Sector Report

Over the past decade, Vietnam has experienced resilient growth in FDI inflows, driven by the trend of manufacturing relocation. Countries like Singapore, Taiwan, and China have contributed to this growth, attracted by Vietnam’s competitive advantages, including favorable investment policies, low labor costs, strong intellectual property rights, and a stable economic environment.

However, in 2024, FDI inflows into Vietnam have decelerated. Total registered FDI reached $27.26 billion, representing a year-over-year increase of only 1.9% from January through October 2024. In the short term, FDI companies might adopt a wait-and-see approach until there is more clarity on Trump’s tariff policies, including those affecting imports from Vietnam.

The government is addressing bottlenecks to attract more FDI through several initiatives. These include researching and establishing mechanisms to support large enterprises affected by the Global Minimum Tax, proposing a new law with lucrative investment incentives for semiconductor investment, amending certain articles in the current investment law to allow provincial People’s Committees to approve new industrial park investments, and enhancing infrastructure to connect industrial hubs, such as the North-South expressway and the railway linking China and Vietnam. Consequently, we believe that FDI inflow will continue to grow, even with potential new tariffs from the US.

For investing in stocks, we continue to favor select industrial park stocks, each with unique growth drivers, such as BCM, SZC, KBC, and DPR.

For 3Q24, we observe that local garment manufacturers achieved record high quarterly results for both top and bottom lines, beating our in-house expectations on demand recovery. Apart from STK reporting a miss, TNG, MSH and TCM all recorded impressive results. Notably, TNG and MSH both achieved gross margin expansion. We attribute the strong sales to the high season, as expressed by solid volume order recovery in both the US and EU markets. Within our sector coverage, we have an OUTPERFORMrating on the shares of TNG (TP: 31,300/share, +23% upside), largely due to: (i) outstanding revenue CAGR of 14.5% for the 2018-2023 period; (ii) NPAT growth of +47% YoY during 2024 and +16% YoY for 2025; and (iii) an attractive valuation, with 2025 P/E of 8.1x for 2025 compared to the sector historical range of 10-12x. We have an OUTPERFORM rating on the shares of MSH (TP: 56,500/share, +11% upside) as we expect it to post NPAT growth of +17% YoY during 2025, while capacity expansion will continue to fuel growth over the medium-term. We have a MARKET PERFORM rating on the shares of TCM (TP: 51,400/share, +9.8% upside) and STK (TP: 27,500/share, +8.7% upside) due to unattractive valuations and STK still have uncertain sales outlooks.

Pretax profit at banks under coverage increased 13.6% YoY at 3Q24, reflecting the low base effect. Pretax profit for the first three quarters of 2024 has roughly met our expectations, tracking 73.9% of our annual projection. However, NIM missed, prompting us to lower our earnings forecasts for 2024:

The new Land Law, effective from August 1, 2024, introduces significant changes compared to the previous legislation. One of the key updates is the removal of the old land price framework. Instead, the land price table is now updated annually to reflect market values, considering factors such as land use purpose, duration, input information, and other influences. This table is crucial for calculating land use fees (LUFs), rent, land use tax, income from land use rights transfers, management fees, fines, compensation for land-related violations, and starting prices for auctions.

Following the implementation of the new Land Law, several provinces, including Ho Chi Minh City, Hai Duong, Lam Dong, Ha Nam and Ba Ria Vung Tau provinces, have drafted or issued new land price tables. These updates have led to significant increases in land prices, ranging from 20% to 50 times, depending on the location and will take effect from the date of approval as stipulated by the new Land Law.

Although all banks in attendance agreed that deposit rates would rise slightly during 2H24 due to a recovery in credit demand, there has remained a divergence of opinion with respect to the NIM outlook. For state-owned commercial banks, the NIM is expected to remain flat or be slightly higher than 1H24. Meanwhile, the reverse tendency is likely to be observed at the joint stock commercial banks due to the intensely competitive lending rates. On the other hand, we also see a positive outlook for asset quality, as NPL formation rate appears to have decreased. The NPL ratio may peak between 3Q24 and 4Q24. In general, all participating banks appear to be confident in their previous profit guidance set during the AGM season.

