyen Quang reaches only 60% of the average annual water flow.
Despite the difficulties in capital raising, 15 generating units of EVN with total capacity of around
2,078 MW are still planned to be in operation in 2010, and 6 new projects will be implemented
with total capacity of 5.356MW.
Implementation of new power projects are not likely to affect business performance of
current power plants as: (1) with the fast growing economy, Vietnam has very high demand for
electricity and currently power output per capita of Vietnam is still well below that of neighboring
countries, the demand is still outweighing the supply; (2) new power project would take time
before they operate in full capacity; and (3) power production per unit of current power plants
would still be lower than that of new plants, and selling price of current plants will be relatively
lower and thus more competitive.
Continued increases in retail electricity and fuel price and impact on power generation
companies
The recent retail electricity price rise by an average of 6.8% effective from 1 Mar 2010 will not
directly affect power generation companies. Power generation companies that are going to
March 2010
Sector Watch
47
renegotiate the Power Purchase Agreement (PPA) with EVN (TBC, PPC, VSH), increase in retail
electricity price would help put less pressure to lower the new selling price.
In 2010, both coal price and gas price, which make up a significant portion in production cost of
thermal power companies, are expected to increase. Coal price rise by 28% from 1 Mar 2010
and gas bought from Cuu Long Basin raised to 3.55 USD/ mil BTU from 1 Apr 2010 will result in
higher selling price of coal fired power generation companies (PPC, NBP, BTP) to EVN as coal
price fluctuation is reflected in selling price to EVN. Higher fuel price will not much impact on the
companies‟ profitability
Growth potential: Having strong cash position, many existing power companies have decided
to contribute capital to new power projects or have their own power projects. As capacity build-up
of current power plants is not always feasible, for most power companies business, expansion
through participation in or constructing new power projects will increase substantially the total
capacity of generation companies and thus boost their earnings in the longer run, but in the short
and medium run, the power projects are not likely to generate profit.
The one with clearest growth potential is VSH which owns a number of power projects (such as
Thuong Kom Tum, Dong cam etc.) By 2014, when Thuong Kom Tum Project starts operating,
total capacity of VSH will more than double.
PPC, TBC, BTP have ownership in Hai Phong and/or Quang Ninh Thermal power JSC, yet the
stake is less than 50%, thus the companies might only report financial revenue when Hai Phong
and Quang Ninh starts generating profit and paying out dividend.
Competitive generation power market: In the initial plan, Competitive power generation market
was to be implemented in 2009. Yet, due to delays in regulatory procedure, in our view, the
competitive market will be either implemented at the end of 2010 or 2011. The purpose of the
competitive generation market is to create a sound competitive market among power producers,
increase effectiveness in power production (encouraging cost saving), attracting more
investment in the sector as well as ensuring power supply for the increasing demand. Currently,
EVN is working on grouping power generation companies into 8 GENCOs with similar capacity
and production cost so that these companies could compete with each other when the
competitive market starts operating.
COMPANIES IN FOCUS
Overall, at the current time we do not favor the Electricity sector as there is not much
upside potential for the companies in the short term. Most of the companies rely mainly on their
current power plant with little room for additional capacity expansion, and some invest/contribute
capital in power projects, which would take some time before they begin to generate profit. On
the other hand, power production is much dependent on EVN mobilization, rather than on real
market demand-supply and EVN would still hold a dominating power when negotiating the selling
price with power generation companies.
Regarding companies under our coverage and in the watch list, including: Thac Ba Hydro
Power JSC (TBC); Vinh Son Song Hinh Hydro Power JSC (VSH); Phalai Thermal Power JSC
(PPC); Ninh Binh Thermal Power JSC (NBP) and Ba Ria Thermal Power JSC (BTP).
 In terms of valuation, NBP looks quite attractive with the lowest P/E ratio yet there is still
concern over the possibility of relocation of NBP‟s current plants. Our view for NBP at the
current time is NEUTRAL until there is the final decision on the fate of the current plant and
more details on the transfer of Thai Binh Thermal project to NBP.
 In terms of growth potential, VSH‟s capacity will increase significantly when Thuong Kon
Tum Hydro power project and other projects come to operation from 2014. Yet, there will be
EPS growth pressure due to heavy investments. We still like VSH for long term investment.
 In terms of stock performance, PPC‟s stock price will likely be more volatile as its price
usually highly correlates with JPY fluctuations. Although not having a clear growth potential,
within one-year time frame price performance of PPC stock is likely to be driven by investor
speculation/betting on JPY exchange rate (for example, at the end of Q1/2010, when Japan
48
Sector Watch
March 2010
closes their financial year, if JPY/USD rate decreases, as it happened last year, investors
may view it as a potential unrealized forex gain and thus PPC price may be up, and vice
versa).
 We remain NEUTRAL for both BTP and TBC, as we do not see any clear upside potential.
2009
Net sales
(mn VND)
VSH
PPC
NBP
BTP
Net earnings
growth
(YoY)
Net
earnings
(mn VND)
(YoY)
Gross profit
margin
Net profit
margin
TBC
208,995
-100%
132,840
-18%
64.81%
63.56%
VSH
465,834
-4%
320,783
-14%
60.43%
68.86%
NBP
509,005
12%
56,584
15%
19.38%
11.12%
PPC
4,420,950
14%
889,770
-518%
28.96%
20.13%
BTP
1,472,398
14%
46,443
-74%
13.33%
3.15%
2009
EPS
ROA
ROE
Power output 2009
(mn kWh)
Power output
growth (YoY)
TBC
2,092
15.4%
16.8%
408
-15%
VSH
2,240
12.8%
14,6%
924
7.6%
NBP
4,398
21.8%
29.97%
757
1%
PPC
2,736
7.6%
20.61%
7,357
7.2%
BTP
675
2%
5%
2,180
1%
Ticker Company name
TBC
Net sales
growth
Thac Ba Hydro
Power JSC
Vinh Son Song
Hinh Hydro
Power JSC
Phalai Thermal
Power JSC
Ninh Binh
Thermal Power
JSC
Ba Ria Thermal
Power JSC
Close
price
Market
No. of
Current
cap
outstanding
P/B
(Bn VND)
shares
EPS
2009
PE
2009
EPS
2010
PE Capacity
2010
MW
18,900
1,200
63,500,000
1.53
2,092
9.0
1,707 11.07
120
15,800
3,259
206,241,387
n.a
2,240
7.1
1,552 10.18
136
18,000
5,853
325,154,614
1.36
2,736
6.6
2,055
8.76
1,040
27,000
347
12,865,500
1.94
4,398
6.1
5,953
4.54
100
12,300
744
60,485,600
0.95
675
18.2
1,051 11.70
388.6
*: SSI Estimates
March 2010
Sector Watch
49
Hung Luu Pham
Research Analyst
hungpl@ssi.com.vn
SECTOR: FARMING & FISHING (FISHERIES)
2009 REVIEW
After a long winning-streak, Vietnam fisheries export posted the first ever decline in terms of revenue
and volume. In figure, the total export volume was 4.25 billion USD, declining 5.7% yoy. Decline was
seen across the board, including all of major market such as EU, Japan, US, Eastern Europe and the
pick up in Asia (ex-Japan) market, like Korea, ASEAN, China pared the loss. Shrimp sector still takes
the lead, with 9.4% YoY growth in volume and value hit 1.67 billion USD, while pangasius sector
performance is better than expected, followed with 1.34 billion USD (-7.6% YoY) and volume also fell
5.3%. Main issues for the sector are still market barriers (in the form of defacing the products or
quality-related concerns), raw material constraints and internal competition.
Shrimp export 2007-2009
Pangasisus export 2007-2009
(monthly volume)
(monthly volume)
100
30
2007 Vo lume
2007 Vo lume
2008 Vo lume
2008 Vo lume
25
80
2009 Vo lume
20
60
15
40
10
20
5
2009 Vo lume
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug Sep
Oct
Nov
Dec
Jan Feb Mar Apr May Jun
Jul Aug Sep Oct Nov Dec
Source: VASEP
2010 OUTLOOK
Demand for fisheries would pick up in 2010 in line with the global economic recovery. The on-going
depreciation of VND would help exporters, including fisheries companies The 2010 plan for export
revenue for 2010 is quite conservative, at about 4.5 billion USD. However risks remain, but in a
different form. Beside the prolonged obstacles of the raw material shortage and competition amongst
local exporters, the most notable market barrier is the IUU (illegal, unreported and unregulated fishing)
regulation for the EU market (effective from Jan 2010, but this regulation will give farming fisheries,
(which most listed fisheries companies basing on), a helping hand over the catching fisheries. In
addition, the potential classification of catfish under the Farm Bill for the US market post a substantial
risk for the exporters. For the 1st quarter of 2010, as it is not a high season for fisheries, so a positive
QoQ growth is not expected, instead we should continue to see a well-defined trend of YoY growth.
With only some big players and numerous small factories, consolidation is believed to be a good way
to transform the fragmented market to a better competitive environment (giving more market power to
the exporters and good access to raw material source, as well as for enjoying economies of scale).
For the pangasisus sector, competition is still fierce, not between the leaders, but from the small
enterprises which produced the low-quality products that enable them to sell at a big discount.
Although the unfair competition would not last long, this might damage the Vietnamese pangasius
image in the world market and is the main obstacle for expansion as well as the improvement in term
of price. Processing capacity for pangasius fillet is high, and no more expansion would be seen this
year. Rather, enterprises prefer to have a closer integrated production chain by adding by-product
processing factories. For the export market access, Russia might have room to grow on the low base
of 2009 (as the market closed for a half of 2009), while classification of pangasisus under catfish
would pose a looming threat on the US market. New market for the year might be South America,
namely Brazil, Ecuador...and the potential of Japanese market is still open.
50
Sector Watch
March 2010
For the shrimp sector, there is no big rivalry as MPC remain the leader with clear distance from the
followers. The main issue is on the raw material shortage. Unlike pangasius sector, the the level of
controlling the raw-material source of shrimp sector is very limited (about 10%, much lower than the
level of 40-50% from HVG or VHC). Market access is not a very big problem, as the anti-dumping
tariff stays at near-zero for most of the leading exporters, so we think that the recent lawsuit by
Vietnam against the US imposition of anti-dumping tariffs on frozen shrimp to WTO might not affect
the listed companies in short term Black tiger prawn should continue be the major export, while white
shrimp share in total export might rise. We won‟t expect a big surprise, but as the Vietnamese shrimp
hold a stable position, we believe a positive growth is likely.
COMPANIES IN FOCUS
Hung Vuong Corporation (HVG) stole the top spot of pangasius exporters in 2009 due to its
aggressive strategy on maintaining revenue growth. Although 2009 net earnings increased
117%, operating profit fell 32% YoY as the export price fell and the liquidation of financial
investment portfolio (leading to net reversal gain of 77 billion VND from investment loss
provision) contributed to the overall earnings growth. Operating capital is still an issue, as
receivables remained high (however it seemed flat after rising in previous quarters and no
provision was made for those receivables). In 2010, HVG would maintain the leading position in
Vietnam pangasius exporters, and it is expected that growth would be seen in both HVG‟s
revenue and profit, due to the recovery in demand as well as the plan of raising to majority stake
in associated companies (Agifish, Hung Vuong Tay Nam.) Particularly for Agifish (AGF), the fifth
largest pangasius exporter in 2009, the planned acquisition of AGF would allow HVG to return to
the US market (Anti-dumping rate applied to AGF is almost zero, which is much lower than the
country-wide rate of 58% applied to HVG) as well as to expand the production by increasing the
low-capacity utilization rate of AGF factories. Moreover, the deal was very attractive, as AGF‟s
PB at the beginning of 2010 was only 0.7x. A sizeable growth would be expected for Russia
market, as this market was blocked for 6 months in 2009. We expect the 2010 EPS of HVG is
around 7,553 VND equivalent to PE 2010 of 6.3x.
Bentre Aquaproduct Import And Export Joint Stock Company (ABT) 2009 performance was
impressive, with net earnings of 80.3 billion VND increasing 255% yoy while revenue growth was
15%, much higher than its initial target. Core business was stable, as it remained the largest
exporter of clam and the outlook for 2010 is brighter as Ben tre „s clam fishery was awarded
Marine Stewardship Council certification, which is another confirmation of its excellent quality.
Financial investment is still on the bright side, which contributed 26.2 billion VND to net earnings
in 2009. ABT 2010 plans for revenue and net profit are 550 billion VND and 80 billion VND,
respectively, with dividend remains at 40%. Together with the fact that the company has booked
a loss provision for inventory of 10 billion VND in 4Q 2009, we believe that this is again a
conservative target. With the stable core business and attractive financial investment portfolio,
ABT should meet the above-mentioned target and is a stock with good fundamentals with room
to grow in a rising stock market in 2010.
Minh Phu Seafood Corporation (MPC): MPC 2009 earnings was better than expected which
there is a bit surprise in profit figure, where the net earnings grew 74% QoQ to put the total 2009
net earnings to 241 billion VND, which beat the initial plan 16.9%. Stable core business coupled
with gain from financial activities (liquidating the financial investment portfolio in 1Q09 to book
the reversal gain, as well as a good dividend of 30 billion VND from the 200 billion VND
investment in SSI Vision Fund in 2009) helped boost the earnings. Its export volume reached
16,096 tons and revenue was 158.67 million USD, increasing 16% and 1.65% yoy, respectively.
This allowed MPC to continue being the largest Vietnamese exporters in 2009 in terms of
revenue. The leading position in shrimp sector is still solid, as the MPC export revenue and
volume doubled the runner-up. Raw material shortage would pose a risk for MPC in 1Q10, but
current performance is decent and overall we believe the MPC fundamentals are still good in
2010. The expected expansion in 2011 (to double the capacity) would fuel a strong growth if it
comes in line with the demand growth and raw material supply.
March 2010
Sector Watch
51
Linh To
Senior Analyst
linhtt@ssi.com.vn
SECTOR: FARMING & FISHING
(LIVESTOCK FEEDS)
2009 REVIEW
Price fluctuated but still in an uptrend
After the rather stable period in the first five months, price of livestock feed became very volatile
towards the year-end. During 4Q09 alone price increased 3-5% from 3Q09 and compared to
2007 price increased 40-60%. According to experts, Vietnam is among those with the highest
livestock feed‟s price level in the world (20% higher than Thailand). The main reasons are:
(1) The rise in the imported ingredient‟s price, which depended on the global market‟s price.
(2) The sharp depreciation of VND against USD
(3) The shortage of domestic feed ingredients supply due to the smaller corn cultivated areas.
(4) Higher import demand for feed ingredients from China in the border area due to the long
drought in the corn cultivated area in China.
40-60% main ingredients were still imported
The total value of imported ingredients in 2009 nearly reached 2 billion USD. Manufacturers
imported most of ingredients, especially ones that contained a high percentage of protein,
mineral and vitamin. Dependence on imported raw materials has created difficulties for the
breeding and fishery industries and adversely impacted the livestock feed manufacturers‟
business performance.
2010 OUTLOOK
2010: The livestock feed sector will face a lot of challenges in 2010. Firstly, input costs increase
due to a heavier import tariff on some main feed ingredients effective from 1/1/2010 (imported
tariff increased from 0% to 5% for corn and bonemeal, from 5% to 7% for fish oil and from 10% to
15% for wheat flour). Additionally, the import of feed ingredient creates substantial pressures on
manufacturers who are exposed to input price volatility in the world market and the shortage of
foreign currencies supply.
1Q10: the livestock feed price is expected to continue increasing after the new import tariff is in
effect. In fact, it rose by more than 2% at the end of January 2010 compared to that prevailing at
the end of 2009. Three factors caused the price to increase: (1) price of feed ingredients in the
global market entered a new uptrend after the biggest harvest finished in late 3Q and early Q4,
(2) lack of visibility on domestic supply as the harvest time of some key grains such as corn,
soybeans and bran has passed, (3) difficulties in mobilizing foreign currencies to import material
inputs.
