Market Outlook Report

August 2014

VN-Index long-term trends

Highlights

GDP growth for the whole year 2014 will achieve

5.5 percent y-o-y, driven by the government
spending and exports from the FDI sector.

The Vietnam dong is projected to weaken by one

percent due mainly the recovery of US economy
and the narrowing of QE3.

2014s annual CPI is expected to be in the range of

5.0 to 5.5 percent.

Deposit rates will reduce additional one percentage

points to 6.5 percent while lending interest rates
may decline by larger amount of approximately 1.3
percentage points.

Positive signs from Vietnams property market are

expected to be seen towards the end of 2014.

Foreign portfolio investments are expected to

accelerate further as some big IPOs will come to
the market in 2H2014, such as MobiFone and
Vietnam Airlines.

The VN-Index may continue to rise in the shortterm as P/E multiples continue to expand. But over
the medium-term, we believe that it is a bit
overbought and will correct back to a more
reasonable valuation in the range of 560 to 580.
This would equate to an annual return of 12 to 15
percent and a P/E ratio of 13.5 to 14.0x

Sources: Bloomberg, HSX, VPBS

Ticker

Current

Forecast

GDP growth (yoy)

5.18%

5.5%

Net exports (yoy)

3.68%

10%

CPI (yoy)

4.80%

5.0% - 5.5%

Interbank exchange
rate (VND/USD)

21,225

21,458

VN-Index (31/7/2014)

596.07

560 - 580

Sources: GSO, SBV, VPBS

Breakdown of Vietnam Exports (USD mn)

14,000
12,000

Sources: GSO, VPBS

10,000
8,000
6,000
4,000
2,000

FDI Sector

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May-14

Jan-14

Sep-13

Jan-13

May-13

Sep-12

Jan-12

May-12

Sep-11

Jan-11

May-11

Sep-10

Jan-10

May-10

Sep-09

Jan-09

May-09

Domestic Sector

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Contents
INTRODUCTION ............................................................................................................................................. 3
GDP GROWTH ................................................................................................................................................ 3
Consumption .............................................................................................................................................. 4
Investment .................................................................................................................................................. 6
Government spending ............................................................................................................................ 6
Domestic credit growth .......................................................................................................................... 8
First half FDI rises despite East Sea tensions ........................................................................................ 8
Net exports ............................................................................................................................................... 10
MACRO INDICATORS .................................................................................................................................. 11
Foreign exchange ..................................................................................................................................... 11
Inflation: 1H2014 hits the lowest level in 13 years .................................................................................. 12
Property market ........................................................................................................................................ 15
Foreign portfolio investment ................................................................................................................... 17
STOCK MARKET OUTLOOK ........................................................................................................................ 18
POTENTIAL GAME CHANGERS .................................................................................................................. 23
FTA: EU-VN/TPP........................................................................................................................................ 23
Foreign ownership limits ......................................................................................................................... 23
Slowing banking reform .......................................................................................................................... 25

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INTRODUCTION
Through July of 2014, the Vietnam economy continued the trend of stability with slightly
higher growth. Demand did start to show some signs of life in terms of consumption and
property purchases but is still at low levels after years of declines. GDP growth was
driven largely by exports, especially from the FDI sector. Improved stability, evidenced by
inflation and exchange rates, was recognized by Moodys Investor Services, which
upgraded Vietnams sovereign rating to B1. This lays the foundation for stronger growth
going forward.
The stock market reacted very enthusiastically to the economic conditions. The
benchmark VN-Index increased 20.6 percent year-to-date. We wonder whether this wasn't
a bit of an overreaction given the slow earnings growth. As the index moves towards a
P/E ratio of 15x, a correction may be on the horizon. Still we believe that index should
finish the year with gains of 12 to 15 percent and that the gains should continue into 2015.

GDP GROWTH
GDP growth (%)

GDP structure (%)

12

6.5

10

5.5
5

4.5

3.5

3
2010

2011

2012

1H

2H

2013

2014
GDP growth

Agriculture

Manufacturing and Construction

Service
Sources: GSO, VPBS

GDP data for the first half of this year has shown that the tensions in the East Sea
since May have not had any significant impact on the economy. According to the
General Statistics Office (GSO), Vietnams GDP is estimated to have risen at an
annual rate of 5.25 percent in the second quarter, up from a 5.09 percent rise in the
first quarter of the year. GDP for the first six months of this year increased 5.18
percent y-o-y, which is higher than the 4.90 percent and 4.38 percent growth for the
same periods in 2013 and 2012, respectively.
The service sector has significantly outperformed the overall economys GDP growth
rate since the third quarter 2005. This sector grew by 6.01 percent y-o-y, accounting
for 43.61 percent of GDP, slightly higher than 43.12 percent in the same period last
year. Manufacturing and construction sectors grew 5.33 percent y-o-y, representing
38.70 percent of the countrys GDP, unchanged compared to last year. The
agricultural, forestry and fisheries sector increased 2.96 percent in the first six
months, accounting for 17.69 percent of GDP, which is lower than 18.18 percent last
year.
In order to understand the impact of GDP growth on Vietnams stock markets, we
must look at each of its components:
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Consumption
Consumption is an important part of aggregate demand. The growth of final
consumption, approximated by the index of retail sales was in a downtrend since 2012 but
has started to recover since the early this year.
In real terms, total retail sales increased 5.7 percent y-o-y. This is much higher than the 4.9
percent increase in real terms for the same periods in 2013 but lower than 6.5 percent in
1H 2012 respectively.
Retail sales of goods and services by types of economic activity

140.0%
120.0%
100.0%
80.0%
60.0%
40.0%
20.0%
0.0%
-20.0%

Mar-12

Jun-12

Sep-12

Dec-12

Mar-13

Jun-13

Sep-13

Dec-13

Mar-14

Jun-14

-40.0%
-60.0%
Retail revenue

Hotels and Restaurants

Other services

Total retail sales

Tourism

Sources: GSO, VPBS

Notes: yearly growth by months at January 2011 constant price

Of which, over the first six months of 2014, in real terms, other services had the highest
real growth of any economic activity at 30.1 percent y-o-y, followed by tourism at 23.8
percent y-o-y and accommodation, food and beverage services, up 15.5 percent y-o-y.
Retail of commodity revenue growth, which reflected the best the consumption of basic
goods, was the lowest, at only 12.7 percent y-o-y, although higher than 8.5 percent of 1H
2012, was lower than 17.2 percent of 1H 2013.
In general, the domestic purchasing power is weakening because the price of goods and
services in recent years has become a lot more expensive. Meanwhile, high interest rates
and real appreciation of the dong increased the operational costs of local businesses,
leading them to cut labor costs so as to maintain their competitiveness. Therefore, the
income of the people and enterprises did not increase at the same pace as prices.
The monthly average income per capita at current prices rose at CAGR of 19.4 percent y-oy during the period from 2004 to 2012. However, the average living expenditure per capita
stood at a low level, estimated at USD72.10 per month, or USD 2.40 per day.
According to the Vietnam General Confederation of Labor (VGCL), the current minimum
wage, as stipulated by Decree 182 dated November 14, 2013, even at the highest level of
VND2.7 million per month, was not enough for a single worker (who resides alone) to live
on at subsistent level. Experts commented that the current minimum wage covers only 68
percent to 76 percent of the workers needs depending on localities.
Low incomes, in our view, will lead to an erosion of domestic consumption and hamper
GDP growth.