Based on Research and Markets, Vietnam’s 2023 data center market is valued at USD 685 mn, and is projected to surpass the average growth of APAC between 2024-2029. We primarily attribute this to the underdeveloped background of the data infrastructure in the country compared to many other APAC nations. For a competitive environment overview, domestic players are dominant in the data center market, whereas the cloud segment is primarily driven by foreign players. FPT, CMC Corp, FPT Telecom (subsidiary of FPT) and VNG are notable domestic companies that have data center exposure in Vietnam. We expect such industry landscape to remain in place - at least in the short and medium term.

For FPT, we recommend an OUTPERFORM rating for the stock, with a 12-month target price of VND 153,100/share – representing a 14% upside. The company currently operates three data centers (3,940 designed racks) in Vietnam, and targets to launch a new one (over 3,000 designed racks) during 2025. Nearly a double increase in capacity implies a promising medium-term double-digit growth potential for the field.

2Q24 earnings of the banks under coverage beat our expectations 16.4% YoY (vs. our estimate of between 12-14% YoY). The beat came from a recovery in the NIM (+11bps QoQ), NFI (+14% QoQ) and write-back income (+133% QoQ). The surge in write-back income was a surprise to us given the current still low liquidity in the property market. The NPL ratio at Jun was broadly in line with our expectation, hovering at 1.94% (flat QoQ). However, the NPL formation rate and credit costs were higher than expected, mostly due to the surge at BID, CTG, VPB and OCB. All in all, we did see positive signs from credit demand, which is expected to continue during 2H24. However, uncertainties exist as the inherent credit risk related to renewable energy, real estate (developers and mortgage) have not yet unfolded and the NIM is highly dependent on the pace of credit demand recovery. Cumulative through 6M24, pretax profit of banks under coverage were generally in line with our expectations, achieving 48% of FY24 estimates. Details of the change in estimates (if any) will be discussed in our reports on the individual banks.

On 3 Jul 2024, the Vietnamese government enacted Decree No. 80/2024/NĐ-CP, governing the direct electricity trading mechanism between renewable power generators and large electricity users (Direct Power Purchase Agreement-DPPA mechanism). Considering the importance of the mechanism for outlook of Vietnam electricity sector, we list out key points and potential impacts on key beneficiaries.

Overall, the DPPA mechanism could encourage more investments into renewable power projects in Vietnam, which should promote environmental sustainability and enhance the efficiency of the electricity market in Vietnam.

The WCI is recently up by 181% YoY and 232% higher than average 2019 rates while the 1700-TEU time charter rate is up by 90% YTD. This rally derives from both supply and demand side. From the supply side, the consequences of ship diversion from the Red Sea has emerged gradually at all points of the supply chain that we start to see port congestion in key ports hub like Singapore, Dubai or Rotterdam. Container imbalance also leads to signs of container shortages in some key ports in China, further pushing up freight rates. From the demand side, we think that it inventories restocking activities from 1Q 2024 and surging shipping demand from China to the rest of the world, especially the US have led to the strong increase in container shipping freight.

On the 8^th of May, the US Department of Commerce (D.O.C) heard the testimony between Vietnamese government representatives and U.S industry and labor representatives regarding the pending upgrade decision to elevate Vietnam to market economy status. For the background information, Vietnam is currently on the US D.O.C list of 12 non-market economy countries for purposes of its application of US antidumping (AD) and countervailing dumping (CVD) laws. The upgrade was in discussion between Vietnam’s Ministry of Industry and Trade and D.O.C since 2019, but only tangible on the agenda since the Biden administration. This has been in the works a long time now – the U.S D.O.C initiate from Oct 2023 and by schedule, is expected to announce the final results on 26 July 2024. Details from surrounding discussions are quite neutral on the reclassification. Some supportive voices are the National Retail Federation or Samsung Electronics America, but many are against such as Alliance for American Manufacturing or the United Steelworkers (USW) union. It also needs to pass potential legal challenges in the U.S. as well. Please keep in mind that in 2016, for similar reasons, the DOC rejected China’s application for the reclassification.

