Vietnam freight transport report q4 2012

... of any information hereto contained Vietnam Freight Transport Report Q4 2012 © Business Monitor International Ltd Page Vietnam Freight Transport Report Q4 2012 CONTENTS BMI Industry View ... for exports would negatively affect Vietnam' s freight transport sector © Business Monitor International Ltd Page Vietnam Freight Transport Report Q4 2012 Vietnam Political SWOT Strengths ƒ ƒ... risk for Vietnam' s freight industry in that the US is currently by far and away Vietnam' s top export partner © Business Monitor International Ltd Page Vietnam Freight Transport Report Q4 2012 SWOT

Q4 2012 www.businessmonitor.com VietnaM freight transport Report INCLUDES BMI'S FORECASTS ISSN 1750-5364 Published by Business Monitor International Ltd. VIETNAM FREIGHT TRANSPORT REPORT Q4 2012 INCLUDES 5-YEAR FORECASTS TO 2016 Part of BMI’s Industry Report & Forecasts Series Published by: Business Monitor International Copy deadline: August 2012 Business Monitor International 85 Queen Victoria Street London EC4V 4AB UK Tel: +44 (0) 20 7248 0468 Fax: +44 (0) 20 7248 0467 email: subs@businessmonitor.com web: http://www.businessmonitor.com © 2012 Business Monitor International. All rights reserved. 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All information is provided without warranty, and Business Monitor International makes no representation of warranty of any kind as to the accuracy or completeness of any information hereto contained. Vietnam Freight Transport Report Q4 2012 © Business Monitor International Ltd Page 2 Vietnam Freight Transport Report Q4 2012 CONTENTS BMI Industry View ............................................................................................................................................ 5 SWOT Analysis ................................................................................................................................................. 7 Vietnam Freight Transport SWOT ......................................................................................................................................................................... 7 Vietnam Political SWOT ........................................................................................................................................................................................ 8 Vietnam Economic SWOT ...................................................................................................................................................................................... 9 Vietnam Business Environment SWOT................................................................................................................................................................. 10 Industry Trends And Developments ............................................................................................................ 11 Maritime ................................................................................................................................................................................................................... 11 Multimodal................................................................................................................................................................................................................ 14 Air ............................................................................................................................................................................................................................. 14 Market Overview ............................................................................................................................................. 16 Industry Forecast ........................................................................................................................................... 20 Macroeconomic Outlook ........................................................................................................................................................................................... 20 Road Freight ............................................................................................................................................................................................................. 20 Table: Road Freight, 2009-2016.......................................................................................................................................................................... 20 Rail Freight............................................................................................................................................................................................................... 21 Table: Rail Freight, 2009-2016 ........................................................................................................................................................................... 21 Air Freight ................................................................................................................................................................................................................ 21 Table: Air Freight, 2009-2016 ............................................................................................................................................................................. 21 Maritime And Inland Waterways .............................................................................................................................................................................. 22 Table: Maritime Freight, 2009-2016 ................................................................................................................................................................... 22 Table: Inland Waterway Freight, 2009-2016 ....................................................................................................................................................... 22 Trade ........................................................................................................................................................................................................................ 23 Table: Trade Overview, 2009-2016 ..................................................................................................................................................................... 23 Table: Key Trade Indicators, 2009-2016 (US$mn) .............................................................................................................................................. 23 Table: Main Import Partners, 2002-2009 (US$mn) ............................................................................................................................................. 24 Table: Main Export Partners, 2002-2009 (US$mn) ............................................................................................................................................. 24 Global Oil Products Price Outlook ............................................................................................................... 25 Table: BMI Oil Price Forecasts, 2011-2016 ........................................................................................................................................................ 25 Political Outlook ............................................................................................................................................. 32 Domestic Politics ...................................................................................................................................................................................................... 32 Long-Term Political Outlook .................................................................................................................................................................................... 33 Macroeconomic Outlook ............................................................................................................................... 36 Table: Vietnam – Economic Activity, 2011-2016 ................................................................................................................................................. 38 Company Profiles ........................................................................................................................................... 39 Vietnam Airlines Cargo ....................................................................................................................................................................................... 39 Vinatrans ............................................................................................................................................................................................................. 41 Vietnam Demographic Data .......................................................................................................................... 43 Table: Vietnam's Population By Age Group, 1990-2020 ('000) ........................................................................................................................... 44 Table: Vietnam's Population By Age Group, 1990-2020 (% of total) .................................................................................................................. 45 Table: Vietnam's Key Population Ratios, 1990-2020........................................................................................................................................... 46 Table: Vietnam's Rural And Urban Population, 1990-2020 ................................................................................................................................ 46 BMI Methodology ........................................................................................................................................... 47 © Business Monitor International Ltd Page 3 Vietnam Freight Transport Report Q4 2012 How We Generate Our Industry Forecasts .......................................................................................................................................................... 47 Transport Industry ............................................................................................................................................................................................... 47 Sources ................................................................................................................................................................................................................ 48 © Business Monitor International Ltd Page 4 Vietnam Freight Transport Report Q4 2012 BMI Industry View Vietnam's main export partners, the US, China and Japan, are all set to suffer slowdowns during 2012, but the bleak global economic climate will not prove to be such a great obstacle for Vietnam as its freight transport industry appears to be heading towards a period of sustained healthy growth. Although BMI has downgraded its real GDP growth forecast from 5.8% to 5.2% for 2012, Vietnam's freight industry appears to be bucking the negative trend, with the shipping sector leading the way, followed by road, air and rail respectively. In the shipping sector, Cai Mep International Terminal (CMIT) achieved a cargo-handling record for Vietnam, having handled 2,100 containers in 11.5 hours for Danish ocean carrier Maersk Line, underling the positives surrounding this sector over the mid term. Aside from this, CMIT witnessed strong growth as of early July 2012, and is expected to handle almost 600,000 twenty-foot equivalent units (TEUs) by the end of the year, or 50% of the total passing through the port, according to Transport Weekly. Headline Industry Data ƒ 2012 rail freight tonnage is set to increase by 3.04% to 8.44mn tonnes. ƒ 2012 air freight tonnage is forecast to rise by 5.73% to 206,970 tonnes. ƒ Tonnage handled at the Port of Ho Chi Minh City in 2012 is forecast to grow 7.44% in 2012, whereas tonnage handled at the Port of Da Nang is forecast to increase 3.08%. ƒ 2012 road freight tonnage is forecast to grow by 6.48% to 663.25mn tonnes. ƒ 2012 total trade is forecast to rise by 6.23% Key Industry Trends APMT Puts Cai Mep On The Map We believe the positive growth outlook in terms of throughput at Cai Mep is in no small part attributable to APM Terminal (APMT)'s operation of the terminal over the past year. The terminal operator has put an onus on investment and has also attracted new clients operating on key trade routes. We believe APMT's presence will support continued growth at the port over the medium term (2012-2016) as it continues to improve the port's facilities and attract shipping lines keen to capitalise on Vietnam's positive macroeconomic outlook. Kerry Logistics Constructs New Warehouse Hong Kong-based Kerry Logistics underlined its commitment to expanding its network in Vietnam with the announcement in July 2012 of the construction of a new warehouse. The facility will cover an area of 11,000 square metres (m2) in the Song Thang area of Ho Chi Minh City. Construction work has already © Business Monitor International Ltd Page 5 Vietnam Freight Transport Report Q4 2012 started and is likely to be concluded in Q113. Upon completion, the company will have a total of nine warehouses with a capacity of 62,000m2 in Song Thang. The facilities are aimed at fulfilling rising demand