VIETNAM Vietnam Strategy - VN – INVESTOR · 2016-11-20 · Hoa Phat Group JSC 22 PetroVietnam...

Please refer to the important disclosures and analyst certification on inside back cover of this document, or on our website www.macquarie.com.au/disclosures.

VIETNAM

Inside

Reality may force some changes 2

Macro update 4

Theme 1: Bank reform still slow, liquidity

holds up 8

Theme 2: FDI may surge, TPP an

opportunity for VN 14

Theme 3: Facing reality –

Steady change 17

Appendices – Demographics,

FDI & wages 18

FPT Corp. 20

Hoa Phat Group JSC 22

PetroVietnam Drilling and Well Services 24

PetroVietnam Fertilizer & Chemical 27

Vietnam Dairy Products 29

Analyst(s) Peter Bennett +65 6601 0847 [email protected]

Vina Securities Cal Le +848 3821 9316 [email protected]

27 August 2013 Macquarie Capital Securities (Singapore) Pte. Limited

Vietnam Strategy Reality may force some changes A combination of stubbornly low and tepid GDP growth rates (4.6% in 2Q13),

and ineffectiveness of 800bps in policy cuts (since Jan-12), is forcing policy

makers in Hanoi to turn to FDI, and portfolio capital to underwrite GDP growth.

With inflation now squarely back in mid-single digits, the next step has to be

starting the process of bank recapitalisation which will mean a fair bit of dilution.

Some of the recent stepped-up activities in bank restructuring are encouraging,

and if ownership liberalisation, improved FDI flows be followed by a pick-up in

the substance and pace of SOE reform, then GDP growth of 6%+ for Vietnam

may well resume from 2015 and beyond.

Theme 1: Bank reform is slow, but liquidity is held up

The magnitude of Vietnam‟s NPL reality was quantified by the 1 year delay in

implementation of Circular 2/2013/TT-NHNN to 1 July 2014. Circular 2 aimed to

tighten risk management and enforce more consistent and uniform standards on

the treatment of debt, collateral, and NPLs. The SBV acknowledged that Circular

2 would have brought to light an additional VND270tn (~USD13bn) in NPLs.

An Asset Management Company (VAMC) to tackle NPLs was established on

July 26th. Given only VND500bn (USD24mn) in paid-in capital and banking

regulations, two things are clear: i) it will initially use base money to buy loans, ii)

it lacks incentives or ability to easily liquidate underlying loan collateral. Thus, we

conclude the VAMC‟s job is to provide a liquidity buffer to the weakest banks.

Finally, the SBV has just been given authority to direct banks (presumably state-

owned banks) to take primary equity stakes in weaker SBV supervised banks

that fail to meet recapitalisation or follow the SBV‟s restructuring instructions.

Theme 2: FDI will grow, TPP a serious opportunity for VN

Vietnam continues to benefit from relative wage cost advantages, esp. vis a vis

China. Samsung is now building a new US$3.7bn smart phone and chip plant in

Thai Nguyen province in the north of the country. The Trans Pacific Partnership

(TPP) is stimulating a surge in inbound textile investment. Soft factors such as 8

public holidays per annum vs. 23 in China will also help drive FDI.

Theme 3: Opening up foreign limits – 60% from 49%?

Last week, the MoF submitted a proposal to the PM‟s office to raise foreign limits

to a maximum of 60% for public company‟s termed „non conditional‟ industries.

Restricted industries would remain at 49%, plus a quota of 10% in non-voting

shares. A big question remains; will policy makers increase restrictive bank limits

and allow effective or foreign control of Vietnam‟s commercial banks?

Conclusion

We still believe the market faces strong fundamental headwinds (related to the

weak banking and real estate sectors). Stock picking continues to be key, but

easy choices (i.e. VNM & GAS) are no longer bargains. Significant dilution in the

banking sector is a foregone conclusion, and we would avoid banks as a

consequence. On VNM, while it‟s 30% higher than the PER valuation of the

VN30, it‟s still 29.5% cheaper than regional peers. Stocks we still like a lot

include: FPT, HPG, PVD and DPM. All have: i) single-digit PE ratios, ii) good

growth potential and iii) in DPM‟s and HPG‟s case, solid dividend yields that are

twice as high as the broader markets.

Macquarie Research Vietnam Strategy

27 August 2013 2

Reality may force some changes Many of the themes highlighted in last year‟s note “The moment of awful clarity” remain valid,

albeit progress is slowly but steadily being made.

1) Further economic stability has been achieved, but at the expense of continued low and

below trend GDP growth.

2) As inflation has fallen dramatically, policy rates have been slashed by 800bps in the last

18 months alone. This has resulted in only a tepid return of credit growth (selective

sectors and at 5.6% for 1H13 - YTD), as banks essentially remain largely unwilling to

lend out new money. Curing the Zombie-like banking system will require liberalisation of

restrictive share ownership rules and squarely facing up to NPL realities.

3) Some big ticket FDI projects have been announced, to tackle much needed economic

value add, and more immediately, some high profile manufacturing led FDI

disbursements are clearly underway.

4) Liberalisation of foreign limits in public companies has now been proposed. But specifics

remain elusive. The PM‟s office has been asked to sign off on raising the limits to 60% in

non-restricted sectors and 49% in restricted sectors. One big question is what happens

to the current restrictive limits imposed on commercial banks. Recapitalisation can‟t

efficiently take place without changes here.

Politically, policy makers still seem to be grasping with multiple govt mandated economic

deliverables, but for reasons we will highlight later on, seem unwilling or may well be justly

afraid to make hard sacrifices to achieve them. This is especially true when it comes to large

scale liquidations of real estate (and related NPL‟s) or focussing on loose monetary policy to

achieve growth at any cost.

The policy goals are broadly defined as follows: Real GDP growth of 6.0% (at a minimum), 7-

8% inflation, an accommodative (but not liberal) credit growth and to a lesser degree a

crawling peg exchange rate policy to help the GDP numbers along. The SBV devalued the

VND by 1.0% in July this year, ostensibly to boost exports, fx reserves and aid GDP growth.

Where we would be putting our money

The VNIndex has returned 26.5% since Sept-12. Of the 105 points it gained, 73.0 of them

came from VNM (+108.6% YoY) and GAS (+69.1% YoY). On the downside, Banks have

been predictably relative laggards along with some conglomerates and real estate stocks. But

in general negative contributions were pretty minor (sub 10pts in aggregate).