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Monthly average income and expenditure per capita

VND '000

2,500
2,000
1,503

1,500
1,139
1,000

705
360

500

460

0
2004

2006

2008

2010

2012

Monthly average income per capita at current prices

Monthly average expenditure per capita at capita at current prices
Monthly average living expenditure per capita at curret prices
Sources: GSO, VPBS

In July, Australia and New Zealand Banking Group Bank (ANZ) together with Australian
firm Roy Morgan Research released the first monthly Vietnam Consumer Confidence
Index (Vietnam CCI). The CCI is an indicator designed to measure consumer confidence of
Vietnam, which is defined as the degree of optimism on their activities of savings and
spending. They had done the survey for the first half year, pooling 1,000 people aged 14
or above in major cities and provinces. On the scale, 100 represent a neutral score.
According to the report, Vietnam CCI tumbled from March to May 2014, falling from above
the level of 135 to below the level of 125. This followed the development of Chinese oil
rigs in the disputed area between Vietnam and China.
Vietnam Consumer Confidence Index

140

135

130

125

120

115
Jan-14

Feb-14

Mar-14

Apr-14

May-14

Jun-14
Source: ANZ-Roy Morgan

The CCI rebounded sharply to 131.0 in June, just above the 2014 average of 130.5. For
July, Vietnam CCI rose by 3.1 points, up to 134.2. According to the newest release,
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55percent of the interviewed Vietnamese expect their families will be better off
financially this time next year, an increase of seven percent and the highest level of the
year to date. Just six percent expect to be worse off, a decline of two percent and the
lowest level year-to-date.
Around 34percent, an increase of two percent, said their family is better off than a year
ago compared to 19percent who said the opposite, a decrease of one percent.
Another indication of Vietnams growing consumption economy came from the listing of
Mobile World Investment Corporation (MWG). MWG is the second largest in terms of
revenue in Vietnams technology and consumer goods retailing segment. On July 14,
2014, all 62,733,171 of MWGs outstanding shares were listed on the Ho Chi Minh Stock
Exchange (HSX). On the first trading date, MWG stock increased by 20percent from its
reference price, with the trading volume of 10,660 shares. The development of MWG after
and before being listed was seen as the evidence for the fast improvement on
consumption in the whole economy.
Investment
Total investment capital disbursed in the first six month was estimated at VND502.5
trillion, up 3.2percent y-o-y, excluding price factors. Of this, investments by the state
sector reached VND198.2 trillion, up the strongest 4.6percent y-o-y. Non-state investments
were VND178 trillion, up 3percent y-o-y and FDI sector investments reached VND126.3
trillion, up 1.6percent y-o-y, in real terms. These growth rates are all higher than those of
the same period in the last two years.
Table: Total investment by types of ownership real annual growth
1H2012

1H2013

1H2014

State sector

6.5%

-3.6%

4.6%

Non-state sector

-7.5%

1.0%

3.0%

FDI sector

-5.7%

-1.4%

1.6%

Total

-1.9%

-1.4%

3.2%
Sources: GSO, VPBS

Government spending
In absolute terms Vietnams fiscal deficit had been rising for the past few years, but was
lower as a percentage of GDP in 2013 than it was in 2009. For 1H2014, the deficit declined
as a percentage of GDP. It is significant that Vietnam was able to control the deficit while
maintaining stable GDP growth. Higher deficits can be good for the long-term
development of the country if funds are invested in projects, such as infrastructure, that
support development of industries. But more often, they have more impact on the
countrys fiscal health, the value of the currency and inflation. Over the long-term, lower
deficits are therefore important and the 1H2014 results are encouraging.
Investment from the state sector includes investment by the state budget (hereafter
referred to as on-budget investment), investment managed by the state budget (such as
those using government bonds for infrastructure approved by the National Assembly, and
on-lending, hereafter referred to as off-budget investment), and investment by municipal
authorities and by state-owned enterprises (SOEs).
The rise in investment from the state sector in the first six months mainly came from offbudget spending, municipal investment and SOEs.
GSO estimated that about VND90 trillion has been disbursed from the state budgets this
year, fulfilling 48.6percent of annual plan, up 1.6percent y-o-y at current prices, or down
3.1percent in real terms whereas about VND108.2 trillion was disbursed outside the
budget, up 33percent y-o-y in real terms. The surge in state investment using off-budget,
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municipal and SOEs funds has relieved the pressure on the state budget, which
encountered constraints in the last several years due to declining tax revenue.
Table: Government budget deficit (VND tn)
2009

2010

2011

2012

2013

1H2014

629

777

963

1,038

791

414

Government expenses

(744)

(886)

(1,075)

(1,212)

(986)

(492)

Budget deficit (1)

(114)

(109)

(112)

(174)

(196)

(79)

-6.90%

-5.50%

-4.90%

-5.36%

-5.30%

-4.70%

Off-budget deficit (2)

(36)

(56)

(45)

(45)

(60)

(108)

Total deficit (1+2)

(150)

(165)

(157)

(219)

(256)

(187)