for storage places. Air China Cargo Chasing Growth In Intra-Asia There is a growing trend of major freight companies showing an interest in the intra-Asia market, first noted in the container shipping sector, that is currently picking up pace in the air cargo market, BMI has noted. Air China Cargo, the freight subsidiary of Air China, is reportedly preparing to launch a cargo service linking China with Vietnam, the airline's second cargo venture into Asia in 2012. Key Risks To Outlook Providing a risk to the downside to Vietnam's freight industry is the fact that we expect to see external demand remaining subdued in the months ahead and we also expect new export orders to remain stagnant in 2012. This should in turn lead to an overall slowdown in net exports. Accordingly, we see net exports growing at just 6.0% in 2012, which is significantly lower than the 16.9% estimated for 2011. On the upside, air freight development in the country could be about to see something of a boom, with carriers becoming increasingly interested in Vietnam. As well as Air China Cargo planning to enter the market (as we examine in more detail in the Trends and Developments section of this report), other airlines that have begun freight flights to Vietnam this year are Saudi Airlines Cargo, Air Hong Kong (on behalf of DHL) and Asiana Cargo. Also providing good news going forward for the country is the fact that Vietnam's geopolitical significance will rise over the coming decade, as the US courts it as a potential ally to counterbalance China. Although Hanoi is wary of Beijing's rise, it will avoid a formal alliance with Washington, instead charting a careful middle course between China and the US to maximise its strategic independence. This should provide upside risk for Vietnam's freight industry in that the US is currently by far and away Vietnam's top export partner. © Business Monitor International Ltd Page 6 Vietnam Freight Transport Report Q4 2012 SWOT Analysis Vietnam Freight Transport SWOT Strengths ƒ ƒ ƒ Weaknesses ƒ ƒ ƒ Opportunities ƒ ƒ ƒ Threats ƒ ƒ ƒ Vietnam's strong domestic growth rate, coupled with its geography: it stretches for thousands of kilometres on a north-south axis, creating a need for long-distance freight haulage. Recovery of the nation's ports in 2010 is expected to continue over the mid-term to 2016. Vietnam's location on the South China Sea gives the country access to the main interAsian shipping routes, as well as access to the developing land transport links with ASEAN countries, allowing the country scope to develop its trade logistics. The generally poor state of the road network. Despite new highway construction, only 13.5% of the network is considered to be in good condition. Just 26% of the network has two or more lanes and only 29% is tarred. Traditionally low investment in rail, with the potential for cost-effective bulk rail freight being underutilised. Decades of under-investment have left the country with a port infrastructure system that is poor by international standards. Overcapacity is therefore a growing problem. The beginnings of local commercial vehicle production, which will help improve the stock of lorries used by road haulage companies. Chinese investment could bring about much needed improvements in the rail sector. Growing international interest in Vietnam as a growth market within the box shipping sector. Vietnam risks losing out to neighbouring countries if it is unable to develop its infrastructure to keep up with the pace of demand. Vietnam is vulnerable to any slowdown in Chinese investment. Indeed, the Chinese government issued a warning to foreign shipping companies operating in the South China Sea in mid-April 2012, following an incident which saw the Philippine navy frigate Gregorio del Pilar involved in a stand-off with two Chinese surveillance vessels after it had intercepted Chinese fishing vessels traversing the region. A drop in international demand for exports would negatively affect Vietnam's freight transport sector. © Business Monitor International Ltd Page 7 Vietnam Freight Transport Report Q4 2012 Vietnam Political SWOT Strengths ƒ ƒ Weaknesses ƒ ƒ Opportunities ƒ ƒ Threats ƒ ƒ ƒ The Communist Party of Vietnam remains committed to market-oriented reforms and we do not expect major shifts in policy direction over the next five years. The oneparty system is generally conducive to short-term political stability. Relations with the US have witnessed a marked improvement, and Washington sees Hanoi as a potential geopolitical ally in South East Asia. Corruption among government officials poses a major threat to the legitimacy of the ruling Communist Party. There is increasing (albeit still limited) public dissatisfaction with the leadership's tight control over political dissent. The government recognises the threat corruption poses to its legitimacy, and has acted to clamp down on graft among party officials. Vietnam has allowed legislators to become more vocal in criticising government policies. This is opening up opportunities for more checks and balances within the one-party system. Macroeconomic instabilities in 2012 are likely to weigh on public acceptance of the one-party system, and street demonstrations to protest economic conditions could develop into a full-on challenge of undemocratic rule. Although strong domestic control will ensure little change to Vietnam's political scene in the next few years, over the longer term, the one-party-state will probably be unsustainable. Relations with China have deteriorated over recent years due to Beijing's more assertive stance over disputed islands in the South China Sea and domestic criticism of a large Chinese investment into a bauxite mining project in the central highlands, which could potentially cause wide-scale environmental damage. © Business Monitor International Ltd Page 8 Vietnam Freight Transport Report Q4 2012 Vietnam Economic SWOT Strengths ƒ ƒ Weaknesses ƒ ƒ Opportunities ƒ ƒ ƒ Threats ƒ ƒ Vietnam has been one of the fastest-growing economies in Asia in recent years, with GDP growth averaging 7.1% annually between 2000 and 2011. The economic boom has lifted many Vietnamese out of poverty, with the official poverty rate in the country falling from 58% in 1993 to 14.0% in 2010. Vietnam still suffers from substantial trade, current account and fiscal deficits, leaving the economy vulnerable to global economic uncertainties in 2012. The fiscal deficit is dominated by substantial spending on social subsidies that could be difficult to withdraw. The heavily-managed and weak currency reduces incentives to improve quality of exports, and also keeps import costs high, contributing to inflationary pressures. WTO membership has given Vietnam access to both foreign markets and capital, while making Vietnamese enterprises stronger through increased competition. The government will in spite of the current macroeconomic woes, continue to move forward with market reforms, including privatisation of state-owned enterprises, and liberalising the banking sector. Urbanisation will continue to be a long-term growth driver. The UN forecasts the urban population rising from 29% of the population to more than 50% by the early 2040s. Inflation and deficit concerns have caused some investors to re-assess their hitherto upbeat view of Vietnam. If the government focuses too much on stimulating growth and fails to root out inflationary pressure, it risks prolonging macroeconomic instability, which could lead to a potential crisis. Prolonged macroeconomic instability could prompt the authorities to put reforms on hold as they struggle to stabilise the economy. © Business Monitor International Ltd Page 9 Vietnam Freight Transport Report Q4 2012 Vietnam Business Environment SWOT Strengths ƒ ƒ Weaknesses ƒ ƒ Opportunities ƒ ƒ Threats ƒ ƒ Vietnam has a large, skilled and low-cost workforce, that has made the country attractive to foreign investors. Vietnam's location – its proximity to China and South East Asia, and its good sea links – makes it a good base for foreign companies to export to the rest of Asia, and beyond. Vietnam's infrastructure is still weak. Roads, railways and ports are inadequate to cope with the country's economic growth and links with the outside world. Vietnam remains one of the world's most corrupt countries. According to Transparency International's 2011 Corruption Perceptions Index, Vietnam ranks 112 out of 183 countries. Vietnam is increasingly attracting investment from key Asian economies, such as Japan, South Korea and Taiwan. This offers the possibility of the transfer of high-tech skills and know-how. Vietnam is pressing ahead with the privatisation of state-owned enterprises and the liberalisation of the banking sector. This should offer foreign investors new entry points. Ongoing trade disputes with the US, and the general threat of American protectionism, which will remain a concern. Labour unrest remains a lingering threat. A failure by the authorities to boost skills levels could leave Vietnam a second-rate economy for an indefinite period. © Business Monitor International Ltd Page 10 Vietnam Freight Transport Report Q4 2012 Industry Trends And Developments Maritime APMT Puts Cai Mep On The Map BMI believes Cai Mep's positive throughput growth outlook for 2012 is in large part attributable to APM Terminal (APMT)'s operation of the terminal over the past year, as the company has poured in investment and attracted new clients operating on key trade routes. We believe APMT's presence will support continued growth at the port over the medium term (2012-2016) as it continues to improve facilities and attract shipping lines keen to capitalise on Vietnam's positive macroeconomic outlook. Cai Mep International Terminal (CMIT) at the Port of Ho Chi Minh City (also known as New Saigon Port), which is made up of a collection of terminals lying 50 kilometres (km) away from Vietnam's capital city, is on course to handle nearly 600,000 twenty foot equivalent units (TEUs) in 2012 – its first full calendar year of operation – according to projections from Maersk Line's sister company APMT. CMIT accepted its first vessel on March 30 2011 and in the following nine months to 2012 handled 186,000TEUs. APMT's strong growth projection for CMIT in 2012 supports BMI's forecast for the Port of Ho Chi Minh City over the medium term. In 2010 (last available data), the port handled 2.85mn TEUs, growing 17.2% from 2009. While we expect this rate to slow year-on-year (y-o-y) to 7.9% in 2012, this still represents solid throughput growth. Over the medium term (2012-2016), we believe the port's positive growth will continue. We forecast TEU throughput to grow at an annual average of 6.7% over the period, bringing the total to 4.1mn TEUs in 2016. BMI highlights the substantial investments APMT has made in CMIT since it opened in March 2011 as an important driver of growth. In addition to helping to construct the port, which it did through a joint venture (JV) with Saigon Port and Vietnam National Shipping Lines (Vinalines), APMT purchased two laden reach stackers, an empty reach stacker, two empty container handlers and a 25-tonne forklift – all of which were delivered by Konecranes in 2011. Weak infrastructure is one of the main factors holding back Vietnam's shipping sector – the country ranks 111th out of 145 countries on the World Economic Forum's Global Competitiveness Report on the Quality of Port Infrastructure. As such, APMT's commitment to improving CMIT's facilities is an important step both for the terminal and the country's shipping sector as a whole. Investment in the port has allowed Cai Mep to attract a client base of some of the major players in the box shipping sector. While a foregone conclusion, given APMT's close connection with the company, Maersk Line began pulling into the port in August 2011, boosting throughput as expected. More significantly, CMIT has added CMA CGM and the Grand Alliance – comprising shipping lines Hapag-Lloyd, Nippon Yusen Kaisha (NYK), and Orient Overseas Container Line (OOCL) – to its client list. These © Business Monitor International Ltd Page 11 Vietnam Freight Transport Report Q4 2012 lines not only provide positive prospects for the port given their direct impact on throughput volumes, but their presence also signals the industry's confidence in the terminal's growth outlook and growing role in the region. An important aspect of the addition of these lines to the terminal is that they have exposed CMIT to the two largest maritime trade routes: Asia-Europe and Asia-America. Maersk has added the port to its Transpacific string from Asia to North America, while CMA CGM and the Grand Alliance have placed it on their Asia-Europe routes, marking the first time Vietnam had been directly connected on either of these trade routes. We highlight that Vietnam previously only played a role as a feeder port, relying on the transhipment of containers through one of Asia's larger, better equipped ports such as Singapore. Exposure to these routes is in large part attributable to the port's ability to handle ultra-large container ships, which are becoming the standard for shipping containers on Asia-Europe trade routes. This was demonstrated in December 2011, when CMA CGM's 13,820TEU Laperouse docked at the terminal. We believe CMIT's proven capacity for handling these vessels marks an important step for the terminal and will be a key