COMPANIES IN FOCUS
Up to now, Dabaco is still the only livestock feed manufacturer listed on the stock market.
DBC: Dabaco Vietnam Corporation
DBC ended 2009 with YoY revenue and net profit growth of 19% and 51% yoy, respectively. The main
contribution to this achievement was the favorable input-output price trends with output price generally
increasing faster while falling more slowly relative to ingredients‟ prices.
For 2010 DBC expects a YoY net revenue growth of 71% to 2,932 billion VND and a YoY after tax
profit of 13% to VND 93 billion. We believe DBC is capable of achieving this target due to the
commencement of 2 new factories in 2010: Dabaco Song Hau – aquatic products manufacturing with
52
Sector Watch
March 2010
capacity of 20 ton/h and one Chickenfeed food manufacturing with capacity of 2000 unit/h. Dabaco
plans to use profit in 2010 to invest in a port project in Catba (HaiPhong city) and a fish powder
processing factory in Bach Long Vy island (in Quang Ninh provice). We believe DBC can successfully
implement these projects because they are in good financial health with a big cash balance of VND
387 billions (equivalent to 15,000 VND/share).
DBC and Hung Thinh JSC recently won the bid to build Den Do Urban Area, which locates in Dinh
Bang ward, Tu Son town, Bac Ninh province . The project area is in a very good location with a
2
63.560 m land. DBC plans to implement the project soon; however it has not disclosed any detailed
implementation plan. We believe upon completion the project will contribute significantly to DBC‟s
core operational business.
We hold our view that DBC is a good stock for long-term investment. Based on an assumption that
DBC will complete the 2010 plan, PE 2010 will be 10.3x at the share price 33,000 VND/share as at
26/2/2010.
March 2010
Sector Watch
53
Linh To
Senior Analyst
linhtt@ssi.com.vn
SECTOR: FARMING & FISHING (SEEDS)
2009 REVIEW
Limited domestic supply: Domestic production of rice seeds satisfied only 35% of demand,
(among them only 17% provided by certified producer). The rest was mostly imported from China
and Thailand. Supply of corn seeds was relatively abundance to meet domestic demand and
partly export to Laos, Cambodia and China. Vegetable seeds were mainly provided by FDI
companies and imported from neighboring countries.
Demand and supply of certified producer (Unit: MT)
Source: Vietnam Seed Trade Association (VSTA)
Strong and steady growth: In 2009, seed companies maintained high growth rate as in the
previous periods. Revenue and profit before tax growth rate respectively reached 30% and 40%
compared to 2008‟s. These rates were a bit higher than our expectation due to drought in China
followed by lower seed exportation to Vietnam that make more room for domestic companies.
Changeable weather: Center region had been heavily flooded by the storms number 9 and 11,
more than 17,000 ha of rice field inundated, in which 3,400 ha was completely loss. Seeds
production for Winter-Spring crop also affected and resulted in raising selling price as supply is
more restricted and higher demand due to re-sowing purpose.
Improvement in legal framework: Administrative reform makes registration of intellectual
proprietary more convenient. Copyright of new seeds varieties is more strictly protected and for
the first time, license of new tropicalised rice seed has been traded at price of 10 billion VND.
2010 OUTLOOK
Overall view: We believe that the seeds sector would have strong and steady growth rate from
15% to 20% per annum for the next 3 years as supply is still limited, companies are continuously
investing to expand production capacity under active supporting policy of government.
Production growth: In normal weather condition, seeds companies could produce 20% more
than last year due to continuous investment in equipment and storage. Government has
approved the investment project amount of VND 69 trillion to support and develop system of
seeds and breeds from now to 2020. Target of seed industry is utilization of certified seeds and
equivalent that reaches 70%-85%.
54
Sector Watch
March 2010
Profit growth: Profit growth rates vary amongst companies and may be higher than revenue
growth. The common trend is restructuring product line to focus on exclusive varieties that have
higher profit margin.
Investment risk: Seeds industry is strongly impacted by unfavorable weather and moderate
competition from imported seed from China and Thailand.
1Q10 prospective: 2009 is a leap year of lunar calendar, plus northern region is rather dry at the
end of the year so the Winter-Spring 2009-2010‟s crop start a bit later than usual. Large part of
revenue from this crop will be recognized in 1Q10 then it‟s expected that companies in this line of
product would have better result than 1Q09.
COMPANIES IN FOCUS
In overall, seed companies have good result in 2009: strong growth, profit margin improved and
healthy financial status. In 2010, we believe that they would keep strong growth rate.
SSC
VND million
NSC
2008
2009
Growth rate
2008
2009
Growth rate
202,103
258,130
28%
214,397
269,639
26%
33%
40%
20%
32%
31%
-1%
Profit before tax
33,734
56,168
67%
28,450
40,316
42%
Net profit after tax
30,321
50,543
67%
28,345
33,964
20%
Net sales
Gross profit margin
We would prefer NSC to SSC as NSC has superior growth rate compared to SSC and market of
NSC‟s main product (rice seeds) is much bigger than SSC‟s one (corn seeds). In 2009, NSC‟s
revenue was slightly greater than SSC‟s while legal capital only equal to 80% of SSC‟s.
However, SSC is also attractive by its integrated value chain that makes better profitability and
SSC‟s real estate project is more potential than NSC‟s one.
NSC: National Seeds J.S.C
Ending 2009, NSC maintained its leadership in the northern region with 60% of rice seeds
market share (25% of national market). There is no change in corn seeds business, NSC still
take 7% of market share as last year. It‟s estimated that revenue in 2010 could reach VND 315
billions and possible of increase proportion of high margin product such as exclusive rice seeds,
vegetables... Additionally it‟s possible that NSC could have extraordinary income from transfer of
land in Dong Van town.
We estimate that 2010‟s net profit after tax will grow 15% compared to 2009 as NSC has no
more corporate tax deduction privilege. This estimation does not include the extraordinary
income as mentioned above.
NSC has acquired more seed processing machines and finished cold storage in Ba Vi district,
Dinh Tuong factory‟s upgrade. Rice seeds processing capacity has increased from 13,000 MT to
15,000 MT and rice seeds are currently in uptrend. In 2010, NSC will continue to expand
capacity, take over smaller companies to enlarge Center‟s market and develop vegetable seed
product.
As at 31/12/2009, financial situation is quite good as there is a bit debt but cash/share ratio
reaches 9.000 VND per share. At current price 38,000 VND/share as of 26/02/2010, PE 2009
and PE 2010 are correspondingly 9x and 8.8x.
SSC: Southern Seed J.S.C
2009 was a good year for SSC: in the first half the price of corn seed raised, in second half
demand of rice seed increased due to need of re-sow after inundation. In corn seed business,
March 2010
Sector Watch
55
SSC is currently the second player with 19% of market share after CP Group (21%). Rice seeds
product keep up with 10% of market share. We estimate that sales in 2010 will grow by at least
10% compared to 2009, reaching VND 310 billion. Product structure will be the same as SSC
would probably continue to exploit new seeds that they have developed recently.
Net profit after tax in 2010 could reach VND 55.5 billion, increased of 10% compared to 2009.
This estimation does not include extraordinary income from revaluation of land use right in joint
venture with Daewon.
SSC has converted its mechanical workshop to subsidiary company to improve efficiency. This
workshop currently manufactures major part of domestic seed processing machines. At the end
of 2009, SSC has also successfully bought out 70% of Nghe An Imexco to expand company
market share in North Center region and exportation to Laos.
As at 31/12/2009, cash/share ratio is VND 8,720 VND/share. At the price of 39,900 VND/share
as of 26/02/2010, PE 2009 and PE 2010 are correspondingly 7.9x and 7.2x.
56
Sector Watch
March 2010
Linh To
Senior Analyst
linhtt@ssi.com.vn
SECTOR: INSURANCE
2009 REVIEW
Total insurance premium. In 2009, the insurance market experienced higher-than-expected
growth, 16.5% YoY, of which non-life segment witnessed much higher growth than life segment
nd
(22% compared to 10.6%). Much growth of insurance premium was seen in 2 half of the year.
The same trend was also observed in both life segment and non-life segment (see table below).
 Life insurance: The segment saw very positive development in that the number of new
insurance contracts increased 13% YoY with a total premium increased 33% YoY (9M09
data). The premium per contract rose from 3.6 mil VND to 4.2 mil VND. These figures
indicate better awareness of people for insurance products as well as stronger financial
capability of purchasers.
 Non-life segment: there has not been any official full-year statistics on each insurance
business line to identify the driver for the segment‟s growth. However, 9M data showed that
highest growth segments included motor insurance (36% YoY growth), property and casualty
(29%), health and personal accident (25%) and Hull and P&I insurance (25%).
1H09
2H09
2009
Total premium
12.4%
20.5%
16.5%
Life insurance premium
8.7%
12.3%
10.6%
Non-life insurance premium
15.8%
28.6%
22.1%
Sources: Ministry of Finance, Association of Vietnam Insurers, SSIResearch
Industry competition – impact on the bottom line and market share. As indicated by largest
industry players, unhealthy competition in non-life insurance (lowering premium and reducing
deductible level regardless of risk, increasing insured perils without increasing fee, increasing
agent commission above the level regulated by the Ministry of Finance in various forms) still
existed, although at a lesser extent. This coupled with high claim resulted in low profit in
insurance activities. Some companies even continued to incur loss this year. The participation of
insurance companies invested by large state-owned corporations (such as by Vinacomin or
Vietnam Airline) has taken away related business from existing insurers, leading to reduction in
market share of many large incumbent enterprises.
Effort by regulatory authority in creating a better legal framework. The Ministry of Finance
issued several decrees and circulars, particularly Decree 41 (5/5/2009, administrative penalty in
insurance business), and Circular 86 (28/4/2009, providing many clauses to reduce unhealthy
competition). These documents will create a better environment although may not be able to
eliminate all problems immediately.
2010 OUTLOOK
Short term outlook
 In 2010, we believe there will be growth in insurance premium of both life and non-life
insurance. We expect GDP growth of 6.1% in 2010, inflation rate of 9.2% and positive growth
in import (about 15%) and export (about 12%) would create demand for non-life insurance
service. Rising consumers‟ awareness for life insurance would be the driver for growth of life
segment. Given the growth rates above and the expected increase in insurance penetration
rate, we think, growth of 20% in non-life segment and 9-10% in life segment are attainable.
 For non-life insurance, although unhealthy competition might be less due to the continued
effort of regulatory authority and of the longer-established insurers (we have seen many
insurers willing to accept low growth in order to improve product quality with better pricing for
healthier long run development), this has not yet secured positive profit from insurance
activities for all insurers in 2010. Some might still have negative profit.
March 2010
Sector Watch
57
 Higher interest rate level in 2010 (about 11%) compared to 2009 (8-9%) will have positive
impact on income from financial activities of both life and non-life insurers.
View for 1Q10. Compared to subsequent quarters of the year, the first quarter is typically not a
quarter with much storm and flood, one cause for customers‟ claims in various insurance
segments. Thus, we expect operating result of insurance companies in 1Q2010 to be quite
decent.
Long term outlook. Although in the short term, a big surge in non-life insurers‟ bottom line is
difficult (life insurers, who have completed their technical loss period, are more profitable), we
are positive about the long term growth potential of both insurance segments. Low industry
penetration rate (0.81% of GDP for non-life and 0.69% for life), low density compared to other
countries (16.4 USD per capita, source: SwissRe), and much better awareness of the young and
more educated population about life insurance products will create growth potential for the
sector. We expect growth rate of insurance sector to average 15-16% p.a. for the next several
years.
Chart: Insurance premium
Chart: Non-life insurers market share 9M2009
Source: Association of Vietnam Insurers
COMPANIES IN FOCUS
On the stock exchanges, there are 2 listed non-life insurance companies , Bao Minh Insurance (BMI)
and PetroVietnam Insurance (PVI), a reinsurance company, Vietnam National Reinsurance Company
(VNR) and Bao Viet Holdings (BVH). BVH is more a financial company having a life insurance and a
non-life insurance subsidiary.
In 2009, we have seen much expected shift in market share of non-life insurance companies. While
Bao Viet (BVH‟s non-life company) and BMI both saw a decline in market share, PVI had impressive
improvement, increasing market share from 18.6% in 2008 to 21.6% in 9M09 and took the second
position away from BMI (market share 13.9% in 9M2009) to stay only after Bao Viet (market share
27%). PVI‟s outstanding improvement mostly came from growth of PVI‟s main premium contributor -oil
& gas insurance and related segments, in which PVI is the dominate player, while Bao Viet and BMI
suffered a great deal from industry competition.
Growth of insurance premium was quite diversed amongst the companies depending on their
exposure to different market segments (PVI growth was 37% compared to BMI‟s growth of close to
0%). Although most companies were profitable in 2009, profit from insurance activities was either low
(PVI – 19 bn VND), or negative (BMI – loss 40 bn VND).
In 2010, although insurance premium growth is expected in all insurance companies, and financial
activities are expected to benefit from the higher interest rate level, the bottom line may not improve
proportionately as companies may still incur loss (or earn low profit) from insurance activities. In the
longer term, the companies‟s bottom line will significantly improve when market competition becomes
healthier, consumer awareness rises, and insurance penetration rate is still expected to increase.
Of the 3 listed insurance stocks, we favor PVI the most, followed by BVH. PVI has the most catalyst to
rise in the short term (explained below). Its high market liquidity compared to peers increases the
stock‟s attractiveness and this partly explains PVI‟s valuation premium over BMI and VNR (see table
below). There is also upside potential in the longer term as the company‟s financial investment is
expected to improve with the participation of PVI‟s strategic investors. BVH is a company with good
58
Sector Watch
March 2010
fundamentals, however, valuation is currently high. The stock is worth considering for investment if the
stock price falls.
PVI – The company is expected to continue to have good growth in insurance premium in 2010,
thanks to the development of oil & gas sector and its position as a dominant players in energy
insurance segment. Some may have concern about PVI‟s product risk as energy insurance segment
contributes a major part in PVI‟s revenue, however, PVI‟s recent expansion into other retail-type
insurance segments such as motor and health and personal accident insurance, in our view, is a good
direction for long term development. PVI is in the process of rasing its chartered capital to 1,600 bn
VND from 1,035 bn via share issuance to existing shareholders and strategic shareholders (in
financial investment arm). The company is in the final stage of negotiating with some strategic future
shareholders, whose names have not been disclosed yet. The success of the deal and expectation
about the improvement in PVI‟s financial activities thanks to the support of these shareholders would
be a catalyst for PVI‟s stock in the short term. In 2010, PVI still receive 50% reduction in corporate
income tax. Due to share issuance in 2010, EPS 2010 will be somewhat diluted.
BMI – Unlike PVI, BMI exposes to more risk in terms of revenue, as the companies‟ largest revenue
earners are insurance segments with highest industry competition (motor vehicle and health &
personal accident insurance). Thus BMI‟s is expected to have lower growth than industry growth, and
is losing market share to competitors. Continued high insurance expenses are expected which may
still cause loss in insurance activities for the company. BMI has no substantial changes in corporate or
capital structure or business activities in 2010.
BVH – BVH will continue to benefit from its well-known brand name, operating network, and good
relationship with corporate clients. Due to its big size, BVH may not achieve growth as high as
industry growth in both life and non-life insurance. In addition, like BMI, the largest 2 insurance
segments of BVH‟s non-life subsidiary, namely motor and health and insurance segments, face the
most industry competition, threatening profitability of its insurance activities. The recent increase in
holding (from 10% to 18%) of BVH‟s strategic shareholder, HSBC Insurance (Asia Pacific), has shown
its greater commitment into the company, affirming expectation on HSBC‟s support in BVH‟s
insurance activities, hence BVH‟s profit prospect for the longer term. In addition, we believe BVH‟s
investment in Bao Viet Bank will create synergy between BVH‟s various financial arms.