Total deficit/GDP

-9.1%

-13.3%

-10.4%

-9.8%

-8.4%

-11.2%

Government revenue

Deficit/GDP

Sources: GSO, MOF, VPBS

According to the MOF, total state revenue reached VND413.56 trillion in the first half of the
year, equivalent to 52.8 percent of the annual plan, up 15.8 percent compared to the same
period last year. State expenditures, including principal repayments, were VND492.42
trillion, equal to 48.9 percent of this years plan. Thus the State budget deficit reached
VND78.8 trillion in the first half of 2014, which is only 35 percent of this years planned
state budget deficit of VND224 trillion set by the National Assembly, and equivalent to 4.7
percent of total GDP, which is much lower than that of 6.1 percent in the same period last
year.
Government regular expenditures were VND353.7 trillion (up 50.3percent y-o-y).
Expenditures on infrastructure investment and principal payments reached VND77.8
trillion (up 47.7percent y-o-y) and VND60.9 trillion (up 50.7percent y-o-y), respectively.
Although budget deficit cap was approved by the National Assembly at 5.3percent of
GDP, some National Assembly members have been requesting the government to curb
the deficit within 4.8percent of GDP if the budget revenue is better than planned.
Thanks to the use of capital from sources outside the budget, the announced budget
deficit was kept as low as only 4.7percent in the first half, down from 5.3percent estimated
for 2013.
Government bonds are an important source of funding for both on- and off-budget.
Regarding off-budget investment, the Ministry of Finance (MOF) plans to raise VND100
trillion (USD4.74 billion) from government bond sales in 2014 to finance public works, in
an effort to stimulate total demand. The total amount comes from two plans related to
infrastructure investment. According to the National Assembly Resolution No.
12/2011/QH13 dated November 9, 2011, the budget amount for the two years 2014 to 2015
is VND75 trillion. Of this amount, VND60 trillion is planned to be issued this year. The
second plan, totaling VND170 trillion for the 2014 to 2016 period, was approved by the
National Assembly on November 28, 2013. Of this, VND40 trillion is targeted for issuance
in 2014.
The amount of government bonds and bills issued in 1H2014 increased to a record high
level of VND151,748 billion (USD7.11 billion), up 5.5percent compared to the first half of
2013.
In the table above, we also estimated another deficit ratio including off-budget spending
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and noted that the total deficit over GDP ratio in 1H rose to 11.2percent, after falling down
gradually from 13.6percent in 2009 to 9.8percent in 2012, and to the lowest 8.4percent last
year. This implied that the government has increased its spending significantly in 1H for
the purpose of stimulus package. The strong rise in state investment indicates that the
serious decline in aggregate demand led the government to intervene more strongly.
Increasing deficits can increase growth if the money is used well. But deficits can also be
bad for the economy otherwise. More deficits have led to the increase in the amount of
government borrowings in the past years, which are creating much pressure for
payments in the coming years. The payments liabilities, according to Dr. Tran Dinh Thien,
Head of Vietnam Economics Institutions, are approaching the safety benchmark
25percent of total budget revenue in 2014, and will soon exceed 30percent threshold.
Domestic credit growth
Private investment in the first half of 2014 was equivalent to 10.3 percent of GDP,
which is lower compared to 11.1 percent of GDP in the same period last year,
according to NFSC. This was partly due to the low credit growth rate during the first
half, in which credit increased by only 3.52 percent compared to the end of 2013, far
below this years target of 12 to 14 percent. Foreign currency credit grew much
faster, at 12.03 percent, than VND credit, which rose by just 2.17 percent. The slow
credit growth may have been impacted by the expected implementation of Circular
09, which became effective on June 1, causing banks to be more cautious in making
loans.
However, the 3.52 percent credit growth through the first six months of the year
represents a significant increase from the 0.01 percent growth through the end of
March. And as a general rule, the credit growth rate in the second half of the year
often doubles that of the first half of the year. Credit growth was 4.5 percent in the
same period last year, but soared up to 12.51 percent at the end of the year.
Given the above positive factors, it is possible that this year credit growth will come
close to the years target, at around 10percent. That means private investment will
speed up and a huge amount of funds will be injected into the market in the second
half of this year.
First half FDI rises despite East Sea tensions
Vietnam has recently been very competitive in attracting FDI inflows compared to
other countries in the region thanks to its stable economy, well-control inflation,
young and vibrant workforce, and low labor costs. Additionally, the rising wages in
China in recent years and Malaysias new minimum wages, which became effective
since the beginning of 2013, have made China and Malaysia less attractive. Besides
these, Thailands political turmoil has caused investors to look for others market.
Free trade agreements (FTAs) that Vietnam is currently negotiating also play
important roles in drawing more FDI inflows into Vietnam. According to the Foreign
Investment Agency, as of the end of June, there were 16,589 valid projects with total
registered capital of USD240 billion. Japan, Korea, Singapore and Taiwan are the
leading investors in Vietnam with total a registered amount of USD125.14 billion,
accounting for more than 50 percent of the total FDI capital.
New registered FDI in the first half of this year dropped sharply to USD6.85 billion,
which is only equivalent to 64.7 percent of the same period last year. Samsung - Thai
Nguyen and the Nghi Son Oil Refinery Thanh Hoa projects, which brought in USD2
billion and USD2.8 billion, respectively, in the same period last year, were the main
reason for the large difference.
FDI disbursement, however, increased slightly by 0.9 percent y-o-y, reaching
USD5.75 billion. Korea was the biggest investor in Vietnam during the first half of
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this year, with registered capital doubling y-o-y, to USD1.55 billion, accounting for
22.6 percent of total registered FDI. Hong Kong surpassed other countries to become
the second biggest investor with registered FDI of USD1 billion, which is five times
higher than the same period last year.
FDI disbursement and registered 2010 2014 (USD mn)

12,000
10,000
8,000
6,000
4,000
2,000
0
2010

2011
2012
2013
FDI disbursement
FDI registered

2014

Sources: Foreign Investment Agency

Manufacturing has been the most attractive sector this year, with registered FDI of
USD4.8 billion, accounting for 70 percent of the total registered FDI. This sector is
also expected to be the main driver for the growth of the economy this year.
The rising tension on the East Sea since May 7, which caused protests against China
in Binh Duong and some other southern cities, led to heavy damages to many FDIs
firms. However, Ho Chi Minh, Binh Duong and Dong Nai remained as the most
attractive destination for foreign investors. Newly regist ered and added FDI in Ho
Chi Minh and Binh Duong in June were much higher compared to May and April,
reaching USD886 million and USD876 million, respectively, as of June 20.
The tension had previously raised concerns that FDI inflows could be affected.
However, thanks to the effective solutions from the state and local government after
the protests, firms have resumed their confidence in the business environment .
Outlook:
The regional and domestic environment, in conjunction with the upcoming FTAs, will
help Vietnam attracting more FDI inflows. Notably, the worlds largest oil and gas
group, ExxonMobil, is currently discussing a gas and power project in the provinces
of Quang Ngai and Quang Nam worth USD20 billion. Another global group Intel also revealed it will target to make Vietnam its CPU hub next year, planning to
produce 80 percent of Intels global CPU manufacturing in Vietnam in 2015.
Additionally, Good Choice Group has recently started its 5-star complex of hotel and
theme-parks in Ba Ria Vung Tau, which are capitalized for USD1.29 billion. On the
newest updates from the Foreign Investment Agency (FIA), Samsung has - registered
to invest USD1 billion in Samsung display Bac Ninh, bringing the total investment
amount from Samsung Group into Vietnam to reach almost USD7 billion since the
first investment of USD678 million in 2009. Many leading global corporations have
recently visited Vietnam to search for investment opportunities, implying massive
investment inflows to Vietnam in the near future.

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Net exports
The strong economic performance has been supported by an improving balance of
trade, which began to record a trade surplus in 2012 and 2013 after years of deficits
since 1993. The main reason for years of trade deficits was that dom estic companies
import a large amount of materials for domestic production. Meanwhile, t rade the
surplus over the past two years was mainly thanks to FDI companies, which
accounted for 63 percent and 67 percent of total export value in 2012 and 2013,
respectively.
FDI companies have recorded a CAGR of export growth of 21 percent from 2009
through end of June 2014 compared to 12 percent by Vietnamese companies. Most
of the high quality export has come from FDI enterprises. Notably, Samsung has
contributed USD23.9 billion out of the total export value of USD132 billion in 2013,
soaring from USD245 million in 2009.
Breakdown of Vietnam Exports (USD mn)

14,000
12,000
10,000
8,000
6,000
4,000
2,000

FDI Sector

Apr-14

Jan-14

Oct-13

Jul-13

Apr-13

Jan-13

Oct-12

Jul-12

Apr-12

Jan-12

Oct-11

Jul-11

Apr-11

Jan-11

Oct-10

Jul-10

Apr-10

Jan-10

Oct-09

Jul-09

Apr-09

Jan-09

Domestic Sector
Sources: GSO, VPBS

In the first half of 2014, Vietnam has achieved a balance of trade of USD140.71
billion. Export turnover values reached USD71.11 billion, up 15.3 percent y-o-y, while
import turnover was USD69.60 billion, up 11 percent y-o-y, bringing a trade surplus
of USD1.51 billion. Export of FDI sector reached USD43.72 billion (not including
crude oil), increasing 17.1 percent y-o-y and accounting for 67.5 percent of total
export revenue, with major items including mobile phones and accessories; textile,
shoes and sandals, machinery and spare parts, transport vehicles, computer and
accessories.
Vietnam export has recently moved towards high value-added goods. In the first half
of 2014, mobile phone and accessorizes surpassed textile to rank first in exports
share, with the export value of USD11.56 billion and USD9.38 billion, respectively.
The EU is the largest export market of Vietnam with total export turnover of USD13.1
billion, an increase of 12.8 percent y-o-y. It was followed by the US, the ASEAN, and
China with total export value of USD13 billion, USD9.6 billion, and USD7.4 billion,
respectively.
Given the current economic conditions, the pending free trade agreement (FTA) such
as the Trans Pacific Partnership (TPP) and the European Union - Vietnam FTA, and
Vietnam - Korea FTA are expected to enhance trade and investment, to boost
economic growth and development. Vietnam is expected to be the biggest winner of
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the TPP as it can enjoy the low bilateral tariffs. The U.S. Department of Commerce
has projected the bilateral trade between Vietnam and U.S. at USD33.6 billion this
year and rising to USD59.4 billion in 2020. Vietnams export activities to the
Eurozone are also estimated to increase by 35 percent once the EU Vietnam FTA
becomes effective, according to the EuroCham.
GDP Outlook:
Although GDP growth was stronger in 1H2014 than the same period in either of the
past two years, we still think this years target of 5.8 percent is a big challenge.
When we examine each component of GDP, growth in the first half was supported
greatly by strong exports and government investment, but held back by sluggish
domestic consumption and modest private investment and credit. We forecast that
GDP growth for the whole year 2014 will achieve 5.5 percent y -o-y, driven by the
government spending and exports from the FDI sector.