driver of growth over the medium term. Furthermore, BMI highlights the effect Vietnam's positive macroeconomic outlook will have on throughput volumes at CMIT. Nominal GDP is forecast to grow at an average annual rate of 6.8% over the medium term, with GDP per capita set to grow almost twice as fast over the period, at 12.5% annually. A key driver of this growth will be the country's booming export sector. By 2016, we forecast the country's exports climbing 83% to US$178.6bn, from their 2011 level of US$97.8bn, providing a boost to the country's shipping sector. Additionally, CMIT's strategic location some 50km upriver from Vietnam's capital, Ho Chi Minh City, will make it an attractive option for shipping lines looking to take advantage of this burgeoning growth. Vinalines Cuts Newbuild Budget By A Third BMI believes Vietnamese National Shipping Lines (Vinalines)'s decision to reduce its spending on newbuilds is prudent considering the current operating environment in the shipping industry, especially in the dry bulk sector. Additionally, the company must address internal problems that have reduced its efficiency and profitability relative to its peers. However, if Vinalines can correct these problems and endure the difficult operating environment over the medium term (2012 to 2016) it will be well positioned to take advantage of growing trade in the region over the longer term. Vinalines announced that it will cut its newbuild budget by 32%, from VND100trn (US$4.78bn) to VND68trn (US$3.25bn) on fleet renewal to 2020. The Ministry of Transport explained that the decision to scale back was reached because of negative prospects for the shipping market. Vinalines primarily leases its 154 vessels, the majority of which are dry bulk carriers, with only one of its 16 subsidiaries, © Business Monitor International Ltd Page 12 Vietnam Freight Transport Report Q4 2012 Vietnam Ocean Shipping Company, handling shipping services with its own fleet. The company accounted for 45% of Vietnam's shipping capacity in 2011. Vinalines is following the trend of cutting back on ship orders, which has emerged in the shipping industry in recent years on the back of overcapacity in the dry bulk sector. With rates depressed to historically low levels on the Baltic Dry Index (BDI), shipping companies have largely changed their focus from expanding fleet size to maintaining profitability, or in many cases simply limiting losses. We believe it is wise for Vinalines to follow this strategy given the gloomy outlook for the dry bulk sector. Having expanded its fleet substantially in recent years, the purchase of an additional US$4.78bn worth of vessels would be imprudent without a definitive end in sight to the difficulties in shipping industry. BMI also maintains that the cut-back is prudent in consideration of circumstances unique to Vinalines. In 2010, the company acquired 36 ships as part of an asset offloading of the then debt-ridden Vietnamese shipbuilder Vinashin. This was a widely unexpected, and perhaps unwanted, gift as two-thirds of the vessels did not meet technical requirements and required further investment to make them compliant. With the planned expansion to the fleet announced in March 2010, and the acquisition of vessels from Vinashin coming only a few months later in August, it seems that the decision to cut back on newbuilds was inevitable. Beyond its unplanned expansion in 2010, Vinalines has experienced numerous operational difficulties that BMI believes must be addressed before spending on fleet expansion. The state-run shipping line has had as many as seven ships detained in the first four months of 2012 as a result of clients' inability to pay for the charter, or because the vessels did not meet technical requirements. Vinalines' subsidiaries have also suffered losses due to declining values on old vessels, many of which were breaking the rule that bans local companies from purchasing ships that are more than 15 years old. Furthermore, loss-making acquisitions, as well as accusations of corruption, are indicative of the organisational improvements that are needed. In February 2012, the company's general director, along with two others, including a state auditor, were arrested for embezzlement. Vinalines has also attracted criticism for its purchase of a 43-year-old floating dock for US$14.1mn, which is yet to be operational despite further investment of over US$19mn. With such a strong foothold in Vietnam all ready, there is still hope for Vinalines, but it has a long way to go before it can become a strong and profitable shipping company. If Vinalines is able to correct the issues that have plagued the company it may be able to successfully capitalise on growing intra-Asia trade, especially to and from Vietnam as it continues its rise as a key manufacturing hub in the region. BMI maintains that the decision to cut back spending on newbuilds will improve the firm's ability to navigate the difficulties facing the dry bulk sector over the medium term (2012 to 2016), and will allow the company to focus its efforts on improving its fundamentals. © Business Monitor International Ltd Page 13 Vietnam Freight Transport Report Q4 2012 Multimodal Kerry Logistics Constructs New Warehouse Hong Kong-based Kerry Logistics is to expand its network in Vietnam with the construction of a new warehouse, the firm announced at the end of July 2012. The facility will cover an area of 11,000 square metres (m2) in the Song Thang area of Ho Chi Minh City. Construction work has already started and is likely to be concluded in Q113. Upon completion, the company will have a total of nine warehouses with a capacity of 62,000m2 in Song Thang. The facilities are aimed at fulfilling rising demand for storage places. The global logistics service provider also declared that it had completed the expansion of an automotive facility at the Kerry Logistics Centre Laem Chabang (KLCLC) in June 2012. This expansion measures some 2,968m2 with the aim of accommodating the requirements of a luxury car manufacturer, according to Port Calls Asia. It was also announced in July that Kerry Logistics had acquired a plot of land of some 55,000m2 in Eastern Seaboard Industrial Estate (ESIE) in Rayong Province, Thailand. The plot will house an automotive logistics centre in an area that is cluttered with car manufacturers such as Ford and General Motors. Air MASkargo Launches New Asian Freighter Service The cargo division of Malaysia Airlines announced in May 2012 that it had launched a new Asian freighter service, reported the Journal of Commerce. MASkargo will operate the bi-weekly service between Kuala Lumpur in Malaysia, Ho Chi Minh City in Vietnam and Bangkok in Thailand. It will utilise MASkargo's fleet of three A330-200 freighters. The service is intended to extend MASkargo's Asian operations. We continue to forecast growth in Malaysian air freight volume to accelerate to 3.9% (up from an estimated 2.7% in 2011), reaching 1.37mn tonnes. The main factor behind this increase will be the growth of intra-Asian trade, in moves such as the one highlighted above, which will offset a slower performance by the domestic economy. Air China Cargo Chasing Growth In Intra-Asia The trend of interest from major freight companies in the intra-Asia market, first noted in the container shipping sector, is now picking up pace in the air cargo market. Air China Cargo, the freight subsidiary of Air China, is reportedly preparing to launch a cargo service linking China with Vietnam, the airline's second cargo venture into Asia in 2012. © Business Monitor International Ltd Page 14 Vietnam Freight Transport Report Q4 2012 According to Air China Cargo's chief operating officer, Titus Diu, the carrier is to launch an all cargo service in Q312 linking Shanghai with Hi Chi Minh City in Vietnam via Singapore, followed by a direct flight back to Shanghai. BMI notes that the planned route once again highlights Air China Cargo's determination to expand its coverage of the intra-Asia air freight market – a common trend for the company in 2012, with the carrier also launching an air freight service connecting Shanghai with Chennai in India in March. The company has a fairly low exposure to intra-Asia, currently operating cargo services to only Tokyo and Osaka in Japan, Chennai, Taipei in Taiwan and Hong Kong. However, we believe the intra-Asia trade route offers huge potential; and while container lines have been quick to react to its possibilities, the air freight sector is only now becoming more involved. Our positive view on intra-Asia trade growth stems from the development of the Chinese economy. While the country's economic growth is slowing, BMI predicts it will continue to expand at a robust annual average of 6.5% in the medium term (2012-2016). This will enable the country to continue its development toward becoming a major importer, rather than solely an exporter. Trade patterns will develop in line with the trend, as China seeks goods from outside its borders. The country appears keen to patronise its Asian neighbours, thereby keeping transport costs low – as the signing of the ASEAN-5 China Free Trade Agreement (FTA) which came into force in January 2010 shows. The growth outlook for intra-Asia trade is highlighted in Air China's latest cargo data and explains why the company has concentrated on boosting its Asia coverage in 2012. Although the smallest percentage of the company's air freight operations, regional air cargo volumes for June 2012 have increased by 46.5% to 6,168 tonnes. This compares with growth of just 1.7% in the company's international freight operations and the decline of 1.2% in the volumes of domestic cargo transported by the carrier in June 2012. Vietnam is, in BMI's opinion, an obvious choice for air cargo operators seeking to expand their intra-Asia coverage. The country is fast becoming the factory of Asia and container lines and port operators have already spied its potential, with new box terminals launched in the past 18 months and the country now linked directly by container ships to the US and Europe. Vietnam's air freight development is the next logical step and carriers are becoming increasingly interested in the country. As well as Air China Cargo planning to enter the market, airlines that have started freight flights to Vietnam in 2012 are Saudi Airlines Cargo, Air Hong Kong (on behalf of DHL) and Asiana Cargo. This interest will continue to drive already robust air freight growth in Vietnam, where the sector has grown by an annual average of 16% between 2000 and 2012 (last available data) and is forecast by BMI to grow by a further 30.5% over the medium term (2012-2016). © Business Monitor International Ltd Page 15 Vietnam Freight Transport Report Q4 2012 Market Overview Recovery Signs Evident There are currently signs of recovery on the horizon in Vietnam as we head into the final quarter of 2012. Real GDP growth accelerated from 4.1% year-on-year (y-o-y) in Q112 to 4.4% in Q212 and we expect the pace of economic growth to pick up steadily over the coming months as recent rate cuts begin to feed through to the economy. We have recently upgraded our 2013 real GDP growth forecast for Vietnam from 6.5% to 6.9%. That said, economic headwinds that have hit in 2012 in the US and eurozone should continue to act as a dampener on external demand throughout the year, especially in the case of the US, which is by some distance Vietnam's top export partner. Also, another of Vietnam's largest export partners, China, is set to see a cooling of GDP growth in both 2012 and 2013, as is Japan. This suggests that production activity in the manufacturing sector and other export-based industries could face difficulties, with a negative effect on the freight transport industry expected as a result. Vietnam To Ride Out The Global Economic Storm Vietnam Real GDP, 2000-2016 (% change y-o-y) e/f= BMI estimate/ forecast. Source: Asian Development Bank, General Statistics Office Retail sales have moderated considerably since November 2010, when the State Bank of Vietnam (SBV) initiated its monetary tightening cycle. Retail sales growth slowed from 32.5% in November 2010 to 22.6% in June 2011, indicating that the measures have dampened private consumption growth. Nonetheless, retail sales remain at double-digit growth rates, indicating that private consumption growth remains resilient. This supports our view that private consumption would remain resilient on the back of robust labour market conditions and rising wages in Vietnam, boding well for containerised imports. © Business Monitor International Ltd Page 16 Vietnam Freight Transport Report Q4 2012 However, public spending cuts and a subdued outlook on gross fixed capital formation (GFCF) growth due to high lending rates would lead to continued moderation in domestic demand throughout the year. Prior to 2007, policymakers outlined that foreign direct investment (FDI) inflows into the export sector should gradually reduce the state's role in driving the economy, providing a spur for Vietnam's freight industry. However, recent economic data suggest that this has not been the case. While exports have risen from 76.9% of GDP in 2007 to 80.7% in 2011, mainly driven by private sector export of processed food, agricultural products and mined resources to South East Asian countries, state-owned enterprises' share of the economy has remained stubbornly high at 33.7% of GDP