October 2022 Macroeconomic & Stock Market Highlights for Vietnam

We would like to present you our monthly Macroeconomic & Stock Market Highlights for Vietnam alongside with the monthly performance update of the TIM Vietnam Actively Managed Certificate for October 2022.

Vietnam’s Update – Economy

As October 2022 macroeconomic highlights:

• In Oct-2022, macro indicators remained solid, with consumption expanding by 1.5% m/m and the industrial production index (IIP) increasing by 3.0% m/m. The Vietnam Nikkei Manufacturing PMI posted 50.6, marking the 13 months above the expansion level albeit showing sign of decelerated growth. Regarding foreign direct investment (FDI), disbursement reached $2.0bn, up by 6.9% y/y. Notably, FDI registration rebounded significantly in Oct, reaching USD2.8bn (+4.6% y/y), which was the highest monthly figure since Mar-2021. However, trade activities showed signs of slowing due to the challenging environment for global demand. Yet 10M/2022 total trade was still growing by 14.0% y/y and the 10M trade surplus further increased to USD9.4bn. Robust business and retail sales growth supported 10M/2022 government revenue growth of 16.2% y/y, completing 103.7% the full year target. With regard to prices, the Oct CPI rose by 0.1% m/m and by 4.3% y/y, similar to our projection. We expect the CPI to calm down gradually in the last 2 months of this year, closing at around 4.0% by the end of 2022.

• During the month, the chairwoman of the Van Thinh Phat Group, a private conglomerate with large interests in real estate development, was arrested. Meanwhile, the group’s related bank, the Saigon Commercial Bank (SCB), was put under special control. That caused panic across the market as investors were concerned about any potential impacts on other banks and companies. Notably, the State Bank of Vietnam (SBV) has reassured that it stands behind SCB to guarantee liquidity and people from State-owned banks also joined in SCB’s board to ensure normal operation. The situation has calmed down in recent days and SCB can now even attract more depositors.

• As for the foreign exchange rate, the VND has depreciated by another 4.2% in October and is now down by 8.7% YTD against the USD. But the VND has appreciated against other currencies such as the THB, the JPY, the KRW…etc., which has also caused some headwinds for Vietnamese exports as goods here have become relatively more expensive than goods from these neighboring countries. In mid-Oct, the State Bank of Vietnam (SBV) raised policy rates for the second time by 100bps and widened the trading foreign exchange band from 3% to 5%, to allow for more flexibility for the VND against reference exchange rates. The latest rate hike was higher than our expectation of 50bps for Q4/2022. YTD, the SBV has increased policy rates by 200bps, which caused current deposit rates to surpass pre-Covid levels. The higher deposit rates will attract more deposits, support liquidity for the banks (9M/2022 YTD credit growth and deposit growth are 10.5% and 4.0%, respectively) and stabilize the foreign exchange rate. We think that Vietnam’s policy rates will continue to increase by 50bps in the next 6 months as (1) the FED is expected to raise rates in its next three meetings by around 150 bps and as (2) the spread between the VND and the USD rates must remain positive to keep the VND attractive, providing a stable investment business environment. Hence, any further significant depreciation of the VND against the USD is unlikely in our view.

• Although the government’s anti-corruption campaign’s aim is to discipline wrongdoings and thereby to guide toward a sustainable development of the financial markets, the recent arrests have weighed heavily on sentiment of many corporate bond individual investors, who hold 30% of the total currently outstanding issuance. These investors have become very reluctant to buy newly issued bonds. Combined with the recent increase in interest rates, the environment for bond issuers will become more difficult as (1) floating bond issuers will have to bear higher borrowing costs; (2) there are bonds coming to maturity in 2023, and certain sectors such as renewable energy might have difficulties to refinance due to less production volume sellable to the Vietnam Electricity Corporation (EVN). Overall, we expect bond issuers, particularly unlisted companies who have a high amount of outstanding bond maturing in next year, to face difficulties to repay their outstanding papers. Examples are Trung Nam (USD0.4bn), An Dong – Van Thinh Phat’s subsidiary (USD0.6bn), Nova Group (USD0.7bn), or Sovico (USD1.7bn). To avoid a systematic risk to the credit system, the Vietnam Bond Market Association (VBMA) is suggesting the SBV to prepare a bailout solution in form of a special purpose vehicle (SPV) to securitize specific corporate bonds like South Korea did in 1998- 2000 (currently outstanding Vietnamese corporate bonds equal about 13% GDP). Thanks to that intervention, South Korea has regained investors’ confidence and successfully developed a healthy corporate bond market afterwards.

