Sector Report

Domestic demand growth is expected to recover to a normalized level of 8% off of a low base in 2020. The drivers for steel demand include infrastructure investment and FDI inflows, which also helps to boost construction activities, alongside infrastructure and FDI projects. Demand from export the market should remain positive, but stronger competition is expected: According to the World Steel Organization, global demand in 2021 is expected to grow 4.1% after having fallen by 2.4% in 2020 -  fueled by the recovery in developed markets. Emerging market (excluding China) demand is also expected to grow 9.4% in 2021. On the other hand, after growing by an estimated 8% in 2020 - fueled by infrastructure investment - demand in China is expected to be flat in 2021. As a result, we expect that Vietnamese steel exports can achieve single digit growth in the coming year. However, stabilization of global supply can also lead to higher competitive pressures for the export market.

Positive outlook driven by global recovery. As COVID-19 remains severe, we do not expect it to be fully contained in 2021. However, as social distancing measures are reduced and vaccines become commonplace, we would expect normalization to be gradual and inventory restocking to begin in 2H 2021. We believe that Vietnam exports might benefit from the recovery in global consumption, however, the growth rate may not be strong because other export countries will also resume production. We expect Vietnam trade value and total seaport international volume throughput to grow 10% YoY in 2021, supported by: (i) global recovery; (ii) newly effective FTAs; and (iii) an increase in FDI projects as the production chain diversifies away from China. High demand for containers could return in 2H 2021. It should be noted that container throughput volume of Vietnam seaports was negatively impacted by global container scarcity and this could continue through 1Q 2021.

Oil&gas share prices have bounced back to pre-Covid levels, while as of end-2020, the oil prices remain -22% YoY. Earnings projections for the sector in 2021 are still about -17% lower when compared to 2019. A rising tide carries all boats, which is what occurred to the oil&gas sector with the abundance of market liquidity.  Although, the sector’s rising share price recovery can also be modestly attributed to oil price improvement to a degree. We still expect upside for the sector should oil prices advance further from their current levels. If this is the case, an upward re-rating for the sector should occur.

The dairy sector is less sensitive to Covid-19. Although dairy is considered to be a staple, consumption might follow a “K-shape” pattern. Hence, demand from low-income consumers could still be impacted given the fact that COVID-19 has hurt the low-income group and price sensitive consumers. Companies such as Vinamilk and Vinasoys have witnessed the downtrading phenomena between Jan-Sept 2020. In contrast, the premiumization will continue as middle and high-income groups are less impacted, and will be more open to consuming higher quality dairy products.

We expect higher top line growth in 2021 for both life and non-life insurers of +22% and +10-12% YoY, respectively.

Valuation has not returned to pre-Covid levels. Currently, BVH is trading at a trailing P/B ratio of 2.46x, lower than its 5 year and 10 year average of 3.06x and 2.76x, respectively. It is also lower than its pre-Covid level of 2.62x. We think this low valuation could be explained by low interest rates. We maintain our Neutral rating on the sector as the crucial growth-engine being interest rate could be low level through 2021.

2021 outlook. We expect economic recovery to boost balance sheet expansion and stabilize asset quality in 2021. Accordingly, credit growth for 2021 is projected to be in the range of 13% to 14%. This is higher than the estimated credit growth of 2020 of roughly 11%-12%, and relatively close to the average 2018 and 2019 credit growth rate of over 13%. Under our base case, reported NPLs would be flat as compared to 2020, but the ratio of VAMC bonds to total loans would shrink 39 bps to 0.17% of total loans, as BID, CTG, HDB, LPB and MSB have cleared their VAMC bond exposure during 2020. Combined, the total of NPL and VAMC bonds should contract to 1.98% in 2021 (from the peak of 4.69% in 2015) amongst banks under our coverage. We note that some of the credit problems could still be masked and delayed by government support (Circular 01). 

Nationwide power consumption growth appears to be on a solid upward trend that could be part of a recovery trend, having expanded +8.2% YoY in Sept20, having caught up with the Sept19 growth pace of +8.4% YoY.  The price on the competitive market (CGM price) has also advanced by 26% on a QoQ basis, due to the miraculous recovery in electricity demand. The generation volume from hydropower remained high due to the rainy season. According to the Vietnam Meteorological & Hydrological Administration (VMHA), precipitation might still shape up nicely before declining in 1Q ’21. Regional thermal coal prices have already bottomed out, and are also on a recovery path due to partly to normalized economic activities that also exist outside of Vietnam. For 2021, we estimate that the domestic thermal coal price for coal-fired power plants will increase between approx. 2-3% YoY.

Prompted by speculation surrounding the change of listing from both the UPCOM and HNX to the HSX, three banks have outperformed the market YTD. LPB, SHB, and VIB have respectively increased in value by 80%, 197%, and 95% YTD. While we still see a 16.7% further upside potential for LPB given our perceived upside in the shares, we do not feel the same way about VIB given its full FOL and valuation which has prompted us to initiate coverage on the shares with an Underweight rating. In terms of SHB, we issue a Market Perform rating.  