The results for banks in our coverage universe were generally in line with what we had anticipated. Earnings recovery was slow (+8.3% YoY and +4.6% QoQ), as NIM continued to be under pressure (-8 bps QoQ) in a weak credit demand environment (+2% YTD or 15% YoY). Meanwhile, asset quality deteriorated after a brisk seasonal improvement in 4Q23. The deterioration, however, was at a greater magnitude than we expected. At 1Q24, special mention loans (SMLs) and NPLs to total loans were 2.23% (+24 bps QoQ) and 1.94% (+23 bps QoQ, close to the 3Q23 high of 1.98%) respectively. The good news is forex trading gains partly offset stagnant bancassurance sales and weak write-backs. In addition, banks in general successfully curbed OPEX, with a CIR of 30.7% (vs. 31% in 1Q23 and 36% in 4Q23).

During 1Q24, Vietnam textile and garment exporter proceeds reached USD 7.8 bn (+9% YoY), in line with the VITAS export forecast growth of 9% YoY for 2024. The growth in 1Q24 (+9% YoY) was driven mostly by volume due to the low base effect in 1Q23 (-17% YoY), indicating that the recovery has started slowly. We note that ASP was flat QoQ and decreased YoY for 1Q24, and weak ASP should remain through 3Q24. We maintain our view that export recovery will come during 2H24.

The value of apparel inventory in the US market remains high. Brands’ inventory by value was still higher than during the 2019-2020 period, and fashion brands sales growth (such as Nike, Adidas) is mostly mid-single digit growth for 2024.

Impact of USD/VND depreciation: During 2023, USD/VND decreased by 3% YoY, we saw that most export companies, such as TNG and MSH, recorded net exchange gains, accounting for between 14-16% of PBT. We expect that these companies will continue to benefit from USD/VND depreciation. During April 2024, The USD/VND declined almost 4% YTD.

We have begun to witness some initial signs of a better-than-expected recovery in the secondary property market, along with an improving macro backdrop during the first quarter of 2024. There were more transactions in the secondary property market given the extremely low introductory mortgage teaser rates (4.8% to 8%) offered during the first 1-2Y of the loan contract (avg. duration of 20 years). Condo prices in Hanoi and Ho Chi Minh City increased between 10-20% YoY during 1Q23. Although we have not seen this dynamic spreading yet to the primary market, this is still a positive sign as: (i) the value of loan collateral might not decrease as we had previously expected; and (ii) the improved state of market liquidity likely will support bank sale of collateral if necessary. In addition, manufacturing data is exhibiting some encouraging signs in the form of industrial production data. We expect similar results in consumption data later in the year. We believe that even in the case where recovery maintains its steady pace, it will still take some time to be reflected in bank fundamentals. The earnings trend for the banking industry during 1Q24 is expected to be in line with our expectations. We foresee a modest earnings growth range of 5 – 8% for banks under our coverage, given that credit growth only accelerated toward the end of March, while fee-based services remain sluggish. We expect that fundamentals might improve during 2H24 of lower-than-expected NPL formation, NIM improvement, and stronger-than-expected writebacks. We broadly maintain sector-wide earnings forecasts for FY 2024.

Last week, PetroVietnam Group (PVN) along with other investors and partners of Block B – O Mon gas-fired electricity megaproject has held a ceremony to sign several contracts, which is a significant move to reach the final investment decision (FID) for the project. Contracts signed include GSPA (gas selling and purchasing agreement, between upstream and midstream), GTA (gas transporting agreement), and GSA (gas selling agreement) for O Mon 1 power plant. After the signing ceremony, MOECO (investor of upstream and midstream parts) has immediately announced reaching FID for the upstream and midstream investment of the project, which we think is another major development, as it shows MOECO confidence in the profitability and feasibility of the project.