in 2011, compared with 35.9% in 2007. The total share of the state's ownership in the economy is even larger at around 39% of GDP, when taking into account of joint-stock companies – in which the state holds a controlling stake while the private sector is allowed to invest and share in the profits. From our perspective, further measures to reduce the state's control over the economy and allow the private sector to allocate capital more efficiently, will play a key role in determining the country's growth prospects over the medium term. Road Freight Remains The Dominant Force In Tonnage Terms Road transport is the most advanced in terms of freight sector privatisation and is by far the dominant mode for freight in Vietnam, with a market share of around 75% of domestic cargo. Few foreign companies are present in the market and there are many small, family-owned road freight companies operating informally. Road Continues To Dominate Vietnam Freight Transport Mode Breakdown (% of total 2012f) Source: General Statistics Office of Vietnam © Business Monitor International Ltd Page 17 Vietnam Freight Transport Report Q4 2012 Vietnam has a national road network of 180,549 kilometres (km), according to the latest data provided by the CIA's World Factbook. BMI believes the sector requires substantial investment as the quality of Vietnam's road infrastructure was judged by the World Economic Forum (WEF) to be very poor, ranking 123rd out of 142 countries surveyed in its Global Competitiveness Report 2011-2012. Vietnam's railway transport sector has just one operator, the Vietnam Railway Corporation (VRC), established in April 2003 as a state corporation operating railway transport and related services. Vietnam's rail network totals 2,632km. The network is of mixed-gauge, comprising 2,105km of 1.000m gauge and 527km of 1.435m gauge. Room For Improvement Across The Board (Especially Road) Vietnam Transport Infrastructure Rankings * Rail infrastructure is measured out of 123. Source: World Economic Forum's Global Competitiveness Index Latest data puts the total amount of airports in Vietnam with paved runways at 37, with seven unpaved. This total puts the country in a poor 97th place in comparison with other countries. Vietnam's dense river and canal network provides the country with a highly developed inland waterway system of 17,702km. This is the second largest sub-sector involved in domestic cargo transport, accounting for 25-30% of total transport volumes. Vietnam's seaport network comprises of many small and medium-sized entities, with inefficient distribution. Most large ports are located on rivers, like Hai Phong and Ho Chi Minh City, with limited depth at the entrance. Some ports are located in big cities, thus making it difficult to connect with other modes of transport for cargo transfer due to traffic congestion. © Business Monitor International Ltd Page 18 Vietnam Freight Transport Report Q4 2012 Vietnam's port infrastructure is poor by international standards. The WEF's 2011 Global Competitiveness Report ranks it 111th out of 142 countries, placing it 12th in the region, just one place ahead of the Philippines, the regional underperformer. Investment And Development Outlook According to our key infrastructure projects database, there are US$171bn-worth of infrastructure projects planned or currently under way in Vietnam's transport sector. One of the most expensive of these is a US$3.6bn plan to build the Van Phong International Entrepot. The project will begin with the construction of two deep water ports in Dam Mon that will be able to accommodate container ships with tonnage of 9,000 twenty-foot equivalent units (TEUs) and the capacity to handle 0.5mn TEUs per year. The project is currently suspended, however, due to an ongoing review of geological conditions at the site. The air freight sector will undoubtedly benefit from the planned construction work on a new passenger terminal at Long Thanh international airport. Costing an estimated US$6.7bn, the work would also incorporate a new runway, providing capacity for 100mn passengers a year. A tender for investment consultancy work was under development as of December 2011. © Business Monitor International Ltd Page 19 Vietnam Freight Transport Report Q4 2012 Industry Forecast Macroeconomic Outlook Signs Of A Recovery There is evidence that Vietnam is staging something of a recovery in terms of headline growth. Real GDP growth accelerated from 4.1% y-o-y in Q112 to 4.4% in Q212 and we expect the pace of economic growth to pick up steadily over the coming months as recent rate cuts begin to feed through to the economy. We have recently upgraded our 2013 real GDP growth forecast for Vietnam from 6.5% to 6.9%. In line with our view that prices will stabilise over the coming months and that we will see a pickup in demand in 2013, we believe that the SBV will refrain from introducing further rate cuts. Accordingly, we are maintaining our forecasts for the SBV's policy rate to remain at 10.00% throughout 2012. We expect Vietnam's two biggest export partners, China and Japan, to encounter differing growth patterns in 2012. China's rapid growth will cool somewhat to 7.5% in 2012, down from 9.2% in 2011, and this is set to slip again in 2013 and beyond over the mid term. Although Japan will avoid the contraction it saw in 2011, it will still only post 1.4% growth in 2012, which we also forecast will fall in 2013. This will impinge on Vietnam's freight industry, due to its exposure to these economies. Road Freight Road Freight Continues To Dominate Vietnam's largest sector in tonnage handled terms is to enjoy healthy growth both in 2012 and over the forecast period. BMI is predicting average growth over our forecast period of 6.11%, which would see tonnage reach 806.85mn tonnes by 2016. For 2012, we expect annual growth to be 6.48%, ever so slightly up on 2011's estimate but down on the impressive growth figures recorded between 2007 and 2010, inclusive. Table: Road Freight, 2009-2016 2009 2010 2011e 2012f 2013f 2014f 2015f 2016f Road freight, '000 tonnes 513,629.90 585,024.50 622,880.48 663,249.02 703,847.87 746,473.03 791,173.03 837,813.57 - % change y-o-y 12.66 13.90 6.47 6.48 6.12 6.06 5.99 5.90 Road freight, mn tonnes/km 30,261.40 34,467.73 36,840.47 39,338.57 41,850.92 44,488.66 47,254.80 50,141.02 - % change y-o-y 8.20 13.90 6.88 6.78 6.39 6.30 6.22 6.11 e/f = BMI estimate/forecast. Source: General Statistics Office of Vietnam © Business Monitor International Ltd Page 20 Vietnam Freight Transport Report Q4 2012 Rail Freight Rail Recovers From Contractions The country's rail freight sector is to continue the positive year-on-year (y-o-y) growth that it enjoyed last year, following four years of annual contractions between 2007 and 2010. In 2012, we have forecast y-o-y growth of 3.04%, following 2011's estimated 4.83%. Over the mid term to 2016, average annual growth is set to come in at 3.05%, which will translate as tonnage increasing from 8.44mn tonnes in 2012 to 9.51mn tonnes by the end of 2016. Table: Rail Freight, 2009-2016 Rail freight, '000 tonnes - % change y-o-y Rail freight, mn tonneskm - % change y-o-y 2009 2010 2011e 2012f 2013f 2014f 2015f 2016f 8,068.10 7,809.92 8,187.28 8,436.00 8,686.15 8,948.78 9,224.20 9,511.57 -4.87 -3.20 4.83 3.04 2.97 3.02 3.08 3.12 3,805.10 3,901.00 4,085.13 4,309.66 4,535.47 4,772.56 5,021.18 5,280.60 -8.77 2.52 4.72 5.50 5.24 5.23 5.21 5.17 e/f = BMI estimate/forecast. Source: General Statistics Office of Vietnam Air Freight Growth Steady, But Work To Be Done The air freight sector is set to follow the lead more of the road sector than the rail sector over the mid term. We forecast annual average growth of 5.47% between 2012 and 2016, while 2012's growth is projected to come in at a slightly better 5.73%. This scenario will see tonnage throughput increase from 206,970 tonnes in 2012 to 255,450 tonnes by the end of 2016. However, the huge double-digit growth (33.24%) witnessed in 2010 will be a thing of the past. Table: Air Freight, 2009-2016 Air freight, '000 tonnes - % change y-o-y Air freight, mn tonnes-km - % change y-o-y 2009 2010 2011e 2012f 2013f 2014f 2015f 2016f 139.60 186.00 195.76 206.97 218.25 230.08 242.50 255.45 6.24 33.24 5.25 5.73 5.45 5.42 5.40 5.34 316.60 428.00 448.89 473.63 498.52 524.64 552.04 580.63 7.10 35.19 4.88 5.51 5.25 5.24 5.22 5.18 e/f = BMI estimate/forecast. Source: General Statistics Office of Vietnam © Business Monitor International Ltd Page 21 Vietnam Freight Transport Report Q4 2012 Maritime And Inland Waterways Ho Chi Minh Leads The Way The Port of Ho Chi Minh is once more expected to lead the way in tonnage growth rate terms over the mid term, while also dwarfing the Port of Da Nang in actual tonnage handled. Year-on-year (y-o-y) tonnage throughput growth at the Port of Ho Chi Minh is set to be a very healthy 7.44% in 2012, to reach 35.94mn tonnes. Over the medium term (2012-2016), the port will handle a y-o-y average of 6.41%. At the Port of Da Nang, average growth is predicted to come in at 3.51% over the forecast period, as tonnage handled at the port rises from 2012's 3.99mn tonnes to 4.60mn tonnes by the end of 2016. Meanwhile, inland waterways will also enjoy relatively healthy growth of 4.89% over the medium term, coming in slightly better than our forecast growth of 5.06% for 2012. Table: Maritime Freight, 2009-2016 2009 Port of Ho Chi Minh City (Saigon New) throughput, tonnes '000 2011e 2012f 2013f 2014f 2015f 2016f 19,140.00 31,132.00 33,450.71 35,937.79 38,299.31 40,675.88 43,117.72 45,626.73 - % change y-o-y Port of Da Nang throughput, tonnes '000 2010 -5.15 62.65 7.45 7.44 6.57 6.21 6.00 5.82 3,132.00 3,303.04 3,868.00 3,987.31 4,135.48 4,284.59 4,437.79 4,595.21 14.21 5.46 17.10 3.08 3.72 3.61 3.58 3.55 - % change y-o-y e/f = BMI estimate/forecast. Source: Port authorities Table: Inland Waterway Freight, 2009-2016 2009 Inland waterway freight, '000 tonnes - % change y-o-y Inland waterway freight, mn tonnes-km - % change y-o-y 2010 2011e 2012f 2013f 2014f 2015f 2016f 135,688.40 142,201.44 148,378.09 155,881.97 163,428.66 171,352.01 179,661.03 188,330.78 2.00 4.80 4.34 5.06 4.84 4.85 4.85 4.83 25,365.20 25,593.49 26,752.09 28,053.76 29,362.86 30,737.30 32,178.64 33,682.55 2.00 0.90 4.53 4.87 4.67 4.68 4.69 4.67 e/f = BMI estimate/forecast. Source: General Statistics Office of Vietnam © Business Monitor International Ltd Page 22 Vietnam Freight Transport Report Q4 2012 Trade Table: Trade Overview, 2009-2016 Real 2009e 2010e 2011e 2012f 2013f 2014f 2015f 2016f Imports, real growth, % yo-y -13.81 22.40 11.30 6.15 5.10 4.70 4.60 4.44 Exports, real growth, % y-o-y -15.00 24.81 11.00 6.30 6.10 6.00 5.83 5.75 Total trade, real growth, % y-o-y -14.40 23.61 11.15 6.23 5.60 5.35 5.22 5.10 73.27 90.90 111.17 125.76 140.48 156.95 174.37 193.40 - % change y-o-y -12.87 24.06 22.29 13.12 11.71 11.72 11.10 10.92 Exports, US$bn 63.63 80.27 97.89 110.90 125.06 141.45 159.00 178.57 - % change y-o-y -9.57 26.14 21.96 13.28 12.77 13.11 12.41 12.31 Total trade, US$bn 136.91 171.17 209.06 236.65 265.54 298.40 333.37 371.97 - % change y-o-y -11.37 25.03 22.14 13.20 12.21 12.37 11.72 11.58 Nominal Imports, US$bn e/f = BMI estimate/forecast. Source: General Statistics Office of Vietnam, BMI Table: Key Trade Indicators, 2009-2016 (US$mn) 2009 2010 2011e 2012f 2013f 2014f 2015f 2016f 2,078.21 2,666.48 3,438.71 3,905.93 4,414.82 5,003.85 5,634.41 6,347.44 -16.26 28.31 28.96 13.59 13.03 13.34 12.60 12.65 1,583.74 3,436.62 3,359.21 3,835.32 4,315.85 4,853.22 5,421.75 6,140.73 -23.61 116.99 -2.25 14.17 12.53 12.45 11.71 13.26 Exports 412.56 594.33 727.85 833.19 947.94 1,080.75 1,222.93 1,381.23 - % change y-o-y -27.00 44.06 22.47 14.47 13.77 14.01 13.16 12.94 2,769.30 3,300.36 4,323.16 4,938.88 5,560.34 6,255.30 6,990.56 7,746.91 -11.66 19.18 30.99 14.24 12.58 12.50 11.75 10.82 Exports 536.96 1,622.95 1,818.39 2,110.56 2,428.78 2,797.12 3,191.42 3,695.74 - % change y-o-y -72.63 202.25 12.04 16.07 15.08 15.17 14.10 15.80 51,400.66 60,547.73 74,088.85 83,838.38 Agricultural raw materials Imports - % change y-o-y Exports - % change y-o-y Ores and metals Imports - % change y-o-y Iron and steel Imports © Business Monitor International Ltd 93,678.54 104,682.67 116,325.01 128,785.82 Page 23 Vietnam Freight Transport Report Q4 2012 - % change y-o-y -5.03 17.80 22.36 13.16 11.74 11.75 11.12 10.71 33,558.08 40,806.05 49,905.21 56,870.98 64,458.15 73,240.02 82,641.10 92,983.62 -1.60 21.60 22.30 13.96 13.34 13.62 12.84 12.51 47,971.77 59,491.63 72,732.80 82,265.21 -12.02 24.01 22.26 13.11 11.70 11.71 11.09 10.82 8,507.05 11,085.59 15,819.79 17,834.37 20,028.66 22,568.48 25,287.37 28,382.74 -32.73 30.31 42.71 12.73 12.30 12.68 12.05 12.24 7,497.36 9,659.44 13,936.54 15,825.26 17,731.54 19,863.30 22,118.70 24,594.26 -39.19 28.84 44.28 13.55 12.05 12.02 11.35 11.19 Manufactured goods Exports - % change y-o-y Imports - % change y-o-y 91,886.24 102,645.30 114,028.37 126,369.45 Fuel Exports - % change y-o-y Imports - % change y-o-y e/f = BMI estimate/forecast. Source: UNCTAD, BMI Table: Main Import Partners, 2002-2009 (US$mn) 2002 2003 2004 2005 2006 2007 2008 2009 Mainland China 2,158.84 3,138.55 4,595.10 5,899.70 7,391.30 12,710.0 0 15,652.1 0 16,441.0 0 Japan 2,504.65 2,982.06 3,552.60 4,074.10 4,702.10 6,188.90 0.00 7,468.09 Korea 2,279.60 2,625.44 3,359.40 3,594.10 3,908.40 5,340.40 7,066.30 6,976.36 955.24 1,282.19 1,858.60 2,374.10 3,034.40 3,744.20 4,905.60 