MACRO INDICATORS
Foreign exchange
VND/USD

Exchange rate to USD

22,000

105

21,000

102

20,000

99

19,000

96

18,000

93

17,000
1/5/2009 1/5/2010 1/5/2011 1/5/2012 1/5/2013

90
1/1/2014

1/21/2014
VND

2/10/2014
THB

3/2/2014
IDR

PHP

Sources: Bloomberg, VPBS

In the previous three years, VND/USD exchange rate has been stable compared to other
currencies in the region thanks to a strong current account and controlled inflation. On
June 18, the SBV announced a rise in the VND/USD average interbank rate for the first
time in 2014 by one percent, up from current rate of 21,036 VND/USD to 21,246 VND/USD
with the aim to increase exports as well as to reduce production costs to a more
competitive level. The VND/USD, therefore, has a new level of 21,458 VND/USD and
21,034 VND/USD for its ceiling and floor prices, respectively.
However after rising high on the event, the Vietnam dong currency fell by roughly 120
each side during middle July, reverting back to the level of VND21,170 21,200 per US
dollar. This may have happened because since early July, large disbursements of foreign
direct and indirect investment (FDI and FII) and official development assistance (ODA)
have created ample supply of USD. Additionally, demand for USD by enterprises, which
usually peak at the end of months and quarters when foreign currency payment come
due has been calmed down.
On July 15, the SBV proved its ability as a market operator to raise its foreign currency bid
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rate to 21,200 VND/USD with an unchanged ask price. They also resumed buying USD to
raise foreign reserves level, however the exact amount has not been disclosed. As of the
end of June, Vietnam hit a record foreign reserves of roughly USD36 billion.
Stronger foreign currency reserves and a good trade balance has helped to stabilize the
Vietnam dong. Announcements by the US Federal Reserve that they were tapering the
QE3 monetary stimulus program significantly affected other emerging markets currencies,
but the Dong held its value.
Outlook:
In the week from July 27 to August 1, the Vietnam dong remained steady at VND21,225
per US dollar while other Asian currencies fell against the USD. The steadiness of the
Vietnam dong is a sign of macroeconomic stability, which is good for investors in general.
However as the US economy recovers and its monetary environment normalizes, there
are considerable uncertainties regarding the future direction of fund flows. The State Bank
of Vietnam (SBV) governor has said that the exchange rate could be adjusted by two
percent this year, which leads us to believe that there will be another one percent rise
towards the end of this year. This would be consistent with the governments efforts to
boost export values and support the balance of trade. As the Vietnam dong is weakened
further, local goods will become less costly for foreigners, which will spur demand and
attract more foreign currency inflows. Such a move would create inflationary pressures by
increasing the cost of imported goods. But inflation has been quite low so far this year,
giving the SBV more latitude to devalue the currency. We expect the VND interbank
exchange rate could reach 21,458 VND/USD within the next six months.
Inflation: 1H2014 hits the lowest level in 13 years
The Consumer Price Index (CPI) for the first half of this year increased 4.77 percent
compared to the same period last year and it rose 1.38 percent from the end of last
year through June, which is equivalent to only 20 percent of this years inflation
target. This years results continue a trend seen over the past two y ears. Vietnam
successfully reduced inflation gradually from its peak at 23.02 percent in August
2011 to 6.9 percent in June 2012 and then ended the year at the lowest level in a
decade. Monthly CPI has been controlled well at around five to seven percent since
June 2012.
CPI growth (%)

25

CPI MOM (R)

2.50

CPI YOY (L)

2.20
2.00

20
1.32
1.25

1.37

15

0.93
0.82

10

1.50
1.06

0.85

0.53
0.39
0.36

0.63
0.16 0.18
0.05

0.83

0.47
0.27

0.27
0.02 0.05

0.69
0.51 0.55
0.49
0.34

1.00
0.3 0.50
0.20
0.08
-

0
07/11

(0.26) (0.29)

(0.06)
(0.19)
-0.44

(0.50)
(1.00)

01/12

07/12

01/13

07/13

01/14
Source: GSO

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Page | 12

Similar to the previous years, CPI hiked up in the first two months of the year and
began to slow down in March. The decline of CPI in the first quarter came from the
food and food stuffs sector and accommodation and the construction material
sector, which slid by 0.96 and 0.74 percent m-o-m in March, and rose 0.95 percent
and fell 0.37 percent in the first quarter, respectively.
However, the prices of these two sectors rebounded in the second quarter,
increasing 0.28 and 0.61 percent m-o-m in June, and 1.56 and 0.11 percent as of the
end of the second quarter, respectively.
The adjustment in the price of 1,996 medical check services in public medical
centers since the beginning of June in Ho Chi Minh City was one of the main
drivers of inflation in the second quarter. This sector recorded a rise of 0.74 percent
m-o-m in June and 1.13 percent from the end of last year through end of June,
which is much higher compared to 0.29 percent in the first three months of 2014.
Outlook:
Despite inflation for the first half of this year hitting its lowest level in 13 years, it is
expected to accelerate faster for the rest of the year. This is because of the coming
price adjustments by the State in healthcare services (which will be raised start ing
from August 1) and tuition fees and the potential rise of gasoline and petro price s.
However, given the low consumer demand and purchasing force, and given that
demand usually drops considerably in the seventh month of the Lunar calendar
(Ghost Month), next quarters inflation is expected to rise very marginally. We
expect Vietnam to record inflation for the year 2014 in the range of 5. 0 to 5.5
percent.
Interest Rates
VND deposit and lending interest rates

%/year

25
20
15
10
5

4/1/2014

1/1/2014

10/1/2013

7/1/2013

4/1/2013

1/1/2013

10/1/2012

7/1/2012

4/1/2012

1/1/2012

7/1/2011

10/1/2011

4/1/2011

1/1/2011

7/1/2010

Deposit rates

10/1/2010

4/1/2010

1/1/2010

10/1/2009

7/1/2009

4/1/2009

1/1/2009

10/1/2008

7/1/2008

4/1/2008

1/1/2008

Lending interest rates

Sources: Bloomberg, VPBS

In the first six months of 2014, short-term market interest rates have fallen significantly,
resulting from low inflation, ample liquidity in the banking system and modest credit
growth.
Both VND bank lending rates and deposit rates moved downward. According to the
National Financial Supervision Commission (NFSC), at July 2014, average deposit interest
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Page | 13