Fig 1 VNIndex return chart Fig 2 VinaSecurities key stocks summary

Ticker Rating FY13EPER(x)

FY14EPER(x)

FY15E PER(x)

FY13E P/B(x)

FY13EDivYield

(%)

DPM O 6.8 7.6 9.0 1.6 7.2% FPT O 8.4 7.3 6.5 1.7 3.2% HAG N 29.3 16.1 9.6 0.9 0.0% HPG O 9.9 6.6 5.2 1.6 6.1% PVD O 7.1 6.3 5.9 1.4 1.5% VNM O 17.1 14.0 11.5 6.1 2.7% VNINDEX 11.5 9.9 n.a 1.6 3.1% Note: O=Outperform; N=Neutral; U=Underperform

Source: Bloomberg, Macquarie Research, Vina Securities, August 2013 Source: Macquarie Research, August 2013; priced as of 22 August 2013

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Ho Chi Minh Stock Exchange (HoSE) (VNINDEX)

Price Close MAV10 MAV50

Source: Bloomberg

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RS

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150

23-08-12 24-10-12 25-12-12 25-02-13 26-04-13 27-06-13

Vol

bn


27 August 2013 3

Like last year, we continue to believe the market and Vietnamese economy face strong

fundamental headwinds almost exclusively related to the weak banking and real estate

sectors. Stock picking continues to be key, but the easy choices (i.e. VNM and GAS) are no

longer the bargains they were. Significant dilution in the banking sector is a foregone

conclusion, it‟s just a matter of time and we would still avoid the sector as a consequence.

On VNM, while it‟s 30% higher than the PER valuation of the VN30, it‟s still 29.5% cheaper

than regional peers Stocks we still like a lot include: FPT, HPG, PVD and DPM. All have: i)

single-digit PE ratios, ii) good growth potential and iii) in DPM‟s and HPG‟s case, solid

dividend yields that are twice as high as the broader markets.


27 August 2013 4

Macro update Is the jar half full or half empty?

In its recently completed 2013 Article IV consultation with Vietnam, the IMF‟s executive board

broadly concluded:

“Vietnam regained macroeconomic stability over the past year, but the economy is

progressing at two speeds. The export sector is performing well - especially foreign-

invested enterprises - but the domestic sector, though improving, has yet to find a solid

footing because of several factors, including low productivity, structure of resource

allocation, impaired bank balance sheets and inefficiency in several state-owned

enterprises (SOEs).”

Slow domestic demand, low credit & GDP growth – low inflation.

Against the above assessment, Vietnam‟s below trend GDP growth has persisted now for

almost six quarters and semi-official public commentaries suggest that the official 6.0% GDP

growth target for 2013 is almost unreachable. Inflation has been almost unseasonably low,

averaging only 0.1% per month over 2Q13, but looks to come in around 7.2% for the year,

when seasonal factors and core pressures recur later over the second half of this year.

Fig 3 Real GDP Growth (% -YoY) Fig 4 Historical & Inflation outlook

Source: SBV, Macquarie Research, Vina Securities, August 2013 Source: GSO, Macquarie Research, Vina Securities, Aug 2013

The sluggish GDP is despite the fact that in the last 12 months, the SBV‟s key refinancing

rate has been cut by a further 200bps, over and above the 600bps of cuts in early 2012.

Whilst policy cuts will affect the economy with a lag, we think the loosening effects should

have been felt by now. Credit expansion is only at 5.6% (as of July) and the SBV has a 12%

target for the year. Clearly, something other than interest rates is at play in the system.

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27 August 2013 5

Fig 5 12M Changes key rates and Bond yields Fig 6 VND/USD Fx rate and 3M+ , 6M+ CDS

Source: SBV, Macquarie Research, Vina Securities, August 2013 Source: Bloomberg, Macquarie Research, Vina Securities August 2013

Anecdotally, we also see hints of slower consumer demand, particularity in the consumer

discretionary sectors and non-staple food sectors. As the table below shows, revenues in

these listed consumer stocks is sluggish, while pre-tax profitability has been slowing in

tandem as costs and SG&A expenses rise.

Most notable amongst these is FPT trading/retail, who distributes a wide range of consumer

electronics, including Apple, Nokia, Dell, Toshiba and others. Jewellery retailer PNJ is also

facing demand led issues (even as Gold prices have fallen). YoY, in consumer foodstuff

segments confectionary (KDC), coffee (VCF), and fish sauces and noodles (MSC – a

subsidiary of listed MSN), YoY growth is essentially flat in real terms, coming in at low-single-

digit growth levels.

Fig 7 Consumer demand indicators from listed stocks

YoY growth HoH growth

Revenue 1H11 2H11 1H12 2H12 1H13 1H12 2H12 1H13 1H12 2H12 1H13

FPT trading/retail 8,117.6 8,191.4 6,730.1 7,606.8 7,452.8 -17.1% -7.1% 10.7% -17.8% 13.0% -2.0% PET 4,695.2 5,625.5 5,206.3 4,947.5 5,461.2 10.9% -12.1% 4.9% -7.5% -5.0% 10.4% KDC 1,512.7 2,734.1 1,549.5 2,736.3 1,705.9 2.4% 0.1% 10.1% -43.3% 76.6% -37.7% MSC N/A N/A 4,061.9 6,327.5 4,270.1 N/A N/A 5.1% N/A 55.8% -32.5% MSC excl. VCF N/A N/A 3,239.8 5,090.0 3,426.8 N/A N/A 5.8% N/A 57.1% -32.7% VCF 721.8 863.7 837.0 1,277.7 843.3 16.0% 47.9% 0.7% -3.1% 52.6% -34.0% PNJ excl gold export, gold bar trading

2,234.4 2,122.8 2,208.2 1,899.7 2,116.4 -1.2% -10.5% -4.2% 4.0% -14.0% 11.4%

Pretax profit 1H11 2H11 1H12 2H12 1H13 1H12 2H12 1H13 1H12 2H12 1H13 FPT trading/retail 279.6 241.0 268.1 129.4 209.4 -4.1% -46.3% -21.9% 11.2% -51.7% 61.8% PET 234.7 172.0 151.3 154.6 154.2 -35.5% -10.1% 1.9% -12.0% 2.1% -0.2% KDC 51.9 297.3 27.2 462.7 131.3 -47.5% 55.6% 382.1% -90.8% 1598.6% -71.6% MSC N/A N/A 1,299.7 2,019.9 1,181.7 N/A N/A -9.1% N/A 55.4% -41.5% MSC excl. VCF N/A N/A 1,186.9 1,919.3 1,124.2 N/A N/A -5.3% N/A 61.7% -41.4% VCF 135.6 97.8 112.8 213.4 57.5 -16.8% 118.1% -49.0% 15.3% 89.1% -73.1% PNJ excl gold export 184.5 133.7 160.8 149.3 111.5 -12.8% 11.7% -30.7% 20.3% -7.2% -25.3%

Source: Company Data, VinaSecurities, Macquarie Research August 2013

Official retail sales data tells a similar story, with both the nominal and inflation adjusted

growth data trending downwards in recent months. Overall, the data supports the view that

domestic demand is weak, underpinned by weak credit growth and below trend GDP growth.