4,514.07 2,533.49 2,875.82 3,618.40 4,482.30 6,273.90 7,613.70 9,392.50 4,248.36 Thailand Singapore Source: IMF's Direction of Trade Statistics Table: Main Export Partners, 2002-2009 (US$mn) 2002 2003 2004 2005 2006 2007 2008 2009 United States 2,453.15 3,939.56 5,024.80 5,924.00 7,845.10 10,104.5 0 11,868.5 0 11,355.8 0 Japan 2,436.96 2,908.60 3,542.10 4,340.30 5,240.10 6,090.00 8,537.90 6,291.81 Mainland China 1,518.33 1,883.12 2,899.10 3,228.10 3,242.80 3,646.10 4,535.70 4,909.03 66.67 74.67 120.20 103.90 155.70 236.90 516.90 2,486.49 1,328.33 1,420.86 1,884.70 2,722.80 3,744.70 3,802.20 4,225.20 2,276.72 Switzerland Australia Source: IMF's Direction of Trade Statistics © Business Monitor International Ltd Page 24 Vietnam Freight Transport Report Q4 2012 Global Oil Products Price Outlook Monetary Stimulus And Production Cuts To Boost Oil Prices In H212 BMI View: Brent has fallen 27% since its March 2012 high of US$126.22 per barrel (bbl) in a dramatic shift that has left oil bears sitting pretty. The rout has been driven by a deteriorating eurozone debt crisis, alongside signs of a Chinese slowdown. Moreover, a market which just months ago looked dangerously tight now seems to be fairly well supplied as Saudi output continues to run close to 10mn barrels a day (b/d) and US crude production hits a 14-year high. We expect demand fears are slightly overdone and that Saudi Arabia will move to cut production in Q3-Q412. As a result, we have cut our 2012 production forecasts for Brent and WTI by just US$5/bbl to US$110/bbl and US$95/bbl, respectively. BMI had expected prices to correct downwards in Q212 (see our online service, April 25, Prices To Slide On Iranian Talks And Easing Fundamentals’), but the sheer size of the fall has been far more dramatic than we anticipated. Many analysts that inform the consensus have been caught offguard. A Reuters poll of 32 forecasters showed that between December 2011 and May 2012, the average price guidance surged from US$105/bbl to US$115/bbl. Many forecasters were raising their targets just as prices were tumbling. Table: BMI Oil Price Forecasts, 2011-2016 2011 2012f 2013f 2014f 2015f 2016f WTI, US$/bbl 95 95 92 91 91 92 Brent, US$/bbl 111 110 102 99 98 96 16 15 10 8 7 4 Brent-WTI Spread (US$) f= BMI forecast. Source: BMI Target Practice Those upward revisions now look inopportune. Brent will need to average around US$115.80/bbl for the remainder of the year in order to hit US$115/bbl; WTI will need to average over US$101/bbl to have any chance of posting an annual average of US$100/bbl. Given the current macroeconomic outlook and oil market fundamentals, that looks increasingly unlikely. We have therefore revised our 2012 price targets down to US$110/bbl for Brent, and US$95/bbl for WTI. In the light of these revisions and changing market dynamics, we have also made downward revisions to our long-term forecasts for both benchmarks. © Business Monitor International Ltd Page 25 Vietnam Freight Transport Report Q4 2012 Looking Oversold Weekly Front Month Brent Crude, US$/bbl & RSI (below) Source: Bloomberg, BMI These adjustments reflect technical factors which show that sentiment has turned excessively bearish in recent weeks, as illustrated by the daily relative strength index (RSI), which last week sunk to the lowest level since Q308. It also reflects two key changes in market fundamentals which we expect to lead a revival in oil prices during H212. First, we expect a steady, if unspectacular, revival in global oil demand. ƒ With only two nuclear reactors approved to resume operations in Q312, Japanese oil demand is set to remain strong. According to the IEA, the power sector consumed 500,000b/d of oil products in April 2012, a y-o-y increase of 40%. Oil consumption by utilities is expected to hit 600,000-700,000b/d during the summer, breaking what would otherwise be a very sharp fall in overall OECD demand. © Business Monitor International Ltd Page 26 Vietnam Freight Transport Report Q4 2012 ƒ Refineries are set to increase throughput as new facilities in China and India ramp up utilisation rates and the spring maintenance season comes to a close. The IEA expects global runs to rise by an estimated 1.6mn b/d in Q312 to 75.9mn b/d, up 345,000 b/d y-o-y. ƒ The recent correction in US gasoline prices could help stem declining demand for the fuel. According to the IEA, gasoline consumption fell by an average of 3.5% y-o-y in Q2-411. In March and April 2012 the fall was a much less dramatic 1.3% and 1.1% respectively. Falling Prices To Drive Revival In Demand Weekly US Regular Conventional Retail Gasoline Prices (US$/Gallon) Source: EIA, BMI ƒ Lastly, and perhaps most importantly, lower oil prices have helped to ease inflation fears and thereby increase the likelihood of further monetary stimulus. BMI’s Global Strategy team expects the US Federal Reserve to announce QE3 in late July with some form of monetary expansion from the European Central Bank likely around the same time. Given recent PMI disappointments, Beijing may also be considering rate cuts of its own. © Business Monitor International Ltd Page 27 Vietnam Freight Transport Report Q4 2012 Oil Price Decline Easing Inflationary Pressures Brent Crude Oil And BMI Global Inflation Series (% chg y-o-y) Source: Bloomberg, BMI The main risk to this view comes from the eurozone. While positive Greek elections and a US$100bn bailout for Spain’s banks have helped to pull the currency block back from the brink once again, there is no sign that policymakers are closer to making lasting progress on the serious fiscal and economic reforms that will be required to put an end to the crisis. Our view is that the threat of disorderly disintegration will remain the only catalyst to a meaningful restructuring. The odds of a break-up have therefore worsened to 50/50 (see BMI’s Eurozone Crib Sheet on our online service, June 22). The impact of a break-up on global oil demand would depend largely on its contagion effects. If, for example, Greece underwent a managed exit then it would be unlikely to affect the global balance. With the UK, Spain, Greece and Italy all in recession, consensus is that European demand is already set to fall 2-3% in 2012. Even if that doubled to 6% in the face of a Greek exit, it would shave around 900,000b/d, or just 1%, off global demand according to our calculations. If, by contrast, we were to see contagion force one or more of the larger eurozone economies into a disorderly exit it would be likely to kick-start a second financial crisis and global recession that would result in a dramatic collapse in oil consumption and prices to levels not seen since the collapse of Lehman Brothers in September 2008. Tactical Retreat While we expect demand to remain steady if unspectacular, we anticipate big changes on the supply-side. Indeed, the second key factor we expect to support a price recovery in H212 is a cut to Saudi Arabian © Business Monitor International Ltd Page 28 Vietnam Freight Transport Report Q4 2012 production, pulling OPEC output back towards its quota of 30mn b/d. The cartel has been exceeding its official ceiling by 1.6-1.8mn b/d in a bid to offset the impact of new Iranian sanctions and prevent high prices from damaging the fragile global economic recovery. That policy is soon likely to have run its course given that the market now looks much better supplied and prices have tumbled well below what Saudi oil minister Ali al-Naimi has identified as a ‘target price’ of US$100/bbl. Moving The Market – Saudi Oil Production (RHS) & Total OPEC Oil Production (LHS), 000b/d Source: Bloomberg, BMI We expect a Saudi adjustment to come in late Q312 or early Q412 once more is known about the impact of new US and EU sanctions on Iran. Our core view remains that sanctions will have a limited impact on the global market as many refiners have already made the necessary adjustments to crude supplies. Turkey’s Turpas, India’s MPCL, and China’s Sinopec have announced big cuts to shipments. South Korea has axed cargoes by 40%, while Spain, Greece, the UK, the Netherlands and South Africa have already completely suspended imports. Indeed, Iran admitted for the first time on June 28 2012 that its exports were being affected by the new measures. According to a NIOC spokesperson, volumes have fallen 20-30% from ‘normal’ levels of 2.2mn b/d. Going Nuclear The main risk to this view comes from an escalation in tensions relating to Iran’s nuclear programme. Talks continue but a lasting agreement is likely to remain elusive. Our current oil price scenario does not price the ‘security premium’ that would arise from renewed fears over a confrontation with the West and/or Israel. That remains a big risk despite our view that military action is highly unlikely before the US Presidential elections in November 2012. © Business Monitor International Ltd Page 29 Vietnam Freight Transport Report Q4 2012 A further upside risk could arise from the EU’s new financial sanctions that will prevent shippers of Iranian crude from obtaining insurance and reinsurance. Japan authorities have passed a bill allowing the government to provide liability cover directly. China and India are also considering sovereign guarantees. If these measures prove inadequate or ineffective then cuts to Iranian imports could be more dramatic than we anticipate, raising upside risks to prices (especially for intermediate grades such as Russia’s Urals that are an easy substitute for Iran’s main export grade). While this is a clear risk, we anticipate the market now has sufficient spare capacity to absorb a larger than expected fall in Iranian shipments even with a cut to Saudi volumes. Production continues to rise in non-OPEC countries, especially in North America, reducing the ‘call’ on OPEC. OECD crude stocks are also back into line with the five-year average. Indeed, falling OECD demand means stock ‘forward cover’ is now nearly two days above the five-year average of 57.5 days. Stock Rises Take Their Toll On WTI – Weekly Front Month WTI Contract, US$/bbl & RSI (below) Source: Bloomberg, BMI © Business Monitor International Ltd Page 30 Vietnam Freight Transport Report Q4 2012 Perhaps just as important is rising non-OECD stockpiling. A great deal of Saudi Arabia’s extra production has gone into the country’s giant international storage hubs. Its crude oil stocks hit a record high of 284mn bbl in April 2012, according to Joint Oil Data Initiative, up from 258mn bbl in the same month a year ago. China is also stockpiling with reports that some 85-110mn bbl of additional Strategic Petroleum Reserve storage capacity is likely to become available in H212. These extra stocks will help to insulate the global market from the impact of new sanctions should they prove more effective than anticipated. Counter Attack With Saudi likely to cut production and new monetary stimulus looking increasingly likely we expect that oil prices may have completed their retreat and are set to rise again in H212. It’s unlikely to be an easy ride and, given the big demand-side and geopolitical risks still in evidence, trading is set to remain very volatile. Nevertheless, we anticipate a sustained recovery with a return to US$100/bbl likely by Q412. Depending on the impact of new sanctions and Saudi production cuts, prices could even rise beyond that by year-end. We have therefore chosen to cut our 2012 forecasts by just US$5/bbl to US$110/bbl for Brent and US$95/bbl for WTI. © Business Monitor International Ltd Page 31 Vietnam Freight Transport Report Q4 2012 Political Outlook Domestic Politics Growing Signs Of Public Unrest BMI View: The Vietnamese government's heavy-handed clampdown on political dissidents in recent years reveals an increasingly unstable political environment. Furthermore, we have witnessed little indication that the politburo will begin to relax its stance on perceived challenges to its authority in the near term. Although we believe a major political upheaval is unlikely to materialise for now, we warn that unless the government relaxes its control over the media and implements deep democratic reforms, Vietnam's political environment is poised to deteriorate, putting the country at risks of major public unrest. The Vietnamese government has become increasingly aggressive in clamping down on political dissidents, independent journalists and internet activists in recent years. From our perspective, the growing number of arrests made by the government since 2011 not only indicates mounting pressure for democratic reforms, but also reveals an increasingly unstable political environment in Vietnam. We believe that Hanoi's stance towards allowing democratic reforms over the coming years will play a crucial role in determining public confidence in the country's single-party system of government, which the ruling Communist Party of Vietnam (CPV) has fervently tried to defend over the decades. However, we have witnessed little indication that the politburo will begin to relax its heavy-handed stance towards freedom of speech and information, political debates and other perceived challenges to its authority in the near term. No Signs Of Political Upheaval For Now The probability of a major political upheaval that threatens the Communist Party of Vietnam (CPV)'s grip on power remains remote for now. However, we note that the adoption rate of the internet is expected to increase steadily over the coming years, in particular among