Strategy report august 2008

Strategy Report MayAug 20th, 2008 Tue, 5th 2008 Market turns can it last? • The market has double bottomed and with sentiment visibly improving hopes are for a continuation of the current trading rally for a while COMPANY REPORT • A combination of short and medium term factors have helped to rekindle investor interest; a stabilisation of the US$/VND unofficial exchange, and improvement in both the trade deficit and CPI trends recently • The market fell by 60% from its peak and some key stocks fell by up to 85% From a trading standpoint the market was oversold and due for a bounce • However we still see some forward risks, macro growth will slow slightly in the 2-H and FY2008 corporate earnings are likely to undershoot • Valuations are reasonable but not absolutely cheap The market is trading at an adjusted forward P/E (top 25 stocks) of 16.5x based on our estimate of a 28% decline in EPS this year We exclude VIC from the list • We may have bottomed but in our base case scenario we see potential 2-H downside risk of up to 25% from here We also see upside of 15% • Therefore we recommend investors to buy selectively over the next few months especially if the market shows any weakness Fiachra Aodh MacCana Managing Director Head of Research fiachra.maccana@hsc.com.vn • We see a recovery in corporate profits and a return to trendline economic growth in FY2009 Our medium term outlook is very bullish HCMC Securities Corporation Level 1, & Capital Place Building, Thai Van Lung St., District 1, HCMC T: (+84 8) 823 3299 F: (+84 8) 823 3301 Hanoi office Le Thanh Tong St., Hoan Kiem Dist, Ha Noi T: (+84 4) 933 4693 F: (+84 4) 933 4822 E: info@hsc.com.vn www.hsc.com.vn Please refer to the disclosures of potential conflict of interest and the disclaimer at the end of this report Trắc nghiệm kiến thức chứng khoán Mỹ : www.sachchungkhoan.net Strategy Report MayAug 20th, 2008 Tue, 5th 2008 Table of contents Section Page COMPANY REPORT The market turns - but for how long? Macroeconomic snapshot - mixed fortunes in the 1-H Dim sums - why balance of payments crisis was always very unlikely The terrible twins - macro crisis is over but the micro fallout hasn’t hit us yet 10 Reasons to be cheerful - what’s driving the change in sentiment 11 (1) Currency stabilises (2) Domestic gold market loses some of its allure (3) Trade deficit peaks out (4) CPI slows down (5) Global conference call calms nerves The macroeconomic response - Killing the inflation dragon without burning down the whole village 23 (1) Turning off the credit fountain (2) Clipping the wings of the SOE’s (3) Cutting back on government expenditure The flood waters ebb - Currency and money market forward view 29 Overview Money markets and interest rates Forex market Bond markets 34 Equity view - Two things that still worry investors (A) FY2008 corporate earnings still a concern (B) Banking sector - the weak link And two things that should comfort investors 43 2-H Market scenarios 46 Please refer to the disclosures of potential conflict of interest and the disclaimer at the end of this report Trắc nghiệm kiến thức chứng khoán Mỹ : www.sachchungkhoan.net Strategy Report MayAug 20th, 2008 Tue, 5th 2008 Executive summary Has the market bottomed? Yes we believe it has for the time being But that doesn’t mean we have seen the long term bottom in this bear market yet The stock market has bounced off the 370 level on the VN index twice in mid June and has since rallied over 30% Domestic buyers have returned to the market and market turnover REPORT in the past six weeks The has COMPANY improved dramatically technical selling in key blue chips stocks has come to an end and foreigners have are more active in the market We also suspect that some money has shifted out of gold and back into the stock market These flows are small and could easily be reversed The key to the market’s bounce is a return of some stability to the currency and money markets May/June was a volatile time and the gap between the official and unofficial VND/US$ exchange rates widened as much as 18% in June That gap has almost closed again This new mood of relative optimism has been fueled by a dramatic fall in the trade balance and a peaking in the monthly CPI numbers The credit crunch has halted the runaway economy and in the 2-H evidence of a slowdown is accumulating Even the recent 31% hike in petrol prices won’t halt this trend for very long The macro problems that bedeviled the 1-H have started to subside and now all attention is focused on how hard the landing will be In our base case scenario we forecasts a fairly soft landing with GDP growth of 6% this year Imports have already fallen sharply and credit is hard to come by Other indicators such as industrial production and retail sales are likely to experience a slowdown as the effects spread Now that the asset bubble has burst we await the microeconomic fallout as prices in the real estate and stock markets have already fallen heavily Given that much of the country’s credit is anchored by collateral such as property or in some cases stocks we expect to see a rise in doubtful loans from now on Most sectors will be affected including banks, real estate companies and construction firms However oil related, pharmaceutical and consumer goods companies should relatively better as they escape the worst In addition provisioning against writedowns in equity positions will place an additional burden on year-end earnings If current prices remain the same a 30% writedown of the value of a typical equity portfolio would seem fair to us Most companies have chosen to delay this exercise until the audited results at the end of the year We forecast that FY2008 corporate earnings will fall -2% leading to a 28% drop at the EPS level This is due to the heavy dilution leftover from last year (using IAS standard calculations for outstanding shares) While the market has staged a good recovery from an oversold position we think that in Q4 we may have to test the bottom again as the investors price in slowing earnings In our opinion this will be the final downturn in the current bear market and this would be the last chance for medium to long term investors to buy in close to the market’s lows Hence we would be buyers into any weakness As Vietnam is a relatively young market out stock picks are focused on a best of breed strategy There is a lot of pent-up growth potential across most sectors which will be released again as the economy starts to recover next year Companies with good management and solid balance sheets will be best placed to benefit regardless of the sector they are in The long term story is intact and indeed the current weakness offers the opportunity to buy into it at very reasonable valuations in the coming months So while the short term horizon does offer a few clouds, beyond the clouds the sun awaits In addition the economic slowdown is leading to a downtick in demand and putting pressure on core earnings Margins are falling as input costs have been rising faster than output prices 1-H earnings did not see the effect of this but in the 2-H core earnings are likely to slow significantly Please refer to the disclosures of potential conflict of interest and the disclaimer at the end of this report Trắc nghiệm kiến thức chứng khoán Mỹ : www.sachchungkhoan.net Strategy Report MayAug 20th, 2008 Tue, 5th 2008 Chart 1- Bid/Ask Chart 2- Bid/Ask spread 1900% 1400% 900% 400% -100% -600% Bid offer spread -1100% COMPANY REPORT 29/7/2008 28/7/2008 25/7/2008 24/7/2008 23/7/2008 22/7/2008 21/7/2008 18/7/2008 17/7/2008 16/7/2008 15/7/2008 14/7/2008 11/7/2008 9/7/2008 10/7/2008 8/7/2008 7/7/2008 4/7/2008 3/7/2008 2/7/2008 1/7/2008 30/06/08 26/6/08 27/06/08 -1600% Source - HSC Source - HSC The VN market has clearly turned around, for the time being at least What started as a rally amongst small cap and OTC bank stocks in mid June, spread to large caps before hitting a high of 489 on the VN index by July 17th Since then the index has corrected somewhat and now rests around the 450 level Blue chips, including DPM, SSI and STB led the charge Overall market breadth and trading volume has improved dramatically from April/May when most of the volume was being executed in the put-through sessions With hindsight we can conclude that one reason for this sudden turnaround was that we had fallen a long way already The VN index had dropped 50% so far this year and was 60% off its peak in March FY2007 Putting it simply the market has changed direction because local buyers have returned We can see this in the improvement of daily turnover since June The other reasons we discuss in a later section In our base case scenario however the market may need to test the bottom one more time to confirm it before we can leave the bear market behind us This testing may occur in late Q3 or Q4 as we approach the year-end results season (2) The market turns - but for how long? (3) Gold and equity turnover has an inverse relationship – When gold market turnover soared at the beginning of the year it was at the expense of equity market turnover Now that margin trading in equities is next to impossible, the generous margin trading facilities offered for gold traders have looked very tempting As a result some wealthy retail investors have taken to switching back and forth between gold and equities depending on which asset class looks momentarily attractive (4) Currency movement is the key to both the gold and equity market movement – When the spread between the official reference rate for the US$/VND and the unofficial currency rate galloped apart back in May the stock market reacted badly After the famous global conference call in June which calmed nerves, the gap started to close and the stock market turned around (5) Foreigners are contrary indicators usually buying on the down days usually – These days when foreigners are net buyers usually the market is falling and when they sell the market is going up Foreign investors have learned that in a momentum driven and fairly illiquid market it’s a lot easier to buy when there are a lot of offers about rather than chase prices higher The recent market rally has been characterised by several features worth noting (1) OTC bank stocks are leading indicators of the VN index – some OTC bank stocks are very liquid and trade without daily trading restrictions And given bank earnings sensitivity to both the currency market and the overnight lending rates these stock prices follow both very closely Generally speaking when the gap between the official and unofficial VND rates narrows or overnight rates fall this is positive for both OTC bank stocks and the market in general Small caps and widening breadth are other important leading indicators – usually a market bottom or top is signaled several days in advance by changes in the market’s breadth Therefore it’s worth paying close attention to the number of stocks falling and /or rising every day Small cap stocks usually bottom out first, as much as two or three days before the market as a whole And the same trend can be seen at the top of the market Please refer to the disclosures of potential conflict of interest and the disclaimer at the end of this report Trắc nghiệm kiến thức chứng khoán Mỹ : www.sachchungkhoan.net Strategy Report MayAug 20th, 2008 Tue, 5th 2008 Chart - VN-Index Chart - HASTC-Index COMPANY REPORT (6) Source - HSC Source - HSC Market