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VNDUSD Spot VND 3M CDS VND 6M CDS


27 August 2013 6

Fig 8 Retail sales growth (real terms) Fig 9 Nominal retail sales & avg. real growth rates

Source: GSO, Macquarie Research, Vina Securities, August 2013 Source: GSO, Macquarie Research, Vina Securities, August 2013

Exports growing, foreign reserves, FDI & Portfolio flows are rising

Monthly non-oil exports continue to grow strongly YoY (as of July 2013) as annual growth

was 15.7%, with non-oil and total exports reaching US$10.6bn and US$11.2bn, respectively.

Export growth is strongest in the electronics and footwear categories rising at 41.2% and

26.6%, respectively. These two sectors accounted for US$1.72bn, and along with general

manufacturing (textiles and others) accounted for in excess of 85% of non-oil exports.

Registered FDI data since 2012 also lends credibility to a positive outlook for manufacturing

and FDI. Notably, in the last 18 months, virtually all approved and registered FDI has gone

into manufacturing, with real estate in fact contracting as projects have been abandoned.

Fig 10 Monthly non-oil exports (USDm) Fig 11 Recent trends in Approved FDI (US$m)

Registered Capital

Cumulative to

Dec-12 Dec-12 to

date Cumltv

Share

Incrementa

l Share

Manufacturing and Processing 103,524 12,919 52.9% 104.7% Real Estate 49,724 (1,465) 21.9% -11.9% Accomodations and food 10,606 92 4.9% 0.7% Construction 9,917 (37) 4.5% -0.3% Electricity, Gas, Water, Production & Distrib. 7,486 15 3.4% 0.1% Information and communications 3,938 91 1.8% 0.7% Arts and Entertainment 3,675 (10) 1.7% -0.1% Transport and Storage 3,476 43 1.6% 0.3% Agriculture, forestry, fisheries 3,344 (40) 1.5% -0.3% Mining 3,177 20 1.5% 0.2% Wholesale, retail, repair 2,814 312 1.4% 2.5% Finance, banking, insurance 1,322 1 0.6% 0.0% Health and Social Assistance 1,219 85 0.6% 0.7% Water Supply, Waste Treatment 1,234 51 0.6% 0.4% Professional Specialties, Science and Tech.

1,087

74 0.5% 0.6%

Other Services

733

8 0.3% 0.1%

Education and Training

458

191 0.3% 1.5% Administrative and Support Services

201

(8) 0.1% -0.1%

Total

207,936 12,342 100% 100%

Source: SBV, Macquarie Research, Vina Securities, August 2013 Source: MPI, VinaSecurities, Macquarie Research August 2013

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T12M Ave real growth (YoY %) Nominal Retail Sales (VND bn)

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Rubber Fish Coffee Rice Electronics Footwear Coal Others Non-Oil Exports


27 August 2013 7

Summing it up

On balance, Vietnam‟s stubbornly below trend GDP growth (4.9% - 2Q13), for the most part,

remains largely self-inflicted. In part, as Vietnam has allowed the banking system‟s hangover

from the 2006 – 2010 credit and real-estate boom to persist. Perhaps because of a lack of

political will or perhaps inexperience in handling its first modern NPL crisis, the country has

been somewhat slow to react. Recent stepped-up activities, however, are encouraging, and in

addition, what appears to be a recent willingness to liberalise barriers to new investment into

the stock market and restricted FDI sectors is a welcome development.

If true, and if ownership liberalisation and improved FDI is followed by a pick-up in the

substance and pace of SOE reform, then GDP growth of 6%+ for Vietnam is likely to resume

from 2015 and beyond.

Fig 12 Summary Macro forecasts

Key Indicators 2008A 2009A 2010A 2011A 2012A 2013E 2014E

Real GDP Growth 6.2% 5.3% 6.8% 5.9% 5.5% 5.4% 5.6% Inflation (YoY) 19.9% 6.5% 11.8% 18.1% 7.7% 7.2% 6.3% Inflation (avg) 23.0% 7.0% 9.2% 18.6% 8.6% 8.3% 8.0% VND/USD rate (Interbank) 17,486 18,500 19,498 21,034 20,843 21,300 21,800 Fx Reserves (USDbn) 23.9 15.2 12.7 13.5 25.4 32.3 38.5 Exports (USDbn) 62.9 56.6 71.6 96.2 114.6 137.7 158.3 Imports (USDbn) 80.4 68.8 84.0 105.8 114.3 142.2 163.9 Import Cover (months) 3.6 2.7 1.8 1.5 2.7 2.7 2.8 Trade Deficit (USDbn) -17.5 -12.2 -12.4 -9.6 0.3 -4.5 -5.6 FDI Commitment (USDbn) 71.7 22.6 18.6 15.6 16.3 17.0 19.0 FDI Disbursed (USDbn) 11.5 10 11.0 11 10.5 11.5 13.0 Credit Expansion 30.0% 37.7% 27.7% 16.0% 7.0% 10.0% 14.0% Budget Deficit/GDP 4.6% 4.8% 6.2% 5.0% 4.8% 4.5% 4.5% Public Debt/GDP 42.9% 52.6% 56.6% 57.5% 48.8% 48.9% 50.0%

Source: IMF, GDO, Macquarie Research, Vina Securities, August 2013


27 August 2013 8

Theme 1: Bank reform still slow, liquidity holds up NPL problem is further quantified by Circular 2

The magnitude of Vietnam‟s NPL reality was quantified by the 1 year delay in implementation

of Circular 2/2013/TT-NHNN to 1 July 2014. Circular 2 aimed to tighten risk management and

enforce more consistent and uniform standards on the treatment of debt, collateral, and

NPLs. The SBV and SOCB banks have acknowledged that Circular 2 would have brought to

light an additional VND270tn (~US$13bn) in NPLs for the system. This would have meant an

NPL ratio of approximately 16.0% based upon the SBV‟s latest NPLs estimate.