Vietnam’s Update – Stock Market

• The stock market here had another turbulent month as the VN-Index, which is a gauge for Vietnam’s stock market, declined by 12.7% in October (-36.2% YTD). The decline was broad-based as 348 out of 413 stocks retreated, and every sector performed negatively. Selling pressure has been heavy for months now amid the rising interest rate environment. The fraud around the Van Thinh Phat Group further weighed on the markets.

• Trading volume on the three Vietnamese bourses fell by 16.9% m/m to only $0.5bn, which was the low for liquidity this year so far. Meanwhile, rising interest rates in Vietnam weaken retail investors’ buying power, softening their investment interest in equities. Usually, retail investors account for 85-90% total trading volume; but now that ratio has dropped to 80%. Foreign investors also sold $57mn this month, leading to total YTD net sold of $46mn.

• During the month, listed companies have started to release third quarter’s results. Basing on preliminary numbers, most banks posted strong earnings with double digit growth. Going forward, although the increase in deposit rates will lower net interest margin (NIM) in the short-term, banks can gradually pass on the higher interest rates to customers thanks to the floating lending rate next year. Non-performing loans (NPL) are expected to go up due to higher interest rates and tighter liquidity conditions in the economy. But we think that banks are well-prepared with a sufficient capital buffer and high loan loss provision ratio. Total earnings of the banking sector in 2023 are expected to be lower than in previous years, but we don’t expect a banking crisis like 10 years ago given both the macro picture and banks’ internal strength are very much different. As for real estate companies, their earnings usually fluctuate quite much due to different booking schedules. However, their aggregated earnings should be higher as the largest real estate company – Vinhomes (VHM) – achieved a historically high single quarter profit. Real estate companies such as VHM and Nam Long Group (NLG) said that they will post strong earnings in coming quarters. In general, earnings of banks and real estate firms were still healthy in 9M, but their earnings are expected to be negatively affected in coming quarters due to the current rising interest rates and tighter liquidity in the bank system and in the corporate bond market.

• Generally, 9M earnings are also positive in other sectors. However, results of industrial and materials companies were quite mixed due to sharp declines in industrial commodities prices. Some companies benefited from lower input prices (i.e. plastics pipe companies), but some suffered from the quick drop in selling prices (i.e. steel companies). As for consumer staples, there was a strong recovery in the F&B sectors in Q3 due to a rebound in domestic consumption in all distribution channels, supported by out-of-home activities and a quick recovery of foreign tourism. Specifically: Sabeco’s (SAB) 9M’s net profit jumped by 76.9% y/y (higher than pre-Covid level). Masan Consumer Holdings (MCH) posted an increase of 5.2% y/y of its 9M profit. Quang Ngai Sugar’s (QNS) 9M2022 revenue grew by 9.3% y/y, but net profit was flat due to higher input material prices (soybean, sugar, etc.). Meanwhile, most pharmaceutical companies also posted solid growth, benefiting from the double epidemic of dengue fever and of COVID that drove the consumption of COVID/flu-related products, and helped the pent-up demand for treatment of non-COVID illness after the market reopened. Also, in Q3, DHG recorded a historically high net profit of VND262bn (+22.6% y/y). DBD’s Q3 net profit increased by 31.2% y/y, resulting in 9M net profit growth of 21.8% y/y.

• At the end of October, Vietnam’s Top 100 stocks are trading at a 2023F P/E of 8.9x, at a P/B of 1.4x, and at a 2023F EPS growth of 15.2% (21.9% in 2022F). Meanwhile, the stocks on our buy recommendation list are trading at an average 2023F P/E of 8.1x, at an average P/B of 1.4x, and at an EPS growth of 16.5% (21.9% in 2022F).

• In the short term, tighter liquidity conditions and rising interest rates are likely to generate ongoing selling pressure on the Vietnamese stock markets. Hence it is difficult to forecast when stocks finally hit bottom and a strong recovery will start. However, we think that the current market valuation excessively deviated from its fair valuation, and that investors will gradually gain back confidence after the current period of turbulence. Many stocks of healthy companies are trading at their book values but continue to have good earnings prospects.

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Please download the October 2022 Factsheet for our TIM Vietnam Actively Managed Certificate. We are also offering investment advisory mandates and research services for the Vietnamese stock market. Furthermore, we offer our clients Discretionary and Investment Advisory Mandates for the purpose of investing in listed Vietnamese equities.

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