tops are usually characterised by big volume days – With the momentum driven nature of the market a big volume day where bids and offers are closely matched usually signals a market top or bottom We look closely at the bid and offer spread every day and can track sentiment changes based on the relationship between them A large increase in either the bid or offer side against the trend of the market usually signals a trading top or bottom Our forecasts assume a decline in margins due to falling demand and rising output costs for most companies (except the PV group which operates in its own universe) We also assume some provisioning for financial losses although we take a generous view on OTC positions as many companies may keep these on the balance sheet at book cost And of course we assume that banks will have to add to their rather modest provisioning against bad loans Valuations reasonable but not that cheap Our team has come up with some rough forward earnings numbers for the top 20-25 stocks in both HCMC and Hanoi We see net profits in FY2008 net profit falling by 2% this year and EPS falling a further 28% This is far more bearish than company’s own forecasts for FY2008 which call for a 27% increase in net profit but EPS falling 12% Investors may be surprised by the dilution effect We use IAS standards to calculate average weighted outstanding shares in order to make EPS calculations So the full effect of the massive increase in share capital last year will partly fall into this year’s EPS calculations We have the full capital history of the top 50 stocks available on request Based on this even a modest dip in earnings leads to a big drop on an EPS basis The second problem is skewing VIC has a huge P/E and this completely skews the numbers With VIC included in the top 25 forward P/E (using HSC forecasts) comes out at 20.5 times which is not cheap by any standard However if we strip out VIC then the adjusted forward P/E falls to 16.5 times which is far more reasonable Normally we would take the aggregate P/E as it comes but because the difference is so big its important to point it out We will use this adjusted number The result is a modest drop at the net profit level which we feel is balanced That is our base case scenario and we also have a bull and bear case The bull case assumes companies will meet their target forecasts while the bear case takes a very unforgiving view on provisioning and assumes a hard landing for the economy In terms of probability we weight our base case at 50%, the bull case at 30% and the bear case at 20% Overall we take the view that while the market is likely to test the June bottom again and might even venture below it the worst of the bear market is behind us However the microeconomic fallout from the credit crunch will be reflected in year-end earnings and its debatable whether or not this is priced in yet Our rule of thumb is as follows If the likely fallout is quantifiable and fairly well-known then its quite easy to price it in Frankly the scale of the fallout is still only partly known and we are groping in the dark on some key issues such as provisioning And as a rule markets can’t price in what they don’t know So we may have to test lower again in order to firm up the foundation of the next rally The medium term case for corporate earnings is intact and we see a strong double digit recovery in FY2009 And with little dilution to worry about in most sectors, much of this will go straight down to the bottom line With an adjusted P/E of about 16.5 (excluding VIC), and good FY2009 earnings growth on top of that this would set the stage for a good market recovery next year Please refer to the disclosures of potential conflict of interest and the disclaimer at the end of this report Trắc nghiệm kiến thức chứng khoán Mỹ : www.sachchungkhoan.net Strategy Report MayAug 20th, 2008 Tue, 5th 2008 Chart - Economic snapshot and HSC house view: 1-H and full year FY2008 forecasts by HSC FY2007 FY2008e 1-H FY2008 2-H FY2008e Comment GDP 8.5% 6.0% 6.5% 5.5% slowing down slightly but may slow further in 2-H to 5.5% Industrial Production 17% 16.25% 16.5% 16.0% shows no sign of slowing yet but we expect some 2-H weakness Retail sales 22% 27.5% 30.0% 25.0% also very strong partly on inflation but likewise we see a slowdown coming Import US$60.8 bn US$79.7 bn US$44.5 bn Exports US$48.4 bn US$58.7 bn US$29.7 bn REPORT US$12.4 bn US$29 bn As the global economy slows export demand may slow somewhat in 2-H US$21 bn US$14.8 bn US$6.2 bn Trade deficit in 2-H will be down sharply This target is very aggressive however US$21.3 bn US$50 bn US$31.6 bn US$19.4 bn Registration at record high but large real estate projects may not be realised US$5 bn US$8 bn US$5 bn US$3 bn 8.3% 28% 18.4% 10% COMPANY Trade deficit FDI registration FDI disbursement CPI US$35.2 bn Imports are falling sharply as letters of credit are hard to come by Disbursement also at record highs and should continue for 2-H CPI trend is moderating as food prices fall and y/y effect kicks in from October Source - GSO, all forecasts by HSC Forecasts are based on our most likely scenario Macroeconomic snapshot - mixed fortunes in the 1-H The 1-H saw a slight drop in GDP growth due to a falling trade deficit and softness in the construction sector However most other indicators such as CPI, retail sales and industrial production showed still showed signs of robust growth CPI growth for the first half was up 18.44% year to date In the H-1, Exports rose to $30.63 billion, up 35.87% y/y while imports came to $44.84 billion, up 64.9% on year Farm, forestry and sea-food export revenues topped US$7.6 billion in the first half of this year, up 24.8% y/y on soaring prices Meanwhile textile and garment exports were worth US$4.08 billion in the 1-H, up 17.7% on-year The authorities have taken notice And the monetary and fiscal measures taken so far have just started to work their way through to the underlying economy and we expect more evidence of a slowdown to emerge in Q3 We especially look for more signs of a slowdown in CPI, retail sales and industrial production to prove that the government’s policies are having an effect Imports growth was even stronger, led by soaring demand for machinery, steel, cars and petroleum products 1-H machinery imports rose 56% y/y, petroleum rose 72% y/y and steel imports shot up 121% y/y From May however imports started to fall sharply led by a sharp drop in steel and car imports Vietnam’s economy grew 6.5% to VND625.738 trillion ($39 billion) in the first half of this year, which compares with growth of 7.91% in the 1-H of FY2007 Much of the slowdown can be seen in the industry and construction sector which has been starved of credit recently In 1-H, FY2008, the industry and construction sectors were still the main engines of the economy, up 7% on the year But this growth rate is far slower than the 9.88% rate recorded in the first half of last year The service sector grew by 7.6% on the year, the fastest growth rate amongst any sector And the agricultural, forestry and fisheries sectors grew a more modest 3.04% on the year Investments are not slowing down however Vietnam invested a total of VND265.4 trillion ($16.58 billion) in the 1-H, FY2008, up 21.1% on the year The state sector made VND106.1 trillion worth of investment, up 15.2% on year, VND80 trillion worth was financed by the private sector, up 15.1% on year And direct foreign investment came to VND79.3 trillion up strongly also Still in the 1-H we ran up a huge trade deficit Vetnam’s trade deficit almost trebled to an adjusted number of US$14.8 billion By comparison in 1-H, FY2007 the trade deficit was $4.6 billion, while the full-year trade deficit in FY2007 was $12.4 billion Some other parts of the economy namely retail sales and industrial production are still growing very fast Too fast in fact Total retail sales came to VND447.3 trillion, up 30% on year This is accelerating largely due to higher prices While we are seeing some shift away from individual retailers to larger private sector stores and keener price competition the sector is still very inefficient And industrial production for the 1-H, was VND326.6 trillion ($19.8 billion), up 16.5% on the year The June number was VND56.77 trillion, up 17.1% y/y showing no slowdown since the beginning of the year As for the breakdown, the private sector continued to lead, posting a growth rate of 22.3%, the foreign-invested sector grew output by 17.4% and the state-invested sector’s output rose 6.9% on year Please refer to the disclosures of potential conflict of interest and the disclaimer at the end of this report Trắc nghiệm kiến thức chứng khoán Mỹ : www.sachchungkhoan.net Strategy Report MayAug 20th, 2008 Tue, 5th 2008 Chart - Going strong still … Exports - y/y and m/m trends 10.00% Exports y/y trend RHS FDI hit record highs for both registered and disbursed, we saw more in the 1-H than all of last year These days the projects are larger and are getting approved more quickly We are also seeing more and more real estate related projects The Koreans are the largest investors and two thirds of that money is being poured into real estate projects worth a total of US$14.5 billion currently The largest single project approved recently is a resort complex in Ba Ria-Vung Tau with a registered capital of $4.2 billion by Canada’s Asian Coast Development Ltd Co Arguably the quality and execution chances of these big real estate projects are lower than those for say a steel mill or a laptop factory, given that they are driven by more subjective expectations So we have arrived at a turning point with some indicators seeming to slow and others still strong What about the 2-H? 2-H forecasts and assumptions The table on page shows our base scenario assumptions for the 2-H and also FY2008 as a whole We see full year GDP growth of 6%, due to a slower 2-H pace of 5.5% This is based on a general slowdown in demand and consumption as the credit crunch works its way through the rest of the economy This began in earnest at the end of Q1 and now after four months or so the effects are starting to be felt Since June the signs of a slowdown have accumulated The trade deficit tumbled on a sharp drop in imports Then food prices fell back as a bumper harvest and lowering international prices partly reversed the 1-H trend Apr-08 Jun-08 Feb-08 Oct-07 Source - GSO Dec-07 Aug-07 Apr-07 Jun-07 0.00% Feb-07 -40.0% Oct-06 0% Jan -04 Mar-04 May-04 Jul-04 Sep-04 Nov -04 Jan -05 Mar-05 May-05 Jul-05 Sep-05 Nov -05 Jan -06 Mar-06 May-06 Jul-06 Sep-06 Nov -06 Jan -07 Mar-07 May-07 Jul-07 Sep-07 Nov -07 Jan -08 Mar-08 May-08 -30% Exports m/m trend -30.0% Dec-06 10% 20.00% -20.0% Aug-06 COMPANY REPORT -20% 30.00% 0.0% -10.0% Apr-06 20% Jun-06 30% 40.00% 10.0% Feb-06 0% -10% 20.0% Oct-05 40% 50.00% 30.0% Dec-05 10% 60.00% 40.0% Aug-05 50% y/y % RHS 50.0% Apr-05 20% 60% m/m % Jun-05 30% Feb-05 Chart - Still robust ……Retail sales y/y vs m/m Source - GSO And the Ministry of Planning and Investment, felt comfortable enough to revise down the full year import target from US$83 billion to US$80.2 and then the trade deficit forecast from US$30 billion to about US$20 billion In our opinion this is a little too optimistic While the deficit shrank to a yearly low of US$736 million in June (this is an adjusted number) we got a little help from seasonal and other special factors that may not continue We think the full year