Against that sanguine back drop, the SBV‟s latest (February) estimate has NPLs at 6.0%,

down from earlier September and December 2012 estimates of 8.8% and 7.8%, respectively.

One the other hand, independent outsiders have since gradually raised their estimates, with

Fitch Ratings increasing its upper range to as high as 20% as recently as 9 July 2013. Finally,

this week, the SBV stated on its website it had recently completed a review to bad debt in the

banking system (to international standards) but declined to give further comments.

Fig 13 NPL Ratios

Fig 14 Real Estate and landed property as a percentage of loan collateral

Source: SBV, Macquarie Research, Vina Securities, August 2013

Source: Company Data, Macquarie Research, VinaSecurities August 2013

Reinforcing the NPL issue is that a substantial majority of loans in Vietnam use real-estate,

landed property and immovable assets as collateral. Just for the major listed banks, collateral

exposure ranges from just under 50% to approximately 72% of total collateral. Clearly, any

significant impairment in real estate collateral values would result in further NPLs.

The discrepancies between outsider, SBV, and bank NPL estimates highlight the ongoing

short-comings of the current accounting and reporting standards. As mentioned in prior notes,

we believe banks may be relying on several accounting strategies to mask bad debts in their

loan books, these included: buying corporate bonds issued by bad customers, issuing new

funds to repay older overdue loans – i.e. ever greening; lending to customers‟ related parties

to pay off bad debts.

The magnitude of Circular 2‟s VND270tn bite comes, in part, from its specific address of

some of these accounting strategies. Circular 2 expanded the definition of debt to include

unlisted bonds, credit cards loans, and deposits at other credit institutions. Defining unlisted

bonds as debt limits a bank‟s ability to mask debt by replacing borrower loans with purchased

bonds issued by the same „bad‟ borrower. The circular also supplanted an earlier SBV

decision which gave banks the flexibility to maintain and not increase a debt‟s risk grouping

despite being rescheduled more than once.

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ACB CTG EIB MBB STB VCB

2011 2012

True system NPLs

remain dangerously

high

Circular 2 would

have added

~US$13bn to the

statistics


27 August 2013 9

Consequently, the delay in Circular 2 affords banks continued flexibility in managing (or

exposing) their real NPL situation until at least mid-2014. But given the delay, the circular‟s

impact is almost impossible to measure across individual banks. Only a handful of banks

claim either compliance or near limited additional NPL exposure to Circular 2.

By example, Military Bank (MBB VN) tells investors it was fully compliant with Circular 2 in its

FY12A results, while Vietcombank (VCB VN) has stated that its incremental exposure to

Circular 2 was VND6.0tn (US$283mn) of the VND270tn. For the others, we are left to glean

hints from notes in their audit reports and from media reports.

For example, from disclosures and notes from Sacombank‟s latest annual report, the auditor

highlighted VND9.02tn in real estate refinancing loans (approximately 9.5% of the bank‟s total

customer loan book) that were made in apparent breach of lending rules. While the bank has

classified these loans as Group 1 (Current), Circular 2 introduces several additional criteria

for assessing the risks for such loans.

In particular, “debts that violate regulations on credit extension” could warrant a Group

3 (Sub-standard) classification, requiring additional specific provisioning of 20% of the

risk weighted asset.

In this case, (Fig 8.0) related parties were extended credit exceeding that allowed by state

regulations. The pledged collateral of VND8,657.0bn also is largely comprised of real estate

which is risk weighted by a factor of 50% for CAR calculation purposes under SBV guidelines.

Fig 15 STB’s 2012 Audit report – An Emphasis of Matter & Note 8.3 (*)

Source: STB 2012 Audit report, VinaSecurities, Macquarie Research, August 2013

Under Circular 2, for Sacombank, we estimated a Group 3 provision charge (on just this item,

and before any other Circular 2 effects) could have totalled VND960bn, or 96% of STB‟s 2012

net profits. More importantly, it could have meant a 7.0% hit to the bank‟s Tier 1 capital and

pushed STB‟s CAR to 8.9% (below the 9.0% requirement) and BVPS down 7% to

VND13,091/sh.

A significant provisioning charge may await Asia Commercial Bank (ACB) surrounding its

exposure to Vinalines, the unprofitable SOE shipbuilder which collapsed after racking up

more VND43tn (USD2.1bn) in debts, more than four times its equity. Of this total,

approximately VND854bn in loans and VND88bn in investments in Vinalines bonds are

owned by the bank. Based upon 2012 financial disclosures, ACB classified these loans to

Vinalines as Group 2 – Special mention, which saves the bank from reporting the debts as

NPLs under Vietnam Accounting Standards (VAS) and VAS.


27 August 2013 10

As the Govt works to implement Vinalines‟ restructuring plan with various stakeholders, ACB

will very likely have to book significant provisioning charges, as it begins reclassifying these

loans to NPL status and begins to take on for significant provisioning for the Vinalines bonds.

For just these loans, assuming a Group 5 – Bad loan classification with 20% recoveries, we

estimate incremental provision charges of VND683bn. This would have pushed ACB‟s 2012

NPL ratio from 2.46% to 3.12%, above the SBV‟s 3% compulsory rate for NPL sales to the

VAMC.

We note ACB has indicated its interest in possibly selling up to half, or VND1.5tn (US$70mn),

of its reported NPLs to the AMC. ACB has one of the highest exposures to real estate in its

collateral portfolio. But it is classified as a Tier 1 bank on the SBV‟s liquidity-based ranking

framework.

In the background – IMF/World Bank Financial Stability Assessment Program was undertaken and results are pending

In 2011, the government of Vietnam agreed to undertake jointly with the SBV, IMF and the

World Bank, a Financial Stability Assessment Program (FSAP). The FSAP‟s purpose is to

provide a comprehensive and in-depth analysis of a country‟s financial sector, through a

comprehensive analytical framework.

According to the IMF, in developing and emerging market countries, FSAPs are conducted

jointly with the World Bank and include two components: a financial stability assessment,

(undertaken by the IMF), and a financial development assessment, (undertaken by the World

Bank). Each individual country‟s FSAP concludes with the preparation of a Financial System

Stability Assessment (FSSA) report. Publication of the report is not mandatory.