PVI
BMI
BVH
VNR
2,968,776
2,012,045
7,355,000**
1,126,515
2009
Total insurance premium*
- growth
38%
-0.35%
8.9%
2.8%
19,271
-40,483
n.a.
14,124
Profit from financial activities
200,113
206,421
n.a.
208,724
Net profit
198,327
150,000
670,000#
194,799
Profit from insurance activities
EPS
Book value per share (4Q2009)
1,915
1,989
1,169
2,898
23,329
28,545
14,511
29,538
3,282,995
2,123,032
8,236,000##
n.a
261,761
171,026
818,000^
n.a
1,636
2,265
1,305
n.a
2010E
Total insurance premium
Net profit
EPS
Valuation
Closing price (26 Feb 2009)
25,400
23,000
45,000
24,200
P/E 2009
13.2x
11.5x
38.5x
8.3x
P/E 2010
15.5x
10.2x
34.5x
n.a
P/B 4Q09
1.1x
0.81x
3.1x
0.8x
Note:
*total insurance premium include direct premium and reinsurance premium received
** total of life insurance premium and non-life insurance premium
# profit afterminority interest
##: BVH’s target; ^ SSI Estimate; Data 2009 from unaudited financial statement/companies announcement
March 2010
Sector Watch
59
Dzung Nguyen
Director of Investment Research
Dzungnh@ssi.com.vn
SECTOR: OIL & GAS
2009 REVIEW
Vietnam’s oil and gas sector’s latest development
Current Production and consumption
2007
2008
2009f
2010f
2011f
2012f
2013f
2014f
3410
4730
4750
4800
4800
4700
4650
4557
Oil production, 000/d
337
317
350
400
390
390
385
372
Oil consumption, 000/d
298
334
351
372
390
410
434
460
0
0
130
130
130
160
160
310
Crude oil exports 000/d
337
317
233
283
273
246
241
93
Oil price US$/bbl, OPEC basket
69.1
94.1
59
83
85
90
90
90
Proven oil reserves, mn barrels
Oil refinery capacity 000/d
Source: International Business Monitor, 2010
New discovery: A number of new discoveries have taken place in 1H09, although the reserves
were not disclosed:
 PetroVietnam made 3 oil discoveries in the first 5 months of 2009: Hai Su Den-2X, Thien
Ung-2X, and CC-2XST. The Hai Su Den is expected to come onstream at a rate of 21,000
b/d in 2011.
 The Hac Long (Black Dragon), discovered in April 2009, is claimed to be the largest gas
discovery in Northern Vietnam to date, estimated to hold up 50bcm of gas reserves and 45
ml of condensate.
 The Su Tu Vang oil field, which was expected to overtake Bach Ho Oil field, has been
disappointing, with the production (35,000 b/d) is half of the previous peak (65,000b/d).
 BP reduced its Vietnamese upstream exposure in March 2009 by withdrawing from two
offshore blocks. The maritime disputes between Vietnam, Taiwan and China is likely to play
a part in this decision.
Refining progress
 Dzung Quat refinery plant has some technical issue and was halted from operation in
December; however, it will soon be handed over. At its full capacity, the plant is expected to
refine at least 6.5mn tpa of oil (130,000d/d) and produce 3mn tonnes of diesle, 1.8mn tonnes
of gasoline and 400,000tonnes of jet fuel among other products.
 Another 200,000b/d Nghi Son refinery plant in the Northern province of Thanh Hoa is being
planned, and the government will allow IOCs to own at least 70% of this plant to speed up
the implementation of this project. For the construction, the Japan Bank for International Cooperation will finance 70% cost.
 Long Son refinery plant is the most interesting project by PetroVietnam, since it is to be
located in Ba Ria-Vung Tau, the most densed oilfield of Vietnam. This plant is expected to be
completed in 2014-2015
 Beside the above 3 projects initiated by PetroVietnam, there are a few other privately funded
refinery plant projects.
60
Sector Watch
March 2010
2010 OUTLOOK
Oil price performance
Source: Reuters
Oil price bottomed on 23/12/2008 at 30.28USD/bbl and has recovered continuously in 2009 to
peak at 83.95USD/bbl on 11/Jan/2010. Freezing temprature in the US, Europe and China helped
keep the oil price high until 08 Jan 2010 then it gradually fell towards the end of January.
Oil price is expected to average at 80 USD-85USD/barrel in 2010, according to EIA (US Energy
Information Admission) and a number of other well-known research houses. The EIA‟s forecast
assumes that US‟s GDP growth by 2% in 2010.
Drilling Services subsector
The drilling service, nevertheless, will not expect any good jump in 2010 for several reasons; 1)
the time lag: even if the oil price increases substantially, it will take at least 6 months for the
drilling rate to reflect this change. 2) In our opinion, the oil price level to trigger some significant
change in the daily drilling rate is 90USD-100USD, and it‟s unlikely to happen in 2010.
With a number of new oil fields in operation, the drilling service sector is still growing strongly.
International supply is abundant; however, international players will prefer to sign long-term
contracts since the fixed cost is high (transport cost from other countries to Vietnam), whilst the
domestic player (PVD) is willing to sign short-term contracts (60 days). PVD will have 3 jackup
rigs all ready to operate in 2010. Our assumption for 2010 is the average drilling rate for all 3
jackups will be 140,000USD/day; and the efficiency rate for 3 jackups are 90% (to account for
the fact that there will be idle days between short-term contracts).
Related-drilling services will also have a high-volume year with the revenue grows by 15-20%. A
number of new refineries being built in Vietnam will lead to high demand for domestic crude oil,
thus exploration activities will continue to blossom. Vietnam currently has only explored the
continential areas, and the deep-sea water still awaits. PetroVietnam plans to acquire deeper
water drillships, since the current jackup rigs (as of PVD) can only drills at 300+feet depth (90m120m).
Oil & gas transportation
Looking at the bright side, although Dzung Quat Refinery (DQR) has been late for a few months
(see next page), its technical issues are being solved and the possibility that DQR is in full
operation for 2010 is very high.
Nevertheless, the shipping freight is very low. The maritime transport industry is going through
the recovery period, but it will be long before it reaches the previous peak again for the following
reason: the demand for petroleum trasnportation is increasing very slowly, if not decreasing,
whilst the supply of ships are increasing substantially after a lot of new ships being ordered
during peak periods. Thus for PVTrans (PetroVienam Transportation Corp), who has ships
March 2010
Sector Watch
61
ranged from 25,000DWT to 100,000DWT ready to transport for Dzung Quat, from crude oil to
refined products, it still a low margin year.
For PVS (PetroVietnam Technical Services), PVS runs the specialized ship services (it‟s like
water taxi for oil and gas services, and to transport people, tools and equipment from land to the
oilfields) and the port operation for those services. These services are still monopoly and will
continue to enjoy at least 10-15% growth in revenue in 2010.
COMPANIES IN FOCUS
PVS lacks the attractiveness to shareholders for serveral reasons 1) it lists on HASTC with less
restricted disclosure requirement 2) PVS‟s service is very complicated thus exhibits low earnings
predictability 3) PVS‟s growth is rather consistent with expectation whilst earnings surprise is still
the driver of this stock‟s price.
In terms of financial performance, we have seen PVS exceed its target every year since 2007,
and the operating profit grows significantly every year (>20%). The oil and gas sector will still
thrive for a long time to come, and this is one of the best stocks to get exposure to this sector,
although it may be a good idea for the company to move its listing to HOSE.
For 2009, the company achieves 10.7 trillion VND (~570 million USD) in revenue, and 526 billion
VND in net profit, equivalent to 2,830 VND EPS. For 2010, PVS‟s net earnings grow at 6%,
which results in PE2010 of 11.2x, not an expensive level.
PVD: We notice that foreign investors quite like this stock, for the following reasons: 1) the
drilling service market of PVD is very strong and stable, with the drilling rate always higher than
the regional and local average; 2) PVD‟s information disclosure is very clear and transparent to
investors; 3) PVD focuses in its core business and do not diversify into real estate or securities;
and 4) PVD continues to have growth and also has a high dividend payout ratio.
We assigned the neutral rating to PVD over 2009 and the stock price performance proved our
rating fair. We continue to go neutral on this stock for now, as its outlook stays rather mixed with
the upsides and downsides tend to offset each other 1) PVD will enjoy a good revenue growth in
2010 thanks to the new jackups; however profit growth will be very small due to lower drilling rate
accompanied with high operational cost; and at the same time as VND has depreciated, the
unrealized forex loss incurred on PVD‟s USD-denominated debt will be enormous (more than
300 million USD debt; and 5% depreciation means 300 billion VND loss).
PVT: PVT will have a more positive earnings outlook for 2010, as Dzung Quat is hoped to be
fully in operation from mid January. Nevertheless, we believe investors should consider a
number of issues before purchasing this stock. This is very low operating margin yet capital
intensive industry. As a result, PVT is highly leveraged with low and even negative profitability
due to high interest and depreciation expense. The ROA and ROE both below 3% in 2009 and
even 2010. The transport pricing is complicated, but in simple language, PVT will always be able
to cover its cost for the whole year, including depreciation and interest payment, even when
DQR is delayed or when PVT is waiting at dock. The profit per each transport trip will be a
markup of the cost, and will be reasonably small. We believe that being able to cover the cost is
already a luxury for a company that‟s highly leveraged and had bought a number of new ships at
very high prices in 2007-2009. Another positive point of the pricing scheme, whatever we hear of
the Dzung Quat refinery in the news next year, it doesn‟t affect PVT‟s well-being, even when
DQR is running at loss, the transport fee is very small compared to the cost of crude oil and
technical assistance.
Ticker
PVD
PVS
PVT
62
Company name
PetroVietnam Drilling Corp
PetroVietnam Technical
Services Corp
PetroVietnam Transportation
Corp
Price
(26/02/2010)
net profit
2009
Revenue
2010
Operating
Profit 2010
Net profit
2010
PE
2010
56,500
839,118
5,316,423
1,321,856
952,944
12.8
30,100
526,096
10,481,201
744,165
559,434
9.5
12,400
12,282
1,980,000
192,060
52,243
54.3
Sector Watch
March 2010
SECTOR: PHARMACEUTICALS
Phuong Hoang
Associate Director
phuonghv@ssi.com.vn
2009 REVIEW
Revenue maintained stable growth, profit margin was improved: In 2009, pharmaceutical
companies continued to post decent revenue growth of 15-18%, similar to historical average. In
fact, revenue growth did not fully reflect sales volume growth because some pharmaceutical
companies gave direct discounts from selling price, effectively making sale price down while
sales volume rose higher than revenue growth.
Moreover, these companies‟ profit margin also improved thanks to many supporting factors such
as lower average input material price; interest subsidy program; the reversal of provision for
financial investment and bad debts; and official approval of pharmaceutical companies giving
promotional drugs to customers since 4Q 2009.
Strengthening competitiveness: In order to overcome the situation that so many companies
focus on a group of similar products resulting in fierce competition in the sector, pharmaceutical
companies in 2009 were very active in restructuring product portfolio towards over weighing
high-margin product lines while under weighing low-margin products. Companies showed more
interest in investment in CAPEX and many companies are now in investment phase.
2010 OUTLOOK
General view: in our opinion, the sector will continue to enjoy sound growth and increasing
material price is not the big risk in 2010.
Sales growth : without extraordinary events, growth of sales volume and revenue in the 15-20%
range is expected for all pharmaceutical companies in 2010. Sales volume is unlikely to post
extraordinary growth rate due to the industry‟s fierce competition. Some companies will start their
new factory in 2010 (IMP, DMC, DVD), producing new products with good growth potential in the
coming years.
Profit growth is likely to vary among companies and may outpace revenue growth, as companies
are very active in restructuring product portfolio towards increasing weight of high-margin product
lines.
The time-limit for applying GMP-WHO standard to western drug factories has been delayed to
th
2010 end instead of June 30 2008 as before. The application of GMP-WHO standard to oriental
st
drug factories, GSP to storages and GPP to pharmacies is also effective from Jan 1 2011.
Together with investments and upgrading process of factories and warehouses, the sector‟s
restructure is going on but at a slow pace.
Risks: The biggest risk to the sector is inflation and increase in oil price, which will increase price
of input materials (for companies that produce western drugs), while selling price is under control
of Drug Administration of Vietnam. However, our discussion with the companies revealed their
view that input material price will not rise strongly in 2010.
General view on 1Q10: 1Q is not the high season of the sector, hence, we believe that
companies‟ growth will sustain at yearly average with no surprise.
COMPANIES IN FOCUS
2009 generally marked a year of companies‟ positive revenue and profit growth, improved margin.
March 2010
Sector Watch
63
2009
DHG
IMP
DMC
DVD
Net Revenue growth
17.50%
17.48%
13.88%
50.17%
Operating profit growth
174.15%
10.55%
38.62%
285.07%
Net profit growth
185.82%
16.95%
40.14%
334.88%
Gross margin
53.10%
44.45%
29.60%
23.53%
Operating margin
23.47%
12.58%
9.64%
14.88%
Net margin
21.29%
10.32%
8.24%
11.86%
Sources: Companies’ statements
In 2010, our view on the sector is a good growth rate, low valuation and the sector is safe to invest in.
The sector is relatively cheap compared to its historical trading multiple. P/E is at the low range in
history. Some companies have P/E 2010 below 10x. This year also sees many more pharmaceutical
stocks being listed on the exchange such as Vidiphar, SPM, Mekophar. Most of pharmaceutical
companies have small chartered capital. Besides, state shareholder and strategic/institutional
shareholders normally have large ownership. Thus, stock liquidity is one of the biggest hindrances of
investing in pharmaceutical stocks.
DHG Pharmaceutical Joint Stock Company (DHG – HOSE)
In 2010, DHG is expected to have a moderate growth in revenue since the company will continue
to give price discounts to customers. 2010 revenue may reach 1,800 billion VND. There will not
be a big change in product portfolio. Distribution remains DHG‟s strength yet DHG‟s biggest
issue is that the company is operating at above full capacity and has been increased capacity via
outsourcing contracts. The company‟s investment plan in 2010 will focus on capacity expansion.
DHG targets effective cost management and restructuring product portfolio to maintain high
profitability. DHG‟s financial position looked healthy with 534 billion VND cash balance by the
end of 2009. 2010 net profit may reach 280 billion VND. 2010 EPS may be at 10,500 VND which
is still considered relatively high though lower than 2009 EPS which is 13,935 VND. On 26 Feb
2010, DHG share price was 125,000 VND, hence although 2009 P/E is lowest in the sector
(8.97x), 2010 P/E is at 11.9x, higher than its peers.
IMP Imexpharm Pharmaceutical Joint Stock Company (IMP – HOSE)
Revenue/Profit of IMP in 2010 will come from two sources: (1) cephalosporin factory comes into
operation in the middle of 2Q (generates 200 billion VND of annual revenue at maximum
capacity); (2) some partners such as GSK will soon finalize their contracts, which are still in
discussion, with IMP. We expect IMP to earn 92 billion VND profit before tax and 78 billion VND
profit after tax. With assumption IMP will not raise more capital in 2010 (current cash balance is
sufficient to undertake the investment in new factory), 2010 EPS will be 6,690 VND, 15% higher
than 5,844 VND in 2009. At price of 70,000 VND, 2010 P/E stays at around 10.5x. In 2009, the
company sustained stable operating activities with cautious business strategy. In 2010, IMP‟s
target completion will depend on the sales of IMP‟s cephalosporin products in hospitals. We think
IMP has good fundamentals, high stability; however, the company needs to strengthen its
distribution system and marketing in order to boost its sales volume.