the younger, highly educated and technologically adept population. This means that the government will face an increasingly insurmountable task of maintaining absolute control over the flow of information and silencing any voice of political dissent in the country. The number of internet users in Vietnam reached around 30mn (or around 33% of Vietnam's population) as of 2011 and the rapid growth of social media tools is expected to further strain the government's capability to control public opinion going forward. We believe that the more Hanoi attempts to toughen its stance on political dissent over the coming years – which could mean that security forces will be given greater powers to suppress political demonstrations by force – the more the government is likely to provoke action by the international community. International Rights Group Demand Change In recent years, Vietnam has increasingly become a hot target for international rights groups seeking to © Business Monitor International Ltd Page 32 Vietnam Freight Transport Report Q4 2012 pressure the country into stopping widespread abuse of human rights. Vietnam is ranked 172 out of 179 countries according to the 2011-2012 World Press Freedom Index published by Reporters Without Borders, an international non-governmental organisation that advocates freedom of the press and freedom of information. According to another report published by Human Rights Watch, at least 24 rights activists and 27 political dissidents were convicted and imprisoned for violating laws including 'conducting propaganda against the state', 'undermining national unity' and 'subversion of the administration'. International rights groups have accused the Vietnamese government of exploiting these vaguely defined laws to imprison hundreds of political dissidents and democracy activists over the last decade. Local rights activists, who documented widespread cases of land rights violations where resident farmers in the rural regions were forcefully evicted from their homes without appropriate compensation, also face the risk of arrest and imprisonment. Looking ahead, we believe that the CPV's absolute commitment towards maintaining its ideology of a single-party state will continue to lead to the oppression of political dissidents over the coming years. This explains our relatively low score of 57.5 (out of a score of 100) for the 'social stability' subcomponent of our short-term political risk ratings for Vietnam. This suggests to us that unless the government relaxes its control over the media and implements deep democratic reforms, the political environment in Vietnam is poised to deteriorate, putting the country at risks of major public unrest. Long-Term Political Outlook Key Political Challenges Over The Coming Decade BMI View: Vietnam's biggest political question over the coming decade is whether one-party rule under the Communist Party of Vietnam (CPV) will face growing calls for democratisation, as was the case in other major South East Asian countries. While our core scenario envisages the CPV transforming itself into a technocratic administration, it faces major economic challenges which if mismanaged could lead to widespread unrest. On the foreign policy front, we expect an increasingly powerful China to drive Vietnam further into the camp of Asian nations with close relations with the US. Although Vietnam is a politically stable country, we view the ruling Communist Party of Vietnam (CPV)'s monopoly on political power as unsustainable over the long term. One of the CPV's biggest challenges will be managing Vietnam's transformation into a more pluralistic society over the coming decade and beyond. Indeed, the CPV's strict control of the media and political opinion is already cracking, with a growing number of internet bloggers becoming increasingly critical of government policy. Challenges And Threats To Stability Inflation And Devaluation As Drivers Of Discontent: As in neighbouring China, economic growth has brought sizeable material gains for the majority of the population. However, the Vietnamese government's loose fiscal and monetary policies have led to high levels of inflation and repeated © Business Monitor International Ltd Page 33 Vietnam Freight Transport Report Q4 2012 devaluations of the dong in recent years, which have eroded the real value of wages and savings. A failure to contain inflation at a reasonable level and uphold the real value of the dong could undermine confidence in the regime. Divisions Within The Communist Party: High inflation and devaluation have opened schisms within the CPV leadership between proponents of continued economic reform and a more conservative wing which believes that a deceleration or even reversal of reform policies would benefit macroeconomic stability. Ethnic And Regional Tensions: Vietnam is relatively homogeneous, with ethnic Viet comprising almost 90% of the population. Ethnic minorities in the Central Highlands have previously objected to government policies promoting migration of ethnic Viet into the highland region. While protests have died down, they could emerge in future. A potential spark could be the Chinese-financed bauxite mining project in Lam Dong and Dak Nong provinces, which is currently causing widespread environmental damage and raising ire among the local population. There are also continued cultural differences between the population of the Red River Delta around the capital Hanoi in the north and the population of the Mekong Delta in the south, where Ho Chi Minh City (formerly Saigon, the ex-capital of South Vietnam) remains the commercial capital. While the general perception is that northerners are more supportive of socialist rule and the southerners more inclined to support continued economic reform, a strong concept of national unity nevertheless exists in both parts of the country. Demands For Increased Religious Rights: One of the most concerted challenges against the CPV in recent years has come from Catholics wishing for a stronger recognition of their right to worship in what is still a nominally atheist country. Hanoi has ceded to pressure from the US to allow a higher degree of religious freedom, but is wary of the Catholic Church becoming a rallying point of political opposition, as was the case in Communist Poland and the Philippines during the Marcos dictatorship. The Vietnamese government has thus slapped heavy sentences on Catholic activists who have extended their fight to encompass increased political freedom. Relations With China: Relations with China have become increasingly strained in recent years as Beijing has expanded its economic, political and military influence southwards. The main point of contention is the conflicting territorial claims for the Paracel and Spratly Islands in the South China Sea. Vietnam's relations with China have also been strained by the large bilateral trade deficit it runs with its northern neighbour, which amounts to more than 10% of GDP, and criticism of a Chinese-financed bauxite mining project in the central highlands. That said, the regimes in Beijing and Hanoi share the same ideological base and political system, and contacts between their respective politburos have decreased tension between them. Nonetheless, we © Business Monitor International Ltd Page 34 Vietnam Freight Transport Report Q4 2012 believe Vietnam will seek increasingly close relations with the US – and potentially India and Japan – in the defence sphere, as a hedge against China's rising power in the region. Vietnam's long-term political risk rating of 53.8/100 is weighed down by a score of 27.6 in the 'characteristics of polity' subcomponent. This is due to the limited independence of the judiciary, the ban on political parties other than the CPV and severe limitations on the media and civil society. While these factors may presage stability in the short term, the experience of other South East Asian nations shows that rising wealth and development later lead to calls for political liberalisation. We have thus drawn up three scenarios for Vietnam's political future: Scenarios For Political Change Core Scenario – CPV Turns Into A Technocratic Regime: Our core scenario is for the CPV to shift increasingly towards a technocratic form of government aimed at maintaining high economic growth levels and an acceptable distribution of wealth across the population. Ambitious young Vietnamese are already joining the CPV as a career path and as a means to serve their country rather than because of ideological convictions. We thus foresee a continuation of economic reforms in spite of the criticism emanating from older more traditionally minded party members. However, intermittent periods of harsh repression against pro-democracy activists and other government critics are a strong indication that political liberalisation is not in the offing. Best-Case Scenario – Gradual Political Liberalisation: Our best-case scenario is the above scenario combined with a gradual move towards political liberalisation involving an expanded role for the National Assembly, greater scope for differing opinion within the CPV, increased political competition at elections, and greater media freedom. This scenario would see Vietnam moving from a one-party system towards a dominant-party system of the kind seen in neighbouring Cambodia, Malaysia and Singapore, where elections are held, but where only the ruling party has a realistic chance of winning them. Looking even further beyond the horizon, the experiences of South Korea, Taiwan and Japan have shown that even dominant-party systems eventually give way to opposition rule. However, in Vietnam's case this may be more than a decade away. Worst-Case Scenario – Mass Unrest And Violent Suppression: Our worst-case scenario involves severe policy missteps that lead to a period of prolonged economic upheaval with high unemployment and rapid inflation eroding wealth. This would significantly strengthen the case for regime change, as advocated by the pro-democracy movement. Faced with widespread street protests and an all-out challenge to one-party rule, we believe at least part of the CPV leadership would support a crackdown on demonstrators by security forces in order to stay in power. A violent suppression of street protests as seen in Beijing in 1989 and in Myanmar in 2007 could easily result in a number of deaths and the imposition of sanctions by the international community. If so, Vietnam would likely face not only diplomatic isolation but also economic weakness as exports and foreign direct investment tumble. © Business Monitor International Ltd Page 35 Vietnam Freight Transport Report Q4 2012 Macroeconomic Outlook Deteriorating Economic Data Prompts Growth Downgrade BMI View: Recent economic data suggest that the outlook for Vietnam's economic growth has deteriorated significantly in recent months. Furthermore, the State Bank of Vietnam (SBV)'s indication that it will normalise interest rates only by Q412 (we were expecting that the monetary easing cycle would be fully completed by Q312), means that credit conditions will remain tight throughout the year. Consequently, we have downgraded our real GDP growth forecast from 5.8% to 5.2% for 2012. Recent data suggest that economic activity will continue to moderate over the coming quarters, presenting significant downside risks to our already below consensus forecast of 5.8% for real GDP growth in 2012. The State Bank of Vietnam (SBV)'s monetary easing cycle is also turning out to be less aggressive than we have anticipated. SBV governor Nguyen Van Binh announced during a press conference on April 11 that the central bank is planning to cut its policy rate (refinancing rate) by 100 basis points (bps) every quarter towards the end of the year. Although this is largely in line with our core view that the SBV will normalise interest rates by introducing 400bps of rate cuts in 2012 (the SBV has already introduced 200bps worth of rate cuts since the beginning of the year), we were previously expecting that the monetary easing cycle would be fully completed by Q312. Given the SBV's latest indication to gradually unwind its tight monetary policy and to normalise interest rates only by Q412, we are revising down our expectations for Vietnam's economic growth. We now expect real GDP growth to come in at a slightly more subdued 5.2% for 2012 (down from our previous forecast of 5.8%). Industrial Production And Manufacturing Sector Growth Slow Looking at industrial production data, we note that there is conclusive evidence of a sustained slowdown in production activity since the SBV introduced a wave of aggressive monetary policy measures aimed at cooling the economy in 2011. Industrial production expanded at just 6.5% year-on-year (y-o-y) in March, compared with an average 8.8% over the past six months and average 10.4% over the past 12 months. The slowdown in industrial activity since the beginning of the year has also been confirmed by a significant decline in manufacturing sector growth, which came in at a weak 4.9% y-o-y in Q112, compared to 10.0% in Q411. We believe that this is partly due to cooling external demand for new manufacturing orders, a trend that is also evident in neighbouring manufacturing export-oriented economies such as Thailand and Malaysia. Given that the manufacturing sector makes up a significant 21.7% share of Vietnam's GDP and that tight credit