number could be more like US$24 billion We will discuss this further later Both CPI and import growth will moderate in the 2-H but investors shouldn’t expect a straight-line decline We will have good and bad months but the trend has definitely turned in our favour We expect retail sales growth to moderate as food prices dip However underlying sales are being supported by powerful demographic forces so the decline will be slight And industrial production will also slow somewhat as both exports and domestic demand become more sluggish Clearly the bubble has burst and the overheating econnomy is cooling down rapidly The question is will we see a hard or soft landing? Our base case assumes a soft landing for most of the economy but there will be pockets such as real estate, construction and some parts of the financial system where the landing may get a little rough Some companies are over-extended and some banks made loans they now wish they hadn’t July CPI growth was just 1.13% m/m, the slowest month since the recent spike began late last year The government did spike petrol prices by 31% in late July but they waited for signs of falling prices before doing so Our full year CPI target is around 30%, but we expect average 2-H monthly CPI growth to average 1.8%, well down on the 1-H Please refer to the disclosures of potential conflict of interest and the disclaimer at the end of this report Trắc nghiệm kiến thức chứng khoán Mỹ : www.sachchungkhoan.net Strategy Report MayAug 20th, 2008 Tue, 5th 2008 Chart 8a - Current account (in mn USD) Chart 8b - Capital account (in nm USD) 2% 2003 (1000) 2004 2005 2006 2007 1Q08E (2000) 0% -2% (3000) -4% (4000) -6% (5000) -8% (6000) COMPANY (7000) REPORT -10% (8000) -12% Current Account 20000 18000 16000 14000 12000 10000 8000 6000 4000 2000 30% 25% 20% 15% 10% 5% 0% 2003 2004 2005 2006 2007 Capital Account As % of GDP 1Q08E As % of GDP Source - State Bank of Vietnam Source - State Bank of Vietnam Dim sums - why a balance of payments crisis was always very unlikely Some regional economists have been fretting about a possible balance of payment crisis and the need for a large currency devaluation to ease the pressure on the VND To bolster their case they pointed to the runaway trade deficit and pressure on the VND back in May/June as clear evidence of an emerging crisis They also wondered whether or not currency reserves were sufficient to meet all eventualities We think they are sufficient and frankly they were looking in the wrong place The Vietnamese economy does have some fragilities but the balance of payments is not one of them At least not for the moment The trade deficit is slowing down There are two reasons for this Firstly end demand in the over-heated economy is starting to come down fast And with the credit shortage, letters of credit (LC’s) are hard to come by And this has forced importers to cut back on the volume of inward trade as they can’t get banks to guarantee payment And while the trade account deficit has started to normalise the capital account surplus remains quite robust So what of the capital account? In the 1-H, Vietnam’s 12000 16% 14% 10000 12% 8000 10% 6000 8% 6% 4000 4% 2000 2% 0% 2004 2005 2006 Balance of Payments 2007 1Q08E As of % of GDP Source - State Bank of Vietnam We have quality concerns with some big projects but even if half of them were cancelled actual disbursement would not be affected as the gap between registered and disbursed flows is simply huge We understand that 1-H remittances are also very firm although the number has not been disclosed yet And ODA disbursement in the first six months of FY2008 came to US$1.1 billion, equal to 58% of the FY2008 target This included US$970 million in ODA loans and US$130 million in non-refundable aid So the capital account looks pretty solid to us But let’s test out a few scenarios What if the flow of FDI slows down drastically? Could that trigger a problem? Actually we think not FDI disbursement is very closely tied to imports FDI disbursements are largely spent on imported machinery, cement and steel to fit out new factories So if FDI collapses, imports would also drop sharply And what of the other three categories on the capital account; remittances, FPI and ODA? Chart 8c - Balance of payment (in nm USD) 2003 newly registered and expanded FDI capital totaled US$31.6 billion against US$21.3 billion for all of FY2007 And at the same time FDI disbursements came to US$5 billion in the 1-H as against US$8 billion in FY2007 In other words FDI disbursement has actually speeded up and the flow of approved FDI investments also shows no sign of slowing Remittances are the most critical segment as they are a pure inward capital flow These come from Vietnamese living or working overseas and amounted to about US$7 billion in FY2007 So far this year we hear that remittances are running higher than last year We believe the risk of a sudden slowdown in remittances remains small although the international slowdown could lead to a slight decline We can live with that ODA is generally know six to months in advance and with agreements in place we know this number will be good until the end of this year Please refer to the disclosures of potential conflict of interest and the disclaimer at the end of this report Trắc nghiệm kiến thức chứng khoán Mỹ : www.sachchungkhoan.net Strategy Report MayAug 20th, 2008 Tue, 5th 2008 Chart - Bound together … Imports vs FDI disbursement Chart 10 - Rocketing higher……FDI registration vs y/y change % 26.0 5.0 18,000,000 24.0 4.5 16,000,000 FDI registration 7000% y/y change % 6000% 8000% 22.0 Imports 4.0 14,000,000 20.0 FDI disbursement (Bil USD) 3.5 12,000,000 5000% 3.0 10,000,000 4000% 16.0 2.5 8,000,000 3000% 14.0 2.0 6,000,000 2000% 12.0 1.5 4,000,000 1000% 10.0 1.0 2,000,000 8.0 0.5 0% Dollar and other foreign currency reserves at the SBV were disclosed at US$20.7 billion recently This covers the reserves at the SBV and may not be the total amount of reserves controlled by the authorities And that’s all we are going to say about that This official number covers 10 weeks of imports (taking the past three months as an average) In classical economic theory currency reserves should be equal to the total amount of current dollar obligations in the economy That means dollar deposits plus short term dollar debt And the declared reserve amount covers both So what will happen to the BOP for FY2008? We lay out our scenario for the balance of payments in FY2008 and FY2009 at the top of page A health warning to begin with Getting balance of payment numbers to balance in a developing economy is notoriously hard Leakages from the official to the unofficial economy are legion and data capture is not the best So forgive us for this stab in the dark We see a moderating trade deficit will reducing pressure on the BOP while on the capital side FDI disbursement, ODA and remittances remain firm for the 2-H These components are more fixed than the trade account, ODA is fixed a year in advance, remittances are driven more by family relationships than economic cycles (although not exclusively so) while the huge amount of already registered FDI will ensure stronger disbursement unless we see a very large flood of cancellations Apr-08 Jul-07 Nov -07 Oct-06 Source - GSO Mar-07 Jun -06 Sep-05 Jan -Feb-06 Dec-04 May-05 Apr-04 Aug-04 Jul-03 Nov -03 Oct-02 -1000% Mar-03 - Jun -02 QII 2008e QI 2008 QIV 2007 QII 2007 QIII 2007 QI 2007 QIV 2006 QII 2006 QIII 2006 QI 2006 QIII 2005 QIV 2005 QI 2005 QII 2005 COMPANY REPORT Jan -Feb-02 18.0 Source - GSO fidence then in the economy won’t triggered then by macro indicators such as runaway inflation or a soaring trade deficit As we mentioned above Vietnam does have other fragilities however that bear watching, the high level of SOE indebtedness and the potential fragility of a financial system going through its second boom and bust cycle These are micro rather than macro factors but then any potential BOP crisis has its seeds in a general collapse in confidence It doesn’t much matter what the source is The authorities have always been very wary of any event that might trigger domestic investors to rush out of VND assets into gold or US$ assets We saw a bit of this in May/June and indeed in the frenetic buying of gold in the 1-H This type of run could dwarf any change in money flows in the capital account And thats why authorities moved very fast to restrict unauthorised forex trading and won’t allow more gold imports for the moment Hence analysing the minutiae of the NDF market, tracking every steel shipment, FDI project or foreign sale of a VGB won’t help much in predicting anything If you are looking to spot early signs of trouble its domestic capital flows through informal channels that you must keep an eye The authorities figured this one out a lot quicker than some out of town economists did And successfully nipped it in the bud And so far we haven’t FPI flows are a little harder to predict and we have seem money flow out of bonds, but at the same time foreigners are still happy to buy equities The ingredients for a macro-driven BOP crisis just don’t see to be there at the moment and this is reflected in the way the currency and the very illiquid non deliverable forward market has behaved in the past month and a half And the trend is improving Any crisis of con- Please refer to the disclosures of potential conflict of interest and the disclaimer at the end of this report Trắc nghiệm kiến thức chứng khoán Mỹ : www.sachchungkhoan.net Strategy Report MayAug 20th, 2008 Tue, 5th 2008 Chart 12 - No slowdown here….FDI disbursements vs FDI registration -3000 -3500 Trade balance (RHS) May-08 Jan -08 Mar-08 Nov -07 Jul-07 Sep-07 May-07 Jan -07 Mar-07 Nov -06 Jul-06 Sep-06 May-06 Jan -06 Mar-06 Nov -05 Jul-05 Sep-05 May-05 Jan -05 -4000 Mar-05 -3% 5.0 - Source - GSO QI 2008 CPI COMPANY REPORT QI 2007 -2% QIII 2007 -1% 10.0 QI 2006 -2500 QIII 2006 -2000 0% 15.0 QI 2005 1% 5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 QIII 2005 -1500 QI 2004 2% FDI disbursement (Bil USD) RHS QIII 2004 -1000 QI 2003 3% FDI registered (Bil.USD) 20.0 QIII 2003 -500 QI 2002 4% 25.0 QIII 2002 5% 30.0 QI 2001 500 QIII 2001 1000 6% QI 2000 7% QIII 2000 Chart 11 - Getting better……Trade deficit vs CPI m/m Source - GSO The terrible twins - macro crisis is over but the micro fallout hasn’t hit us yet If you believe our base scenario then it’s fair to say that the worst of the macro crisis is behind us The credit crunch has started to slow down an over-heated economy CPI growth has moderated, imports have fallen, GDP growth is down and banks don’t lend much anymore Money supply growth has slowed from a sprint to a crawl After a slow start the government applied the brakes very hard And we are seeing some initial results The stock market breathed a small sigh of relief However such a fast landing has micro consequences Firms have had little time to adjust to new circumstances Liquidity is the life blood of business and the supply has been almost cut-off Recently the SBV talked of increasing the credit growth limit to 40% to provide exporters with some badly needed working capital And over a sustained period of time lack of liquidity can cause pain For now the economy lies somewhere between the worst of the macro crisis and the micro fallout which has yet to hit us We think the banking, real estate and construction sectors will feel the worst of it Total