DMC Domesco Medical Import – Export JSC (DMC – HOSE)
In 2010, DMC targets 12% YoY growth for net revenue, 25% for revenue from core business,
25% for profit before tax and 22% cash dividend on par value. In 2010, pharmaceutical material
production and alcohol factory will come into operation in 2Q and are expected to operate at 60%
of full capacity. Thus, revenue and profit from oriental drugs (currently accounts for 15% of
revenue) will increase. Along with HIV test kit, oriental drugs of the new factory can add value to
company‟s export revenue. DMC can increase production capacity of western drug production
line as the production line is operating at only 70% of its designed capacity. According to DMC‟s
preliminary target, 2010 EPS can reach 6,176 VND as compared to 4,941 VND of 2009 level.
We believe that DMC needs more capital for its investment plans in 2010.
DVD Vien Dong Pharmaceutical JSC (DVD – HOSE)
2010 profit after tax is targeted at 130-135 billion VND and according to the interview with
management, PAT growth could be 30-40% higher than company‟s 2010 plan thanks to the
64
Sector Watch
March 2010
launch of new products (Fludon could contribute 60 billion VND to company‟s profit). Profit
margin in 2010 is likely to be improved since outsourced products are being replaced by
products from Lili of France factory which is expected to reduce costs by 10% even though the
new factory will only operate at 50% of its designed capacity in the first year.
There are 2 scenarios for DVD‟s 2010 profit: (1) 130 billion VND of profit after tax as planned and
(2) 169 billion VND of profit after tax or 30% exceeding the target (the difference mostly comes
from new products‟ sales). In the second case, DVD‟s 2010 EPS will be 9,155 VND, close to
2009‟s level and P/E2010 is at 10.5x at price of 96,000 VND.
Table: Updates on some pharmaceutical companies’ EPS and PE 2009 & 2010
EPS09
EPS10
Price
P/E09
P/E10
DHG
13,935
10,500
125,000
9.0
11.9
IMP
5,844
6,690
70,000
12.0
10.5
DMC
4,941
6,176
48,500
9.8
7.9
DVD
9,152
9,155
96,000
10.5
10.5
Note: stock price on 26 Feb 2010; Sources: Companies, SSI Research
March 2010
Sector Watch
65
SECTOR: REAL ESTATES
Cuong Vu - Linh Pham
- Ha Nguyen
Research Analysts
2009 REVIEW
In the first quarter of 2009, the real estate (RE) industry was suffering a lot of consequenses due to
the strong wave of RE prices earlier in 2008 then the hard hit by the global financial crisis. However,
the industry‟s picture somewhat changed its colors from 2Q09 enjoying several favorable conditions
offered from the Goverment‟s stimulus package. We did notice an uptrend in the industry during that
time though it was short-lived and geographically divergent.
The uptrend in the RE market was noticable in northern Vietnam in that RE prices generally moved up
by 30 - 50% in several locations. There were some transactions recording even 80% rise in sell
1
prices. However, the two-month RE craze finally cooled down and somewhat came to a standstill
situation when we witnessed a slump in the number of successful transactions from the peak in midNovember.
The short-lived recovery in the RE market in northern Vietnam in combination with the abundant
capital inflows brought about by the Government‟s stimulus package accordingly resulted in RE
stocks‟ impressive rallies in 2H09. That helped boost up such stocks as SJS, DIG, ITC, HAG, THD, ...
to join the group of the best performers in Vietnam‟s public equity market as soon as the market
rebounded.
With regard to the performance of publicly- traded RE firms such as Kinh Bac City (KBC), Sudico
(SJS), DIC Group (DIG), Thu Duc House (TDH) and Hoang Anh Gia Lai (HAGL) etc, we witnessed
positive reports on those players‟ performance with the bottom lines topping their own plans or
estimates by 20 - 150%. (For specific data, please refer to company comments afterwards).
2010 OUTLOOK
Positive sides
FDI: weight of FDI for RE still rose geographically among the big projects in 2009.
Exhibit 1: FDI Overview
1
Monthly market review by Vietrees in October 2009
66
Sector Watch
March 2010
Item
Unit
2008
2009
Compared with the same period
1
Implemented capital
mil. USD
11,500
10,000
87.0%
2
Registered capital
mil. USD
71,726
21,482
30.0%
3
New projects
3.1.
New capital
project
1,557
839
53.9%
3.2.
Capital increase
project
397
215
54.2%
Exhibit 2: FDI breakdown by the industries
1
Food and hospitality
32
4,982.6
8
New raised
capital (mil.
USD)
3,811.7
2
Real estate
39
7,372.4
4
236.1
7,608.5
3
Construction
74
388.3
11
99.2
487.4
4
Mining
Retailing, wholesale
and repairing service
Transport and
warehouse
Total
6
397.0
0
0.0
397.0
115
191.7
14
46.5
238.2
26
109.8
5
74.8
184.6
839
16,345.4
215
5,136.7
Industry
5
6
New
New registered
Projects to
projects capital (mil. USD) raise capital
New capital and
capital increase
(mil. USD)
8,794.2
21,482.1
Source: GSO
Moreover, the more positive signal is that implemented FDI out of the committed figure
picked up to record highs of 46.5%, topping the past three years'. We do expect the influx of
implemented FDI to rise further in 2010 when the overall economic status of Vietnam's key
investor nations improves and investors may see some attraction from a further devalued
VND.
Hanoi, one of the two big real estate hubs in Vietnam, will be celebrating its 1,000th
anniversary this year. That will add a plus to Hanoi's real estate market since several key
infrastructure projects are now under pressure to hit deadlines. Noticeably, two strategic
bridges Thanh Tri, Vinh Tuy, and Kim Lien tunnel just came into operation in 3Q and 4Q,
2009. We may soon view the completion of multiple-lane Lang – Hoa Lac highway. That
may help improve the overall infrastructure for the whole city.
Inflows of cash and equity into RE sectors: when the market is down, cash/equity turns
out to be king and owners rich in cash may be able to buy favorite properties for
reasonable costs. In a sense, a down market may somewhat stir demand since it attracts
capable investors to their properties of interest. In turn, existing players who currently
owns well-located properties may see opportunities to weather the trough of the RE
market on the basis of multiple models of business cooperation.
More interested parties coming to Vietnam, helping stir up the market currently in the
down period. Knight Frank is the fifth player in the market besides Savills, CBRE,
Colliers, and Coldwell Banker.
Higher entry barriers help existing players to fight against potential competitors. Current
regulations tend to favor land users/owners against real estate companies. The law
requests companies to pay more attention to owners‟ benefits and that will shield several
of the current players from harsh competition given that they have already done with
complex and costly compensation process. Consequently, higher entry barriers to late
comers may be substantially rough since it may be painful and time-consuming for them
to get through the period of site clearance.
People's confidence in VND might be shaky due to concerns on further currency
devaluation and economic fluctuation. Investment in gold may not yield good returns in
2010 given its unpredictability. That may drive big-cashed people into the conventional
real estate hub, which may help prop up the idle demand.
March 2010
Sector Watch
67
In sum, Vietnam's RE sector may still enjoy a whole bunch of positive signals in 2010 when
foreign investors are highly interested in the industry and a lot of new projects are still lining
up. However, we can also notice several concerns for investors should they consider
investing in the industry due to its lack of transperancy, unpredictability and especially a dim
macro picture of Vietnam in 2010.
Negative points
 Though we have witnessed a somewhat positive correlation between a rise in FDI and RE
uptrend, FDI may just play as a catalyst to warm up the industry while investors should not
totally put their bet upon the FDI. In addition to watching FDI inflows, investors should also
pay attention to other marco factors in the economy in order to achieve a better sense when
the RE industry may make a real comeback.
 Tighter monetary policies, which are likely to wind down speculators' activities. Though that
may help stop fueling an RE bubble it may also freeze transactions, pushing RE prices down
in multiple segments.
2
Statistics show that credit for the RE sector accounts for 11.76% out of the total credit for
the whole economy of 91.84 bn. USD. However, most of the money for RE was mostly
concentrated in HN and HCMC with 14.5% and 51% respectively where infrastructure
developed the most, which implies scarce funding sources for other geographical RE
markets.
Lacking conventional funding sources in 2010 have caused developers and investors/users
concerned about how liquid the market can be and how reasonable properties‟ costs may be
whille developers have been struggling for other sources of financing. That vicious circle may
put a burden upon the recovery of the industry.
 The market will view a huge supply of RE “products” in such segments as residentials, office
leasing and industry parks.
Projected Apartments Supply
Supply of apartments in HCMC - 2010 - 2011
Source: CBRE Vietnam
Source: VietRees
 Overpriced properties: The RE sector in Vietnam is defragmented and easily recognized.
The markets are mostly concentrated in Hanoi, HCMC and surrounding areas of the two
cities. It costs no effort to see through this fact owing to the overall economic development of
the two cities which attracts a huge inflow of people from the countryside. As a result,
population density in the two big cities has become extremely high and the general demand
for housing exceeds the total supply. Also, most of market data that are available for both
buyers and developers merely reflect the current conditions of the two cities and surrounding
areas.Therefore, it is absolutely tough for anyone who wishes to analyze the sector in any
cities beside HN and HCMC.
 The indicator house price / GDP per capita exhibits that RE prices in the two big cities has
significantly exceeded prices of many mega cities in the world, namely Tokyo, HongKong,
Paris, NYC etc., The figures in those big cities may swing around 12-15x while it is
2
An interview with Mr. Nghia Xuan Le, vice president of National Financial Supervision Committee, by Saigon
Times in December 2009
68
Sector Watch
March 2010
somewhere from 35-40x in HN and HCMC. The chance that the market continues its current
3
correction is apparently significant.
Exhibit 3: HCMC and HN 6-month RE indexes
Source: Metvuong.com
 The past RE boom and new beneficiary-friendly policies have spiked costs of land
compensation, making the job harder and a lot more expensive, which leads to serious delay
in multiple approved projects.
 Inflationary expectations will be lingering, possibly hiking up construction materials. That may
slash RE companies' margins or push up already-high prices.
 The existing developers who may have been highly-leveraged will be further burdened with
further liabilities. In the context of unfavorable real estate market in which projects are hard
to find customers of sufficient financial capabilities, those developers may resort to cutting
down on their selling prices to avoid financial trouble or even insolvency.
 Many distinguished developers in the two cities managed to weather 2009's financial storms
owing to their abilities to seek secondary developers and transfer part of their land-bank for
competitive prices. The luck might not be easy replicated in 2010 because of tighter
monetary issues and difficulty in seeking leverage.
Tough conditions in 2010 may force developers, especially in Hanoi to cut down on their
selling prices. That may trigger a so-called price war in the North. Should that be the case we
may possibly see a downturn in Hanoi market as it was in HCMC in 2009.
Throughout 2010, our view on the market is still dim up to the end of 2Q, to say the least,
since negative points appear to be considerably outweighing positive ones. Specifically, we
are now seeing several risks associated with newly developed projects and with low
probabilities of transaction growth in the industry. Though the possibility to grasp good
money may dwindle the opportunity may not disappear as long as investors and/or
developers target some less competitive segments where the real demand is high, and
speculators may not have touched and the room for growth remains ample.
Under our coverage, we see that there may be three sub-sectors in this industry that may
bring along profitability in 2010. They are Residentials for low or mid-income end-users, sale
of land, and Commercial RE (retailing space).
Potential segments or subsectors in 2010 and 2011
 Residentials for mid-income end-users.
Overview: the market in this segment is still of high demand since the inflow of
population into big cities keeps rising. While the high-end segment has been somewhat
distorted given extreme speculation and suppressed supply quantities, the mid-income
segment has not been aggressively approached.
3
Report on Real Estate in Emerging economies by CLSA,
March 2010
Sector Watch
69
Supply: this segment has not significantly touched by real estate firms, and the humble
number of projects currently targeting this segment in the two biggest cities, Hanoi and
HCMC, signals less harsh competition in 2010.
Demand: as said above, the influx of population in tier-1 cities is still attractive given its
locations, economic development, business opportunities and especially, employment
possibilities.
Statistics show that GDP growth and GDP per capita in HN, HCMC rank #1 in Vietnam.
Since the entire economic recovery is generally weak, people tend to try to reside in big
cities, which lays a critical foundation for the mid-income residential segment.
The very fast pace of urbanization in tier-1 cities may drive the real demand in those
cities further compared to the supply. For instance, there may be at most 60,000
apartments on the supply side from 2010 to 2012 in HCMC alone while the market may
request 110,000 apartments for all type of prices.
However, the outlook for the residential segment may not be positive for all types of price
level since the market seems to have either reached saturation in high-end segments or
disencouraged buyers due to overvalued properties. Our research has also shown that
the unit price of $800 - $1,000 per meter-square proves affordable to a vast number of
clients, implying a potential segment.
Conclusion: in our view, though the competition in this segment is high, we expect to
see existing players such as Binh Chanh Company, Thu Duc House and Intresco to get
through the trough of the market in 2010 in this segment.
 Sale of land
Overview: when the market is down opportunities may drift to "land raiders" who are in
pursuit of land expansion. They may take opportunities in the down market to enlarge
their land-bank through purchase of land from primary developers who may still gain
significant benefits from low compensation costs and whose land-bank is mostly clean.
Sale of land may help primary developers handle their temporary cash trouble in the
market, and improve their liquidity. Specific players in this segment can be considered
Sudico and DIC Group.
Supply: we view the limited supply due to a small number of current players with "clean"
land bank. As analysed above, the current legal framework has automatically shielded
existing players who have locked themselves in a safe ring of huge “clean” land bank
while regulations on RE have exposed late comers to several constraints. From our
observation, the limited number of players in the field may keep their market position
competitive. For instance, Sudico, owner of a landbank of nearly 400 ha, and DIC Group,
holding over 2000 hectares nationwide, are typical companies who may focus on land
development and transfer part of what they own to secondary suppliers.
Demand: due to rising entry barriers and a possible drop in sell prices, several late
comers may wish to approach existing land owners for land purchase. That may help
boost demand in the segment of land-right transfer while helping owners of huge and
clean land bank opportunities to improve their performance.
In this segment, we hold a pretty view toward the two typical players Sudico and DIC
Group who possess an abundant landbank. The two players may leverage their position
to overcome the marekt‟s down trend and take off speedily when there is a warm
comeback.
 Commercial RE (Retailing space)
Overview: the high population density in big cities may help improve the retailing
industry. Recent statistics show that Vietnam may use 70% of their income on
70
Sector Watch
March 2010
consumption and shopping. The total retailing sales in 2009 alone reach almost
1,200,000 bn VND, up by 18.9% versus 2008‟s. The figure is expected to move up in
4
coming years
That fact has actually attracted several huge retailing giants to the two hubs, i.e., HN
and HCMC, to mark their initial appearance in Vietnam. Vietnamese people's consuming
behavior has so far driven the central areas or business districts (CBDs) in HN and
HCMC to be precious. Therefore, rent in those areas has skyrocketed due to very low
supply source in CBDs.
Supply: As said above, the supply is extremely limited due to several constraints on real
estate development in CBDs. Though we have seen a lot of large projects lining up in
5
both HCMC and Hanoi we do not see much more competition in CBDs given limited
available space. Therefore, rent in CBDs has reportedly reached record highs ranging
from 220 to 250 USD/m2/month.
Demand: The demand is extremely high as tenants may have to fight for a niche in big
cities. Given a lot of favorable data on retailing consumption in Vietnam, several worldclass retailers plan to land in Vietnam to take advantage of being a first-movers in a
potential market of 80+ million people.