Due to the Covid-19 outbreak, international flights in and out of Vietnam were closed for most business and travelling activities. Needless to say, it caused a significant drag upon closing deals, impacting recent leasing progress of industrial parks (IPs). Most successful transactions were at final stages before the outbreak occurred. In 1H 2020, listed industrial park tickers posted a total revenue of VND 21.4 trillion (-14% YoY) and net income of VND 3.6 trillion (-18% YoY). On the other hand, SZC, D2D, and SIP were tickers that witnessed positive earnings growth during the period. For example, SZC revenue jumped 1.5x YoY with 17 ha (+1.4x YoY) of IP land leased in 1H20. As such, its net income increased by 155% YoY accordingly. Meanwhile, D2D revenue reached VND 149 billion (+22% YoY), and deposit interest saw a leap of 3x YoY, lifting its net income to increase 80% YoY in 1H20. As for SIP, 1H20 revenue grew 10% YoY, while deposit interest and sales of investments increased 2.2x YoY, resulting in a 1H20 net income of VND 418 billion (+1.5x YoY).

The banking sector reported a decent earnings growth in 1H 2020 of +14% YoY. However, we suspect that the worst is in front of us and that bank bottom line performance could be under significant pressure in 2H 2020 (-22% YoY), followed by a reasonable recovery in 2021. We recommend investors to revisit the sector early next year.  We favor ACB and MBB. We appreciate ACB for its prudent lending practices and diversified loan book, which provides profit resilience. The bank also levers its bancassurance platform. MBB, on the other hand, is expected to settle much of its bad debt in 2020. While profits will be under pressure for the near-term, we would anticipate solid growth in 2021. The restructuring of Mcredit also poses reduced risk. VCB is on watch because of its resilient fundamentals and its ability to perform through thick and thin. Although we expect its earnings to be hit in 2020 because of the bank's measures to support customers as well as prudent provisioning, we believe its earnings will recover strongly after Covid-19. 

The Oil & Gas sector was amongst the sectors which  have posted the deepest earnings declines in 2020. In H1 2020, sector earnings were eviscerated - declining -65% based on results of listed companies. Based on our estimate, earnings of companies under coverage declined -39% YoY in 2020, based on a Brent crude price assumption of USD 40/ bbl in 2020 (-37.5% YoY). Based on global consensus for oil prices in 2021, our base case is that the Brent crude will average USD 50/ bbl in 2021 (+25% YoY). E&P activities: Besides ongoing projects such as Sao Vang-Dai Nguyet, Nam Con Son 2 phase 2, LNG Thi Vai, and Long Son refinery, we expect other large projects to begin in 2021, including the NT3 power plant (EPC value of USD 500 mn), Block B (EPC value of USD 1.2 bn). Accordingly, we expect a 40% recovery in earnings of the oil & gas sector in 2021. Key earnings growth drivers for the sector are PLX (+181%) and GAS (+23% YoY) 

In 2021, we expect demand to rebound between 3%-5% from the low base in 2020, as we expect a nationwide economic recovery, on top of a recovery in infrastructure projects and stronger FDI inflows into Vietnam. According to the World Steel Association, a 4% recovery in global steel demand is expected in 2021, which should support the export channel of Vietnamese producers. Earnings of HPG is expected to increase by 15% fueled by Phase 2 of Dung Quat Integrated Complex, while HSG profit is expected to experience a mild correction due to margin normalization.

In 2021, we believe that demand can rebound by 3%-5% from the weaker performance in 2020 due to the recovery of the domestic economy, and from renewed interest in infrastructure projects. HT1 net profit is forecasted to rise +11% YoY from improved sales volume, and a decrease in interest expenses.

Demand for beer was more negatively affected by Covid-19 during H1 2020, contracting -12.7% by volume, while Nielsen observed that FMCG consumption declined by just -7.3%. According to Nielsen,  consumption was reduced by -22.6% YoY in  Q2 2020 by volume. The Nielsen data reflects actual beer consumption, while sales of SAB and other breweries refer to that from manufacturers to distributors. Beer consumption accounted for 20.7% of FMCG consumption in Vietnam in H1 2020 (Nielsen), a slight contraction from the -22% decline in 2019. Production volume has recovered since May, increasing +60% compared to the February to April period. Volume decreased by -17% YoY in 1H 2020 according to the Vietnam GSO. For 2020, we expect SAB to decline by -30% YoY in terms of beer volume.  2H is expected to be better than 1H provided that Vietnam does not issue another nationwide lockdown. For 2021, we believe that the sector could recover by 20% due to a resurgence from the low base expected in 2020. Having said this, we do not expect beer consumption to achieve pre-Covid levels in 2021. We find that beer consumption could take up to two years to recover to both pre-Covid and pre-Decree 100 levels.

As legal issues related to real estate projects usually take years to resolve, we anticipate a similar situation for 2021. As such, we only expect an incremental price gain of between 1-2% in the Hanoi market, while the HCMC market to again see moderate price expansion of between 5-7% in terms of price – not dissimilar to 2020. For property stocks under coverage, we forecast 2021 net profit growth of between 7-8% YoY, due to solid past sales which typically take 2-3 years to be fully amortized into earnings. We forecast between a 15%-17% YoY growth rate in pre-sales within our coverage universe. Several developers have expanded into areas outside major metropolitan areas and are developing large-scale townships, offering greater landed properties. These have received strong buyer interest of late. 

Our Top Call: VHM (Buy, TP VND 113,000), KDH (Buy, TP VND 30,500), NLG (Buy: TP VND 33,400)