lending in the economy is around 90% of GDP and as of FY2007 NPL’s under Vietnamese accounting standards (VAS) amounted to around 2.2% of the total But VAS is too generous to banks and if NPL’s were recalculated under stricter IAS standards they would at least be double what they are now Under current legislation known as decision 493, Vietnamese banks can elect how they classify bad debts, under article 6, which is equivalent to VAS standards, or under article which is much closer to the IAS standards All banks chose article 6, no surprise there However from April, FY2008 they may have to start switching to article And unless the SBV gives them 10 a reprieve this will be reported by the end of the year And with real estate prices falling 30-50% in some cases the value of the underlying collateral is declining sharply Once collateral falls below the value of the actual loan this triggers higher provisioning The value of collateral is usually checked once a year But what is the real estate exposure of the banking sector? The SBV estimates that the real estate related loans amounts to about 10.8% of the total Thats lowballed in our opinion A number in the range of 12-14% might seem fairer based on our survey of selective banks And to that we would add NPL’s as they are effectively real estate related once the collateral comes into play So currently we estimate the total exposure may be around 14-16% If NPL’s are recalculated under IAS rules we think the current exposure might increase further to around 16-18% And if NPL’s start to rise this exposure may increase further As Q4 progresses we will face as number of headwinds that might cause NPL’s to increase The recalculation under article is just one issue The current severe downturn in the real estate market is another as this erodes collateral and can trigger higher levels of provisioning And the downturn itself is likely to take a turn for the worst as many loans are due for re-setting in Q3 and Q4 at much higher interest rates These loans were taken out in the 2-H of FY2007 when credit growth was at its strongest, with one year re-sets on interest rates Despite some moves to delay these re-sets will hit the sector soon All of the above factors hitting the system at about the same time will test the banks The SBV is braced and ready but we expect some pain in the sector And at the very least credit growth recovery will be delayed until next year Please refer to the disclosures of potential conflict of interest and the disclaimer at the end of this report Trắc nghiệm kiến thức chứng khoán Mỹ : www.sachchungkhoan.net Strategy Report MayAug 20th, 2008 Tue, 5th 2008 Chart 44 - Still work to do…… NPL provisions at selected banks NPL provisions Total loans (1) Provision for loan loss in 1-Q (2) Total provision for loan loss (3) Pretax profit (2)/(1) (3)/(1) (4) (5) (6) 1-Q performance Techcombank 25,531,885 106,541 242,496 219,229 0.42% 0.95% ACB 40,694,274 74,379 244,873 512,843 0.18% 0.60% STB 42,344,000 30,133 206,886 412,350 0.07% 0.49% VIB 20,687,796 124,428 256,899 113,229 0.60% 1.24% EAB 24,761,888 78,708 142,487 397,319 0.32% 0.58% STB 38,059,000 60,124 236,877 732,896 0.16% 0.62% COMPANY REPORT 1-H performance Source - HSC (B) Banking sector – a weak link? The banking sector will take the brunt of the fallout from the 1-H credit crunch Four factors, higher funding costs due to the huge rise in interest rates, new stricter rules on assessing bad debts, excessive SOE borrowing and falling real estate prices eating into the value of collateral seem to be converging in the 2-H of FY2008 The sector will fall short of FY2008 earnings targets and may also see some consolidation over the next 12 months We see this as a long term positive and the sector will emerge far stronger But things will get worse in the short term With interest spreads falling to breakeven points and treasury gains drying up banks aren’t likely to earn much in the 2-H to begin with Banks did quite well in the 1-H despite the sharp slowdown in credit growth For a start the slowdown didn’t hit until Q2 And volatility in the currency markets and a sharp gain in gold prices was manna for bank treasuries 1-H earnings were surprising close to targets as a result Since June however, the party is definitely over The SBV is enforcing the 21% loan ceiling as if it’s very life depends on it And recently it made this ceiling retroactive to all outstanding loans Given that average deposit rates are between 17-18% (they have fallen slightly recently) interest spreads are now around 3-4% We estimate that the average breakeven spread for commercial banks is around 3-5% State owned banks enjoy economies of scale and access to cheaper funding so their breakeven spread will be lower than this Anyway few banks can make money from new loans right now and with this new ruling pretty soon that means all loans And what about other sources of income? Well now that the currency has stabilised and gold trading volumes have fallen slightly treasury gains will be harder to come by in the 2-H And fee income has become a dirty word so there won’t be much of that either 37 Very low credit growth, negative loan spreads for now, little treasury income and not much in fees And we haven’t even started talking about bad debts yet Bad debts and all that We believe that some banks hare erred in two critical aspects; lent money beyond the capability of some borrowers to repay; and valued collateral too close to the market value Most banks however were fairly prudent Before providing a loan, banks typically assess three key factors; the purpose of the loan, the borrower’s repayment capability and the security offered Banks will offer loans to borrowers if the monthly repayments on the principal and interest make up a maximum of 60% of a borrowers’ income or cash flow That seemed fairly safe Not any more In the 2-H FY2007, when we saw the bulk of the increase in credit, average lending rates were around 1-1.2% per month Now monthly lending rates have risen to around 1.6-1.8% That’s a 50% increase in interest payments over a month period And in the 2-H many long term loans and mortages will be re-set at the new rate The problem is what was just affordable in FY2007 for many borrowers has now become unaffordable If we look at a typical loan, taking principal payments into account the total cost of servicing a loan has increased this year by 30-40% And if the original repayment schedule already swallowed 50-60% of the borrower’s monthly income the cost of servicing that loan would now increase to 80-90% of their monthly income And with inflation already taking a huge chunk out of disposable incomes many borrowers find themselves deep under water You get the picture In case a borrower is unable to continue servicing the loan, then the current value of the collateral offered becomes very important Banks generally have separated Please refer to the disclosures of potential conflict of interest and the disclaimer at the end of this report Trắc nghiệm kiến thức chứng khoán Mỹ : www.sachchungkhoan.net Strategy Report MayAug 20th, 2008 Tue, 5th 2008 Table 45 - Seems good but little provisioning….1-H Pretax profit 62.1% 1,600,000 1,473,000 1,000,075 2,500,000 2,126,815 STB 754,000 2,000,000 1,581,971 37.7% EAB 397,319 800,000 360,906 49.7% VIBank 323,000 700,000 426,000 46.1% VPBank 150,000 550,000 314,000 27.3% Seabank 258,000 852,000 409,000 30.3% Habubank 640,000 235,000 461,000 272.3% 207,000 386,000 240,000 53.6% 8,169,394 16,301,000 14,100,785 50.1% Source - Various banks, media the credit and appraisal functions in order to allow for independent and fair appraisal of the value of the collateral offered, almost always real estate In practice, just how much sway the credit department has over loan approvals and the value applied of the underlying security varies widely from bank to bank It boils down to the management and culture of the institution Risk management functions well in certain banks such as ACB, Military Bank and Techcombank, enabling them to build more safety into both the affordability of the loan and the appraised value of the security Not all banks practice good risk management We have heard of a few banks that were not only happy to lend close to 100% of the market value of the security but in fact topped up those loans when real estate prices moved higher late last year Luckily only a few did that Either way a 50% increase in interest rates was unanticipated by even the most conservative of banks and we expect NPLs to increase dramatically in the 2-H The reason is simple arithmetic Two thirds of all loans extended last year were made in the 2-H Now, the bulk of these loans were short term loans which are rolled over at market rates every three months or so However about a third of the total outstanding loans made last year were long term fixed loans Fixed rate loans are a misnomer because in fact they are in fact a hybrid product The rates are fixed for twelve months and then re-set at the market rate A lot of re-sets are due between now and the end of the year with the peak period in November through to December This will lead to some distress Estimating how much of the outstanding loans are real estate related is one of the holy grails of banking sector analysis In fact it’s a rather vain exercise not only because the data is unavailable but because defining what exactly is a real estate related loan is an exercise in itself 13% 11% 9% 60 months 55.6% 36 months 62.7% 24 months 43.8% 609,000 18 months 710,000 735,000 13 months 1,300,000 1,260,000 38 July 15th 15% 12 months 723,000 552,000 461,000 Maritime Bank June 19th 17% Techcombank Total May 19th 40.0% Military Bank COMPANY REPORT 628,847 April 16th 11 months Eximbank March 11th 10 months ACB 19% months Vietinbank 2,732,000 2,028,246 months 604,000 FY 2007 months 3,383,000 months BIDV FY 2008e months 2,100,000 months 1-H 2008 Vietcombank month Banks Chart 46 - Deposit rate yield curve (March - July) % of FY2008 target Source - Banks website Loans to the real estate sector, which means to real estate developers, construction companies, mortgages and home improvement loans account for 10.8% of total outstanding loans as of the end of FY2007 according to the SBV And about 9.96% more recently This seems quite low Of course the exposure of individual banks such as BIDV for example would be higher than that But then, this is said by some to be too narrow a definition Given that most loans in Vietnam are backed by real estate collateral, in theory up to 90% of all loans can be said to be real estate related Clearly that’s too wide a definition Being simple people, we take a simple approach and define the exposure as follows; HSC’s formula for calculating real estate exposure of the banking sector Total real estate related loans = Loans to real estate developers + construction companies + mortgages + home improvement loans + non performing loans backed by real estate collateral After all, a normal healthy loan that happens to be backed by real estate is not really real estate related But then if it goes bad the real estate collateral comes into play And suddenly it’s a real estate related loan Of course this approach doesn’t help that much in coming up with a total figure Because you have to add actual NPL and potential future NPL’s to get an idea of the true real estate exposure But at least we have a workable framework We have our