Though Vietnam is a populous country, the real demand for consumption may be largely
concentrated in big cities especially Hanoi, HCMC, Da Nang and their surroundings
because of robust economic development and activities in those cities. As locations
suitable for retailing activities in those cities are not many while interested sellers may be
various, the high demand for eye-catching locations may competitively targeted.
CBDs will still face a limited supply and the conversion of shop houses into modern retail
shops will be hard to push a break upon rental growth given their limited locations and
hard-to-remodel space and architecture.
COMPANIES IN FOCUS
Song Da Urban and Indusitrial Zone Development JSC (Sudico - SJS)
 Given the company‟s attractive clean landbank of 330+ hectares in Hanoi and vast sites in
Dong Nai, and HCMC already acquired for low costs Sudico may be able to maintain or
boost up its high margin in 2010. Moreover, its small and medium business scale may allow
itself to move fast and effectively with regard to decision making process and less SG&A.
Besides, Sudico‟s historical low debt ratios (20-35%) and significant business performance
will surely enhance its financial flexibility upon approach additional external funding required.
 In order to raise its margin on sales, the company may target end-users for sale of individual
plots instead of sale of huge plots. However, the dull macro picture of Vietnam‟s economy
leads us not to expect any surprising performance from Sudico in 1H.2010. Instead, the
company may concentrate on handling its unearned revenues and preparing its
infrastructure in An Khanh South for sale in 2H2010.
 Sudico may seek financial investment opportunities with multiple company members of Song
Da since the Corporation may exit several investment soon in its restructuring strategies to
become a state business group in 2010. Those possible opportunies may get Sudico some
potential profits in 2010 should the company be able to acquire those members‟ equities for
good prices.
4
Report by Domestic Market Control Body
Reports by CBRE, Savills, Collier International exhibit that the total retailing floor area will double the current area
2
to 740,000 m towards 2013 in which the area in the surrounding areas is expected to rise seven-fold while the
figure is a lot more humble in CBDs.
5
March 2010
Sector Watch
71
Investment risks
 The Goverment‟s tighter control over credit growth to fight inflation in 2010 will undermine
growth momentum in RE industry. Besides, inflating production costs will certainly hammer
the demand through pushing up already-high housing prices. With some projects to put in
line and for sale in 2010, the inflationary costs appear to hurt Sudico‟s margin in 2010.
 Less profitability from financial invesments: Sudico has mostly cleared its lucrative portion up
to now. Since its profit from financial investments accounts for one third of its whole bottom
line in 2009, Sudico may encounter tougher challenges to view a high profit growth from its
core business in 2010.
 Profitability will be considerably deducted due to removal of preferential income tax rate in
2009, i.e. 17.5%. Income tax will, therefore, be taxed at 25% instead from 2010 onward.
 Since Song Da Corp. remains the biggest investor, Sudico‟s success is somewhat contingent
upon its relationships with Song Da‟s management. Changes might take place should Song
Da Corp. go through restructuring, which will probably trigger some unrest with Sudico.
 The current small size regarding the personnel issue may well prevent Sudico from intensive
penetration into the Southern RE market, which will definitely cost the company several
potential opportunities in the future.
 We keep our previous view on Sudico as a company with strong fundamentals. However,
there may not be momentums in the stock‟s price in 1H2010.
DIC Group (DIG)
 Even when the RE sector keeps its downtrend in the time to come the company‟s vast land
bank may still benefit from transfer of land rights to secondary investors and/or co-operate
with other developers for immediate profits.
 DIC Group has developed its close ties with local authorities where it operates, which has a
significant contribution to speeding up its process of land acquisition. That has led to the
company‟s abilities to optimize its profits through low-cost acquisition. That advantage will be
further enhanced when the government plans to raise bars higher to any potential players via
tax and credit policies.
 Additionally, DIC Group has somewhat hooked its interest up with multiple professional RE
developers and investors. Specifically, Vina Capical is a 7%+ shareholder with the company.
Also, DIC Group has partnered with two Korean firms through its affliates and subsidiaries in
Dai Phuoc Project.
Invesment risks
 As long as the economy has yet to make a real and strong rebound through new FDI flows
the residential sector is unlikely to see a much better flow of foreign-invested projects in the
next few years. The fact that DIG has largely invested in several projects simultateously will
confront its bets upon Vietnam‟s economic recovery in the years to come.
 The Goverment may impose tighter credit control to fight against inflation expectations in
2010, causing a downturn in the sources of capital into the real estate industry. Besides,
inflating input prices may drive construction materials and production costs up. That will
certainly hammer the demand through pushing up the already-high RE prices, which may
negatively impact on DIG‟s residential projects.
 The current business size regarding the personnel issue may well prevent DIG from catching
up with several large projects lining up concurrently, which may well lead DIG to loose its
control, thus somewhat slashing its potential profitability.
72
Sector Watch
March 2010
 DIC Group plans to join the state-owned Song Da Business Group in 2010. Should the plan
impact on the company‟s leadership or management team, that might be a minus to the
firm‟s future development.
By and large, DIC Group is a typical RE project developer tapping into different geographical
locations. However, we do not expect the company to yield any surprise to investors at least
in 1H10. Consequently, our proposal to this point is that DIC Group‟s stock may not exert
high returns toward end of 1H10.
Kinh Bac City JSC (KBC)
 KBC has well developed its relationship with local and central authorities, which has a lot
aided its process of land acquisition, thus resulting in the company‟s ability to gain significant
benefits from low-cost acquisition. Also, the proactive management team led by Mr. Dang
Thanh Tam may help the company fill its highly vacant industrial parks during this downturn
period. This benefit may well enable KBC to maintan or boost up its margin later on.
 KBC‟s current financial leverage below 40% will surely enhance its capability to approach
new financing sources without further diluting its shares or putting more pressure on
earnings per share.
 Given its current rich-cash balance and abilities to pool external funding, KBC may be at
huge advantage when it needs to finance a lot of its projects lining up. Since the current
management also wishes to leverage its strengths by moving into other business areas as
high-end complex projects, energy, forest planting, mining and RE in Laos, that would give
KBC a lot of upside gains as long as the company is on top of the whole development
process.
Investment risks
 A slow global economic recovery and the continuing slump in FDI flows in 2010, especially in
industrial parks, may poses numerous challenges to KBC. The fact that KBC has largely
invested in several IPs and RE projects across the country simultateously will confront its
bets upon Vietnam‟s economic recovery in the years to come.
 The fact that KBC plans to move into “new” RE sectors like residentials and hospitality may
question the company‟s current abilities to be on top of all the projects. That may be worsen
in the context that Inflating input may drive construction materials and production costs up.
To this point, we hold a neutral view upon KBC given its upside gains and downside risks
seemingly equal. Investors interested in this stock may need to watch out for macroeconomic
indicators and industry events at each point in time to work out possible risks or gains
accordingly. That would help them come up with buy or sell decisions in a more reasonable
fashion.
Hoang Anh Gia Lai Joint Stock Company (ticker HAG)
 HAG ended the year 2009 with gross revenue accumulated to 4,370.25 bn VND, a 132%
YoY growth and profit after tax achieved 1,287 bn VND, a 68.24% YoY growth. Estimated
profit before tax in 2010 is around 2,700 bn VND, among which the main real estate projects
to be booked are Riverview, Phu Hoang Anh and An Tien. 2010 is also the first year that
HAG earns profit from hydropower projects (profit before tax is approximately 50 bn) and
mining (profit before tax is around 650 bn VND, yet the feasibility of profit from mining still
depends very much on market conditions). In addition, HAG‟s traditional businesses (such
as timber, granite and construction) would add approximately 300-400 bn VND to its profit
before tax in 2010.
 Total assets at the end of 2009 was 12,196 bn VND, of which cash was 1,944 bn, mostly
come from the recent issuance of convertible bonds. In 2010, HAG‟s cash outflows might
add up to 5,000 bn VND due to its aggressive investment plan in hydropower, real estate,
mining ... and repayment for maturing bonds. In our preliminary estimate, HAG‟s cash inflows
is sufficient for its investment plan this year. However, we believe that sometime in 2010, the
March 2010
Sector Watch
73
company will still have to face a temporary short of cash for investments. Therefore, tight
cash management will be the major issue for HAG in 2010 and it‟s likely that the company
will initiate capital raisings during this year.
Investment risks
 Real estate: (i) Macro factors: interest rate rise, restrained credit for property market; (ii)
Sluggish demand for HAG‟s id-price segment (over 1000USD/m2); (iii) Slow cash collection
from AR; (iv) Potential lack of cash for investment into construction and development; (v) The
end of the current land bank in 2012 – 2013.
 Mining: (i) Domestic sales: Lower price than target due to purchasing power of buyers; (ii)
Export sales: limited quota for export, high export tax; (iii) Actual mine reserves may fall short
of estimation; (iv) Quality of iron ore (actual Fe content); (v) Potential lack of cash for
investment; (vi) Other issues: environmental, govermental....
 Hydropower: (i) Environmental issues and pressures; (ii) Cash for investments.
Investment and Trading Of Real Estate Joint Stock Company (ITC)
The news on shareholder‟s meeting‟s approval of 1:1 stock bonus and the following additional
2:1 share issuance was released by the end of 22/2, however the timing of the stock bonus was
not fixed. As the paperwork process for stock bonus lasts below 01 month on average and for
additional share issuance lasts 03 months on average, we believe that the oscillation of shortterm investors‟ sentiment will often center around this news, underlying ITC‟s short-term waves,
which are fueled by a number of investors who believe they get access to unofficial information
on the ex-right date of the stock bonus. Besides, as mentioned in previous report, last year ITC
recognized its profit in a very conservative manner in Q4 (booked only earning sources from
construction but not from the real estate business). One of the reasons may be the company‟s
policy to book those profits into 2010 paralleling with 2010‟s heavy share issuances in an effort to
reduce dilution effects. As chartered capital will triple by 2010 year- end, we expect that
management will aim to keep 2010 diluted EPS in a reasonable level to maintain attractive
valuation for stock price. In 2010, with sales and profit from An Khang apartment and Tu Xuong
villa (used to be in 2009 plan) and other projects such as Thinh Vuong, Da Phuoc, Gia Hoa and
6B residential – Lot 8..., we believe that the company‟s diluted EPS can even grow from 2009
level. However, the actual recognition will depends on cash collection from apartment sales and
company‟s growth policy taking account of following years‟ earning growth.
Therefore, during 2010, the market may receive information on ITC‟s profit that may beat
expectations significantly, causing short-term swings in stock price but we believe that the
duration may be shorter than T+4. Hence, in our opinion, the proper strategy for ITC stock is
BUY for medium term and wait for reasonable exit as good news is released.
Advantages
 Strong brands with credible quality of products and services.
 Large land portfolio bought at cheap price long ago.
 Advantages in carrying out legal procedures for projects, facilitating the compensation
process.
 Good relationship with banks and corporations, stable debt-equity structure, high capital
mobilization capacity.
 Internal synergy among real estate, construction and concrete businesses, underlying
competitive advantage.
 High quality of book value, much upside potential from the revaluation of land and villa
portfolio in the future that may have positive effects on stock price
Investment risks
74
Sector Watch
March 2010
 Tighter credit conditions will affect market‟s purchasing power, sales and cash collection of
the company during 2009 – 2011,
 Concern on the management of cash flows from operation, the risk of higher dependency on
leverage to finance future products and interest expense burden.
 Patience in the construction of projects until completion in order to maximize profitability from
land portfolio.
 Low profitability figures (ROA, ROE) that may increase strongly. Low cash balance and asset
turnover.
Limitations in marketing, sales promotion and activities to improve investors community‟s
awareness and recognition on the strength and value of the company and existing projects.
Binh Chanh Construction and Investment Corporation
BCI missed its revenue second consecutive years but still met its profit target in 2009 due to
unsettled negotiation on selling a subtantial part of apartment projects to the Southern
Management Unit under Hochiminh City Administration. Bottom-line was, however, in line with
the company target due to most of booked residential property projects including Phong Phu 5,
Tay Ten Lua, Nam Hung Vuong associated with a quite low accquired cost. Recently, BCI
promoted an young and egernetic key personel to the post of CEO in atttempt to push up its
business operation. In 2010, our forecast for BCI is 115% growth in sales and 35% growth in net
profit since large-scale projects including Phong Phu 4, Phong Phu Industrial Park and mediumresidential projects including Nhat Lan and Tan Tao appartment are brought on sales in addition
to on-going projects on sales such as Phong Phu 5. This forecast appears quite challenging for
BCI, however, it is feasible taking into account competitivenes of BCI‟s products within a midand-low end segments and flexibility in selling policies by BCI. Bottom line growth will be low
compared to sales growth since only Phong Phu 5 enjoys very low cost as land was aqquired
long time in the past.
We reserve our view on long-term streng of BCI including:
 Abundent land bank for industrial park with room to change land using purpose to residential
area
 Major part of large-scale projects in coming 2 years such as Residential Land of Phong Phu
4, Phong Phu Industrial Park are cleared at efficient cost compared to the prevailing market
conditions.
Investment risks
 Tightenning credit and hiking interest rates for property developer since the last quarter of 09
to at least the end of second quarter in 2010.
 Challenges in financial and human capacity for vast business expansion
 Increasing cost for land acquiring with respect to project pipelines from 2010
Stocks
SJS
DIG
KBC
ITC
HAG
BCI
ROE
45%
26%
21.9%
14.39%
62.39%
18.79%
ROA
20%
15%
6%
6.62%
24.31%
7.2%
EPS-2010
6,800
7,240
5,600
8,250
10,962
5,073
PE-2010
13.5x
9.46x
16.3x
10.54x
7.2x
10x
Current ratio
1.33
1.34
1.43
1.56
1.05
2.1
D/E
Recommendation
March 2010
.29
.34
1.01
1.16
1.5
.40
HOLD
BUY
HOLD
HOLD
HOLD
HOLD
Sector Watch
75
Hiep Nguyen - Phuong Hoang
hiepnc@ssi.com.vn
phuonghv@ssi.com.vn
SECTOR: TECHNOLOGY
2009 REVIEW
Overall, IT industry was only slightly influenced by the economic recession. According to
Vinasa, despite difficult economic conditions in 2009, total sales of IT sector in Vietnam reached 6.2
billion USD, up 20%, of which, total sales of Telecom companies reached 77.5 billion VND, up 61%
YoY. This was a very encouraging results as during the last 10 years, the average annual growth rate
was 20 – 25% for IT industry, 30 – 35% for software industry, and in recent years, 60 - 70% for digital
content industry. Another significant success in 2009 was that Vietnam‟s IT Industry Competitiveness
Index (conducted by EIU) hiked from 61 to 56 globally, mainly due to better infrastructure and
regulation environment, while most of countries in the region dropped.
th
th
Regards to software outsourcing segment, Ho Chi Minh City is at the 5 place and Hanoi is at the 10
place of Top 50 Emerging Outsourcing Cities of the World (Global Services-Tholons, 2009). Vietnam
rd
became the 3 biggest partner of Japan in software outsourcing, just after China and India (CICC
Report, 2008).
The reasons behind all of these high growth and achievements are: low labor cost making our
software outsourcing bid very attractive, consistently high economic growth (even during the global
economic crisis) keeps ICT spending at a stable growth rate (approximately 12% annually),
government‟s priority to create pro-growth environment for IT industry and making it one of the
pioneering industries, and last but not least a big and young population with eager to learn (literacy
popularity is 95%) make a very promising land for telecom firms.
2010 OUTLOOK
Q1 2010 Outlook: With the peak season of sales for the telecom sector in the summer and
software outsourcing sector increasingly growing faster towards the year end as the global
economy recovers, we do not expect significant growth in Q1 of 2010 for the IT industry.