For Vietnam the FSSA we understand has been completed and in its recent Article 4

consultations the IMF Board of Directors encouraged Vietnam to implement the steps

recommended in the program „To return the banking system to health‟. The FSSA report has

yet to be made public, but we understand that the Government of Vietnam is considering the

IMF‟s and World Bank‟s suggestion to publish it.

Revisiting our CAR stress tests for listed banks

We updated our previously published CAR and ABVPS sensitivity analysis with FY12A

results to gauge the circular‟s potential implementation risk for the six listed banks. Half the

list quickly falls below the 9% regulatory CAR minimum with only a moderate 5% increase in

NPLs. Anecdotally, the above disclosures suggest STB as precariously situated and will

quickly need additional paid-in capital due to even minor adverse charges; VCB could tolerate

incremental provisions of VND18tn (3.1x its incremental NPL exposure) before even having to

go to shareholders. Outside of SOE‟s MBB even at a lower CAR of 11.1% may well be the

best of the bunch given claims of very prudent and Circular 2 compliant provisioning.

Fig 16 Stress testing listed banks CAR’s

Source: Company Data, VinaSecurities, Macquarie Research, August 2013

Banks Items Reported +3% NPLs +5% NPLs +7% NPLs +9% NPLs +11% NPLs +13% NPLs

CAR 13.5% 11.1% 9.5% 7.8% 6.0% 4.1% 2.2%

ABVPS 13,463 10,174 7,981 5,788 3,595 1,402 (791)

CAR 14.8% 12.6% 11.0% 9.4% 7.7% 5.9% 4.1%

ABVPS 17,996 14,874 12,793 10,712 8,630 6,549 4,468

CAR 11.1% 9.4% 8.2% 6.9% 5.7% 4.4% 3.0%

ABVPS 13,530 11,295 9,806 8,316 6,827 5,337 3,848

CAR 9.5% 7.7% 6.4% 5.1% 3.7% 2.3% 0.9%

ABVPS 14,076 11,109 9,131 7,153 5,174 3,196 1,218

CAR 16.4% 14.4% 13.0% 11.6% 10.1% 8.6% 7.0%

ABVPS 12,798 10,979 9,766 8,553 7,340 6,128 4,915

CAR 10.3% 7.5% 5.5% 3.4% 1.2% -1.1% -3.4%

ABVPS 12,743 8,928 6,385 3,842 1,299 (1,244) (3,787) CTG

ACB

VCB

MBB

STB

EIB


27 August 2013 11

Several reports suggest both the business and banking communities pressed the SBV for the

delay in implementing Circular 2, raising concerns over the possibility the Circular could

precipitate a vicious cycle - by increasing NPLs, banks would further tighten credit, causing

more business bankruptcies, and in-turn creating more NPLs.

While any cure should not be worse than the disease, we continue to believe that any viable

long-term solution, that doesn‟t provide significant amounts of new capital to Banks, may

result in significant short-term costs and disruptions to the risk appetite for the new credit in

the system.


27 August 2013 12

The Tool of Choice – Vietnam Asset Management Company

Following the decision to defer the NPL, the SBV‟s choice to utilize a “bad bank” vehicle to

handle NPLs was not really controversial. Similar models have been utilised in China and

Japan (both were set up around 2000). Even before its official launch, however, the VAMC

was already working to temper and recalibrate market expectations.

Described as “miniscule” by the World Bank, the VAMC‟s VND500bn (US$24mn) initial

capitalization precludes the vehicle from absorbing any appreciable amounts of bad debt

loses. The VAMC did report, however, that foreign investors have expressed interest in

working with the VAMC to provide additional private capital for loan purchases. Private

capital involvement is not unprecedented and would follow other AMC models, including the

Resolution Trust Company in the US and Cinda AMC in China. We view the possibility of

strategic private capital involvement as an encouraging sign for the VAMC and a critical factor

to its overall effectiveness.

The VAMC‟s most immediate impact will be to provide indirect liquidity support to the system.

The SBV has mandated that banks (over time) with NPLs greater than 3% to sell portions of

their bad debts to the VAMC until NPL ratio‟s fall below the 3% target.

In return, banks receive face-value equivalent amounts of special 5-YR, 0% coupon VAMC

bonds, which can then be pledged as collateral at the SBV‟s discount window for proceeds

(currently fixed at 5.5%). We expect banks to take this opportunity to off-load their most

problematic NPLs. As such, banks are required to book 20% annual provisions over the life

of their bonds (i.e. 100% provisioned at maturity).

Without explicit decree, the SBV expects banks to use their added liquidity for new prudent

customer lending. The SBV currently maintains a 12% credit growth target for the year; its

July YTD estimate, however, was at only 5.2%. Considering the low credit demand in the

economy, some banks may simply consider buying 5-YR, 8.4% government bonds (the most

liquid) to secure a low risk 290 bps spread. Higher spreads could be earned if the Govt offers

more long dated treasuries in auction.

Due to the lack of tangible bank reforms to date, and the corresponding dilution to controlling

shareholders, some banks may also be tempted to revert to their earlier risky lending

practices or expand into new, even higher-risk ventures in hopes of recouping earlier loan

losses. We plan to watch carefully how banks decide to deploy any new found liquidity.

On paper, the VAMC wields significant authority, including powers to recover and restructure

debts, participate in borrower restructuring, sell loans and auction collateral, request state and

law enforcement resources in support of its actions, and inspect banks. Given the current

legal and regulatory ambiguities surrounding bankruptcy laws and asset seizures, we suspect

it will take some months before the VAMC can effectively organize and begin auctioning

significant asset amounts.

While the VAMC would be the entitled owners of the NPLs, as a practical matter, we

understand that the banks themselves will retain the responsibility for bad debt recoveries.

Considering the VAMC‟s size and limited institutional experience with asset recovery, auction,

and seizure, we view this arrangement as more than just a convenience for the VAMC.

Within days of its launch, the VAMC announced it was preparing to buy up to VND10tn

(US$474mn) in NPLs from about 10 banks. The list may include ACB, which earlier indicated

its interest in possibly selling up to half, or VND1.5tn (US$70mn), of its reported NPLs. ACB

has one of the highest exposures to real estate in its collateral portfolio. The VAMC expects

to buy VND40tn-70tn in NPLs by the end of 2012.

