Sector Report

Block B – O Mon is the project chain which develops, extracts, and transports gas from upstream gas fields in Block B&48/95 and Block 52/97 to the downstream gas-fired power plants. The project is currently expected to be granted its final investment decision (FID) by June 2023, and bring forth the first gas extracted during 2026. The project is expected to supply a total of 3.95 tn ft3, equivalent to around 102 bn m3, and 12.65 mn condensate barrels, over a life span of 23 years. Total investment value for the upstream component (including Capex, Opex, and cancelation cost) is estimated at around USD 17 bn. Upon completion, the gas from Block B fields will be transported through the Block B – O Mon gas pipeline to downstream end-users, including four O Mon power plants in Can Tho province, with a total gas demand for the complex at around 5 bn m3/year, divided between the four plants (O Mon 1, 2, 3, 4).

Global sugar prices surpassed a 10-year peak. The production forecasts for both India and China have been revised down by 7% and 10%, respectively, due to unfavorable weather conditions. Raw sugar prices increased 56% YoY and 35% YTD through April 2023. The USDA forecasts that worldwide stockpiled sugar volume will fall -13% YoY in  FY 2022–2023 crop, and exert pressure on sugar prices to remain at elevated levels. Domestic sugar prices begin to increase thanks to (i) the surge in global sugar prices; and (ii) the implementation of the anti-dumping anti-subsidy policy, which protects domestic producers from imported sugar from Thailand. During May 2023, domestic sugar prices reached VND 20,000/kg (+12% YoY, +10% YTD), and we believe that refined sugar prices will remain at this level from 2Q23, after remaining unchanged during 1Q23 at around VND 18,000/kg. We expect that the increase of domestic sugar prices will encourage farmers to revert back to sugarcane plantation.

We previously rated the fertilizer sector UNDERWEIGHT in our recent report as we believe that 2023 earnings will decline notably from the record high set in 2022. Share prices of DPM and DCM have declined by -18% YTD and -12% YTD. In fact, 1Q23 earnings was even worse than our expectations, by the dual effects of: (i) lower than expected urea ASP and (ii) higher than expected transportation tariffs, as companies had to source natural gas from high-cost gas field of Cuu Long basins. In the remaining quarters of 2023, earnings of DPM and DCM may still remain sluggish, as companies may have to reduce urea production to help easing electricity shortages from time to time while also grappling with weak export demand from overseas. 2Q23 earnings may be even worse than that in 1Q23, and could be the earnings trough in terms of absolute value. We hence trim 2023 earnings of DPM to VND 1.23 tn (-78% YoY, from VND 2.98 tn) and earnings of DCM to VND 1.18 tn (-73% YoY, from VND 2.57 tn).

On 23 Apr 2023, SBV has released two Circulars in a row with immediate effect, targeting the corporate bond trading activities of banks (Circular 03) and setting out a debt restructuring framework (Circular 02). A bank can now can repurchase bonds which it had previously sold within 12 months, so long as the bonds satisfy a set of criteria (bond issuers not having NPLs at banks; the bond issuance purpose must not be to restructure debt or to contribute capital to another entity, etc.). At the same time, Circular 02 provides motivation for banks to move forward with loan restructuring.

In a surprise to the market, the SBV published a draft for public comment to amend Circular 16/2021 regarding banks involved in non-bank corporate bond trading. The central bank also took a dovish step to complete the other half of the previous policy rate cut. During the last rate cut, the refinancing rate and the cap for deposit rate of less than 6-month tenure had been kept unchanged in the previous rate cut, whereas this time these rates were also lowered this time by 50 bps to 5.5%, completing the lap of the Vietnamese central bank’s 50bps policy rate cut initiative. The cap of short-term lending rate to priority sectors was further cut by 50 bps to 4.5%. These moves have been well-received by the market, as expectations rise that a well-executed circular amendment could provide a boost to corporate bond demand, while the lower interest rate environment could gradually revive credit demand and support overall economic growth.

Mortgages are considered the safest asset at Vietnamese banks, as these instruments generally offer a good return and low loss rates. Outstanding mortgage loans in the entire domestic banking system are VND 1.7 qn (USD 74 bn) or 14.4% of total outstanding credit at 2022. Amongst banks under our coverage, total mortgage lending was VND 1.4 qn (USD 58 bn, or 20% of total outstanding credit at our covered banks). Hence, the quality of mortgages is a high priority for maintaining strong bank balance sheets. However, there are signals that downside risk in the property sector could shift from supply factors to demand factors. Specifically, NVL recently refused to service interest payments on mortgage loans related to its projects. If cash flows of other developers do not improve near-term, this situation could be the case for other mortgage loans which remain under the grace period (ie. developers make interest payments on mortgages on behalf of borrowers), which could be complicated by projects having an incomplete legal status. This could leave borrowers in the lurch.

