Sector Report

Demand for industrial parks is expected to recover during 2024. As observation in lots of the listed industrial park developers having signed Memorandum of Understanding (“MOU”) for industrial land lease with new tenants in 2H2023, we believe these MOUs will be converted and recorded as land lease contracts during 2024. For the industrial parks in the North Vietnam, industrial park land leases is expected to be in high demand in 2024, powered by the production base supertrend from China to Vietnam, mainly in electronics and semiconductor industries. In Southern Vietnam, Industrial parks could witness a technical recovery from a low base during 2023, with the main types of enterprises leasing industrial land being non-tech industries (textiles, wood, leather and shoes), logistics, and food & beverage production.

On 25th Dec 2023, the Vietnam Ministry of Transportation approved and signed Cirlular 39/2023/TT-BGTVT to set a new tariff for seaport container handling and other services for all Vietnamese seaports. The approval is a long-awaited move by all industry players and investors, which most importantly increases the floor tariff for container handling services by roughly 10% for both feeder ports and deepwater ports compared to the previous version (Circular 54/2018/TT-BGTVT), effective from 15/02/2024.

On 30^th October 2023, PetroVietnam Group (PVN) held a signing and implementation ceremony in Hanoi to kick off the Block B – O Mon gas-electricity mega project. While still facing various obstacles, the recent news of the ceremony is welcomed. In the ceremony, PTSC-McDermott joint construction consortium is awarded the EPCI #1 package on limited terms. The total value of EPCI #1 package (including the central processing platform, living quarters, and a few wellhead platforms) is estimated to have a total package value of USD 1.1 bn. With the package awarded in limited terms, the initial value would be relatively small until the final investment decision (FID) by the project’s investors is reached.

We noted improving order visibility MoM since 3Q23; however, the recovery pace is rather slow.

Companies will start posting earnings growth YoY from 4Q23 thanks to the low base effect in 2022.

With destocking expected to materialize significantly and improving consumer sentiment from 2024, we expect a rebound in both top line and bottom line for companies next year.

Our top picks include VHC and MSH.

The presidential-level US diplomatic visit to Vietnam on Sept 10-11, 2023 marked another step forward, as Vietnam and the US upgraded its relationship from that of a comprehensive partnership to a comprehensive strategic partnership. This includes the U.S. into Vietnam’s top-level ties list of countries: Russia, India, China, and South Korea. 

While a number of business cooperation have been announced and discussed such as the Boeing-Vietnam Airlines aircraft purchase deal and the October unveiling of the $1.6 billion semiconductor plant in Bac Ninh province by Arizona-based Amkor Technology, we see a deepening of the friendshoring strategy, especially regarding semiconductor segment and rare earth.  Besides, closer steps towards U.S. recognition of Vietnam as Market Economy are being made, with the biggest benefit being Vietnamese producers can use their own cost data in a case of anti-dumping investigation by the U.S, instead of having to use data from a third country (such as Indonesia, Bangladesh) as a proxy for the firm’s cost structure. 

Sectors and companies to watch include Garment & Textile and Fisheries sector, FPT as well as Industrial Park sector.

Inventory de-stocking seems to be halfway completed. Current level of inventory is still about 7% higher than the multi-year trend line in the data, signalling that inventory destocking progress is only halfway completed. Also, if we look back to the 2007-2008 Global Financial Crisis, it took 13 months for inventory levels to come down from peak to trough level (from Nov 2008 to Dec 2009), which matches the current destocking pace in the US (50% after 7 months). On the good side, we started to see signs of improvement, with July global container volume inching up by 0.2% YoY, which is the first growth month after 17 consecutive monthly declines, according to CTS data.

Recently, the SBV launched Circular 10 on August 23, 2023 to delay most restrictive clauses of Circular 06 that are directly related to the real estate sector. This was aimed to buy more time for new guidance in the foreseeable future. We cannot rule out the possibility that there could be more regulation changes coming, as there have been several proposals from the Vietnam Banking Association and some associations of real estate developers recently. All of the above-mentioned proposals, however, were in the form of further delaying financial obligations coming due. That appears to be the tell, and we still view the cash crunch amongst developers to be complex in nature, unlikely to see resolution anytime soon. The total amount of corporate bonds due in 2H23 and 2024 is roughly estimated at VND 112.3 tn and VND 240 tn, still posing a risk to banks’ asset quality in particular after the restructuring period ends.

Overall, investors are mostly concerned about consumption recovery and key growth drivers for companies over the long-term. On consumption, we see a consistent view from corporates that the most difficult time has been behind, and demand is gradually coming back, however at slow pace. Earnings hence should post QoQ growth from 3Q23. To deal with external headwinds, corporates have applied different strategies such as speed up store expansion to take market share from smaller players in the retail market (MSN, FRT, PNJ); diversifying its product portfolio to better cater demand (DGW, FRT, PNJ); rebranding (VNM) or deleveraging. These moves are expected to not only help companies to go through short-term challenges but also foster future growth. 