rates stood at 5.53percent per annum, down 0.6 percentage points whereas the average
lending interest rates reached 10.08 percent per annum, down 0.25 percentage points
compared to the end of last year. The fall in lending interest rate was less than that in the
deposit rate.
In the meantime, CPI fell by 1.12 percentage points from 6.1 percent in December 2013
down to 4.98 percent in June 2014, enabling positive real interest rates.
The yields of government bonds also declined substantially in the first half of 2014, in
both the primary and secondary markets.
In the primary market, the winning yields of two-year government bonds fell 1.47
percentage points from 7.15 percent in December 2013 to 5.67 percent in June 2014 while
those of ten-year government bond fell from 8.9 percent to 8.7 percent per annum at the
same time.
In the secondary market, according to Bloomberg data, government bond yields had been
constantly falling across all tenors from the beginning of the year through June with the
short-end falling further than the long-end. By the end of June, yields for short terms
bonds - 1Y, 2Y and 3Y - were cut to 5.00 percent (-165 bps y-t-d), 5.70 percent (-136 bps yt-d) and 6.15 percent (-136 bps y-t-d), respectively. Yields of seven-, ten-, and fifteen-year
tenors experienced smaller declines to 8.01 percent (down 86 bps y-t-d), 8.75 percent
(down 25 bps y-t-d) and 9.03 percent (down 3 bps y-t-d). The yield spread between twoyear and 10-year bonds therefore widened significantly during the first half of this year.
The gap has been increasing and staying at the highest levels of the last four years,
resulting in the steepest slope of the yield curve.
Meanwhile, the declines in long-term yields were more marginal for investors keep their
expectations on high long-term risk and thus, higher market interest rates going forward.
2Y Government bond yields in primary and secondary markets

13.0
12.0
11.0
10.0
9.0
8.0
7.0
6.0
5.0
Jan-12

May-12

Sep-12

Jan-13

2y (primary market)

May-13

Sep-13

Jan-14

May-14

2Y (secondary market)
Sources: HNX, Bloomberg, VPBS

With regards to corporate bonds, around VND15 trillion of corporate bonds were issued to
six big and one small corporation in the first half, up 10 percent on year, with lower
interest rate margins.
The issuing interest rate margins of five-year Vinacomin bonds issued on June 27, 2014
was only 2.75 percent, down 55 basis points compared to itself on September 2013. The
three-year bonds that HDBank issued in June bear the interest margin of 1.5 percent,
down 100 bps compared to those issued in October last year.
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Page | 14

Outlook:
For the rest of the year, because we forecast that CPI rise marginally while sluggish credit
growth will continue, this will lay the groundwork for the market interest rates to go down
further. Deposit rates will reduce additional one percentage points to 6.5 percent while
lending interest rates may decline by larger scale, at around 1.3 percentage points.
Property market
Vietnams property market has experienced five consecutive difficult years but has shown
signs of recovery in 1H2014.
Vietnams property sector has experienced five consecutive difficult years in all main
segments, including apartments for sale, townhouses/villas, office and retail, from 2009 to
2013. Of these, apartments for sale and townhouses/villas were the two hardest-hit
categories, while office and retail segments were spared some of the worse effects.
Research conducted by professional market research and consultancy organizations
indicated overwhelming supply and price cutting across the market.
The gloomy market was reflected in the poor business results of property enterprises in
2013. According to our survey consisting of 18 typical real estate firms, only five out of 18,
accounting for 28 percent, announced the fulfillment of 100 percent and over of their full
years planned net profits. In addition, 10 out of the 18 chosen firms published a decline in
their net profits.
However, in the first half of 2014, given the better macro indexes and the impact of
numerous Government measures, the property market has seen some signals that it is
warming-up, which were translated into rising number of successful transactions over the
same period of last year and the slowdown in the falling trend of housing prices. As such,
property companies started to post better results. In particular, 13 out of our 18 selected
peers posted growth in their 1Q2014 net profits over last years same period.
Business results of typical property enterprises
Ticker

VNDbn
VIC

FY 2013

Market Chartered
capital
capital
VNDbn

Sales

FY 2014
Net income

Sales

Net income

FY 2013 FY 2012 Growth FY 2013 FY 2012 Growth 1Q2014 1Q2013 Growth 1Q2014 1Q2013 Growth
(VNDbn) (VNDbn) % y-o-y (VNDbn) (VNDbn) % y-o-y (VNDbn) (VNDbn) % y-o-y (VNDbn) (VNDbn) % y-o-y

61,703

9,296

18,378

7,904

133%

6,780

1,571

332%

6,175

984

528%

OGC

3,420

3,000

2,623

SCR

1,396

1,501

1,093

KBC

4,443

2,957

HDG

1,655

QCG

1,389

89%

55

83

587

86%

89

-34%

642

306

-91%

332

201

1,073

281

282%

72

(436)

NM

154

557

989

930

6%

123

23

435%

1,093

1,271

973

224

334%

15

DIG

2,331

1,430

753

769

-2%

SJS

2,050

1,000

631

51

1137%

54
70

NLG

2,275

955

602

462

30%

21

IJC

3,729

2,742

615

612

0.5%

162

NTL

970

636

454

TDH

615

382

409

695

-35%

92

200

105%

22

1,460

723

350

199

76%

96

LHG

258

261

241

259

-7%

ITC

570

691

218

56%

NBB

1,147

359

203

1,077

KDH

1,268

481

112

ITA

5,959

7,190

11

36

-69%

BCI

140

1,076

287

275%

110%

-50%

65%

14

1300%

39

295%

13

(53)

NM

188

145

30%

12

140%

88%

42

120

-65%

100%

24

125%

183

176

4%

16

101%

(303)

NM

47

-85%

16

-75%

25

-16%

48

20

140%

(22)

(34)

NM

185

-13%

85

83

2%

19

16

18%

71

30%

41

72

-43%

50%

33

-33%

79

84

-6%

800%

173

-45%

74

33

124%

21

11

91%

24

53

-55%

35

55

-36%

(32)

14

NM

(297)

NM

22

128

-83%

(1)

NM

-52%

25

285

-85%

32

33

-3%

24

500%

2700%

(125)

(56)

NM

80

121

-34%

10

11%

87

33

164%

51

(7)

NM

20

900%

Sources: Companys financial statements, Bloomberg. Data as of July 17, 2014

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Page | 15

According to CBRE Research, in 2Q2014 condominiums for sale segment has performed
better in both HCMC and Hanoi. Particularly, in Ho Chi Minh City (HCMC) sales volume
has continually improved over the last five consecutive quarters thanks to sophisticated
designs and reasonable prices combined with developers promotions. The preliminary
figures show that transactions increased by 10.6 percent q-o-q and 99.2 percent y-o-y in
2Q2014. Sales in the mid-end segment unexpectedly rose by 90.4 percent q-o-q and 214
percent y-o-y due to more launches with lower prices together with aggressive sales
strategies at existing projects. In Hanoi, the transactions increased steadily with an
estimated 2,500 units sold in the quarter an increase of 60 percent from 1Q2014. While
the majority of transactions occurred across the mid- and low-end segments, the high-end
segment saw a significant improvement in sales compared to 1Q2014 performance as
developers launched aggressive promotion campaigns and confidence improved among
buyers.
Sold units by grade in HCMC