In addition to the immediate liquidity, we also see the VAMC providing two other benefits: 1) it

gives both banks and the SBV time to develop and implement more substantial restructuring

and reform policies, 2) in contrast to Circular 2, the VAMC provides a softer inducement for

banks to bring forth and disclose underreported NPLs, an issue that continues to hinder the

market.


27 August 2013 13

Recently, a more aggressive SBV

As the SBV works and learns its way through its first modern NPL crisis, its approach could

be best described as slow and incremental. Its call for voluntary restructuring and

consolidation within the system, followed by the delay of Circular 2, appears to mostly be a

somewhat tepid initial approach.

In early August, however, this encouragement became forceful with Decision 48/2013, which

empowers the SBV to either purchase direct stakes in weak banks or order banks it deems

healthy to purchase stakes in weak banks. We do not know which banks the SBV may

designate as purchasing banks. Considering their ownership, we would not be surprised to

see an SOCB or two (as subsidiaries of the SBV) as likely designates. Such actions will

certainly begin to dilute the shareholders of existing weak banks.

For any direct SBV investments, we suspect, again, the source to be a combination of base

money or conversion of liquidity support into equity in the targeted banks. In the case, of

SOCBs, unsecured interbank loans from SOCBs to weak banks could also be converted into

equity. Finally, to support designated purchasing banks with their investments, the SBV could

assist through the discount window or the Ministry of Finance could offer tax incentives.

Depending upon the form and level of SBV assistance, the impact on healthy banks and their

shareholders remains unclear. Questions regarding investment levels, governance and

management oversight, cross-ownership and ownership limitations, exit strategies and

investment time horizons also remain open.

Finally the Prime Minister just approved the enabling Decision 48/2013/QD-TTg on banks

under special supervision. According to decision, when a bank that is under special

supervision, doesn't fulfil requests to increase chartered capital, undergo restructuring or

M&A activities, the State Bank of Vietnam (SBV) will have the right to assign other banks to

buy shares of weaker banks. The decision will take effect on September 20th 2013.

Next shoe to drop – raising single shareholder and foreign limits

The SBV has suggested amendments to the Govt for Decree 69 by proposing a „special‟

exemption to the 20% strategic shareholder limit, with the approval of the Prime Minister‟s

Office, but then only for „weak banks‟ (presumably those in bottom quartile of the SBV‟s

liquidity based ranking). Since then, there has yet to be a significant recapitalisation of a

„weak bank‟ under these proposals.

By and large, single shareholder limits in Vietnamese Joint stock banks, still stand at 15% (or

20% with SBV approval). Foreign ownership remains capped at an aggregate 30% and

recent updates to regulations have extended these rules to capture the potential effects of

convertible instruments on a fully diluted basis amongst other administrative measures.

Against that background, Brett Krause – the head of the Banking Group of the Vietnam

Business Forum – mooted the associations view in June this year that current shareholder

and foreign limits are insufficient to allow for an adequate recapitalisation of Vietnam‟s

banking system, through new investment. The VBF called for a „roadmap to majority foreign

ownership‟ to allow „rapid rehabilitation of the sector‟.

The IMF‟s resident representative for Vietnam noted “It‟s in the interest of the overall financial

system. At the end of the day, some money should be put in, in part because you don‟t want

to prolong the problem.”

The choices facing policymakers are now clear 1) refloat the system with base money (and

risk a return of high inflation), 2) liberalise ownership rules (allowing effective or outright

majority control) and allow significant recapitalisation to take place on market terms – and by

definition, accept necessary dilution of founding shareholders or 3) to continue to restrict

ownership at the expense of potentially slower recovery in the sector and likely a continuation

of weak credit appetite by lenders.


27 August 2013 14

Theme 2: FDI may surge, TPP an opportunity for VN On the back of several factors, but most importantly; a strong Govt. push to attract higher

value-added manufacturing to Vietnam, along with the ongoing emphasis on inflation control

and macro stability, and finally, what appears to be a strong political push to conclude the

Trans Pacific Partnership Agreement this year, Vietnam looks to be earning some early

dividends.

On top of Samsung Electronics‟ ongoing US$2.0bn investment for its largest mobile phone

plant outside of Korea to date in the Northern Thai Nguyen province. Samsung Electro-

Mechanics Co will now invest US$1.2 billion in a plant to manufacture chips and electronic

components at the same site. Construction is expected to start in October 2013 and begin

operations in August 2014. According to several widely available media reports, inclusive of

this plant, Samsung‟s total investment in Vietnam will reach at US$5.7bn and be its third

facility in the country.

Fig 17 Vietnam Exports (USDm) Fig 18 Vietnam Imports (USDm)

TPP Countries 2010 2011 2012

Australia 2,704 2,519 3,209 Brunei n.a. n.a. n.a. Canada 802 969 1,157 Chile 94 138 169 Japan 7,728 10,781 13,065 Malaysia 2,093 2,832 4,500 Mexico 489 590 683 New Zealand 123 151 184 Peru 38 n.a. n.a. Singapore 2,121 2,286 2,368 United States 14,238 16,928 19,665

Total 30,430 37,194 44,998

China 7,743 11,125 12,388

TPP Countries 2010 2011 2012

Australia 1,444 2,123 1,772 Brunei n.a. n.a. n.a. Canada 349 342 456 Chile 291 336 370 Japan 9,016 10,400 11,602 Malaysia 3,413 3,920 3,412 Mexico 89 91 112 New Zealand 353 384 385 Peru 69 90 n.a. Singapore 4,101 6,391 6,691 United States 3,767 4,529 4,827

Total 22,893 28,606 29,627

China 20,204 24,594 28,785

Source: MPI, Macquarie Research, Vina Securities, August 2013 Source: MPI, Macquarie Research, Vina Securities, August 2013

In the recent state visit to Washington DC by Vietnamese President Trung Tan Sang,

Vietnam and the USA reaffirmed their intentions to conclude “a comprehensive, high-standard

Trans-Pacific Partnership (TPP) agreement this year.” The opportunity the TPP presents to

Vietnam is clear and broadly summed up as follows:

“Joining the TPP, and positive, robust implementation of the commitments could

increase bilateral trade between Vietnam and the U.S. to about US$61.3 billion by

2020. And Vietnam‟s apparel exports to the U.S. could increase to US$22 billion by

2020. Already, South Korean, Chinese, Japanese and other companies have

announced over US$1 billion FDI in Vietnam to provide the supporting textiles

industries, yarn-spinning and fabric-weaving, so that Vietnam‟s apparel exports will be

able to benefit from zero import duties in TPP markets.”