own idea of what the total real estate related in the banking system is We take a rather bottom up approach based on talking to individual banks According to our estimates a real estate loan exposure in the region of 12-14% of total loans seems fairer Then if you add current NPLs of 2.2% and you have a starting point for real estate loan exposure of around 14-16% Of course this NPL estimate is calculated under VAS rules which are pretty generous But we will come back to this below Please refer to the disclosures of potential conflict of interest and the disclaimer at the end of this report Trắc nghiệm kiến thức chứng khoán Mỹ : www.sachchungkhoan.net Strategy Report MayAug 20th, 2008 Tue, 5th 2008 Chart 47 - Total deposit versus lending growth the whole system Table 48 - Selected and partial real estate exposure of banks Bank 60.0% Note Date Vietcombank 50.0% 40.0% 30.0% 20.0% COMPANY REPORT Outstanding loans BIDV 5.86% 30/06/2008 Total exposure to the real estate sector Vietinbank 8.00% 30/06/2008 ACB Around 20% 30/06/2008 Loans to real estate developers: 7% Mortgage loans 1% Mortgate lending accounted for 70% of STB 16.00% 30/06/2008 2.20% 30/06/2008 16.00% 31/03/2008 Loans to developers,construction companies and mortgage loans Total exposure to the sector Eximbank Total deposits 10.0% Techcombank Military Bank 0.0% 2000 2001 2002 2003 2004 2005 2006 2007 2008e VIBank An Binh Bank Source - IMF The second factor worth considering relates to changes in the classification of NPLs According to the current legislation, namely Decision No 493, credit institutions can classify debts and make provisions in accordance with either Article or Article of the decision The two methods lead to widely different results Most banks prefer to apply Article which is old school Article article allows banks to classify loans into five groups based on categories such as current loans, structured loans or delinquent loans based on how long delinquent loans have been overdue And only the worst category of overdue loans is then classified as NPL’s (over 90 days) But the debt classification method stipulated in Article sets much stricter requirements and is close to what international banks and institutions are using The methodology involves 40 different financial ratios and allows banks to get a more accurate qualitative based assessment about their client’s credit quality And here lies the rub Local banks ranking loans according to Article must reclassify loans according to Article No since April FY2008 And Ernst & Young, has estimated that reclassifying debts using Article results in a bad debt ratio 2-3 times higher than that under Article Taking that into account real estate related loans might climb to as much as 17-19% using article for NPLs And with real estate values falling this is likely to rise further in the next two quarters as bad debts tend to rise In a banking system where creditworthiness is based more on the value of the collateral rather than the ability of a customer to service a loan, the actual valuation method holds the key Most banks value collateral somewhere between the supposed market value and the published official value for tax purposes The later values are calculated by the government annually and can be 30-50% below market prices They also lag the market price as they are calculated once a year 39 As a percentage of total loans 5.00% 31/03/2008 less than 15% 31/03/2008 20% 31/03/2008 consumer lending Loans to real estate developers and others Loans to developers only We not know mortgage loans exposure Source - Various banks And then the actual loan value can range between 5070% of the value of the collateral as calculated by the bank Recently banks have tended to lend at only 50% of the collateral value So in theory banks should be well protected against declines in the value of the collateral The problem of course is that in the 2-H FY2007, banks were tripping over themselves to lend money The stuff was coming in the door and they couldn’t get rid of it quick enough So we have anecdotal evidence that a few banks were lending closer to 100% of the actual market value Given the huge amount of lending done in the 2-H of last year loan resets at higher interest rates and falling collateral values is likely to lead to an increase in doubtful loans and bad debts Its hard to estimate how high this can get but there are two potential sources of rising bad debts One is our estimated VND200-230 trillion worth of real estate loans (about 17-19% of total outstanding loans), the other is the roughly VND514 trillion worth of SOE debt Its almost impossible at this stage to quantify how bad debts might get We have heard various estimates but frankly its all guesswork at this point Remember the credit bubble lasted only six months so the fallout cannot be compared to the Asian crisis which was the result of many years of unwise lending practices And the timetable for this all of this to be declared is flexible as many banks are well able to freeze or disguise bad loans for quite some time Pushing bad debts out to subsidiaries, lending interest payments to borrowers or capitalising the interest payments are all favoured devices we have seen in other countries These are all effective delaying tactics So when will banks comply with article 7? BIDV has already implemented article since 2005 and the NPL ratio trebled However most other banks have yet to Please refer to the disclosures of potential conflict of interest and the disclaimer at the end of this report Trắc nghiệm kiến thức chứng khoán Mỹ : www.sachchungkhoan.net Strategy Report MayAug 20th, 2008 Tue, 5th 2008 Chart 49 - HCMC - Luxury and mid priced condominium market - secondary market pricing Prestige apartments segment Price per square meter (US$) - March Price per square meter (US$) - June Price per square meter (US$) - July change YTD% Current status US$2000 or above per square metre Phu My Hung The COMPANY Manor REPORT Saigon Pearl 2,800 or above 2,300-2,500 1,900-2,400 -19.6% partly completed and completed 3,000 2,400-2,700 2,400-2,600 -16.7% partly completed and completed -13.3% partly completed 2,800-3,200 2,400-2,800 2,400-2,800 Sunrise 2,700 2,700 2,600-2,800 Central gardens 2,400 1,800-2,200 1,500-1,800 Cantavil Hoan Cau 3,550 3,500-3,600 2,700-3,000 Phu Hoang Anh 1,800 1,500-1,800 1,800-2,000 - new Richland hill 1,600 1,500-1,600 1,500-1,600 - new Sunview 1,150 950 650-1,000 - new -31.3% partly completed - new Mid priced segment US$1000-1800 per square metre -28% partly completed Source - Colliers, HSC comply with the regulation and SBV hasn’t reminded them yet We may even see some calls soon to delay the implementation of this measure Some of the better banks are moving towards compliance Military Bank has been running the system on a trial basis since March 2008 ACB has signed a consultancy agreement with Ernst & Young on completing a new internal credit rating system Viet A and MHB are building up systems for themselves Its very possible that the SBV may simply ignore the deadline to allow banks more time to comply This would offer relief from one of the factors we mentioned at the beginning But it still leaves the other three factors to consider In a worst case, recovering real estate collateral takes time due to the involved process, and generally it takes about one and a half years to recover If the bad loan is sold on however the process is much quicker In fact if we assume that the underlying collateral of the bad debt realises 30-50 cents in the distressed asset market then the actual final loss would be far less than the nominal amount We think an increase in bad debt over the course of the 2-H will lead to a sharp jump in provisioning at the end of the year What are the implications for the banking sector? Firstly FY2008 earnings will take a hit The 22 top banks we track are currently forecasting total net profits of about VND22 trillion or US$1.3 billion for FY2008 2-H core earnings are unlikely to live up to expectations 40 And even a modest increase in provisioning will take a big bite into earnings Sacombank recently cut its full year earnings forecast from VND2 trillion to VND1.5 trillion We expect more banks to follow suit The state owned sector is likely to take the brunt of any increase in bad debts With the exception of VCB these institutions are fully controlled by the state and may need to see another round of capital injections (perhaps up to several billion dollars) In the past the government has raised money by issuing bank recapitalisation bonds And they could so again Recently foreign investors have been coming back into VGBs so the appetite is there And the banks themselves have a lot of property on their books at very low cost Of course the process might be painful but the government can well afford it given it’s low level of foreign debt For the private sector the scale of any increased provisioning is likely to vary bank by bank Some very well managed banks may take some heavy provisioning writedowns hurting FY2008 results but then should bounce back quickly in FY2009 Other smaller banks may take several years to recapitalise and rebuild their balance sheets And some, mostly the smallest institutions may have to find new shareholders We think consolidation in the banking sector is inevitable We have too many banks in what is still a small financial system and some of these banks have grown too fast in a fairly short time Their operational control and risk management systems lag far behind their asset growth rates Please refer to the disclosures of potential conflict of interest and the disclaimer at the end of this report Trắc nghiệm kiến thức chứng khoán Mỹ : www.sachchungkhoan.net Strategy Report MayAug 20th, 2008 Tue, 5th 2008 Chart 50a - HCM outstanding loans & total deposit growth m/m since 2008 Chart 50b - Current estimated NPL’s VND billion % of total loans US$ billion 10.0% 8.0% 6.0% 4.0% Current estimated outstanding loans 120,000 72.73 of which current estimated NPL VAS 2,640 2.2% 1.60 of which current estimated NPL using IAS 6,000 5% 3.64 2.0% 0.0% Total deposits COMPANY REPORT -2.0% Outstanding loans 30-7-09 30-6-08 5/31/2008 4/30/2008 3/31/2008 2/29/2008 1/31/2008 -4.0% Source - all estimates by HSC based on various sources Source - Media We may well see the consolidation of some smaller institutions over the next 12 months The SBV is always ready to supervise the day to day management of some banks until buyers can be found They also stand ready to pump in emergency lending to any credit institutions at an interest rate of 15% or so Remember the authorities were here in the late 1990’s when more than a dozen banks were consolidated So they know the drill well and are prepared to act quickly In our opinion any increase in bad debts in the banking sector is unlikely to become a major crisis NPLs will surely rise and FY2008 bank earnings will suffer Some small banks may lose their independence and we may well see further capital being injected in some state owned banks and many private sector ones But the system will recover and thrive And we expect that credit growth will resume at the normal pace from Q2, FY2009 or so The process of consolidation will largely affect smaller private sector banks whose licenses have been awarded in the last four years or so Some rural banks that have switched to an urban setting also look vulnerable The process will be gradual, spread