Sold units by year and segment in Hanoi

2,500
2014
2,000
1,500
2013

1,000
500

2012
-500

0
500
Luxury

1,500
High-end

Mid-end

2,500
Affordable

3,500

Q1

Q2

Q3

2012
Affordable

Q4

Q1

Mid-end

Q2

Q3

2013
High-end

Q4

Q1

Q2

2014
Luxury

Source: CBRE Research 2Q2014

The improving pace of recovery in the real estate market is subject, naturally, to the
nations macroeconomic conditions, which are showing signs of vigor. In addition, first
half FDI increased despite East Sea tensions. According to the Foreign Investment Agency,
as of June 20, there were 16,589 valid projects with a total registered capital of USD240
billion. FDI disbursement increased slightly by 0.9 percent y-o-y, reaching USD5.75 billion.
FDI capital flows into the nations real estate sector ranked second in 1H2014 with 16 FDI
projects approved amounting to USD692 million, an increase of 65 percent y-o-y.
Outlook:
Further positive signs of the Vietnams property market are expected to be seen towards
the end of 2014. Thanks to the improving macroeconomic conditions and the drastic
measures of Government in order to unfreeze the national real estate market, we believe
that this sector will have a positive outlook in the second half this year. This forecasted
trend is also confirmed by many well-known professional market research and
consultancy organizations. According to Jones Lang LaSalle, the demand of residential
market both in HCMC and Hanoi may improve in response to developers efforts to
increase launches of more appropriate products. Prices may continue to inch up gradually
over the coming quarters. Affordable and mid-end projects still dominate the supply in
2H2014. New launches are likely to be at reasonable levels in the next two quarters,
coming evenly from re-launched and from brand-new projects. For CBRE, they expected
that the condominium market will maintain its current positive picture in the last quarters
of this year. Particularly, in HCMC, prices are expected to generally remain stable while
the prices of some projects with high sales rates, prime locations and developers with a
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Page | 16

positive reputation are expected to increase slightly. District 2 will continue to be the most
sough-after residential area for both investors and deep pock buyers. However, the
improving pace heavily depends on the macroeconomic conditions i.e the Governments
monetary policy, the GDP growth rate, job security.
Foreign portfolio investment
As of the end of June, foreign investment made up 0.62 percent of the total market
capitalization of the combined HSX and HNX. Vietnam has recently attracted more
foreign institutional investors (FIIs). In 2013 FIIs invested USD321 million into
Vietnam equity markets, up 50 percent compared to 2012.
However, some global and local issues have raised concerns about capital outflows
in Vietnam. The Federal Reserve has continuously tapered its stimulus package
down from USD85 billion since December last year to USD35 billion as of the end of
June. The policy making body plans to end the Quantitative Easing 3 program in
October. Initially there were fears that Fed tapering would cause FII to leave
emerging markets such as Vietnam. But later reports stated that as long as interest
rates remained low, this would not be a concern. We believe that the Fed will
probably not raise interest rates until the middle of next year. Therefore, many
global organizations such as Fitch, HSBC, OECD and World Bank have forecasted a
lower growth rate in emerging countries. The East Sea tension and protests against
China led to heavy damages to many FDIs enterprises, causing some local
organizations to lower their forecast on Vietnams economy and FII but we have not
seen any long-term impact from these events.
Nonetheless Vietnam is firmly stable compared to other emerging countries. Global
organizations have kept their view unchanged about Vietnams economy. In the first
half of 2014, the total inflows impressively reached USD333 million, which is even
higher than 2013s inflows. Foreign portfolio investments are expected to accelerate
further as some big IPOs will come to the market in 2H2014, such as MobiFone and
Vietnam Airlines.
Annual FII flows (USD mn)

350
300
250
200
150
100
50
0
2011

2012

2013

1H2014
Sources: HSX, HNX, VPBS

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STOCK MARKET OUTLOOK

VN-Index year-to-date

620
600
580
560
540
520
500
1/2/2014

2/2/2014

3/2/2014

4/2/2014

5/2/2014

6/2/2014

7/2/2014

8/2/2014

Source: Bloomberg

The most commonly quoted stock market index in Vietnam, the VN-Index, has had a very
good year so far. Starting the year at 504, it quickly rose to a peak of 609 by March 24 due
largely to a combination of factors which we have discussed above including:
-

strong trade numbers

low inflation
stable currency

There were also rumors at the beginning of the year that the government would raise
foreign ownership limits, which created a lot of positive press for foreign investors.
Vietnam probably also benefited from the political tensions in Thailand, which caused
funds to flow here instead. While there was a steep correction in May due to the tensions
in the East Sea and the resulting riots in Vietnam, this decline was short lived and the
index quickly bounced back to 600 levels, a rise of approximately 20 percent y-t-d. This is
an impressive rise, especially after last years gains of 20.6 percent.
VNMidcap Index

VNSmall Index

710

680

680

650

650

620

620

590

590

560

560

530

530
500

500
1/14

2/14

3/14

4/14

5/14

6/14

7/14

8/14

1/14

2/14

3/14

4/14

5/14

6/14

7/14

8/14

Sources: Bloomberg, HSX

The stock market gains have been broad based as well. The market has been led by bluechips such as PetroVietnam (GAS), which has risen by 80 percent y-t-d, respectively. But
we have also seen impressive gains by the VNMidcap and VNSmall Indices, which are up
14 percent and 16 percent.
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Over-performing sectors

Sources: Bloomberg, HSX, VPBS

Under-performing sectors

Sources: Bloomberg, HSX, VPBS

The gains have also been spread across industry sectors. On the HSX, the energy (led by
GAS) and technology sectors have been the market leaders with year to date gains of
approximately 30 percent. But even the weakest sector, materials, has gained more than
10 percent.
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VN-Index long-term trends

1200

1000

Bubble
800

600

400

200

0
2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

Sources: Bloomberg, HSX, VPBS

After such impressive gains y-t-d, one must ask whether the market is overbought or
whether there is momentum for continued gains. Over the long-term, since 2002 the VNIndex has recorded a CAGR of nearly eight percent. Of course, this was interrupted by the
bubble of 2006 and 2007 which then burst in 2008 and 2009. It is very interesting to note
though that following the burst of the bubble, the market returned to the long-term
growth track it was on before 2006. From 2010 to 2012, we saw significant declines as well
as poor trade numbers led to a continuously weakening currency and high inflation.
Eventually, the government was forced to react by tightening credit growth and raising
interest rates. The resulting macroeconomic stability led to very impressive gains at a
CAGR of 25.1 percent over the past three years. This could lead investors to believe that
Vietnams government has found the magic formula for stable growth and that there has
been a structural shift in Vietnams economy that will lead to strong performance for the
foreseeable future. However, this is the same type of thinking that American investors
had about Mr. Greenspans management of the US business cycle going into 2007. So
history teaches us to view such claims with skepticism (and avoid irrational exuberance).
Unless we can identify specific causes for such a structural shift (which we will discuss
below) it seems more likely that the market is currently a bit overbought and we will
return to our long-term eight percent growth trend line.
By definition, in order for stock prices to rise, either the companies earnings must
increase or the price earnings multiples must rise. Therefore, in order to make our forecast
for medium term performance over the next six to 12 months, we break down the market
performance into these two components: earnings growth and price earnings (P/E)
multiples.