conditions (average lending rates remain exceptionally high at around 14-16%) will continue to be a major drag on manufacturing sector growth, we believe that headline growth will come in significantly below Bloomberg consensus of 6.0%. Outlook For Private Consumption Looking Weak Turning to other economic indicators, we note that latest retail sales and domestic vehicle sales data remain relatively weak. While retail sales grew at a 27-month low of 21.8% y-o-y in March, domestic © Business Monitor International Ltd Page 36 Vietnam Freight Transport Report Q4 2012 vehicle sales contracted for the sixth consecutive month at -21.4% y-o-y. These figures reinforce our view that uncertainties over unemployment in the manufacturing sector and corporate earnings will prompt households and businesses to cut back on spending and investment, resulting in overall weak domestic demand growth over the coming months. We also note that according to figures published by the Ministry of Planning and Investment (MPI), around 12,000 enterprises in Vietnam have either declared bankruptcy or completely went out of business as of Q112. We expect this surge in bankruptcies to result in a higher unemployment rate over the coming months, which should put further downside pressure on household spending. Corporate Tax Cut Unlikely To Boost Investment In terms of our outlook on Gross Fixed Capital Formation (GFCF) growth, we believe that the government's plan to slash corporate income tax by 30% for small- and medium-sized enterprises (SMEs) is unlikely to have a significant impact on private sector investment. Given an abundant stock of spare capacity due to the large number of bankruptcies in recent months and a much more moderate outlook for economic growth ahead, we believe that large companies will delay investing in new projects over the coming months. Furthermore, the government's newly announced tax cut will only apply to SMEs, which tend to be more conservative towards expanding production during periods of economic uncertainties due to their relatively weak balance sheets and cash flows in comparison to multi-national companies. Accordingly, we expect GFCF growth to remain at a relatively subdued 5.0% in 2012. Public Spending To Increase In Bid To Support Economy There is increasing evidence that total public expenditure will exceed the government's allocated budget this year. According to a statement published by the Ministry of Planning and Investment, the National Assembly is expected to approve an additional VND4.5trn (US$0.2bn) in funds to be spent on five new infrastructure projects including two bridges, a university dormitory and an oncology hospital. We note that that this will add to a healthy pipeline of infrastructure projects that already in the construction phase and are expected to be completed over the coming years. The government has also pledged to maintain welfare subsidies in response to a challenging economic outlook in 2012. These factors suggest to us that public spending will still grow at a robust pace of 5.6% this year, albeit lower in comparison with 5.9% in 2011. Nonetheless, this should provide some support for overall headline growth in 2012. Still Expecting A Trade Deficit The latest figures published by the General Statistics Office showed a mild trade surplus of US$0.4mn in March, compared with an average monthly trade deficit of US$0.7mn in 2011. We expect trade import growth to cool further in 2012 as Vietnamese manufacturers cut back on intermediate goods imports, in line with our outlook for subdued production activity and moderating economic growth throughout the year. However, we continue to see external demand remaining subdued in the months ahead and we expect new exports orders to remain stagnant in 2012. This should in turn lead to an overall slowdown in net exports. Accordingly, we see net exports growing at just 6.0% in 2012, significantly lower compared with 16.9% in 2011. © Business Monitor International Ltd Page 37 Vietnam Freight Transport Report Q4 2012 Scope For Early Rate Cuts Recent economic data reinforce our core view of a moderation in Vietnam's real GDP growth from 5.9% in 2011 to 5.2% in 2012 and that inflationary pressure should continue to wane on the back of cooling economic activity. The recent round of weak economic data should, however, give the SBV more scope for early rate cuts in Q312 rather than taking its monetary easing cycle late into the final quarter. Nonetheless, given that it will take around six to eight months for the effects of the SBV's monetary policy to fully feed through to the economy, this means that we will only see a pickup in economic activity in H113. Accordingly, we would consider revising our real GDP growth for 2013 upwards should we see signs of a robust economic recovery taking place towards the end of the year. Over the longer term, we remain bullish on Vietnam's attractive growth story and we believe that the government's renewed focus on maintaining macroeconomic stability will be positive for investor confidence and economic growth. Table: Vietnam – Economic Activity, 2011-2016 2011e 2012f 2013f 2014f 2015f 2016f Nominal GDP, VNDbn 2 2,487,631.9 2,847,455.0 3,192,260.2 3,609,813.5 4,068,807.3 4,588,126.0 Nominal GDP, US$bn 2 120.4 135.4 153.5 175.5 200.1 228.3 5.9 5.2 6.5 7.2 7.3 7.4 1,357 1,509 1,693 1,917 2,165 2,447 88.8 89.7 90.7 91.6 92.4 93.3 Industrial production 1,4 index, % y-o-y, ave 10.9 8.0 12.0 14.0 13.0 12.0 Unemployment, % of 4 labour force, eop 4.5 5.0 4.8 4.7 4.6 4.5 Real GDP growth, % 2 change y-o-y GDP per capita, US$ Population, mn e 2 3 f 1 2 Notes: BMI estimates. BMI forecasts. at 1994 prices; Sources: Asian Development Bank, General Statistics 3 4 Office. World Bank/UN/BMI; General Statistics Office. © Business Monitor International Ltd Page 38 Vietnam Freight Transport Report Q4 2012 Company Profiles Vietnam Airlines Cargo Strengths ƒ Vietnam Airlines Cargo is the main air cargo provider in Vietnam. ƒ The recent green light given to the purchase of Jetstar Pacific will only strengthen the company's domestic position. Weaknesses ƒ Unlike its peers, Vietnam Airlines Cargo does not have a freighter fleet and is reliant on using the belly hold of its parent company's planes. Opportunities ƒ The air carrier is well placed to benefit from Vietnam's growing role in the trade sector. The country has flooded money into the development of the country's port sector, but BMI believes aviation also stands to benefit. ƒ Vietnam Airlines is to reportedly run flights between the UK and Vietnam, which could result in cargo being transported in the belly holds of aircraft in the future. Threats ƒ While the sector has recovered well, the outlook for global air freight remains volatile, especially with oil prices at their current high levels. Overview Vietnam Airlines Cargo's parent Vietnam Airlines began operations in 1956 serving the domestic market. In 1993, it was established as Vietnam's national carrier. The cargo carrier's operations are concentrated in Asia, catering for the domestic market. The airline operates its cargo business by transporting goods in the belly holds of its passenger planes. Strategy Operating out of hubs in Hanoi and Ho Chi Minh City, Vietnam Airlines Cargo has developed a network of both domestic and international routes. Within Vietnam the carrier lands at 18 domestic airports. It is heavily focused on Asia, with three freight flights to neighbouring Thailand and routes servicing: China, Hong Kong, Japan, South Korea, Taiwan, Philippines, Malaysia and Indonesia. The air freight carrier is therefore able to cater for all five of Vietnam's top five import partners (China, Japan, Korea, Thailand and Singapore). Vietnam Airlines Cargo's expansion into China offers a launch pad for further services to other Chinese airports. It has also developed routes to Australia, with freight connections to Melbourne and Sydney. Allied to Vietnam Airlines Cargo's cargo links to three destinations in Europe (Paris, Frankfurt and Moscow), parent company Vietnam Airlines began operating a direct air route to the UK in the last months of 2011. The service flies to Gatwick Airport, with cargo space available in the belly holds of planes going to and from London. Financial Results 2011 Not available at the time of writing. © Business Monitor International Ltd Page 39 Vietnam Freight Transport Report Q4 2012 Latest Activity SkyTeam Alliance Adds Saudi Flag Carrier SkyTeam, the global airline alliance, welcomed Saudi Arabia flag carrier Saudia at the end of May 2012 as the 16th member of the network, providing potential openings for Vietnam Airlines in terms of freight opportunities. Saudia adds a total of 51 new destinations to SkyTeam's global network, Vietnam Airlines said, including Islamabad, Pakistan; Colombo, Sri Lanka; and Alexandria, Egypt. 

 Michael Wisbrun, SkyTeam's managing director, explained: 'Saudia's membership adds value to the alliance by opening up the considerable Saudi Arabian market to our customers. We are responding to passenger demand for increased travel choice within the Middle East by adding a significant player from the region. This allows us to offer more destinations, while continuing our focus on enhancing products and services for our global customers.' On June 18 2012, Bloomberg reported that Pham Ngoc Minh, chief executive of Vietnam Airlines Corporation, had announced that the company is seeking an international financial adviser for its upcoming privatisation process, with interested parties urged to submit their application between June 25 and July 24. © Business Monitor International Ltd Page 40 Vietnam Freight Transport Report Q4 2012 Vinatrans Strengths ƒ Vinatrans is a diversified logistics company, offering a wide variety of services. Weaknesses ƒ The company is exposed to the weaknesses inherent in state-owned companies, such as inefficiency and underfunding. Opportunities ƒ BMI has identified intra-Asia trade as a market to watch, as consumer demand in the traditional markets of the US and Europe remains sluggish. ƒ Vietnam is part of the ASEAN 5. As such, it should see an uptick in trade as a result of the group's free trade agreement (FTA) with China. Threats ƒ ƒ Rising fuel prices pose a threat to logistics companies' profit margins. The rate of economic growth in Vietnam has far outpaced the country's infrastructure. Road, railways and ports are all badly in need of upgrades. Overview Vinatrans is a state-owned, Vietnamese freight forwarding company, providing door-to-door logistics worldwide and a number of related services. These include air freight and sea freight forwarding (including customs clearance, cargo surveying, insurance, air consolidation for inbound and export cargos, and exhibition or project handling), shipping (including chartering, husbandry, crewing, and brokerage services) as well as warehousing and cold storage provision. The company is 100% owned by the Vietnamese Ministry of Trade and acts as an agent for several foreign organisations including BAX Global, Hapag-Lloyd Container, Zim Israel Navigation Company and Panalpina. The firm's warehousing and storage facilities in 2 Vietnam include: a 2,500 square metre (m ) Container Freight Station (CFS) for sea and air 2 cargo; a joint venture (JV) cold storage facility of 2,800m , run by Vinatrans and Konoike 2 2 Transport Company of Japan; 40,000m of covered warehousing; and 50,000m of open storage. Strategy BMI has been following the trend of increasing investment in the Vietnamese port sector as the country establishes itself as a centre of production, particularly for the textile industry. We caution, however, that as many factories are situated inland, investment in the supply chain as a whole, including road, air, rail and storage, are needed to deal with increasing demand. Having declined by 10% y-o-y in 2009, Vietnamese exports returned to growth in 2010. The volume of imports and exports is forecast to grow by 20% in 2011. According to the Civil Aviation Authority of Vietnam, air freight to and from the country increased by 37% y-o-y to reach 340,000 tonnes in 2010. As such, we see growth opportunities for Vinatrans in the sector. We note that several air cargo carriers have already spotted the potential in the market. Chinese carrier Jade Cargo has recently opened the first air freight link between Vietnam and Amsterdam. In 2009 Lufthansa Cargo, the air freight subsidiary of Deutsche Lufthansa, launched a weekly direct service between Frankfurt and Hanoi, which it is considering doubling in the future to keep up with demand. From late-June 2011, Vietnam Airlines is planning to increase its flights between Hanoi and Paris, Hanoi © Business Monitor International Ltd Page 41 Vietnam Freight Transport Report Q4 2012 and Moscow, and Hanoi and Frankfurt, which could potentially mean an increase in the amount of freight carried on the routes. Financial Results Vinatrans has reported consolidated earnings for the second quarter and first half of 2010. In Q210, the company made a net profit of VND5.06bn on revenues of VND109.42bn, versus VND3.42bn and VND62.99bn respectively in the same period of 2009. The company made a net profit of VND9.94bn in H110, down 14.16% on a year earlier. Net revenues, however, rose 44.05% y-o-y to VND189.08bn during the period. Six-month earnings per share (EPS) were VND1,816, compared with VND2,117 in the same period