The week had started with relatively subdued price action, though slightly downward. At around USD200mn, liquidity was on par with its recent average. There was relatively little in terms of big news flow from Vietnam other than Vietnam is edging closer to hosting its first F1 race in 2020.
If anything, news about Vietnam was quite positive. Standard Chartered and UOB Bank (Singapore) both revised up their 2018 GDP growth target for Vietnam. Standard Chartered set it at 7%, higher than its previous forecast of 6.8%, while UOB forecasts 6.9% GDP growth in 2018. Their main rationale was that strong manufacturing activity from FDI inflows would support Vietnam’s medium-term growth.
However, on Thursday morning, echoing what had happened Wednesday in the US, all hell broke loose in Vietnam. Excluding some extreme volatility in 2001, when there were just a few stocks and the market was entirely driven by retail punters, the 4.84% drop on Thursday, was one of the VNIndex’ biggest single-day decline in its history!
The good news is that throughout Thursday’s trading there was sufficient liquidity for price discovery. And on Thursday and Friday there were bottom fishers willing to get in at lower prices.
The VNIndex closed the week down 2.6% on relatively strong trading, worth VND25,972.67bn (USD1.13bn). So far this quarter, the VNIndex has lost 4.6% but it’s still one of the better performing markets in the region, and it hasn’t done so bad against to US markets either.
Talking to clients, investors, and other brokers, most of them seem to think this was a knee jerk reaction to the sharp pullback in the US. And the action we saw on Friday seems to point to that idea, as the market bounced back +2.56%.
Foreign investors were net buyers on Friday, ending a 6-day streak of net selling. They injected roughly USD12mn into Vietnamese equities. Vietnam is one of the few countries in Asia with net inflows YTD and where foreign investors continue to invest.
Vietnam’s fundamentals are intact, and Vietnam’s capital market are still not very correlated with US markets. However, correlation is a funny indicator. When these types of “flash crashes” happen, correlations can increase very quickly. What is sure, Vietnam’s market is not immune to global pressure from global equity market volatility, rising interest rates, a strong US dollar, rising oil prices, and the continued row between US and China.
Earlier this week, I had looked at foreign funds’ cash positions. The 16 funds we looked at manage in aggregate an AUM of USD3.5bn. As of their latest updates, they only have about ~3% of their portfolio in cash. This may be explained by the fact that many Vietnam-focused funds are now open-ended. In any event, this doesn’t give them a lot of “dry powder” at times when the market corrects and buying opportunities arise.
Rong Viet Securities Equity Research Summary
Analyst Pinboard
Dry Cell And Storage Battery JSC (HoSE: PAC): Competitive Landscape of the Battery Industry and Position
· Despite fierce competition, PAC’s market share remains stable.
· In the automobile battery market, the company accounts for 40-45% of total sales. Meanwhile in the motorbike battery segment, PAC has only 7%.
· Market share of the leading battery manufacturers remained stable over the last few years. We believe that its competitive edge is attributable to an effective management distribution system.
· The company uses advanced software to control its distribution channels.
· Sales administration policy gives it power over its distributors.
· PAC establishes control not only at the distribution system level but also at the retail level.
· We find PAC’s sales administration relatively optimal but we believe that the market share of the firm will not increase in the future but stay stable.
Vietnam Electrical Equipment JSC (HoSE: GEX ) – Restructuring of the electrical equipment sector promises positive results
· After the Ministry of Industry and Trade’s divestment in December 2015, GEX began its restructuring to become a conglomerate.
· Gelex restructured itself into three main sectors: electrical equipment and other industries; Infrastructure including logistic and utility; and real estate.
· GEX has transferred all of its ownership in its subsidiaries operating in the electrical equipment industry to GELEX Electric.
· Gelex also disclosed its intention to increase its ownership and delist those companies.
· We believe that information transparency is an issue to keep in mind whence the subsidiaries of the electrical equipment industry are no longer public companies.
· GEX plans to increase its ownership in Dong Anh Electric Equipment (UpCOM: TBD) to make it become a subsidiary of Gelex.
· Gelex expects to increase its electrical equipment sector efficiency after the “move under one roof”
· After completing the M&A and restructuring process, GEX electrical production mix will cover fully high, medium and low voltage.
Cuong Thuan IDICO Development Investment Coporation (HoSE: CTI ) – Rebound in 2H 2018
· Cuong Thuan Investment Development IDICO JSC (HSX: CTI) specializes in infrastructure construction and quarries. It focuses on these as a long-term growth driver.
· Top line revenues dropped in 1H18, except for stone quarries. Revenues and NPAT came in at VND416bn (-25% YoY) and VND56bn (-20% YoY), respectively.
· Construction job is expected to recover in 2H18 as BOT 319 Long Thanh – HCMC progress was restored in July.
· On the other hand, Thien Tan 10 quarry was exploded in July, regaining exploit activities.
· Coupled with boosting construction activities, 2H18 result may turn positive. 3Q18 revenue and NPAT are expected to be around VND320bn (+5% YoY) and VND53bn (+62% YoY), respectively.
Pha Lai Thermal Power JSC (HoSE: PPC ) – Update on 3Q18 Business Performance
· Core earnings of PPC in 3Q18 remained stable, meanwhile, new changes in PPC’s capex plan helped to reduce the risk for the company.
· PPC managed a significant improvement in its average selling price (ASP) while sales volume decreased by 15% YoY to VND1.254tn.
· Changes in capex plan results in lower risks for PPC
· The reversal of financial expenses from FX differences in 2016 is expected to be recognized in 4Q 2018, making it a potential catalyst for PPC’s business results.
· Overall, while we consider the prospect of Pha Lai 3 power project uncertain and too early to factor in PPC’s earnings, we still have a positive view because of the above-mentioned changes in its capex plan. This could help maintain its ability to pay a stable cash dividend of VND2,500/share.
Inflation Expectations
· Monetary policy is always driven by inflation expectations. In Vietnam, the Government and the State Bank are aware of the above relationship and make efforts to keep inflation in check.
· In recent years, domestic factors have been the driver of inflation. This year, the rise of pork prices is a contributor to inflation. We forecast 2018’s inflation to be around 4.1%-4.2%, slightly above the target.
· Local energy prices have risen 10% YTD while, in our opinion, they should have been higher as imported energy prices upped 20-30% YTD. The delay of the environmental protection tax on gasoline prices until 2019 and the stop to increase other government-controlled fees are also notable.
· From our point of view, the government has done a good job to sustain macro stability, including anchoring inflation expectations.