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Page | 20

VN-Index Performance Multiples

16

20%

14

15%
10%

12

5%

10

0%

-5%

-10%

-15%

-20%

-25%
Q1/11

Q3/11

Q1/12

Q3/12
P/E (LHS)

Q1/13

Q3/13

Q1/14

Current

EPS LTM (RHS)

Source: Bloomberg

From the middle of 2011 through the middle of 2013, listed Vietnamese companies
recorded earnings declines. This was consistent with the declining GDP growth, especially
from the domestic sectors, high inflation and high interest rates. In 2013, corporate
earnings growth did improve as macroeconomic conditions improved, exceeding 15
percent for the third quarter.
In 2014 we have returned to a very low earnings growth environment. This is consistent
with our earlier macroeconomic analysis. GDP growth has slowed. Although 5.5 to 6.0
percent GDP growth is not bad, a significant portion of the GDP growth comes from the
FDI sector. FDI companies have recorded growth in net exports far stronger than that of
domestic companies while domestic consumption has also remained low. Therefore, the
macroeconomic trends indicate that, on the whole, domestic firms are not growing. We
dont see any reason for the trends to change in the short-to-medium term and therefore
do not see earnings growth as a driver of rising stock prices over these time periods.
Table: Earnings per share growth
EPS 12M at Q2/2012

EPS 12M at Q2/2014

Growth 12M

Consumer

7.11

7.76

-8.4%

Energy

7.00

8.52

-17.9%

Financial

31.12

28.82

8.0%

Health Care

0.57

0.67

-15.9%

Industrials

2.54

2.79

-8.9%

Technology

1.04

0.96

8.7%

Materials

3.34

4.30

-22.2%

Utilities

1.34

1.80

-25.2%
Sources: Bloomberg, VPBS

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Page | 21

Poor earnings growth has been spread across most sectors. One notable exception has
been the financial sector. Banks have benefited from falling deposit rates, while securities
companies have benefitted from strong stock market performance and increasing trading
volumes.
The trend for P/E ratios is more positive than for earnings. The HSX P/E ratio has been
rising steadily from approximately 10x in 2011 to over 14x currently. Again, this trend is
justified by the macroeconomic conditions discussed above. Falling interest rates have led
to improved equity valuations. Lower inflation and record levels of foreign currency
reserves have improved Vietnams image with foreign investors (even leading to an
upgrade by Moodys) and improved investment inflows. We see these trends continuing.
As stated above, we believe that interest rates could fall by another 100 basis points and
trade continues to improve as the US and European economies strengthen. It is therefore
not unreasonable to believe that rising P/E ratios could continue to drive Vietnams stock
markets higher.

Southeast Asian Market P/Es

21.1
19.0
17.1

Southeast Asian Risk-free rates

8.00%

21.2

8.29%
7.77%

7.11%

17.3
14.2

13.7

12.2
3.32%3.15%

Bangkok Jakarta Stock Philippines Ho Chi Minh

Stock
Exchange
Stock
Stock
Exchange
Exchange
Exchange
P/E at 1/2/2014

P/E at 6/30/2014

3.47%
3.00%

Thailand
Indonesia
Philippines
Vietnam
Government Government Government Government
Bond 5Y
Bond 5Y
Bond 5Y
Bond 5Y
Yield at 1/2/2014

Yield at 6/30/2014
Source: Bloomberg

However, we believe that the potential for higher P/E ratios may be reaching its ceiling for
the short-to-medium term. At the beginning of 2014, the HSX was trading at a P/E ratio of
just over 12x, which made it cheap relative to its South East Asian peers. But at the
current level of more than 14x, it is no longer cheap. This is especially true when you
consider that although Vietnams interest rates have been falling they are still much
higher than our neighbors. As we approach a P/E of 15x (which would equate to a VNI
reading of approximately 620, the VN-Index may start to seem expensive and foreign
inflows may slow.
In conclusion, we believe that the VN-Index may continue to rise in the short-term as P/E
multiples continue to expand. But over the medium-term, we believe that it is a bit
overbought and will correct back to a more reasonable valuation in the range of 560 to
580. This would equate to an annual return of 12 to 15 percent and a P/E ratio of 13.5 to
14.0x. Having said that, Vietnams macroeconomic condition is still strong and the market
could see strong, stable growth over the long-term, especially if domestic companies are
able to participate in the growing revenues of the FDI sector. They could do this either by
becoming suppliers to the FDI sector companies or by benefitting from the rising wages of
FDI sector employees.

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Page | 22

POTENTIAL GAME CHANGERS

Our analysis and forecast for the economy and the stock market is based upon the status
quo. But there are several potential developments which could change our analysis
significantly depending on how they progress.
FTA: EU-VN/TPP
Vietnam is currently negotiating several free trade agreements (FTAs). The Trans-Pacific
Partnership (TPP) is the most significant of these. It will help to increase textile and
apparel manufacturing jobs, production and exports in the country members, including
Vietnam. Therefore, Vietnam will attract more foreign direct investment (FDI) from TPP
non-members such as Korea, Hong Kong and Taiwan. According to the Foreign
Investment Agency, Korea accounted for over 30 percent of total FDI to Vietnam for 2014
through July. Moreover, the US economy roared back with four percent growth in the
second quarter, which was largely due to growing personal expenditures. This could lead
to more imports from Vietnam as our nation is the second largest supplier of apparel to
US market. In 2013, Vietnam-US bilateral trade surged by roughly 20 percent year-overyear, reaching USD29.7 billion. Vietnams exports to the US were USD24.6 billion and
imports were USD5 billion. Of these, Vietnams garment and textile sector contributed the
largest share to export turnover to the US, of USD8.8 billion in 2013, according to US
Department of Commerce. In the first half of 2014, Vietnam US bilateral trade increased
sharply by 18 percent year over year to USD16.2 billion.
However concerns are raised that Vietnam sources roughly 80 percent of its apparel yarns
and fabrics from state-owned companies in China, a TPP non-member. As a consequence,
Vietnam needs to develop its own textile manufacturing in order for this industry to take
advantage of the agreement.
Another significant FTA is being negotiated between Vietnam and the European Union.
From June 23 to 27, the 8th round of the EU-Vietnam trade talks were held in Brussels.
Accordingly, the EU expects to sign an FTA with Vietnam by the end of 2014 but faces
several political issues such as civil society and human rights. Signing an FTA with the
EU, recent Eurocham Business Climate Index (BCI) survey showed that 50 percent of
respondents agreed that trade will be the most beneficial sector while 33 percent thought
it would be manufacturing. Only 10 percent think services will be able to take advantage.
The EuroCham Business Climate Index quarter 2/2014 hits a three-year high of 66
compared to its last quarter of 56, indicating that business confidence and outlook among
European businesses in Vietnam have continued to increase. Strong implementation of
FTA will drive more FDI inflows and improve the trade balance.
Aside from these FTA agreements, Vietnam also stands to benefit from the formation of
the ASEAN Economic Community (AEC). This single regional common market will be
created by 2015, establishing a competitive market among Asean countries. There will be
free flow of goods, services, investment capital and streamlining of certain administrative
procedures. The AEC would create greater opportunities for Vietnam to export goods and
services to Asean market.
Foreign ownership limits
Currently foreign investment is limited to 49 percent of the outstanding shares of listed
companies. There has been discussion for quite some time of increasing this limit to 60
percent. At the beginning of 2014, perception that changes in foreign ownership limits
might be coming was one of the key drivers of positive market momentum. Under the
currently proposed draft decree to replace Decision 55/2009/QD-TTg, companys boards
would be allowed to individually approve increasing their foreign ownership limit to 60
percent. Approval of this decree seems to have lost momentum and expectations have
been dampened. But if it were approved, there are several companies who are currently
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Page | 23

full on their foreign ownership limit and would be likely to see increased demand for the
additional shares from foreign investors. On the HSX, assuming that all the companies
who are currently full increased their limit to 60 percent, there would be room for an
additional nearly USD1 billion of foreign investment. Most of this would go to VNM.
Probably more important than the actual amount of investment, would be the improved
perception of Vietnam as a less restricted market.
HSX companies at or near their FOL
Current price
VNM