The Indian government is considering a ban on sugar exports for the upcoming season, which begins in October 2023. The major motives are to ensure Indian domestic demand and to alleviate fears about low output (El Nino creates a lack of rain). World sugar prices reached a 10-year high in April 2024, owing in part to a reduction in Indian sugar production (-5% YoY) and a drop in sugar exports (-46% YoY). As a result, we expect a beneficial influence on global sugar prices in fiscal year 2023/24.

In addition, The Government Office (Vietnam) has sent an official dispatch to the MOIT and the MARD, assess the proposal to increase the sugar import quota to 600k tons (double compared to last year). QNS, SBT, and VNM are the companies allotted to the quota for 2021 and 2022. The vast bulk of imported sugar is raw sugar, which is used to make RE sugar.

Impact of China banning seafood from Japan (from 24^th August 2023): In fact, we do not see pangasius as a direct substitute of seafood imported from Japan. Japanese seafood only accounts for less than 5% of total China seafood imports and scallops make up the largest import by volume. In 2022, fish fillet export value from Japan to China reached only US$11.8mn. Ecuador, India and Russia are the biggest suppliers to China. We noted that seafood imported from Russia to China has been increasing since early 2023 and reached record high in recent months.

Textile and garment shares trade at a 2023 and 2024 P/E of 11x and 9x, respectively. Most companies expect 3Q23 sales to be similar to 2Q23 yet expect an improvement QoQ by 4Q23. We expect companies in the sector to record positive net profit growth during 4Q23. We believe that the worst quarterly results have already been priced in, however, and that investors should expect a sector recovery during 2024. Our top picks for the sector include STK and MSH.

Banks have released their financial statements over the last weekend. In overall, we found the 2Q23 results for banks under coverage in line with what we had anticipated where earnings (+3% YoY and -1.2% QoQ) continued to be pressured with deceleration in credit growth (+6.6% YTD or 2% QoQ), a further squeeze in NIM (-15 bps QoQ) and rising NPLs (+11 bps QoQ). The good news is net income from fee-based services recovered QoQ and CASA appeared to have bottomed out for most banks.

As monetary policy in Vietnam seemingly reaches the saturation point, the Government clearly shows intention to focus more on fiscal-based solutions, as some aspects of the market (real estate & corporate bonds) remain cold. We believe that monetary policy could continue to be the first priority of this administration’s pro-growth strategy, while fiscal policy (into infrastructure) could be crucial for sustainable growth in Vietnam. 2023 Public investment plan reaches USD 30 bn (+25% YoY). This is very large for one year, as even the 2021-2025 government spending plan is only USD 106 bn. For 1H23, only 30% of disbursement target was met (although growing +44% YoY). While the size of the target for 2023 is large, disbursement progress is always challenging. First, it is about the compliance risk. It’s not simply the legal framework that contradicts itself at times, but sometimes the risk of being investigated after the project is completed is sometimes painful, and certainly does not encourage investor participation. Second, land clearance is slow. Third, project preparation is a lengthy process (18-24 months). Fourth, raw material availability (both capacity and price volatility) is difficult to keep under control. Fifth, the disbursement pattern itself. Disbursement is always low in 1H, and then better in 2H, as normally the first half of the year is for project preparation.

As of 1H23, the VN Index has increased by 11.2%, while retailer tickers declined by -1.3%. Sub-optimal share price performance for retail can be attributed to the dismal earnings of retailers in 1H23. However, we believe that earnings of most retailers may have already bottomed out in 1H23 in terms of absolute value, and retailers on a recovery path to profitability. We expect that earnings of retailers to come back to overall profitability from 4Q23 through 2024. Earnings recovery can be driven by (1) acceleration in disbursement of consumer loans, (2) improvement in macroeconomics conditions, (3) market share gain by companies with strong financial position and (4) profit margin improvement on lower inventory level after the fierce price war in 2Q23.

For June ’23, Vietnamese fishery exports is estimated to reach USD 800 mn (-21% YoY), with shrimp and pangasius exports reaching USD 341 mn (-18% YoY; +3% MoM) and USD 156 mn (-26% YoY; -2% MoM), respectively. Shrimp and pangasius exports for 1H23 reached USD 1.6 bn (-31% YoY) and USD 885 mn (-38% YoY), respectively. Signs of recovery in demand from major exports market such as the US, EU and China are not noticeable, given the persistent inflation and slow destocking. For 1H23, we estimate that ASP to the US for shrimp and pangasius reached USD 10.60/kg (-12% YoY) and USD 3.50/kg (-26% YoY), respectively. According to Agromonitor, pangasius sales volume to the US and China have declined -50% and -31% YoY, respectively, during 1H23.

SBV issued Circular 06 (effectively a revising Circular 39), which is expected to take effect on 1 Sept 2023, provides further guidance on lending activities. The trend of banking liberalization has begun to reverse course with the adoption of Circular 06, as the SBV seeks to create a general banking framework to allow greater autonomy/flexibility in lending decisions. This, however, does result in greater monitoring responsibilities for the banks, and is applicable to post-disbursement activities as well. With this circular, the SBV has drawn a proverbial line in the sand with reining-in risk – especially to riskier segments (commercial real estate, brokers, business cooperation contracts, et al).