out over a quarter or two In fact a consolidation is not only long overdue but good for the long term health of the system and will allow the stronger banks to pull ahead and take advantage of the opportunities, especially in consumer lending Other larger banks are likely to have to return to the markets looking for more capital over the next 12 months Whether this is to make good provisioning related losses or simply to meet Basle 2, the need is clear In this exercise strategic partners will have to shoulder much of the load All in all Vietnam’s credit explosion lasted about six months This compares with easy money policies that lasted for almost 15 years in the US Most local banks simply didn’t have the time to get themselves into big trouble And the system is big enough and mature enough to deal with those that did After all many of Vietnam’s medium sized and larger private sector banks sold 10-20% stakes to international banks in FY2006-7 If additional capital is needed they will be asked to play their part And foreign investors seem very happy to buy into the Vietnamese banking sector Recently, SeABank sold a 15% stake to the Societe General S.A, Southern Bank was allowed to increase UOB’s stake in it from 10% to 15% and Eximbank sold a 25% stake to four foreign partners, Sumitomo Mitsui Banking Corporation (SMBC), VinaCaptial’s VOF fund and two of Mirae Asset’s funds 41 Please refer to the disclosures of potential conflict of interest and the disclaimer at the end of this report Trắc nghiệm kiến thức chứng khoán Mỹ : www.sachchungkhoan.net 42 3,383,000 821.01 * forecasts are banks own forecasts Source - various banks 13,546,667 Total private banks net profit (VND) 760,000 Total private banks net profit (US$) 460,000 282,000 Viet A Bank Saigon Hanoi Bank 340,000 Phuong Nam Bank An Binh Bank 280,000 141,000 315,000 HDB 386,000 OCB 207,000 Maritime Bank 235,000 852,000 291,667 640,000 550,000 700,000 735,000 1,260,000 1,300,000 800,000 1,500,000 Nam A Bank 258,000 Habubank 461,000 Military Bank Seabank 552,000 Techcombank 323,000 723,000 Eximbank 150,000 397,319 EAB VIBank 754,000 VPBank 1,000,075 ACB STB 2,500,000 512.85 Private banks 8,462,000 300,000 1,600,000 3,179,000 Total public banks net profit (US$) 604,000 2,100,000 FY 2008e* Total public banks net profit (VND) MHB Vietinbank BIDV 1-H 2008 800,000 1,500,000 HSC house view 559.09 9,224,964 176,000 230,766 194,483 253,165 167,555 231,040 104,417 240,000 461,000 409,000 314,000 426,000 609,000 710,000 628,847 360,906 1,581,971 2,126,815 389.89 6,433,246 200,000 1,473,000 2,028,246 2,732,000 FY 2007 50% 54% 272% 30% 27% 46% 63% 44% 56% 50% 50% 40% 19% 62% % of full year target 46.8% 46.8% 331.8% 99.3% 45.0% 34.3% 67.1% 36.3% 179.3% 60.8% -49.0% 108.3% 75.2% 64.3% 20.7% 77.5% 106.7% 121.7% -5.2% 17.5% 31.5% 31.5% 50.0% 8.6% 56.7% 23.8% y/y COMPANY REPORT Vietcombank State owned banks Chart 48a: Banks 1-H net profit and full year FY2008 forecast Strategy Report MayAug 20th, 2008 Tue, 5th 2008 Please refer to the disclosures of potential conflict of interest and the disclaimer at the end of this report Trắc nghiệm kiến thức chứng khoán Mỹ : www.sachchungkhoan.net Strategy Report MayAug 20th, 2008 Tue, 5th 2008 Chart 50 - Foreigners net buying by month Chart 51 - Selected funds cash positions Date 35,000,000 7,000,000,000 30,000,000 Vollume (share) 4,000,000,000 15,000,000 3,000,000,000 10,000,000 5,000,000 COMPANY REPORT 2,000,000,000 1,000,000,000 Jun -08 Apr-08 May-08 Mar-08 Jan -08 Feb-08 Dec-07 Oct-07 Nov -07 Sep-07 Jul-07 Aug-07 Jun -07 Apr-07 May-07 Mar-07 Jan -07 Feb-07 -5,000,000 Cash position VinaCapital VOF June 30th 2008 662 4.1% Dragon Capital VEIL June 30th 2008 462.69 11.0% VGF June 30th 2008 282.75 13.0% VDF June 30th 2008 189.93 2.0% June 30th 2008 249.1 9.9% VF1 June 26th 2008 106 23.2% VF4 June 26th 2008 43.8 85.7% VEH June 30th 2008 79.4 68.0% May 30th 2008 63 5.0% March 31st 2008 n/a 3.0% June 30th 2008 6.7 33.0% June 30th 2008 6.6 17.0% 5,000,000,000 20,000,000 Value (VND1000) Volume (share) 25,000,000 6,000,000,000 Value ($VND1000) Total net asset value ($USmil) Indochina Capital Vietfund Management Alpha capital Blackhorse Lazard Vietnam Manulife VFMC AMCFM Vietnam Equity Fund Source - Published monthly reports Source - www.vse.org.com We include VFM although it is strictly speaking a domestic fund And two things that should comfort investors Foreign investors want to buy and have cash Foreigners have been net buyers of the market (HOSE) since January investing a net VND6,044.9 billion or US$359.8 million in the January-June period At the same time however, they were net sellers of Bonds , withdrawing VND1,977.3 billion or US$117.6 million over the same period Going forward, we think foreign investors will continue to be net buyers of stocks We have looked at the universe of foreign buyers and divide them into three categories, dedicated Vietnam funds, other regional institutional funds and retail buyers Firstly, the dedicated funds There are about 46 dedicated Vietnam funds, managed by about 32 fund managers with about US$7 billion under management at the end of last year These are manly equity funds with some private equity and real estate investment mixed in We also have two infrastructure funds which can also invest in public equities Of the funds we looked at in more detail, several of them have significant cash on hand (see Chart 51) of the funds have had cash for some time and the others have raised additional funds this year The surprising thing is that despite the very tough investment climate, existing fund mangers with a good track record have been able to raise new cash This is currently the main source of foreign portfolio investment into equities The allure of the Vietnam growth story hasn’t gone away despite some problems this year In fact many investors have pointed to falling valuations and suggest that the market looks more attractive than it has for 24 months or so And we are aware of at least new dedicated Vietnam funds that are about to launch in the next 3-6 months 43 These new funds plan to raise about US$150 million between them, to be invested in both listed and OTC stocks Interestingly we have seen a shift in strategy away from OTC and private equity type investments more towards listed stocks Two reasons for this, lower valuations make listed equities more attractive than before and fund managers have been recently reminded of the value of investing in liquid stocks Then there are the regional institutional funds These are either mainly emerging market funds which can choose to have a Vietnam exposure With Vietnamese companies now included in the Russell Global Index and the Merrill Lynch Frontier Index these type of funds have to at least consider adding some Vietnamese stocks to their basket Of course this is a longer term trend and they can easily wait another 6-12 months or longer if they so wish However this pool of money available to these funds is of course much larger than the dedicated funds But it’s also more mobile as they don’t have to stay invested in Vietnam all the time yet Foreign retail interest is also starting to pick-up Only some of these are active but we have strong anecdotal evidence that the order flow has increased significantly recently One Japanese broker has recently held a very well attended series of seminars in various Japanese cities and has attested to strong interest And as the Japanese account for much of the retail base we see this translating into more investment in the near future Foreign institutions will continue to be steady buyers of the market but there are unlikely to chase prices and are most active in the market when locals are selling And their buying tends to be concentrated in top 20 stocks, about half of whom are at or close to their foreign limit Please refer to the disclosures of potential conflict of interest and the disclaimer at the end of this report Trắc nghiệm kiến thức chứng khoán Mỹ : www.sachchungkhoan.net Strategy Report MayAug 20th, 2008 Tue, 5th 2008 Chart 51a - Foreign Funds in Vietnam No Fund Manager Dragon Capital Ltd Mekong Capital COMPANY REPORT VinaCapital Indochina Capital PXP Vietnam Asset Management Size ($mn USD) Name 31/12/2007 Net Asset Value As of NAV US$m 1,044.3 30-Jun-08 462.69 Vietnam Growth Fund 536.0 30-Jun-08 282.75 Vietnam Dragon Fund 334.1 30-Jun-08 189.93 31-Dec-07 37 Vietnam Enterprise Investment Fund (VEIL) Mekong Enterprise Fund II 50.0 Mekong Enterprise Fund 27.1 Vietnam Azalea Fund 100.0 DFJ VinaCapital L.P 50.0 Vietnam Opportunity Fund 789.5 30-Jun-08 662 Vina Land 600.0 30-Jun-08 790 Indochina Land 42.0 Indochina Land 100.0 Indochina Capital 428.0 30-May-08 285 PXP Vietnam Fund 134.0 30-Jun-08 45 Vietnam Lotus Fund 41.0 30-Jun-08 26 Vietnam Emerging Equity Fund 97.0 30-Jun-08 33 78.0 19-Jun-08 256 Korea Investment Trust Management Worldwide Vietnam Fund Vietnam Holding Asset Management Vietnam Holding Limited (VNH) Vietnam Growth Fund 26.0 450.0 Lazard Lazard Vietnam Fund Limited 58.8 Finansa Fund Management Vietnam Frontier Fund 27.5 10 Christian Philip Kamn Kamn Investment Holdings Inc 25.0 11 Williams De Broe Beta Vietnam Fund Limited 68.3 12 Finansa Fund Management Vietnam Equity Fund 18.1 13 Keppel Group Vietnam Keppel Fund 12.5 14 France Jaccar 15 Bank Invest (Denmark) Private Equity New Market (PENM) 80.0 16 Jardine Fleming JF Vietnam Opportunities Fund 97.0 5-Jun-08 200 17 Deutsche Bank DWS Vietnam Fund 354.0 30-May-08 286 VN Top Select - Zertificat 100.0 30-May-08 63 19-Jun-08 22 30-Jun-08 79.4 100.0 18 Blackhorse Asset Management Blackhorse Enhanced Vietnam Inc 50.0 19 Golden Bridge Financial Group Vina Blue Ocean Fund 19.0 20 Templeton Templeton Vietnam SE Asia Fund 21 International Data Group IDJ Venture Vietnam 100.0 100.0 50.0 22 Horizon Capital Advisor Horizon Capital 23 Golden Bridge Blue Ocean Fund 24 Pioneer Vietnam Pioneer Fund 25 HSBC P-Notes 100.0 100.0 20.0 N.A 26 Keppel Land Keppel Fund 27 Landesbank Berlin VN Opportunities - Zertificat 28 KV Mgt Pte Limited (Singapore) Vietnam Investment Fund Singapore 29 PPF Asset Mgt As PPF A.S 30 Prudential Vietnam 50.0 5.5 50.0 Prudential VN Segregated 288.0 Prudential Fund 63.7 31 Lion Capital Lion Vietnam Fund 33.0 32 Anpha Capital Vietnam Equity Holding (VEH) 79.0 Vietnam Property Holding (VPH) 46.0 Total 7,022.4 Source - Various media, monthly report 44 Please refer to the disclosures of potential conflict of interest and the disclaimer at the end of this report Trắc nghiệm kiến thức chứng khoán Mỹ : www.sachchungkhoan.net Strategy Report MayAug 20th, 2008 Tue, 5th 2008 Chart 52 - Where we are on the IPO’s…… IPO timelines Preparation stage Advisor appointed Curent expected IPO timeline Stategic partner BIDV 60% Morgan Stanley Dean Witter Asia (Singapore) Pte Plan: Credit Suisse Q1/2009 Viettin Bank 50% JP Morgan Secirities Asia Pacific Limited Plan: 49% for the public, 10% for strategic investors; Starting price VND100.000 Q1/2009 Plan: Comvik, Vodafone, France Telecom, NTT Docomo, Singtel, T-mobile Phase : 15% for strategic investors, 15% for the public, Phase 2: Sell a further 19% , State 51% Q1/2009 COMPANY REPORT Mobiphone legal procedure started Vinaphone 20% Viettel 50% Vietnam Airline 0% 2010 Plan: 49% for the public 2010 Plan: Foreign investors 10-20%, State 70-80% 2010 Source - various medias, HSC We still have a large IPO program waiting to roll FY2007 may well be remembered as the year of lost chances