In 9M 2022, the financial performance of retailers recorded a recovery from last year low base. Core earnings of MWG, FRT, DGW and PNJ increased by 28% YoY, 169% YoY, 60% YoY and 132% YoY in 9M 2022. However, from 4Q22 the consumer spending may be hurt by weak macroeconomics factors such as rising inflation and unemployment. These coupled with interest rate hike and last year high base will weigh down significantly on 4Q22 earnings of retailers, especially ICT and CE.

Container shipping market upcycle was over, normalization is underway: The container shipping market craze ended during 2022, as many expected. The Ukraine war sent the world into a supply shock, pushing up energy prices and commodity prices. Consumer confidence was severely affected by skyrocketing inflation from importing countries. The typical high season was absent during 2H22 and shipping demand fell dramatically toward year-end. Domestic market followed international market downtrend. This triggered a deep fall in domestic freight rates to a level not seen since 2020, or -50% off peak levels. Earnings growth remains resilient for all sub-sectors, however, lower prices have caused stock valuations to drop to historical averages or even to historical lows in the case of the shipping stocks P/E.

Vietnam’s residential real estate sector has gone through a challenging 2022 with: (i) tighter credit for the entire sector; (ii) the government’s investigation of land auctions and corporate bond issuance; and (iii) weaker demand for residential properties as lending rate rose. As such, most developers have witnessed a slowdown in presales and recorded decelerating earnings growth since Q3.

We maintain our view that the Vietnamese real estate market will remain pressured through to 2023. Lending rates may cool toward the end of 2023, but we do not expect a sharp decline. In addition, developers with weak financial status or lack of sales capability likely will continue to struggle from a cash flow perspective if this tight credit policy continues and market liquidity does not improve.

Oil price movement: Oil prices soared 72% YTD to reach the peak of over USD 133/bbl in early March after the Russia- Ukraine war began and resulted in a bottleneck of the global supply chain for both oil and distillate fuel. However, oil has subsequently corrected 37% to just around USD 85/bbl at end of 2022 due to weak demand and a concerns of global recession. 2022 earnings of oil & gas companies: During 9M 2022, revenue and earnings of key listed oil & gas companies surged 77% and 75% YoY, respectively, led by strong growth in GAS and BSR due to high oil prices. According to preliminary results, the PBT of GAS, BSR and PVT in 2022 attained tremendous growth compared to 2021 figures, while the earnings of petroleum distributors such as PLX or OIL experienced a decline due to the supply disruption and volatile oil price, especially in the second and third quarter of 2022.

Urea price peaked in 1Q22 due to (1) high input costs caused by the Russia-Ukraine war, (2) resilient demand thanks to high argo commodity price at that time and (3) export restriction by major exporters (Russia and China). Urea producers recorded outstanding performance thanks to the urea price uptrend and certain exposure to the export market. 9M 2022 PBT of DPM and DCM jumped by 200% YoY and by 308% YoY, with the strongest growth occurring in 1Q22. Meanwhile, NPK producers experienced a deterioration in the gross profit margin and sales volume due to demand destruction and little exposure to the overseas market. 9M 2022 PBT of LAS increased by 15% YoY, while that of BFC declined by -8% YoY.

The banking sector declined 21% during 2022, but still outperformed the VN Index by 12%.  Best performers include: BID (+4%); VCB (+2%); SSB (-7%); CTG (-20%); and ACB (-21%).

Stronger credit growth, with a tweak in credit structure due to reduced corporate bond issuance. Credit growth for 2022 is estimated at 14.5% by the SBV (vs. 13.6% in 2021).

Vigorous earnings growth with normalized asset yields and provisioning. As bank results during 2021 were impacted by Covid-19 and 2022 results have not reflected the impact of higher lending rates and a sluggish property sector, we expect full-year earnings growth to be 35% YoY.

After stellar runs during 2020 and 2021, the steel industry corrected -51% in 2022, underperforming the VN Index by 18%.  Most shares experienced declining prices between 60%-70%, while HPG - the best performer – also witnessed a price decline of -49%.

Total sales volume of finished steel products through 11M 2022 dropped -3.8% YoY due to declines in the export channel, especially in galvanized steel segment. The domestic demand also experienced significant weakness during the second half. Steel prices soared during the first quarter thanks to pent-up demand and the recovery in global price before significantly correcting through the end of the year due to weakening demand and high inventories.

Having experienced impressive growth during 1H22, the textile and garment sector entered a difficult period mid-way through the year. McKinsey forecast global non-luxury sales to decline -5% YoY in 2H22. Luxury and discount fashion continued to outperform, while physical retailers too rebounded in 2022. In Vietnam, textile and garment exports are estimated to reach USD 42 bn for 2022 (+3.8% YoY and +11% compared to 2019). To recap, listed companies posted mixed results during 9M 2022. Yarn manufacturers were the worst earnings growth performers (NDT, ADS, STK), as export ASP began declining sharply during July ’22. Garment manufacturers based in southern Vietnam (VGG, GIL, TCM) were the best earning growth performers thanks to their low-base earnings in 2H21, being affected by Covid-19 lockdown.