Vietnam special report: Covid-19

In this report, we try to recap the measures taken in Vietnam to contain the outbreak. Then we analyze impacts on economic activities from those measures, from the global supply chain disruption, as well as from the lower global demand. We contacted many companies that we follow, and discussed with the management the above-mentioned topics.

It has been two months since the Chinese government decided to lockdown Hubei province including Wuhan city to contain the spread of Covid-19. Since then, the virus has spread to 171 countries, infected at least 307,280 people, and killed at least 13,049 people, causing the WHO to declare a global pandemic on 11 March. To protect public health all over the world, numerous restrictions on people travelling and gathering have put many business activities on hold. Ill-capitalized businesses or businesses without a sustainable business model might face difficulties surviving the current crisis.

Given the current uncertainties, Vietnam’s VN-Index fell by 19.6% MTD and by 26.3% YTD. Large-cap stocks suffered the most because of foreign money outflow (USD210mn net sales in the stock market MTD). Trading volume, however, increased by 20% on average in March vs. YTD average.

At this point in time, it is difficult to anticipate when things will go back to normal, meaning back to a pre-Covid19 level. But when businesses start to resume their activities, hopefully in a few months, various sectors will have to change fundamentally, the majority hopefully for the better. For example, manufacturers will have to diversify their supply chains to reduce their dependence on a few regions and markets; businesses are likely to conduct more online meetings; and therefore, the airlines industry might face slower demand from this important clientele.

In a report published on 16 March, McKinsey & Company pointed out two scenarios for the development of the pandemic. In the first scenario, where countries are taking serious steps (similar to what are happening now), then the outbreak will be tamed by end of Q2, and business activities will gradually resume from the beginning of Q3. We take this scenario as our base case for our analysis.

In our report, we try to recap the measures taken in Vietnam to contain the outbreak. Then we analyze impacts on economic activities from those measures, from the global supply chain disruption, as well as from the lower global demand. We contacted many companies that we follow, and discussed with the management the above-mentioned topics. And we assume McKinsey’s base case for the pandemic development. In this scenario, our estimates for Vietnam are as follow:

  • 2020 GDP growth of 4.8% (versus our last projection of 6.8%). From Q3, we expect to see more public investments, especially into infrastructure. As seen in the past, this is the fastest way to stimulate the economy and to increase employment rate.
  • VND depreciation vs. the USD of 2-3% (versus our last projection of a slight appreciation).
  • Listed companies’ EPS growth (Top 100 by Market Cap) of -6.0% (versus our last estimate of +15.0%).
  • However, the impact of the crisis on the different sectors will vary. Earnings of some companies from the consumer staples or from the healthcare sector won’t be affected by the current situation. For other companies, for example in the construction materials sector, the financial impact should be insignificant. At the revised earnings, the Top 100 stocks by Market Cap, as a proxy for the whole market, is trading at 2020F P/E of 12.9x, the lowest level since 2016. And the country’ economic dynamics has changed substantially over that time frame: Vietnam GDP was USD198bn in 2016 and expectedly USD279bn in 2020.
  • The companies on our BUY recommendation list are trading on average at a 2020F P/E of 7.8x. For some that we have been followed for a long time, the current level is similar to 10 years ago (Vietnam GDP was USD111bn in 2010)

In addition to the fundamental analysis for company earnings, we also acknowledge that the global market sentiment can swiftly change its direction upon information about the availability of medicines and vaccines for Covid-19 (In the last days, there are talks about the effectiveness in Covid-19 treatment of medicines for malaria treatment and prevention while some potential vaccines are being in advanced tests).

Even though the pandemic is still escalating in certain parts of the world (Europe, U.S., Middle East),  with the combination of both earnings forecasts and positive development on the front of Covid-19 containment and treatment, we think that we should try to keep a clear mind and look into the future with some optimism. Vietnam is positioned relatively well (number of confirmed Covid-19 cases <100 as of today, the government’s indebtedness is low, individual and corporate leverage in general is only moderate).

Some specific companies, which are market leaders in their respective markets will come out even stronger from this current situation. It’s hard to call a bottom, but we think those Names are already traded at their historical low prices, and would offer a very good entry point in the next 3-4 weeks.

Please click here to download our full report.

Featured image credit: Timvest