-Herb Cochran, Executive Director of AmCham Vietnam in HCMC.

One of the key issues in the TPP is the “yarn-forward” rule, which means yarn and fabric must

be manufactured and assembled in the free-trade partner country in order to enter U.S.

markets tariff-free. Dropping this has been contentious, as more than 160 Members of

Congress have signed a letter to the U.S. trade representative, asking to maintain the yarn-

forward rule, which has reportedly been included in every major U.S. free trade deal for the

last 25 years.

We note that Garment companies in Vietnam heavily rely on fabric imports as the domestic

textile industry cannot supply high-quality fabric. Currently, Vietnam imports raw materials

used in garment manufacturing, including 75 per cent of fabric, 90 per cent of cotton and all

polyester filament and fibre requirements. The demand for fibre was high and local firms had

to import 150,000 tonnes each year, according to a press statement by the Vietnam National

Textile Garment Group.

FDI into

manufacturing is

now significant.

TPP is generating

significant FDI

Interest in Textiles

and garments


27 August 2013 15

As we have noted last year, the trade deficit with China is a significant source of opportunity

cost to Vietnam. In 2012, Vietnam ran a US$16.4bn trade deficit with China and in the first

half of this year, it reportedly stood at US$11.4bn.

There has been press commentary that “yarn-forward” and trans-shipment provisions will

result in a slower rate of textile FDI in Vietnam relative to if the rule was included. However,

we believe that the country‟s proximity to China along with TPP benefits will drive a growing

trend of intermediate manufacturing investment in Vietnam, a necessary step if Vietnam

hopes to increase productivity, and become less dependent on wage advantages over time.

China‟s Texhong textile group may have already seen this likely outcome, it has already

invested $200 million in a plant in Dong Nai Province, and in April 2012 the company said it

would invest $300 million to build a new yarn factory in Quang Ninh. When fully complete,

Texhong will be able to produce110,000 tonnes of yarn in Vietnam. As noted in its 1H13

interim reports:

“At present, the first phase of the northern Vietnam project of about 170,000 spindles

and 30 sets of open-end spinning machines was successfully put into full production in

July 2013 at high efficiency. Our newly expanded capacity in other places including

Vietnam and China of about 600,000 spindles in aggregate is expected to be put into

full operation on a gradual basis in the third quarter of 2013.”

“For the expansion plan in 2014, it is expected that production facilities equivalent to

about 520,000 spindles will be built and are expected to be completed in the second

half of 2014. The total investment will be about RMB1.35 billion. This will include the

second phase of our northern Vietnam project with about 230,000 spindles.”

Fig 19 Selected Big Ticket FDI projects

Project - 2013 Province Industry Investor Country New Capital

(USD mn) Total Capital

(USD mn)

PTT Nhon Hoi Refinery Binh Dinh Refining (Feasibility Study) Thailand 28,700 28,700 Formosa Plastics Group Ha Tinh Steel / PetroChemiclas Taiwan 17,100 27,000 Nghi Son Oil Refinery Thanh Hoa Refining Japan, Kuwait 2,800 6,740 Long Son Petrochemical Complex

Ba Ria Petrochemicals Thailand, Qatar 4,500 4,500

Samsung Electronics Co., Ltd Thai Nguyen Electronics Korea, Singapore 2,000 3,200 Samsung Electronics Co., Ltd Bac Ninh Electronics Korea 1,000 2,500 Bus Industrial Center Co., Ltd Binh Dinh Manufacturing & Processing Russia 1,000 1,000 VSIP Dung Quat Quang Ngai Industrial Parks Singapore 338 338 VSIP Binh Hoa Binh Duong Industrial Parks Singapore 200 200

Project - 2012 Province Industry Investor Country New Capital

(USD mn) Total Capital

(USD mn)

Samsung Electronics Co., Ltd Bac Ninh Electronics Korea 830 1,500 Tokyu Binh Duong Garden City Binh Duong Real Estate / Industrial parks Japan 1,200 1,200 Wintek Vietnam Co., Ltd. Bac Giang Electronics Taiwan 870 1,120 Shimizu Group Hanoi Real Estate / Industrial parks Japan 1,000 1,000 Bridgestone Tire Vietnam Hai Phong Manufacturing and Processing Japan 575 575 LIXIL Vietnam Dong Nai Manufacturing and Processing Japan 441 441 Oshima Shipbuilding Khanh Hoa Transport and Storage Japan 180 180

Source: MPI, Macquarie Research, Vina Securities, August 2013


27 August 2013 16

There has been some movement in big ticket FDI Projects over the last year. As noted, these

intermediate industries are necessary precursors‟ for Vietnam to improve productivity.

The Japanese and Kuwaiti joint venture behind the Nghi Son Oil Refinery complex in Thanh

Hoa Province took a major step forward in late July when the project officially received its

land-use rights and construction certificates. The US$9.0bn project, 75% foreign-owned, is

scheduled to begin construction in the Nghi Son Economic Zone in September and is

expected to boost the country‟s refinery capacity by more than 200,000 barrels/day, or 10

million tonnes/yr, once completed in 2016.

This would more than double the country‟s current estimated 6.5 million tones/yr refining

capacity and allow Vietnam to meet upwards of 70% of its domestic petrol fuel needs, up

significantly from its current 30% level.

Following closely behind Nghi Son, another mammoth project, the US$4bn Long Son

Petrochemical complex, also received its official land transfer papers in mid-August, allowing

construction to begin in early 2014. The Long Son complex will produce polymer materials

and plastics for domestic consumption.


27 August 2013 17

Theme 3: Facing reality – Steady change Raising foreign ownership limits

The Ministry of Finance, following a review by the State Securities Commission submitted a

plan on liberalisation of foreign limits to the Prime Minister‟s office for approval. Details remain

sketchy, but the plan would raise limits to 60% from 49% for what was termed „non

conditional‟ industries. Restricted industries limits would remain at 49%, with an additional

quota of 10% in non-voting shares. No disclosures on which industries will be restricted were

mentioned, but we expect Energy, Telecom, Utilities and Resources to lead the list. But an

open question remains; will policy makers allow foreign control of Commercial Bank (i.e. will

foreign limits in banks go from 30% currently to 49% or perhaps 60%)?