Risks & Challenges: Because of high fee, lack of network availability, and currently limited
value added services, the demand for 3G in 2010 and 2011 is expected to be still weak, making
big investment for 3G infrastructure of telecom firms at risk. On the other hand, expanding
busineses overseas creates more opportunities but also embeds operational risks and more
competitions. Last but not least, we also see higher domestic competition in broadband internet
segment next year as the growth of number of internet users continues to decrease and FPTTelecom will have its presence in most of provinces.
Internet Segment: Oversea Expansion & Higher Competition in Broadband Segment
 Industry basics: Vietnam is among Top 3 fastest growing telecommunication markets in
Asia: With regards to mobile phone servies, Vietnam has 120 million mobile phone
subscribers and 3 Vietnam mobile phone companies are in the world top 100 mobile service
providers.
With regard to interenet services, by end of 2009 there are approx. 22.4 millions Internet
users (17th highest in the world).
Internet Users
2006
2007
2008
2009E
2010E
2011E
2012E
14,683,783
17,718,112
20,834,401
22,490,658
23,809,715
25,206,133
26,427,869
20.66%
17.59%
7.95%
5.86%
5.86%
4.85%
17.67%
21.05%
24.40%
25.64%
26.66%
27.73%
28.56%
516569
1294111
2048953
2985061
4083866.9
5293287.9
6652532.4
150.52%
58.33%
45.69%
36.81%
29.61%
25.68%
g
Pennatration
Rate
Broadband
Subscribers
g
Sources: VNNIC & SSI Estimates
76
Sector Watch
March 2010
Source: Vinasa
Our outlook for the internet segment in 2010 is positive for several reasons:
Decline in growth rates of both number of internet users and number of broadband
subscribers does not mean potential growth rate for this segment is low because 80% of
sales of telecom firms come from two main cities Hanoi and Hochiminh city. This means
penetration rates in these two cities are already very high, and there is still a huge potential for
growth when telecom firms expand their businesses in rural areas. Besides VNPT and Viettel
have already presented in 63 provinces, FPT-Telecom plans to have its presence in 44 cities by
the end of 2010, and 63 cities by the end of 2011.
 Main competition next year will focus on the broadband area which brings higher
sales for ISPs. We can see this from 2009 as telecom firms‟ sales growths well exceeded
number of internet user growth rate and broadband internet growth rate remained high, at
45.69%. With FPT-Telecom (solely focusing on broadband internet) to represent in most of
provinces next year and its lower ADSL ARPU and better internet quality, we see
competition in this area will be higher. However, wider customer base (as broadband user
growth rate remains high, approximately 40%) and part of dial-up users switching to ADSL
services will continue bring high revenue for ISPs. Further, to join the global trend, FTTH
(Fiber-To-The-Home) and Bundle Services will also become more popular in the coming
year. Unlike traditional copper cable ADSL market, FPT-Telecom has light advantages in
these new internet products in the domestic market as it was the first to deploy in 2008,
following by Viettel in 2009. Currently, sales from FTTH already makes up about 20% total
internet sales of FPT-Telecom.
 Another indicator for still high potential growth in telecom market in general and broadband
internet market specifically is that international and domestic connection bandwidth
continue to increase rapidly. Telecom firms continue to invest in infrastructure.
International connection bandwidth has increased from 1Gbps in 2003 to 86Gbps in 2009,
expected to be 110Gbps in 2010.
 In 2009, sales of VNPT up by 30%, Viettel up by 133%, and FPT-Telecom up by 50%. In
2010, VNPT plans to grow at 20%, Viettel plans to grow at 60%, and we estimate FPTTelecom sales to grow at annual rate of 50% in the next 2 years. These high sales growth
rates are believed to be achievable because:
Big firms like VNPT and Viettel are expanding business overseas (Laos & Cambodia). In
Laos, Viettel has the best telecom infrastructure, and in Cambodia, Viettel is currently
the 2nd among local ISPs.
FPT-Telecom will take up more share in the domestic market as it has been expanding
its appearance from 2 to 63 provinces.
March 2010
Sector Watch
77
Mobile Segment: 3G Technology is the Key Factor for Future Growth
 ARPU’s downtrend continues in 2010, however, at a slower rate: According to BMI‟s
estimates, ARPU in 2009 had dropped by as much as 21% to $4.61. The main reasons were
the economic downturn (subscribers cut spending) and new operators creating higher
competition (Noticeably, Beeline‟s 0 VND package). We believe the downtrend will continue
in 2010 and 2011 as the high competition remains but at a slower rate because: (1)
Subscribers will increase their spending, (2) increasing portion of 3G subscribers will boost
the overall ARPU, and (3) as 3G becomes more popular, stronger demand for value added
services & data services is expected.
st
 3G is the Key Factor for Growth: Vinaphone was the 1 to deploy 3G network, then came
Mobiphone in 2009. We expect Viettel to start its 3G package in 2010. Joining the global
trend, 3G technology will become more popular in the coming year. We do not expect the
growth rate of 3G subscribers to be high in 2010 because of high cost and limited network
availability. However, the growth rate will speed up in 2011 and afterwards. Along with the
growth of 3G, digital content & value added service contributors will get benefit as well.
Mobile phone was the segment that witnessed the highest growth in 2009, compared with
other segments in the industry. (Viettel Mobile posted total sales of 40,000 bn VND, up 80%;
Vinaphone‟s sales of 20,500 bn VND, up 45%; and mobiphone‟s sales of 31,000 bn VND, up
82%). In 2010, with the increasing portion of 3G subscribers, slower ARPU downtrend rate,
and operators‟ increasing presence overseas (Besides Laos & Cambodia, Viettel has started
to invest in Haiti, looking at other potential markets like Cuba, Venezuala, North Korea, and
Banlades), our outlook for this segment remains positive.
Software Outsourcing Segment: Recovering from the Low in 2009 towards positive
outlook in 2010
 Industry basics: According to Vinasa, Software Industry keeps a high annual growth rate of
30 – 35% during the last 10 years. Vietnamese government is undertaking the strategy to
make the software industry as a key national economic sector and gives many incentives to
support the industry. There are more than 2500 registered software companies in Vietnam,
mostly based in Hanoi and HCMCity.
The domestic market accounts for 60% revenue of Vietnam software industry and the
government is the biggest customer, the next are businesses. Most of software solutions
sold in Vietnam come from overseas, Vietnamese software companies focus on very few
specific solutions (accounting, mobile solutions, CRM,…) and on IT services to foreign
software vendors.
The export market accounts for 40% revenue of Vietnam software industry and 3 key
markets are: North America, Japan and EU. The export revenue come mostly from
outsourcing services, that include software development, software testing, BPO etc.
 Difficult time in 2009: The revenue of software industry in 2009 reached US$1.575 billion,
including US$ 700 million from digital content services. The software outsourcing area really
had a difficult year as most of software outsourcing firms saw negative or near 0% growth.
(FPT-Software: 0.7%, Vietsoftware: -20%, Tinhvan just finished 50% of its initial plan). The
main reason was that because of the economic crisis, these firms could not find new clients
in oversea markets and existing clients (mostly from Japan where the country still
experiences negative growth) cut budget for IT.
 Signs of recovering in the late 2009, carrying to 2010: Most big software firms like FPTSoftware and TMA solution have seen better demand from oversea clients in the last quarter
of 2009. In India, the second biggest software outsourcing firm posted 5.2% QoQ growth in
the 4Q. This is also an indicator for the recovering software outsourcing market. ICT
spending in Asia is also expected to increase by 8.8% in 2010, compared to 6% in 2009.
Australia, North America and Europe will show higher growth than the Japan market
because those countries‟ economies have passed the bottom. Japanese market will recover
in the latter half of 2010: This market will be still the major market (contributing for over half
of the total sales) in 2010. We expect it to recover in the latter half of 2010 and catch up the
78
Sector Watch
March 2010
normal growth rate in 2011 for several reason: (1) The first generation of IT students trained
with Japanese are graduating this summer, 2010, from FPT-University, (2) Most of clients in
Japan are financial service firms or export oriented firms, hence we expect these firms to
recover as the global economy gets better, (3) Sales will increase as Vietnamese software
outsourcing firms increase the sales portion of embedded software and software design,
which have higher margins.
We estimate FPT-Software, currently accounting for about 50% of the software outsourcing
market in Vietnam, to grow at 40% in America, 30% in Europe, and 15% in Japan next year.
 High potential for high growth to remain: We still see much space for further growth in
software outsourcing sector because the opportunity to expand the market share is still huge.
rd
In the Japanese market, even though Vietnam ranks the 3 after China and India, our
market share is just around 1%. In other markets like the US and Europe, we are still in the
pioneering phase. Most of big software firms plans very high growth rates for 2010: Tinh
Van: 50%, Vietsoftware: 250%, CMC-Soft: 30%. Under our coverage list, we estimate FPTSoftware will increase by 30% - 40% in 2010.
 M&A activity to become more popular: About 90% of the 2500 registered software
companies are small and medium and 25% of software companies are doing outsourcing or
exporting business. After the economic crisis and slowdown in the software outsourcing
subsector, some small firms faced challenges. Hence, we expect M&A to happen more often
in the coming years.
 The 2010 outlook for the industry is very positive. Vietnam Software Association
estimates the growth rate of the industry to be 30% next year. We believe this plan is
achievable based on the following foundation: Telecom segment continues its high growth as
big telecom firms continue to expand businesses overseas (Laos, Cambodia, Haiti, Cuba,
etc), broadband internet sales will account for bigger portion, resulting in higher sales, and
3G technology will further boost the demand for digital content & data service segment;
Software outsourcing sector will recover as the global economy gets better.
COMPANIES IN FOCUS
With the very bright outlook for the industry in 2010, we believe Telecom & IT industry is worth to be
invested in. The top three firms in the industry are still VNPT Group, Viettel Corporation, and FPT
Corporation. Among IT firms currently listed on exchange (FPT & CMG), we see FPT as an attractive
investment opportunity.
Companies
Sales 09
EPS 09
EPS 10
PE 10
ROE 10
Field
FPT
18,751
7,311
8,742
8.9
34%
IT & Telecom
CMC
3,429
1,927
2,506
9.8
16.11%
IT & Telecom
HIG
9,905
6,980
11,240
3.1
18%
Elcom
776
7,340
9,787
n.a
n.a
IT & Telecom
Viettel
55,000
n.a
n.a
n.a
n.a
Telecom (Internet & Mobile Services)
Vinaphone
20,500
n.a
n.a
n.a
n.a
Telecom (Mobile Services)
Mobiphone
31,000
n.a
n.a
n.a
n.a
Telecom (Mobile Services)
IT
Note: FPT & CMC are currently listed on the HOSE, HIG is on the UPCOM. Viettel, Vinaphone, and Mobiphone
are not listed on any exchange. PEs are caculated based the closing price on 26/02/2010;
Source: Companies’ financial statements, SSI Research
FPT (HOSE)
FPT runs business in almost all segments of the industry. It is the leading IT firm in Vietnam,
especially in fields of software outsourcing and system integration. FPT-Software is expected to
grow at 40% and FPT-IS is expected to grow at about 15% next year. While FPT-Telecom, the
most sustainable growth engine in FPT Corporation will remain its high growth rate of 40% - 50%
per year in 2 – 3 years. We see their positions among the top IT firms very stable. We remain
March 2010
Sector Watch
79
BUY recommendation for FPT stock. Our estimated intrinsic value for FPT stock is 97,210 VND
per share. With the current price of 78,000 VND per share as of 26/02/2010, we see the up side
potential of 24.40%.
CMG (HOSE)
CMC Corporation is the 2nd biggest firm (after FPT) operating in IT field. Its business model is
also somewhat similar to FPT, as it also has subsidiaries operating in almost all segments of the
industry. CMC-SI (System Information) is the profit driver of the corporation. Its market share in
Vietnam is about 16%, compared with 46% of FPT-IS. CMC is also famous for its computer
brand, CMS, the best computer produced in Vietnam. All segments like CMC-Soft, CMS, CMCTelecom, & CMC-Distribution plan to grow at 50% - 100% next year. In overall, the company
plans to grow at 50% for sales and 30% for profit after tax in 2010. We believe this plan is
achievable because the industry in general is expected to grow at 30% and CMC will see more
sales and profit in many segments like telecom, distribution, and real-estate next year. For
investing though, we like FPT more because of its much better profitability, lower PE2010, and
CMC will face more and more risk, competition and probably lower growth as it gets bigger in
scale.
HIG (UPCOM)
Compared to FPT & CMG, HIG is much smaller in size. HIG‟s sales, assets, and capital are
about 1/16 those of FPT. HIG‟s net earning was about 67 billion VND while owner‟s equity is
about 315 billion VND. The company plans to maintain high growth rate of 30% - 100% in the
coming 2 years. The total sales are expected to be 1000 billion in 2010 and 1500 billion in 2011.
HIG mainly operates in software and intergrated system areas. Approximately 80% of income
comes from individual projects made for banks, government offices, and telecom firms. The rest
comes from trades and retail. PE2009 (5.5x) and PE2010 (3.4x) seem to be attractive. However,
lower profitability ratios (about half compared with FPT), less stable future (compared with FPT &
CMG, as HIG will face higher risk as it becomes bigger in scale), and low liquidity (as listed on
UPCOM) are the major reasons making it less attractive investment opportunity compared with
FPT.
Elcom (to be listed in 1Q10)
As a leader in fixed, mobile, converged broadband networking, IP technologies, applications, and
services, Elcom offers end to end solutions that enable compelling communications services for
users at work and on the move. Sales growth rate was 193% in 2007 and 18.82% in 2008,
reached to VND 322 billion. Net income growth was 370% in 2007, 59.56% in 2008 and
estimatedly 141% to the end of 2009 with about 90 billion net profit. EPS 2009 is estimated to be
7,340. The company targets net profit 2010 of VND 120 billions and 2011 of VND 145 billions.
ELCOM is the exclusive partner on clients with Comvers, Nokia Siemens Networks, and
Starhome in Vietnam. This key competitive advantage will maintain in the coming years.
Besides, mobile‟s operators are shifting from 2G to 3G. In order to do this, operators will need to
install new systems and provide attractive digital content services. We believe ELCOM will
double benefit from this as it is the provider of both hardware solutions and VAS. A big portion
(~50%) of total sales comes from one client, vinaphone. This represents some level of business
risk. We also see dilution risk as ELCOM plans to raise much more capital to fund its current &
prospective projects.
80
Sector Watch
March 2010
SECTOR: MARINE TRANSPORTATION
(DRY BULK SHIPPING)
Hung Pham Luu
Research Analyst
hungpl@ssi.com.vn
2009 REVIEW
Drybulk sector was amongst the sector which hit the hardest in the recession. Two stages were
witnessed for the sector in 2009. At the first half of 2009, the decline in drybulk freight rate that
started in 4Q 2008 carried over and pushed the sector deep on losses. Weakened demand,
oversized and costly fleet (consequences from the overheating growth in 2008) limited the
rebound of the Baltic Dry Index, after hitting the bottom in December 2008, at much lower than
the break even point. As most of Vietnam drybulk companies operated in worldwide routes, the
global impact was inherent. It should be noted that the through-put volume for 2009 was quite
stable and even posted a growth and the falling rate contributed the most for the losses.
The pick up in China‟s import of iron ore was the major driver for the impressive bounce back of
the dry bulk freight rate for the second half of 2009, and a more balanced performance was seen
in this industry. Other activities, including selling the old vessell, as well as liquidating the
financial investment portfolio helped drybulk companies to survive in this tough time.
One notable issue for the industry in 2009 is that the sudden VND depreciation in late 2009. As
most of their debt is in USD, the forex gain in profit (as revenue is mostly in USD) outweights the
loss in interest payment but the recalculation of the principal troubled the balance sheet.