as far as IPO’s were concerned The timeline for equitising the large state banks and telecom companies had fallen seriously behind And given that from FY2010 the country has to open most of its markets to international competition time is not a friend These capital hungry companies have to come to market as quickly as possible to give them a chance to raise enough capital to compete with the international giants looking to come into Vietnam Of course the main issue is pricing Pricing was what caused all the tears in FY2007 and earlier this year Highly priced new issues such as Bao Viet, PVFC, Vietcombank, Sabeco and Habeco all tested the patience of investors and while they went through, the damage done to market sentiment was obvious by the end And this is reflected in their current share prices Looking forward we believe that there needs to be an implicit understanding that the government brings new issues to market at a level that allows the authorities to earn a fair price and still leave something on the table for investors That ensures good secondary market demand Otherwise secondary market prices are likely to fall after the IPO deal is done and investors then turn wary of the next IPO deal in the pipe So hopefully they will compromise on price and bring some of these issues to market based on the current market sentiment and not on what they might have got a year ago The list of upcoming IPO’s looks good, including the three large telecom players, Mobiphone, Viettel and Vinaphone And in addition, assuming they don’t need to be recapitalised first, the four state owned banks that are left, BIDV Vietinbank, Agribank and MHB And at some point after that Vietnam Airlines, the national carrier Those are the headline name but there are a host of industrial groups also waiting to be equitised Some of these secondary names may be delayed if they run into balance sheet issues Back in FY2007, Vietnam privatized 150 SOEs, generating over VND32 trillion in capital surplus from IPO’s, 4.66xs higher than the par value of the stake offered by the state So it’s clearly lucrative work and the Ministry of Finance is anxious to get back to it With FY2010 market opening looming the government is facing pressure to re-start its privatisation programme before the end of the year, market conditions allowing of course And if they that at more attractive prices, investors both foreign and local will come flooding back And if the authorities have a long pipeline of deals to get away like Vietnam does thats not such a good idea Sustainable pricing then is the key That’s a moving target of course and what was sustainable last year is clearly not this year If the market improves of course so will valuations but the government may not be able to wait for the VN index to get back to where it was in FY2007 45 Please refer to the disclosures of potential conflict of interest and the disclaimer at the end of this report Trắc nghiệm kiến thức chứng khoán Mỹ : www.sachchungkhoan.net Strategy Report MayAug 20th, 2008 Tue, 5th 2008 Chart 53 - HSC Base case scenario for the 2-H FY2008 Macro assumptions Comment 2-H FY2008e FY2008e GDP 5.5% 6.0% Industrial Production 16.0% 16.25% shows no sign of slowing yet but we expect some 2-H weakness Retail sales 25.0% 27.5% also very strong partly on inflation but likewise we see a slowdown coming US$35.2 bn US$79.7 bn Imports are falling sharply as letters of credit are hard to come by US$29 bn US$58.7 bn As the global economy slows export demand may slow somewhat in 2-H Trade deficit US$6.2 bn US$21 bn Trade deficit in 2-H will be down sharply This target is very aggressive however FDI registration US$19.4 bn US$50 bn Registration at record high but large real estate projects may not be realised US$3 bn US$8 bn Disbursement also at record highs and should continue for 2-H CPI 10% 28% CPI trend is moderating as food prices fall and y/y effect kicks in from October Prime rate 16% 16% We think the prime rate need to go up one more time to kill off inflation Listed companies EPS growth -28% 1-H profits are unreliable as they don’t contain provisioning which is the big swing factor Current Forward P/E (Top 25) 16.5 Import Exports COMPANY REPORT FDI disbursement slowing down slightly but may slow further in 2-H to 5.5% Micro Assumptions VN index (+/-) +15/-30% market has downside risk of up to 30% from here, although it could rally later on Source - GSO, HSC 2-H Market Scenarios Below are our three scenarios for the market and economy for the rest of FY2008 Please remember that all the numbers used are our own in-house rough forecasts only and should not be taken as a reliable guide to the future Our Base case (50% weight) Economy slows further in the 2-H as the credit crunch feeds through FY2008 full year GDP growth of 6%; with industrial production of around 15%; retail sales growth of around 25% and a trade deficit in the region of US$25 billion CPI growth for the full year comes to 30%, with 2-H growth of 12% Prime rates are increased further to 16% in response and stays there until the end of the year The currency eases back to an interbank rate of around VND17,000 by year-end That amounts to a very mild depreciation during the year Despite some volatility during the 2-H, the SBV provides enough dollar liquidity to keep exports and imports afloat while at the same time controlling domestic speculation The banking sector faces some challenges in the 2-H as resets of fixed loans taken out in the 2-H of FY2007 start to bite, leading to an increase in defaults Also banks may have to use Article to recalculate bad loans leading to a further increase in bad debts This prompts an increase in distressed assets coming on to the market especially land and real estate Real estate prices fall further due to additional supply with the new owners, the banks, seeking to dispose of them quickly to raise cash The market falls back to test the June lows and may even test below it in Q4 Local investors remain sellers on the way down but foreigners are steady buyers into weakness At these levels forward P/E’s are now down to below 13 times which is fairly cheap given that these are trough earnings forecasts Market starts to rebound towards the year end or in Q1 FY2009 as CPI starts to fall and amid renewed hopes for a corporate earnings rebound in FY2009 As a result 2-H earnings drop dramatically Overall FY2008 EPS growth comes in at -28% according to our forecast This is due to a combination of lower pretax profits ( -2%) and the dilution effect Remember we use IAS standards to calculate the outstanding shares so we have a dilution effect left over from FY2007 This values the market at an adjusted current forward P/E of around 16.5 times 46 Please refer to the disclosures of potential conflict of interest and the disclaimer at the end of this report Trắc nghiệm kiến thức chứng khoán Mỹ : www.sachchungkhoan.net Strategy Report MayAug 20th, 2008 Tue, 5th 2008 Chart 54 - HSC Bull case scenario for the 2-H FY2008 - weight 30% Macro assumptions Comment 2-H FY2008e FY2008e GDP 6.0% 6.3% slowing down very slightly and bottom out in 2-H to 6.0% Industrial Production 16.5% 16.5% shows no sign of slowing yet and only very slight 2-H weakness Retail sales 28.0% 29.0% also very strong partly on inflation and only dips a little in 2-H US$35.2 bn US$79.7 bn US$29 bn US$58.7 bn Trade deficit US$6.2 bn US$21 bn FDI registration US$22 bn US$53.6 bn FDI disbursement US$5 bn US$10 bn CPI 6% 24% CPI trend moderates very fast as food prices fall and y/y effect kicks in from October Prime rate 14% 14% In this scenario the prime rate remains the same in the 2-H Cut to 12% in early 2009 Listed companies EPS growth -12% 1-H profits are unreliable as they don’t contain provisioning which is the big swing factor Current Forward P/E (Top 25) 16.5 Import COMPANY Exports REPORT Imports are falling sharply as letters of credit are hard to come by, weak demand a factor As the global economy slows export demand may slow somewhat in 2-H Trade deficit in 2-H will be down sharply This target is very aggressive however Registration at record high but large real estate projects may not be realised Disbursement also at record highs and 2-H pace remains unchanged Micro Assumptions VN index (+/-) +25/-15% Market has downside risk of just 15%, and could rise 25% higher by year-end Source - GSO, HSC Our Bull case (30% weight) The economy remains fairly robust with year-end GDP growth of 6.5%, virtually unchanged in the 2-H Industrial production eases back slightly to 15.5% while retail sales remain fairly robust at 28% and a trade deficit of US$25 billion same as in our base case CPI growth for the full year comes to 25%, with 2-H growth of just 7% The prime rate stays at 14% and is cut to 12% in Q4 The banking sector does see a slight rise in NPL’s but this only affects certain weaker institutions and the ensuing consolidation is carried out quickly without disrupting credit flows The weakness in the real estate market is marked but short lived with end demand recovering rapidly due to a shortage of end product and falling interest rates in Q4 The currency ends the year at VND17,000 or around the current level With inflationary pressures easing from Q3 and the trade deficit under control the SBV finds it quite easy to provide enough liquidity in the absence of major speculative moves As for the stock market, in the bull scenario the VN index has bottomed out already at 380 in June FY2008 and thereafter the index moves gradually higher to end the year at 550 or so 2-H earnings fall back but this is mainly limited to financial sector and real estate related stocks Other manufacturing and service related stocks produce decent numbers for FY2008 as the credit crunch does not spill into the general economy Overall FY2008 EPS growth is -12% with pretax profits actually slightly positive at 27% 47 Please refer to the disclosures of potential conflict of interest and the disclaimer at the end of this report Trắc nghiệm kiến thức chứng khoán Mỹ : www.sachchungkhoan.net Strategy Report MayAug 20th, 2008 Tue, 5th 2008 Chart 55 - HSC Bear case scenario for the 2-H FY2008 - weight 20% Macro assumptions Comment 2-H FY2008e FY2008e GDP 5.0% 5.75% slowing down sharply for a hard landing in the 2-H Industrial Production 15.0% 15.75% shows no sign of slowing yet but we expect some 2-H weakness Retail sales 20.0% 25.0% despite inflation effect, slows down as demand fall sharply US$35.2 bn US$79.7 bn Imports are falling sharply as letters of credit are hard to come by US$29 bn US$58.7 bn As the global economy slows export demand may slow somewhat in 2-H Trade deficit US$6.2 bn US$21 bn FDI registration US$15 bn US$46.6 bn FDI disbursement US$2 bn US$7 bn CPI 12% 31% CPI trend is moderating as food prices fall and y/y effect kicks in from October Prime rate 18% 18% The prime rate goes up to 18% to kill off inflation Listed companies EPS growth -40% 1-H profits are unreliable as they don’t contain provisioning which is the big swing factor Current Forward P/E (Top 25) 16.5 Import COMPANY Exports REPORT Trade deficit in 2-H will be down sharply This target is very aggressive however Registration at record high but large real estate projects may not be realised Disbursement at record highs but clear slowdown in 2-H Micro Assumptions VN index (+/-) +10/-50% Market has downside risk of up to 50% from here Source - GSO, HSC Our Bear case (20% weight) The economy suffers a hard landing in the 2-H and year-end GDP is just 5% Industrial production for the full year drops back to 15.7%, while retail sales come in at just 20% The full year trade deficit is US$20 as imports fall off sharply in the 2-H As for corporate earnings we assume a bigger hit as a result of lower margins hurting core business and a full provisioning of both listed and OTC positions for those companies with equity portfolios And EPS falls 40% when you add dilution on top And we also assume that banks will need to make large provisions against doubtful debt in this scenario We weigh this scenario at 20% as it is the least likely of our three scenarios Vietnamese companies have a history of muddling through and emerging stronger from tough times Our bet is they it again What action should investors take? If we follow the base case scenario we think the market will test towards the bottom again in Q4 As the economy slows and the micro-economic situation deteriorates the flow of worsening company news will push share prices lower again Banks in particular will see some downside as they struggle to provision against rising bad debts The real estate and construction sector will also be in the eye of the storm and exporters may also suffer as global demand slows Valuations will increase as earnings are revised downwards making the market look relatively more expensive for a while However for the first time we will be seeing trough valuations and this is usually a strong buy signal for the market And market drops back towards the June lows, this will offer an excellent buying opportunity for all investors As for stock picks we would focus on a best of breed type portfolio rather than focusing on sectors weights The Vietnamese market is still relatively mature and the premium valuations will go to those companies with superior management and growth prospects Therefore we strongly believe that investment in the best managements rather than choosing companies or sectors is the best long term strategy We have listed overleaf those stocks that fit our selection criteria Chart 56 - Earnings scenarios sensitivities and assumptions Net profit growth EPS growth P/E Comment Base -3% -28% Assumes margin pressure and some provisioning of equity losses Bull 27% -12% Assumes no margin pressure and no provisioning Bear -15% -40% Provisioning of listed to mark to market level but not much on OTC Using companies own original FY2008 forecasts Assumes extreme margin pressure and full provisioning Provisioning of listed, OTC and bond holdings - all mark to market Source - HoSE, HaSTC, all forecasts by HSC 48 Please refer to the disclosures of potential conflict of interest and the disclaimer at the end of this report Trắc nghiệm kiến thức chứng khoán Mỹ : www.sachchungkhoan.net Strategy Report MayAug 20th, 2008 Tue, 5th 2008 Our stock picks PVI Military Bank Fasting growing non life company Play on industrial production and beneficiary of overall expansion of PV group activities into petrochemicals and power plants May benefit as government extends list of compulsory insurance categories COMPANY REPORTin future Good management Some issues with tied investments but PV connection is overall a big plus Share price down sharply from its high Best of the northern JSB banks with excellent risk management and solid depositor base Low LDR means they can escape the worst of the coming NPL crisis and the bank will be a likely winner along with ACB, Dong A Bank and Techcombank Affiliates such as HFM and Thang Loi also making ground Therefore emerging as a strong financial group and expanding into the south Massan Trading One of the few strong brand name consumer good companies in Vietnam Growth in main business lines driven by marketing prowess and quality reputation FY2007 a breakthrough year due to cancer scare for competition Management is good and focussed on building marketing strengths Sabeco Best of the two beer companies Capacity is the main growth constraint and Sabeco added capacity of 200 million litres of beer earlier this year with another two factories totalling 200 million litres to be launched later this year Market share likely to edge higher towards 40% in FY2008 Raw material price hike an issue Main concern is what lies at the consolidated level with extensive real estate exposure but as this isn’t included in the valuation should not be seem as a major negative TTF Value added furniture exporter using own designs Suffering in FY2008 due to housing crisis in US although main exposure (65% of sales) is to Europe Bad news priced in already But with new factory doubling capacity from next year the company is very well placed to benefit from a cyclical recovery Longer term plan to grow its own timber requires huge investment and may be too ambitious But a scaled down version will reduce import dependence PVD Oli & gas upstream services supplier Half of revenue and 75 – 80% profit comes from full-service rig leasing Benefiting from oil price hike as exploration activities intensified Two new jack-up rigs under construction and expected delivery in September and December 2009 This will drive medium term margins and profits Growth drivers are the core business of drilling and drilling-related services with ambition to expand overseas DPM TRC Play on international fertiliser price rise and medium to long term price upcycle for soft commodities DPM is well placed to benefit both from production or urea and imports of other fertiliser types as price controls have broken down in this sector Bumper profits likely this year but longer term story depends on their ability to add capacity at home or abroad Exploiting and processing the natural rubber A stable and high margin company and the highest productivity in this sector Well technically applied in exploiting latex and good weather will promise a good harvest at the end of this year The after-tax profit of FY2008 could be increased at least 20% comparing with the target because of the oil price’s increase Vinamilk VinaCafe Marketing capability has improved tremendously breathing new life into what was an ageing consumer goods company Market share gain in key product areas in FY2007 likely to be extended in FY2008 allowing the company to grow core profits Has overcome dependence on financial income without hurting growth FY2008 earnings have come in ahead of plan Vinacafe is one of the leading players in the food and beverage space with a 50% market share in instant coffee The company’s brand name has strong consumer awareness for all coffee related products both domestically and overseas Domestic consumption of processed coffee is increasing at 15% per annum, and production capacity is struggling to catch up Excellent future growth prospects backed by the 2nd largest coffee growing industry in the world 49 Please refer to the disclosures of potential conflict of interest and the disclaimer at the end of this report Trắc nghiệm kiến thức chứng khoán Mỹ : www.sachchungkhoan.net 50 Oil & gas upstream services Source- company financial reports, HSC Food & Beverage PVD Vinacafe PVD Rubber TRC TRC Finance and Banking MB TTF Military Bank TTF Fertilizer 45,000 91,000 71,000 21,000 18,500 56,000 107,000 Food & Beverage VNM DPM Vinamilk DPM 41,500 Food & Beverage 28,100 Sabeco Non-life insurance PVI Share price (30/7) 60,000 Sector Ticker Massan Trading PVI Company Name Chart 57 - HSC's recommended list 8,492 8,228 4,940 5,862 2,280 6,760 6,836 1,624 11,517 3,615 FY2008 EPSe 5.30 11.06 14.37 3.58 8.11 8.28 15.65 25.55 5.21 7.77 Forward P/E 619,370 2,738,605 491,894 603,130 2,022,000 3,779,038 6,648,193 6,702,971 531,525 1,685,178 FY2007 sales N/a 3,500,000 424,500 1,131,000 2,722,000 8,000,000 8,200,000 8,901,377 2,000,000 2,400,000 108,343 579,875 177,445 52,245 492,600 1,329,481 963,448 809,185 102,092 249,664 FY2007 net FY2008e sales profit COMPANY REPORT 108,343 1,000,000 148,200 87,930 529,000 2,500,000 1,140,000 809,185 250,600 400,000 FY2008 net profit Sale and profit : Million VND Strategy Report MayAug 20th, 2008 Tue, 5th 2008 Please refer to the disclosures of potential conflict of interest and the disclaimer at the end of this report Trắc nghiệm kiến thức chứng khoán Mỹ : www.sachchungkhoan.net Strategy Report MayAug 20th, 2008 Tue, 5th 2008 Global Disclaimer Copyright 2008 Ho Chi Minh Securities Corporation (HSC) All rights reserved This report has been prepared and issued by HSC or one of its affiliates for distribution in Vietnam and overseas The information herein is believed by HSC to be reliable and is based on public sources believed to be reliable With the exception of information about HSC, HSC makes no representation about the accuracy of such information Opinions, estimates and projection expressed in this report represent the current views of the author at the date of publication only COMPANY They notREPORT necessarily reflect the opinions of HSC and are subject to change without notice HSC has no obligation to update, amend or in any way modify this report or otherwise notify a reader thereof in the event that any of the subject matter or opinion, projection or estimate contained within it changes or becomes inaccurate The information herein was obtained from various sources and we not guarantee its accuracy or completeness Prices and availability of financial instruments are also subject to change without notice This published research may be considered by HSC when buying or selling proprietary positions or positions held by funds under its management HSC may trade for its own account as a result of short term trading suggestions from analysts and may also engage in securities transactions in a manner inconsistent with this report and opinions expressed there in Neither the information nor any opinion expressed in this report constitutes an offer, nor an invitation to make an offer, to buy or to sell any securities or any option, futures or other derivative instruments in any jurisdiction Nor should it be construed as an advertisement for any financial instruments Officers of HSC may have a financial interest in securities mentioned in this report or in related instruments This research report is prepared for general circulation for general information only It does not have regard to the specific investment objectives, financial situation or particular needs of any person who may receive or read this report Investor should note that the prices of securities fluctuate and may rise and fall Past performance, if any, is no guide to the future The financial instruments discussed in this report may not be suitable for all investors Investors must make their own financial decisions based on their independent financial advisors as they believe necessary and based on their particular financial situation and investment objectives This report may not be copied, reproduced, published or redistributed by any person for any purpose without the express permission of HSC in writing Please cite sources when quoting Fiachra Mac Cana fiachra.maccana@hsc.com.vn Cell: 84 (0) 909 505 764 Ho Chi Minh Securities Corporation Level 1,2,3, Capital Place Building Thai Van Lung, District 1, Ho Chi Minh City Tel: (84 8) 823 3299 Fax: (84 8) 823 3301 www.hsc.com.vn 51 Please refer to the disclosures of potential conflict of interest and the disclaimer at the end of this report Trắc nghiệm kiến thức chứng khoán Mỹ : www.sachchungkhoan.net