49.00%

91,426,765

12,799,747,044,000

Additional
Foreign
Investment
(USD)
603,761,653

343,894,224

49.00%

37,791,724

1,908,482,082,200

90,022,740

265,648,792

48.36%

43,299,552

1,199,397,595,940

56,575,358

350,748,034

48.98%

37,169,057

984,980,021,100

46,461,322

Total Shares
Outstanding

140,000

833,433,001

FPT

50,500

REE

27,700

SSI

26,500

% Foreign
Holding

Additional shares
available to
foreignors

Additional Foreign
Investment (VND)

DHG

96,500

87,154,200

49.00%

9,582,003

924,663,289,500

43,616,193

HCM

34,600

127,229,601

49.00%

13,981,959

483,775,767,560

22,819,612

BMP

69,000

45,478,480

49.00%

5,002,633

345,181,677,000

16,282,155

CTD

61,000

42,133,344

49.00%

4,602,012

280,722,756,400

13,241,639

NLG

18,600

121,013,523

48.33%

14,124,534

262,716,328,680

12,392,280

PNJ

30,300

75,596,326

49.00%

8,315,250

251,952,062,880

11,884,531

VSC

58,500

34,374,941

49.00%

3,699,610

216,427,161,600

10,208,828

KDH

20,100

75,000,000

49.00%

8,250,000

165,825,000,000

7,821,934

TCM

27,400

49,099,501

49.00%

5,351,734

146,637,500,640

6,916,863

JVC

14,300

62,500,383

49.00%

9,659,150

138,125,842,140

6,515,370

IMP

67,000

16,705,810

49.00%

1,838,246

123,162,482,000

5,809,551

DMC

41,200

26,713,797

49.00%

2,938,523

121,067,155,840

5,710,715

TCR

5,500

44,535,411

49.00%

21,737,993

119,558,959,300

5,639,574

BBC

54,000

15,420,782

48.56%

1,764,315

95,273,020,800

4,494,010

EVE

27,900

27,507,218

48.94%

2,806,781

78,309,184,320

3,693,829

NVT

6,300

90,500,000

48.51%

10,401,500

65,529,450,000

3,091,012

ST8

19,800

13,740,385

49.00%

1,481,552

29,334,729,600

1,383,714

SAV

14,200

9,567,680

48.94%

864,307

Total

12,273,159,400

578,923

20,753,142,270,900

978,921,805
Source: HSX, VPBS

Financial institutions
Certain industries, such as banks are subject to separate foreign ownership limits. The
Decree No. 01/2014/ND-CP dated January 3, 2014 replaced Decree 69/2007/ND-CP dated
April 20, 2007 on foreign ownership of Vietnams credit institutions as follows:
No.

Foreign ownership cap over

chartered capital of a credit
institution

Decree
69.2007

By a foreign individual and

related parties

5%

By a foreign individual

5%

By a foreign credit institution

and its related parties

10%

By a foreign institution

15%

By a foreign investor
and its related parties

20%

Foreign ownership cap

over chartered capital of
a credit institution

Decree
01/2014

By a foreign strategic investor

and its related parties

15%

By a foreign strategic
investor

20%

Total foreign ownership

30%

Total foreign ownership

30%

By a foreign strategic investor

and its related parties in
special cases

20%

By a foreign strategic
investor in special cases

No
limit

Sources: Decree 69/2007 and Decree 01/2014

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Page | 24

With new foreign room, more M&A deals in the banking sector are expected to be
executed in the coming months.
As foreigners are limited to own only 49 percent of a listed share, the Exchange-Traded
Fund (ETF) has been open to support their investment strategy. Guidance on
establishment and management of the ETFs was found in the Circular 229/2012/TT-BTC.
This type of investment has no limit for foreign ownership and higher degree of
transparency. In more developed markets where short selling is allowed, ETFs serve
another important role. In these markets, investors can purchase shares of an individual
company while short-selling the ETF. This allows them to profit if the company
outperforms the market even if the market declines. Therefore, the domestic ETFs have
marked a great development for Vietnam stock market.
Slowing banking reform
The banking sector has been facing serious issues including soaring bad debts
cross-ownership. The government started bank sector reforms with Circular 02
Circular 09 regarding the classification of non-performing loans, and
establishment of the Vietnam Asset Management Company (VAMC) on July
year. However, the restructuring process is moving too slowly.

and
and
the
last

In the first half of this year, the VAMC has bought VND11,414 billion worth of bad
debts, which is far from this years target of purchasing between VND70,000 billion
and VND100,000 billion worth of NPLs, bringing the total NPLs bought by VAMC
since October 2013 through the end of June to VND50,721 billion. Meanwhile, the
NPL ratios in the banking system have edged upwards from 3.61 percent in
December, 2013 to 4.07 percent as of the end of May this year, with the on-balancesheet bad debts were estimated at around VND132,500 billion (USD6 billion) .
The rising NPL ratios in the first five months of this year indicate that companies are
still confronting many hurdles. Debts that had originally been classified in group 1
and 2 now have to be reassigned to group 3. Additionally, the low credit growth rate
did not help to dilute the NPL ratios. These, in conjunction with the effectiveness of
Circular 09/2014/TT-NHNN since June 1, we are concerned that the NPLs ratios for
the first half of this year would edge up further. Rising NPL ratios may also be d ue
to window dressing by banks. Historically, some banks artificially reduce their yearend NPL ratios by restructuring some defaulted debt in order to make their a nnual
results more attractive. It was often to see some of these moved back into NPL status
during the first quarter.
NPL ratio of the banking system (%)

4.2
4.1
4.03

4.07

3.93

3.9

3.86

3.8
3.74

3.7
3.6

3.61

3.5
3.4
Dec-13

Jan-14

Feb-14

Mar-14

Apr-14

May-14
Source: SBV

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Given the current situation, the NPL ratio will probably continue to edge up until the
end of the third quarter. However, the higher credit growth rate and the increasing
number of bad debts bought by VAMC in the fourth quarter would curb the rising
NPL ratios.
VAMC has sold only VND996 billion worth of bad debts but is currently working with
several international firms that are interested in buying them. The company is very
positive about its plan of selling and collecting VND2,500 billion worth of bad debts
this year. This seems, however, in our view, to be relatively inconsequential when
weighed against the massive amount of total outstanding NPLs that are still in the
system. Such low liquidation rates create a significant risk that banks will eventually
need to write down the bonds they received for their VAMC loan sales.
In an effort to mitigate cross ownership in the sector, the SBV has been actively
supporting the mergers and acquisitions of banks. Among the reasons for banks to
merge, key ones include the pressure of State Owned Enterprises (SOEs) to divest
from banking corporations during the period of 2014-2015 (the typical case
Petrolimex divestment from PG Bank) and the reduction of cross-ownership among
banks (Southern bank voluntarily proposed to merge with Sacombank, Mekong
Development Bank merged with Maritime Bank), etc. However, the process has been
implemented slowly so far.
Thus the restructuring process in the banking system needs to speed up. The SBV, at
the meeting on July 9, said that it will boost the bank restructuring process and start
to restructure big commercial joint stock banks, in conjunction with efforts to reduce
NPL ratios that in the second half of this year. A healthy banking system will
promote credit growth, which is beneficial to the economy as a whole and the stock
market in particular.

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Disclaimer
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Barry David Weisblatt

Head of Research
barryw@vpbs.com.vn
Linh Nguyen
Director Macro and Financials
linhntt@vpbs.com.vn
Giang Pham
Research Assistant Macro Strategy
Analysis
giangpth@vpbs.com.vn
Luong Hoang
Research Assistant Macro Strategy
Analysis
luonght@vpbs.com.vn
Ngoc Nguyen
Research Assistant Macro Strategy
Analysis
ngocnb@vpbs.com.vn
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