However there is helping hand from the government, which allowed split the forex loss over the
maximum period of 5 years as well as to decrease the depreciation for offsetting the loss from its
core business in 2009. Overall, we believe that the Vietnam drybulk sector successfully get
through the crisis and most of them bounced back from losses to be profitable in 2009.
Baltic Dry Index (BDI) and Baltic Handysize Index (BHSI) movements from 4Q 2008
Source: Reuters
2010 OUTLOOK
Improvement in global shipping demand would positively impact the drybulk performance in 2010.
The Chinese import of iron ore remain stable, while the demand in developed countries like EU,
Japan might support the freight rate. Even if the China government take step to curb the overcapacity
in some industrial sectors and tighten the monetary policy, which in most of the cases damage the
steel demand, we believe that the success of this policy is not very straightforward. Handysize
(capacity is less than 35000 DWT, which accounts for the largest portion in Vietnam drybulk fleet)
looked least volatile in 2009 and expected to further increase in 2010, as the pressure of newbuilt
March 2010
Sector Watch
81
delivery is less than other vessel types, like Capesize. For the Vietnamese industry in particular, the
on-going VND depreciation, again, have mixed impact on the industry earnings. The gain in revenue
would be partly offset by the rising cost (fuel, port fee) as well as the debt in USD. We believe that
the above-mentioned forex loss on debt would be one of major factor affected the actual earnings. It
should be noted that a similar method of depreciation to the one in 2009 (i.e to compensate for the
core business loss) might be in place if the shipping market turned unexpectedly negative, so we
could be certain of the industry profitability in 2010. For 1Q 2010 in particular, as the BHSI remain
10% higher on average against 4Q 2009, dry bulk sector performance would at least be as good as
the last quarter and it should be a good start for the year 2010 (as it show a very impressive YoY
growth, as this sector suffered a huge loss in 1Q 2009).
COMPANIES IN FOCUS
Vietnam Sea Transport and Chartering JSC (VST) performance in 2009 was quite optimistic.
Although revenue fell almost 40% to 1316 billion VND YoY, but they returned to net earnings of
77.63 billion VND from the marginal loss of 1.31 billion VND in 2008. The selling of Vien Dong 1 and
Hawk One contributed the largest part for the earnings, and we should note that the operating profit
turning positive from 2Q 2009 and the gross margin was better in YoY terms (14% vs 11%
respectively). We remain positive on VST‟s young, large capacity and effective fleet as well as in its
experienced management. The level of debt of VST is high, because of the fleet upgrade, but we do
think that it is controllable and effort would be made this year to tackle this problem.
Another company worth looking at is Vietnam Ocean Shipping JSC (VOSCO), the largest dry bulk
company in VIetnam and will be listed in HOSE in 2Q 2010. VOSCO turned to profit in 4Q thanks to
the liquidation of financial investment portfolio, selling old vessels as well as making advantage of
some accounting incentives (being allowed to decrease the depreciation level in 2009 as well as split
the forex loss over 5 year). VOSCO dry bulk fleet still operates effectively, and a more balance for
the container and liquid fleet would help VOSCO in 2010. However the rising of interest rate, as well
as the big debt in USD remains obstable for a big jump in 2010, especially when the past buffer of
investment portfolio is not available.
82
Sector Watch
March 2010
Nga Quynh Nguyen
Research Analyst
nganq@ssi.com.vn
SECTOR: PORT OPERATION SERVICES
2009 REVIEW
International trade saw decline, yet throughput volume was still up: Import and export have
been making up over 60% of Vietnam‟s GDP in the past years, and have been playing an
important role in GDP growth of the country. Although the export-import have fallen in 2009 in
terms of value, throughput volume of many export and import goods even saw growth in 2009.
This was partly explained by the fact that in 2009, import tax for many consumer goods and raw
materials were reduced as well as price of many products declined, which encouraged increase
in imports. Moreover, domestic transport still saw growth of 31% YoY (while international
transport grew by only 4%), also contributed to the increase in throughput volume at ports.
Chart 1: Volume growth of some Export goods in Chart 2: Volume growth of some Import goods in
2009
2009
Sources: GSO, SSI Research
According to the statistics of Vinamarine, both container and cargo thoughput increased in 2009.
Container throughput volume was up nearly two times compared to 2008, while drybulk
throughput increased by around 30%. The toal throughput of member ports of Vinanlines in 2009
reached 70 million tons, up 20% YoY (of which throughput volume of Sai Gon port was up 26%
YoY, Doan Xa port 50%, Da Nang Port 14%, etc).
Chart 3: Percentage of Export & Import to GDP
Chart 4: Container and cargo throughput over the
years
Sources: GSO,Vinamarine, SSI Research
2009 saw significant overload and congestion in 1H09
Congestion at the Saigon Port (SGP): Although the containers went through SGP fell by 30%
in the H1 compared to the same period last year , SGP still had congestion in quarter II due to
the sudden increase of dry bulk goods (sand, animal‟s feed, fertilizers etc).
March 2010
Sector Watch
83
Congestion at the Northern ports (Hai Phong and Quang Ninh): Since the concern over
A/H1N1 flu, many countries (mainly China) were afraid of importing frozen meats from Europe
and America, thus postponed/declined to receive the frozen containers, whilst Vietnam‟s custom
law allows temporary import and re-export later. Thus thousands of containers, since April 2009,
were offloaded into port‟s warehouse in the North, both in Quang Ninh and Hai Phong, and
rested at the ports for several months. Vietnamese ports were willing to take the risk and enjoyed
tremendous warehouse fees.
Two deepwater seaports in the Cai Mep-Thi Vai port cluster were launched in June 2009.
The first one, SP-SPA (joint venture between Saigon Port and SPA Singapore) is the first
container deepwater seaport of Vietnam, which can intake 2 vessels at the same time of up to
80,000 DWT, or 4 vessels simultaneously of up to 30,000 DWT. The second port is built by the
Sai Gon New Port (Tan Cang Sai Gon). June witnessed a large-size vessel, operated by APL,
departed from Vietnam directly to America for the first time through transshipping mode (smaller
size ships will transport containers to this port, and transfer to the large size vessel of APL. This
is not the most profitable way, but it‟s the temporary whilst waiting for the road connecting Cai
Mep with the national road 51).
Approval of the master plan: In Dec 2009, the Prime Minister released the decision on the
approval of the development master plan for port system in Vietnam till 2020 with view to 2030.
According to the master plan, the coming new ports will be evolving around the existing, will-bebuilt industrial zones and around big government project such as thermal plants (Mekong Delta
Thermal power plants, Nghi Son, Long Son, Dzung Quat refineries, etc). We see high focus is
also being given to the Central part of Vietnam, with 3 out of 6 port groups of the master plan
belonging to this region.
Although we consider the Master Plan as a positive outlook for this sector, we fear this
plan is too ambitious. Ports are developed in all three regions North, Central, and South, whilst
the support infrastructure is still very poor and the construction plan may not be synchronous
(dredge the river bed, breakwater, heavy road construction, connecting road between the port
and highway etc).
2010 OUTLOOK
Import & Export activities are forecasted to grow in 2010: We expect GDP growth of 6.1% in
2010, inflation rate of 9.2% and positive growth in import (15%) and export (12%) would create
demand for port operation activities. Increasing price of Major export goods of Vietnam such as
garments, rice, rubber, coal, etc. will also boost export and demand for port services. The current
ports still are expected to see growth by investing in equipment, simplyfying customs procedures
as well as reducing loading/offloading time and thus increasing the actual capacity of the ports.
Thus we still believe that the current ports are still expected to continue to grow by around 1015% in 2010.
Moreover, port operators might also benefit from the devaluation of VND againts USD as part of
their revenue is in USD.
Intensive investment plan in ports: According to the Master plan, it is estimated that the total
throughput volume of Vietnam‟s port system by 2015 will reach around 500-600 million tons/year
(2-3 times of the current throughput), and will increase to 900-1,100 million tons in 2020 and
1,600-2,1000 million tons/year in 2030. Total investment is planned at as much as 360-440
trillion VND by 2020.
From now till 2015, the government will focus on investing in deep water searport such as the
International Van Phong Port, Lach Huyen Port Complex as well as Nghi Son Refinery Port, etc.
These ports will be able to handle large vessels with the capacity of over 4,000-8,000 TEUs.
(Previously, Vietnam has had only small scale ports with shallow wharfs that can handle only
vessels with the capacity of around 400-500 TEUs. Limited size of Vietnam ports require goods
from Vietnam to major international markets to be transshipped at larger ports outside Vietnam
often Singapore port).
84
Sector Watch
March 2010
Longer-run outlook: Huge potential for the port sector, due to country’s growth of importexport activities.
Vietnam relies heavily on export to reach the country‟s GDP target, thus in any circumstance, the
government policies will aim at pushing export, thus ports will still benefit. The imported goods
will also find it difficult to reduce. With advantage of resourceful low labor cost, Vietnam has been
and will continue to be an important destination for international supply chain manufacturer such
as garments, shoes, leather, computers, electronics, steel and iron etc. Even petroleum
products, which imported quantity, will fall by over 30% when Dzung Quat and (future refineries)
will be ready to serve domestic needs, will still generate high demand for port services, as
transport of domestically produced petroleum will still use the river route.
COMPANIES IN FOCUS
Doan Xa Port JSC (DXP)
Viconship JSC (VSC)
Dinh Vu Investment &
Developmnet JSC (VDP)
1
2
3
Gemadept (GMD)
4
Doan Xa Port in Hai Phong, the North
Green Port in Hai Phong, the North
Dinh Vu Port in the North,
Inland container depot Phuoc Long and a small river port in Binh
Duong in Southern Vietnam; Nam Hai Port in the North; Dzung
Quat in the Central; and also will be constructing the Cai Mep
Deep Water Seaport in the South and Nhon Hoi International port
in the central.
Overall, we hold a positive view on port operation companies, as the current Vietnamese port system
has not yet met the demand of the growing economy. However, among the issues that port operation
companies are currently facing is limited capacity resulting in slower growth in the coming years. In
the future, newly built large-scale ports with high competitiveness will negatively affect smaller scale
ports will lower competitiveness
Growth potential
As for medium and small scale ports in Hai Phong such as VSC, DXP, DVP, in the coming years,
will still have revenue growth potential:
 As the economy recovers, export and import activities will increase, which expectedly will
increase service fees for port operators
 also investing in machinery to increase loading/offloading capacity of the port
 Invest in other ports in the area
In particular:
 Doan Xa Port:
In the past years Doan Xa has seen considerable growth, in terms of both volume of goods
putthrough as well as revenue and profit, especially since 2008, when new management was
elected, who successfully implemented a series of new measures Increasing the quality of
loading/offloading services, switching the yards into container yards (which increases
utilization rate of the port); restructuring goods handled at the port with export-imports
accounting for higher portion (loading/off-loading fees for import and export goods are higher
than that of domestic ones).
In our view, the total volume of goods handled is not expected to increase significantly as the
current utilization rate of Doan Xa port is not likely to increase. DXP is also leasing external
container yards besides the company‟s current yard. The company also might continue to
increase the proportion of import and export goods in the structure of goods handled
March 2010
Sector Watch
85
(as handling fees for import and export goods are higher than for domestic ones- thus
better profit margin). However, the company might not restructure completely as among
large domestic clients is Vinalines Shipping, which has 51% ownership in DXP.
In the longer run, DXP is considering buying some small size ports in Hai Phong port
area.
 Viconship:
Currently port operation contributes the highest portion in VSC‟s revenue and profit (we
estimate that port operation makes up around 60-65% of the revenue and 70% of the profit).
However, aside from that, VSC continues to expand to road transport business, and
invests in CFS expansion or CY (container yard), etc. and especially container marine
transport. The company has recently purchased 10 container trucks in Aug with total value
of 4-5 billion VND, and liquidated some old trucks.
Port capacity utilization rate is about 65-80% and might be still improved in the coming time
thanks to the help of equipment investment. VSC has 2 docks and they could receive about
12-14 ships per week (currently 10 ships per week). VSC also bought some new specialized
trucks for saving handling time. Besides operating the sea-port, which contributes the most
to VSC‟s total sales and profit (60% - 65% of sales and 70% of profit), the firm continues
developing other business segments like road transport, building CFS storage, building
container yards (CY), repair department, etc. The firm has bought 10 container trucks in the
last August for 4 – 5 billion VND, and VSC also liquidated some aged trucks Besides, in
2009 when ship price was cheaper than in 2008, the firm bought two 14 year-old container
ships ACX KOHUTO having capacity of 400 TEU (5.946 DWT) for 2.8 mil USD. Green Star
01 ship, received in the last August, was used right away for the route Feeder Haiphong –
Northeast Asia. In average, it runs one trip per week for the total revenue of 50-60,000
USD/trip. This is a new business so VSC hire sailors, officers, and ship‟s managers from
VOSCO. At the same time, VSC is looking for a ship that has the same technical figures
similar to ACX KOHUTO‟s for about 3 million USD. VSC‟s investment in 2 container ships
was to improve the door-to-door supply chain.
 Dinh Vu port:
In the period of 2009-2010, DVP will focus in investing in equipment and infrastructure to
increase port capacity and utilization rate. Total investment in that period is estimated to
reach 381 billion VND, using company‟s investment and development funds, owner‟s equity,
debts and finance leasing. Recently, DVP has invested in the Mobile Harbour Crane HNK
208E, with lifting capacity of 100 tons, which came to operation in Nov 2009. The crane will
help improve loading/offloading capacity as well as reducing the time for vessel clearance.
Also in the mid 2010, a new container yard behind wharf 2 will be finished to increase
container handling capacity of the port.
Profitability, valuation
Of the 4 port operation companies under our coverage, VSC and DXP looks cheaper in terms of
PE 2009 and 2010. We like VSC and DXP for their efficiency, low debt ratios.
VSC has the advantage of non-state management and clearer growth potential as VSC can still
increase their port utilization rate (utilization rate in 2009 was around 75-80%) as compared to
DXP.
86
Sector Watch
March 2010
Dinh Vu is less efficient than VSC and DXP and has higher D/E ratio. DVP currently has a
number of investment projects in infrastructure and is in the expansion phase. We believe in the
longterm growth potential of DVP.
Gemadept: With current book value of 1.1x, andstrong asset portfolio, best proxy to the
country‟s port master plan. We believe there is huge potential for GMD in the long term.
However, in the short-term, GMD needs a very high level of capital expenditure, thus delivering
low ROA and high PE
GMD
Net Sales (mn
VND)
1,771,684
DXP
151,878
61,124
40%
40%
49%
41%
3.7%
VSC
457,513
155,049
35%
34%
36%
24%
14%
DVP
264,440
73,372
33%
28%
24%
16%
39%
Current
PB
PE 2009
PE
2010E
2009
Net earnings
(mn VND)
321,206
Operating
margin
9%
Net Margin
ROE
ROA
D/E ratio
18%
13%
7%
45%
Company name
Close price
Market
cap
GMD
Gemadept JSC
75,000
3,563
No. of
outstanding
shares
47,500,000
1.44
11.1
12.2
DXP
DoanXa Port JSC
Vietnam
container
shipping JSC
Dinh Vu Investment
and Development
JSC
65,300
343
5,250,000
2.76
5.6
5.1
90,000
1,083
12,030,551
2.56
6.9
6.1
39,000
780
20,000,000
2.61
10.6
9.7
VSC
DVP
March 2010
Sector Watch
87
APPENDIX
SSI COVERAGE LIST
Ticker
ABT
ACB
BBC
BCC
BCI
BMI
BMP
BTP
BTS
BVH
Company
Name
BenTre
Aquaproduct
Import &
Export JSC.
Asia
Commercial
Bank
Bien Hoa
Confectionery
Corp.