in 2009. The company was targeting pre-tax profit of VND23bn on revenues of VND300bn for 2010, and a dividend payout equivalent to VND1,500 per share for the year. Latest Activity Vietnam Freight Forwarders Association Fears Logistics Companies Too Small According to the Vietnam Freight Forwarders Association (Viffas), Vietnam now has more than 1,000 enterprises which provide logistics services, most of which (about 600-700 enterprises) are located in Ho Chi Minh City. Commenting on the capabilities of the enterprises, Mai Xuan Thieu, head of the Vietnam Logistics Institute, said the majority have a modest capital of VND1-1.5bn. As a result, most Vietnamese logistics firms act as agents for multinational groups. Thieu believes many are incapable of providing enough transport services in Vietnamese territory with competitive costs. Currently, Vietnamese companies can only meet 25% of total domestic demand. BMI believes this is a cause for concern, given that we expect the country's trade volumes to continue growing. © Business Monitor International Ltd Page 42 Vietnam Freight Transport Report Q4 2012 Vietnam Demographic Data Demographic analysis is a key pillar of BMI's macroeconomic and industry forecasting model. Not only is the total population of a country a key variable in consumer demand, but an understanding of the demographic profile is key to understanding issues ranging from future population trends to productivity growth and government spending requirements. The accompanying charts detail Vietnam's population pyramid for 2011, the change in the structure of the population between 2011 and 2050 and the total population between 1990 and 2050, as well as life expectancy. The tables show key datapoints from all of these charts, in addition to important metrics including the dependency ratio and the urban/rural split. Source: World Bank, UN, BMI © Business Monitor International Ltd Page 43 Vietnam Freight Transport Report Q4 2012 Table: Vietnam's Population By Age Group, 1990-2020 ('000) 1990 1995 2000 2005 2010 2012f 2015f 2020f 67,102 74,008 78,758 83,161 87,848 89,730 92,443 96,355 0-4 years 9,340 9,212 7,002 6,776 7,186 7,186 7,026 6,529 5-9 years 8,685 9,193 9,124 6,921 6,703 6,885 7,143 6,982 10-14 years 7,504 8,604 9,142 9,038 6,844 6,539 6,668 7,104 15-19 years 7,127 7,408 8,535 9,064 8,963 8,161 6,806 6,628 20-24 years 6,492 7,003 7,305 8,420 8,954 9,115 8,892 6,745 25-29 years 5,893 6,361 6,879 7,167 8,284 8,602 8,862 8,803 30-34 years 4,884 5,779 6,250 6,765 7,058 7,475 8,202 8,779 35-39 years 3,965 4,794 5,688 6,163 6,677 6,770 6,991 8,131 40-44 years 2,420 3,884 4,710 5,614 6,086 6,304 6,609 6,925 45-49 years 2,039 2,358 3,802 4,653 5,548 5,761 6,012 6,536 50-54 years 1,933 1,968 2,287 3,739 4,580 4,936 5,449 5,914 55-59 years 1,946 1,843 1,887 2,201 3,617 4,001 4,446 5,305 60-64 years 1,544 1,822 1,737 1,767 2,076 2,573 3,455 4,268 65-69 years 1,283 1,391 1,659 1,582 1,621 1,649 1,927 3,233 70-74 years 919 1,084 1,194 1,439 1,389 1,384 1,438 1,729 1,127 1,305 1,559 1,852 2,264 2,388 2,516 2,743 Total 75+ years f = BMI forecast. Source: World Bank, UN, BMI © Business Monitor International Ltd Page 44 Vietnam Freight Transport Report Q4 2012 Table: Vietnam's Population By Age Group, 1990-2020 (% of total) 1990 1995 2000 2005 2010 2012f 2015f 2020f 0-4 years 13.92 12.45 8.89 8.15 8.18 8.01 7.60 6.78 5-9 years 12.94 12.42 11.58 8.32 7.63 7.67 7.73 7.25 10-14 years 11.18 11.63 11.61 10.87 7.79 7.29 7.21 7.37 15-19 years 10.62 10.01 10.84 10.90 10.20 9.10 7.36 6.88 20-24 years 9.68 9.46 9.27 10.13 10.19 10.16 9.62 7.00 25-29 years 8.78 8.60 8.73 8.62 9.43 9.59 9.59 9.14 30-34 years 7.28 7.81 7.94 8.14 8.03 8.33 8.87 9.11 35-39 years 5.91 6.48 7.22 7.41 7.60 7.55 7.56 8.44 40-44 years 3.61 5.25 5.98 6.75 6.93 7.03 7.15 7.19 45-49 years 3.04 3.19 4.83 5.59 6.32 6.42 6.50 6.78 50-54 years 2.88 2.66 2.90 4.50 5.21 5.50 5.89 6.14 55-59 years 2.90 2.49 2.40 2.65 4.12 4.46 4.81 5.51 60-64 years 2.30 2.46 2.21 2.12 2.36 2.87 3.74 4.43 65-69 years 1.91 1.88 2.11 1.90 1.85 1.84 2.08 3.36 70-74 years 1.37 1.46 1.52 1.73 1.58 1.54 1.56 1.79 75+ years 1.68 1.76 1.98 2.23 2.58 2.66 2.72 2.85 f = BMI forecast. Source: World Bank, UN, BMI © Business Monitor International Ltd Page 45 Vietnam Freight Transport Report Q4 2012 Table: Vietnam's Key Population Ratios, 1990-2020 1990 1995 2000 2005 2010 2012f 2015f 2020f 75.5 71.2 60.5 49.7 42.1 40.9 40.6 41.6 Dependent population, 2 total, '000 28,859 30,790 29,679 27,609 26,006 26,031 26,717 28,321 Active population, % of 3 total 57.0 58.4 62.3 66.8 70.4 71.0 71.1 70.6 Active population, total, 4 '000 38,243 43,218 49,079 55,552 61,842 63,699 65,725 68,034 Youth population, % of 5 total working age 66.8 62.5 51.5 40.9 33.5 32.4 31.7 30.3 Youth population, total, 6 '000 25,529 27,009 25,268 22,735 20,732 20,610 20,837 20,615 Pensionable population, 7 % of total working age 8.7 8.7 9.0 8.8 8.5 8.5 8.9 11.3 Pensionable population, 8 '000 3,330 3,780 4,411 4,874 5,274 5,421 5,881 7,706 Dependent ratio, % of 1 total working age 1 2 3 f = BMI forecast; 0>15 plus 65+, as % of total working age population; 0>15 plus 65+; 15-64, as % of total 4 5 6 7 8 population; 15-64; 0>15, % of total working age population; 0>15; 65+, % of total working age population; 65+. Source: World Bank, UN, BMI Table: Vietnam's Rural And Urban Population, 1990-2020 1990 1995 2000 2005 2010 2012f 2015f 2020f Urban population, % of total 20.3 22.2 24.3 26.4 28.7 29.7 31.2 33.9 Rural population, % of total 79.7 77.8 75.7 73.6 71.3 70.3 68.8 66.1 Urban population, '000 13,438.6 16,201.6 18,865.4 21,940.1 25,212.5 26,649.9 28,842.1 32,664.4 Rural population, '000 52,761.4 56,778.4 58,770.0 61,166.2 62,635.9 63,080.4 63,600.5 63,690.7 f = BMI forecast. Source: World Bank, UN, BMI © Business Monitor International Ltd Page 46 Vietnam Freight Transport Report Q4 2012 BMI Methodology How We Generate Our Industry Forecasts BMI’s industry forecasts are generated using the best-practice techniques of time-series modelling. The precise form of time-series model we use varies from industry to industry, in each case being determined, as per standard practice, by the prevailing features of the industry data being examined. For example, data for some industries may be particularly prone to seasonality, i.e. seasonal trends. In other industries, there may be pronounced non-linearity, whereby large recessions, for example, may occur more frequently than cyclical booms. Our approach varies from industry to industry. Common to our analysis of every industry, is the use of vector autoregressions. Vector autoregressions allow us to forecast a variable using more than the variable’s own history as explanatory information. For example, when forecasting oil prices, we can include information about oil consumption, supply and capacity. When forecasting for some of our industry sub-component variables, however, using a variable’s own history is often the most desirable method of analysis. Such single-variable analysis is called univariate modelling. We use the most common and versatile form of univariate models: the autoregressive moving average model (ARMA). In some cases, ARMA techniques are inappropriate because there is insufficient historic data or data quality is poor. In such cases, we use either traditional decomposition methods or smoothing methods as a basis for analysis and forecasting. It must be remembered that human intervention plays a necessary and desirable part of all our industry forecasting techniques. Intimate knowledge of the data and industry ensures we spot structural breaks, anomalous data, turning points and seasonal features where a purely mechanical forecasting process would not. Transport Industry There are a number of principal criteria that drive our forecasts for each transport variable: GDP Growth As transport activity is heavily influenced by real GDP growth, this factor is examined to ascertain its relationship with overall trade volumes. Projected GDP growth is calculated using BMI’s own macroeconomic and demographic forecasts. Real Trade Volumes The sum of imports and exports plays a particularly important role in developing countries with a small © Business Monitor International Ltd Page 47 Vietnam Freight Transport Report Q4 2012 domestic industrial sector. In particular, the focus is on goods, as services do not employ transport. The volumes are forecast based on the following criteria: ƒ Trends manifested through historical data; ƒ The impact of future step changes to the economy (such as future membership of the EU or some other regional body). Port Traffic Port traffic levels act as a ‘second opinion’ on trade volumes. However, this check needs to be used with caution as trade values and volumes do not always move over time in the same way. Market Share The market share of each mode (road, rail, inland waterway, coastal shipping) for future years is based upon: ƒ Trends in historical modal split data; ƒ Evidence of government policy favouring one or more modes over others; ƒ Government and or private sector investment plans in specific modes. Sources Sources used in transport reports include local transport ministries, officially released company results and figures, established think tanks and institutes and donor agencies such as the World Bank and the Asian Development Bank. © Business Monitor International Ltd Page 48 Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. [...]... Vietnam Freight Transport Mode Breakdown (% of total 2012f) Source: General Statistics Office of Vietnam © Business Monitor International Ltd Page 17 Vietnam Freight Transport Report Q4 2012 Vietnam has a national road network of 180,549 kilometres (km), according to the latest data provided by the CIA's World Factbook BMI believes the sector requires substantial investment as the quality of Vietnam' s... average of 16% between 2000 and 2012 (last available data) and is forecast by BMI to grow by a further 30.5% over the medium term (2012- 2016) © Business Monitor International Ltd Page 15 Vietnam Freight Transport Report Q4 2012 Market Overview Recovery Signs Evident There are currently signs of recovery on the horizon in Vietnam as we head into the final quarter of 2012 Real GDP growth accelerated... shipping sector, is now picking up pace in the air cargo market Air China Cargo, the freight subsidiary of Air China, is reportedly preparing to launch a cargo service linking China with Vietnam, the airline's second cargo venture into Asia in 2012 © Business Monitor International Ltd Page 14 Vietnam Freight Transport Report Q4 2012 According to Air China Cargo's chief operating officer, Titus Diu, the carrier... estimate/forecast Source: General Statistics Office of Vietnam © Business Monitor International Ltd Page 20 Vietnam Freight Transport Report Q4 2012 Rail Freight Rail Recovers From Contractions The country's rail freight sector is to continue the positive year-on-year (y-o-y) growth that it enjoyed last year, following four years of annual contractions between 2007 and 2010 In 2012, we have forecast y-o-y growth of... Demand Change In recent years, Vietnam has increasingly become a hot target for international rights groups seeking to © Business Monitor International Ltd Page 32 Vietnam Freight Transport Report Q4 2012 pressure the country into stopping widespread abuse of human rights Vietnam is ranked 172 out of 179 countries according to the 2011 -2012 World Press Freedom Index published by Reporters Without Borders,.. .Vietnam Freight Transport Report Q4 2012 Vietnam Business Environment SWOT Strengths ƒ ƒ Weaknesses ƒ ƒ Opportunities ƒ ƒ Threats ƒ ƒ Vietnam has a large, skilled and low-cost workforce, that has made the country attractive to foreign investors Vietnam' s location – its proximity to China and South East Asia, and its good... connect with other modes of transport for cargo transfer due to traffic congestion © Business Monitor International Ltd Page 18 Vietnam Freight Transport Report Q4 2012 Vietnam' s port infrastructure is poor by international standards The WEF's 2011 Global Competitiveness Report ranks it 111th out of 142 countries, placing it 12th in the region, just one place ahead of the Philippines, the regional... majority of which are dry bulk carriers, with only one of its 16 subsidiaries, © Business Monitor International Ltd Page 12 Vietnam Freight Transport Report Q4 2012 Vietnam Ocean Shipping Company, handling shipping services with its own fleet The company accounted for 45% of Vietnam' s shipping capacity in 2011 Vinalines is following the trend of cutting back on ship orders, which has emerged in the... 32,178.64 33,682.55 2.00 0.90 4.53 4.87 4.67 4.68 4.69 4.67 e/f = BMI estimate/forecast Source: General Statistics Office of Vietnam © Business Monitor International Ltd Page 22 Vietnam Freight Transport Report Q4 2012 Trade Table: Trade Overview, 2009-2016 Real 2009e 2010e 2011e 2012f 2013f 2014f 2015f 2016f Imports, real growth, % yo-y -13.81 22.40 11.30 6.15 5.10 4.70 4.60 4.44 Exports, real growth,... Page 30 Vietnam Freight Transport Report Q4 2012 Perhaps just as important is rising non-OECD stockpiling A great deal of Saudi Arabia’s extra production has gone into the country’s giant international storage hubs Its crude oil stocks hit a record high of 284mn bbl in April 2012, according to Joint Oil Data Initiative, up from 258mn bbl in the same month a year ago China is also stockpiling with reports