Bimson
Cement JSC
Binh Chanh
Construction
Investment
Shareholding
BaoMinh
Insurance
Corporation
Binh Minh
Plastics JSC
Ba Ria
Thermal
Power JSC.
ButSon
Cement JSC
BAOVIET
Holdings
Price
26/02/10
Market
cap
26/02/10
53,000
601
15%
255%
36,500
28,523
n.a
31,500
484
12,800
2009A
Rev
growth
2010E
NP
ROA
growth
Valuation
Rev.
NP
2009
Net profit
growth
growth P/B
2009
P/E
2010 09 Div.
P/E yield
ROE
Revenue
15%
19%
625,505
15%
87,334
9%
1.4
7.5
6.9
7.5%
-1%
1%
22%
n.a
n.a
2,431,653
11%
2.8
13.0
11.7
6.3%
15%
176%
8%
11%
840,610
34%
66,811
16%
0.9
8.4
7.2
3.8%
1,224
25%
-8%
4%
17%
3,004,560
24%
30,512
-85%
1.1
6.1
40.1
7.8%
54,500
2,954
-9%
67%
7%
18%
1,169,234
165%
275,316
32%
2.5
14.1
10.7
3.1%
23,000
1,737
n.a
8%
4%
7%
n.a
n.a
171,026
14%
0.8
11.6
10.2
n.a.
63,000
2,190
39%
160%
30%
37%
1,301,970
14%
205,243
-18%
3.3
8.8
10.7
3.2%
12,300
744
14%
-77%
2%
5%
1,752,865
19%
63,575
56%
0.9
18.2
11.7
4.1%
11,800
1,072
20%
26%
3%
13%
1,937,673
35%
121,133
-8%
1.1
8.1
8.9
8.5%
45,000
28,202
n.a
36%
n.a
n.a
n.a
n.a
818,000
22%
n.a
42.1
34.5
1.8%
CTG
VIETINBANK
32,400
36,460
n.a
54%
1%
16%
n.a
n.a
3,121,056
12%
2.1
13.1
11.7
n.a.
CII
HCMC
Infrastructure
Investment
JSC - CII
38,000
2,853
-12%
135%
12%
26%
244,589
21%
462,913
48%
2.4
9.1
6.2
4.2%
CSM
CASUMINA
62,000
2,015
16%
3445%
27%
57%
2,997,306
20%
176,211
-45%
3.6
6.3
11.4
1.9%
840
19%
51%
6%
13%
2,931,846
71%
93,000
14%
1.4
10.3
9.0
4.5%
3,332
17%
185%
24%
36%
1,806,458
4%
371,552
1%
3.3
9.1
9.0
2.0%
6,850
108%
134%
15%
26%
1,650,000
10%
724,800
20%
2.9
11.3
9.5
5.1%
Bac Ninh
Agricutual
33,000
JSC.
Hau Giang
Pharmaceutic 125,000
al JSC.
Development
Investment
68,500
Construction
(DIC Corp.)
Domesco
Medical
48,500
Import &
Export JSC.
Petrovietnam
Fertilizer and
32,100
Chemical
JSC.
Dong Phu
60,000
Rubber JSC.
DaNang
119,000
Rubber JSC
Vien Dong
Pharmaceutic 96,000
al JSC.
Dinh Vu
Investment &
39,000
Development
JSC.
DoanXa Port
65,300
JSC
849
14%
41%
12%
17%
1,375,000
29%
110,000
25%
1.7
9.6
7.7
3.7%
12,166
2%
-3%
21%
24%
7,815,497
18%
1,455,866
9%
2.2
9.1
8.4
4.0%
2,400
-11%
-7%
18%
25%
813,069
25%
253,517
17%
2.9
11.0
9.5
2.5%
1,831
40%
654%
50%
71%
2,113,904
17%
220,837
-43%
3.3
4.7
8.3
n.a.
1,143
43%
335%
15%
25%
1,424,958
55%
169,000
55%
2.7
10.5
6.8
2.6%
780
73%
81%
16%
24%
290,884
10%
80,709
10%
2.6
10.6
9.7
4.6%
343
55%
102%
41%
49%
167,065
10%
67,155
10%
2.8
5.6
5.1
2.3%
EIB
Eximbank
23,100
20,241
n.a
61%
0%
0%
n.a
n.a
1,316,000
15%
1.6
17.7
15.4
5.2%
FPT
FPT Corp.
78,000
11,219
14%
27%
10%
35% 21,270,247
13%
1,281,301
21%
3.8
10.6
8.8
n.a.
DBC
DHG
DIG
DMC
DPM
DPR
DRC
DVD
DVP
DXP
88
Sector Watch
March 2010
Ticker
GMD
Company
Name
General
Forwarding &
Agency
Corporation
HAG HAGL JSC.
HOM
HPG
HRC
HT1
HT2
HVG
IMP
ITC
KBC
KDC
Hoang Mai
Cement JSC.
Hoa Phat
Group JSC.
HoaBinh
Rubber JSC.
Ha Tien 1
Cement JSC.
Ha Tien 2
Cement JSC.
Hung Vuong
Corp.
Imexpharm
Pharmaceutic
al JSC.
Investment
and Trading
of Real Estate
(Intresco)
Kinh Bac City
Development
Share Holding
Corporation
Kinh Do JSC
Price
26/02/10
Market
cap
26/02/10
75,000
3,563
-4%
79,000
21,326
132%
55%
13,500
972
n.a
n.a
60,500
11,880
-3%
36,200
621
14,800
2009A
Rev
growth
2010E
NP
ROA
growth
Valuation
Rev.
NP
2009
Net profit
growth
growth P/B
2009
P/E
2010 09 Div.
P/E yield
ROE
Revenue
13%
1,820,648
3%
293,090
-9%
1.4
11.1
12.2
10%
25%
5,543,000
27%
2,224,000
87%
4.5
17.9
9.6
n.a.
7%
18%
1,456,460
5%
162,720
7%
1.1
6.4
6.0
7.4%
50%
12%
26% 11,237,028
38%
1,543,968
21%
2.5
9.3
7.7
5.0%
-30%
-27%
15%
17%
223,170
10%
72,880
14%
1.7
9.7
8.5
5.5%
1,627
11%
107%
2%
14%
4,219,377
50%
103,241
-36%
1.4
10.1
15.8
6.8%
13,800
1,214
26%
5%
5%
13%
2,296,000
45%
150,000
14%
1.2
9.3
8.1
7.2%
47,300
2,838
3%
109%
9%
20%
5,519,270
79%
453,160
27%
1.6
7.9
6.3
n.a.
70,000
812
17%
17%
9%
12%
780,000
18%
78,000
14%
1.5
11.9
10.4
n.a.
87,000
2,004
51%
58%
4%
9%
1,172,027
38%
190,000
58%
1.5
16.6
10.5
2.3%
57,500
11,107
38%
97%
n.a
n.a
1,820,600
53%
1,041,000
88%
n.a
20.0
10.7
n.a.
62,000
4,868
5%
Neg 2008
12%
profit
20%
1,679,457
10%
375,740
-23%
2.0
9.9
13.0
3.9%
2,317
7%
Neg 2008
11%
profit
22%
3,782,022
23%
258,149
7%
2.2
9.6
9.0
4.5%
283
21%
6%
11%
30%
1,964,609
9%
42,543
-49%
1.4
3.4
6.7
2.5%
347
12%
15%
22%
30%
570,085
12%
76,584
35%
1.9
6.1
4.5
3.7%
657
11%
9399%
15%
33%
856,984
12%
80,339
-11%
2.5
7.3
8.2
5.4%
305
26%
20%
14%
20%
315,400
17%
34,500
2%
1.8
9.0
8.8
5.3%
2,319
36%
101%
36%
57%
1,723,476
16%
264,577
-15%
4.2
7.5
8.8
2.8%
1,533
5%
91%
22%
36%
1,606,233
23%
138,290
-7%
3.8
10.3
11.1
2.0%
2,941
-16%
-23%
14%
23%
1,174,921
10%
285,762
10%
3.0
11.3
10.3
3.3%
5,853
14%
Neg 2008
8%
profit
21%
4,106,896
-7%
666,984
-25%
1.4
6.6
8.8
2.8%
2,120
144%
58%
9%
20%
6,500,000
-36%
223,197
12%
2.1
10.7
9.5
n.a.
11,894
10%
-9%
7%
20%
5,316,423
30%
952,944
14%
2.8
14.2
12.5
n.a.
2,630
n.a
16%
3%
8%
n.a
n.a
261,761
32%
1.1
13.3
10.0
3.9%
5,250
23%
-2%
4%
15% 10,481,201
-2%
559,434
6%
1.5
10.0
9.4
5.0%
3,631
2%
18%
1,500,000
28%
382,500
-12%
1.5
8.3
9.5
2.2%
7,450
250%
42%
1,561,000
42%
562,500
-24%
3.8
10.0
13.2
2.7%
Minh Phu
MPC Seafood
33,100
Corp.
Vinacomin –
NBC Nui Beo Coal
47,200
JSC.
Ninh Binh
NBP Thermal
27,000
Power JSC.
North Kinhdo
NKD
44,500
Food JSC
National Seed
NSC
38,000
JSC.
Tien Phong
NTP
107,000
Plastic JSC.
Dry Cell and
PAC Storage
76,000
Battery JSC.
Phuoc Hoa
PHR
36,700
Rubber JSC.
PhaLai
PPC Thermal
18,000
Power JSC
Phu Nhuan
PNJ
53,000
Jewelry
PetroVietnam
Drilling and
PVD
56,500
well services
JSC.
Petrovietnam
PVI
Insurance
25,400
JSC.
Petroleum
Technical
PVS
30,000
Services
Corporation
Refrigeration
Electrical
REE
44,800
Engineering
Corporation
Song Da
Urban & IZ
SJS Investment &
74,500
Development
JSC
March 2010
Neg 2008
7%
profit
Neg 2008
13%
profit
525%
Sector Watch
25%
n.a.
89
Ticker
Company
Name
Price
26/02/10
Market
cap
26/02/10
39,900
399
28%
67%
23,500
15,746
n.a
31,200
592
18,900
2009A
Rev
growth
2010E
NP
ROA
growth
Valuation
Rev.
NP
2009
Net profit
growth
growth P/B
2009
P/E
2010 09 Div.
P/E yield
ROE
Revenue
22%
29%
310,000
20%
55,500
10%
2.3
7.9
7.2
3.8%
75%
n.a
n.a
n.a
n.a
1,951,352
17%
n.a
9.4
8.1
n.a.
-11%
146%
4%
10%
2,755,038
5%
65,962
127%
2.0
20.3
9.0
5.1%
1,200
-15%
-18%
15%
17%
186,499
-11%
108,374
-18%
1.5
9.0
11.1
6.6%
25,300
253
20%
-42%
5%
23%
2,355,922
10%
61,663
19%
1.3
4.9
4.1
4.7%
29,800
271
2%
-34%
8%
25%
1,460,189
-6%
38,412
-32%
1.2
4.8
7.1
4.7%
69,000
2,070
-20%
-20%
20%
25%
581,015
32%
185,430
17%
3.3
13.1
11.2
2.2%
85,000
29,856
29%
90%
28%
36% 13,563,373
28%
2,869,963
21%
4.6
12.6
10.4
3.5%
15,800
3,259
-4%
-14%
13%
14%
479,327
3%
319,408
0%
1.5
10.2
10.2
9.5%
49,000
59,294
n.a
76%
2%
26%
n.a
n.a
4,688,574
6%
3.5
13.4
12.6
2.4%
58,000
870
41%
25%
10%
25%
600,000
15%
125,045
34%
2.3
9.3
7.0
3.4%
90,000
1,083
46%
49%
24%
36%
526,140
15%
178,306
15%
2.6
7.0
6.1
4.4%
18,500
740
-40%
-60%
3%
15%
2,003,532
56%
134,830
74%
1.5
9.5
5.5
6.5%
Total
399,047
20%
63%
158,124,101
17%
36,272,483
12%
12.3
11.0
Total
(exc. Financials)
153,552
17%
70%
145,208,240
15%
16,495,455
5%
9.8
9.3
SSC
STB
TAC
TBC
TC6
THT
TRC
VNM
VSH
VCB
VCS
VSC
VST
Southern
Seed JSC
SaiGon
Thuong Tin
Commercial
JSB
Tuong An Oil
JSC.
Thac Ba
Hydro Power
JSC
Vinacomin –
Coc Sau Coal
JSC.
Ha Tu Coal
JSC.
Tay Ninh
Rubber JSC.
Vietnam Dairy
Products JSC
Vinh Son
Song Hinh
Hydro Power
JSC
Vietcombank
Vinaconex
Advanced
Compound
Stone JSC.
Vietnam
container
shipping JSC
Vitranchart
JSC
*:KDC**: base case estimate, profit upside in the
good case is 38% from base case estimate from possible sale of property.
NKD**: base case estimate, without possible
extraordinary income from the revaluation of land use right.
Source: Companies’ statements, SSI Research
ISCLAI
90
Sector Watch
March 2010
R
DISCLAIMER
The information, statements, forecasts and projections contained herein, including any expression of
opinion, are based upon sources believed to be reliable but their accuracy completeness or correctness
are not guaranteed, Expressions of opinion herein were arrived at after due and careful consideration and
they were based upon the best information then known to us, and in our opinion are fair and reasonable in
the circumstances prevailing at the time, Expressions of opinion contained herein are subject to change
without notice, This document is not, and should not be construed as, an offer or the solicitation of an
offer to buy or sell any securities, SSI and other companies in the SSI and/or their officers, directors and
employees may have positions and may affect transactions in securities of companies mentioned herein
and may also perform or seek to perform investment-banking services for these companies,
This document is for private circulation only and is not for publication in the press or elsewhere, SSI
accepts no liability whatsoever for any direct or consequential loss arising from any use of this document
or its content, The use of any information, statements forecasts and projections contained herein shall be
at the sole discretion and risk of the user.
CONTACT
RESEARCH & INVESTMENT ADVISORY
Le Le Hang
ssiresearch@ssi.com.vn
Manager Director
hangltl@ssi.com.vn
Director of Investment Advisory
linhndh@ssi.com.vn
Dzung Nguyen
Director of Investment Research
dzungnh@ssi.com.vn
Ha Nguyen
Director of Economics Research
hantc@ssi.com.vn
Associate Director
phuonghv@ssi.com.vn
Project Manager
quanpm@ssi.com.vn
Huyen Thu Nguyen
Senior Analyst
huyenntt@ssi.com.vn
Linh To
Senior Analyst
linhtt@ssi.com.vn
Hung Luu Pham
Analyst
hungpl@ssi.com.vn
Linh Pham
Analyst
linhpp@ssi.com.vn
Minh Nguyen
Analyst
minhnd@ssi.com.vn
Cuong Vu
Analyst
cuongv@ssi.com.vn
Nga Quynh Nguyen
Analyst
nganq@ssi.com.vn
Hiep Nguyen
Analyst
hiepnc@ssi.com.vn
Minh Ton
Analyst
minhtnn@ssi.com.vn
Research Team Assistant
ngoctthn@ssi.com.vn
Linh Nguyen
Phuong Hoang
Quan Minh Pham
Ngoc Tran
March 2010
Sector Watch
91

sector watch

Transcription

Similar documents

#TVforHE – Pick of the Week – Storyville: Last Days of Vietnam

Miss Saigon Brochure

305 1200-1240 Mr.Vuong Quang Sang NRW Reduction

CleverAdvice Company Profile_en 214x301mm

Bitexco Financial Tower Fact Sheet Bitexco Financial Tower

Le Hong Phong Forest Vicinity

May 2015 - Jefferson Surgical Clinic

PRESENTED BY: DUONG LAN ANH PRICE MANAGEMENT

Anti-Chinese demonstrations in Vietnam looking from the