An increase in foreign limits from 49% to 60% and the creation of a 10% non-voting tranche in

restricted sectors would open up another US$4.5 in foreign quota over and above the existing

available room of US$2.1bn. This would also be only for stocks listed in the VN30 Index. A

sizable increase in quota would also make up significant room in the small cap stocks or

stocks with low free floats that are not captured by the VN30.

The two industry groups that would see the largest increase in foreign availability (in absolute

terms) would be Commercial Banks followed Food Products. The later is largely driven by

increased room in MSN and VNM, whilst the former from the six listed banks.

Fig 20 Estimating the invest-ability effects of higher foreign limits

GICS Industry Group (USD mn) Mkt Cap Avail. Quota Assumed New Limit Non Voting Shares Increased Quota

Energy Equipment & Services $602.7 $72.1 49% 10% $132.4 Chemicals $758.2 $158.2 60% 0% $241.7 Metals & Mining $842.3 $72.1 49% 10% $156.3 Transportation Infrastructure $242.1 $43.8 60% 0% $70.4 Construction & Engineering $157.2 $51.7 60% 0% $69.0 Consumer Discretionary $366.8 $0.0 60% 0% $40.4 Auto Components $273.3 $85.1 60% 0% $115.1 Food Products $9,325.8 $547.3 60% 0% $1,573.2 Commercial Banks $8,366.2 $419.8 60% 0% $2,929.7 Real Estate Management & Devel $2,761.0 $247.9 60% 0% $551.6 Insurance $1,374.2 $341.3 60% 0% $492.5 Capital Markets $476.6 $29.3 60% 0% $81.7 Diversified Financial Services $873.3 $29.3 60% 0% $125.3 Electronic Equip., Instruments $614.3 $0.0 60% 0% $67.6 Electric Utilities $136.9 $28.4 49% 10% $42.1 Gas Utilities $62.6 $0.0 49% 10% $6.3 Total $27,233.5 $2,126.3 $6,695.3 Additional Quota $4,568.8

Source: Macquarie Research, Vina Securities, August 2013

Next steps, executing on SOE reforms

The government‟s SOE reform plan has been progressing slowly and haphazardly. Officially,

SOEs will be required to divest non-core assets, streamline operations, and improve internal

controls and financial reporting lines. About 1,200 SOEs are planned to be restructured.

However, the reform strategy for the 2011–2015 periods focuses on retaining full ownership

of approximately half of the SOEs that operate in public service areas or are of strategic

value, some of which have significant monopoly power (i.e. EVN). The balance of the SOEs

are to be equitized, restructured, sold, or ultimately be liquidated.

Implementation on SOE reform so far has been haphazard, a few large SOEs (PetroVietnam,

VinaChem) have put broadly defined plans on paper, but very few sizable transactions in

restructuring have been executed.

One of the problems with SOEs is the contingent liabilities they reportedly possess. There

has been comments that public/debt to GDP is closer to 100% once SOE loans are added

into the equation. In what sounds like a familiar reason for delaying circular 2. Too aggressive

reform could lead to uncomfortable liquidations of collateral and further NPL visibility. As

such, as the VAMC begins to deal with the bad debt in the system, it may well herald or open

the door to acceleration in SOE reform.

Long-awaited

changes to FII limits

have been

proposed.

Incremental room if

US$4.6bn could be

created.


27 August 2013 18

Appendices – Demographics, FDI & wages

Fig 21 Vietnam Population Pyramid (2015E)

Fig 22 Vietnam Population Pyramid (2030E)

Source: World Bank, Macquarie Research, Vina Securities, Aug 2013 Source: World Bank, Macquarie Research, Vina Securities, Aug 2013

Fig 23 Vietnam Working age Population (1960-2050E)

Fig 24 Vietnam Dependency Ratio (1960-2050E)

Source: World Bank, Macquarie Research, Vina Securities, Aug 2013 Source: World Bank, Macquarie Research, Vina Securities, Aug 2013

Fig 25 Cumulative FDI (US$m)

Registered Capital Jun-09 Jan-11 Jun-11 Dec-11 Jun-12 Sep-12 Dec-12 Mar-13 Jul-13

Manufacturing and Processing 87,401 95,155 98,480 93,053 97,922 100,791 103,524 111,470 116,443Real Estate 33,929 48,004 48,198 47,002 49,358 49,732 49,724 47,920 48,259Accomodations and food 10,938 11,383 11,748 11,830 10,539 10,540 10,606 10,606 10,698Construction 9,118 11,596 11,739 12,500 10,385 10,245 9,917 10,063 9,880Electricity, Gas, Water, Production & Distrib.

2,107 4,870 5,136 7,398 7,404 7,408 7,486 7,489 7,501

Information and communications

4,644 4,789 4,829 5,697 5,721 6,115 3,938 3,952 4,030

Arts and Entertainment 3,662 3,461 3,621 3,636 3,699 3,680 3,675 3,629 3,665Transport and Storage 2,125 3,180 3,218 3,262 3,446 3,463 3,476 3,496 3,519Agriculture, forestry, fisheries 2,960 3,094 3,161 3,218 3,284 3,290 3,344 3,262 3,304Mining 3,078 2,940 2,975 2,975 3,020 3,020 3,177 3,182 3,197Wholesale, retail, repair 1,006 1,609 1,814 2,067 2,321 2,530 2,814 2,984 3,126Finance, banking, insurance 1,182 1,321 1,322 1,322 1,322 1,322 1,322 1,322 1,322Health and Social Assistance 952 988 1,037 1,015 1,166 1,166 1,219 1,302 1,305Water Supply, Waste Treatment

48 64 387 710 2,410 2,402 1,234 1,239 1,285

Professional Specialties, Science and Tech.

508 717 786 983 1,004 1,060 1,087 1,113 1,161

Other Services 600 646 644 716 713 728 733 740 741Education and Training 244 380 345 355 429 433 458 463 648Admin and Support Services 177 183 183 188 189 192 201 201 194 Total 164,680 194,380 199,625 197,927 204,332 208,115 207,936 214,434 220,278

Source: World Bank, Macquarie Research, Vina Securities, August 2013

6.0% 4.0% 2.0% 0.0% 2.0% 4.0% 6.0%

0-45-9

15-1920-2425-2930-3435-3940-4445-4950-5455-5960-6465-6970-74

Male (%) Female (%)

6.0% 4.0% 2.0% 0.0% 2.0% 4.0% 6.0%

0-45-9

15-1920-2425-2930-3435-3940-4445-4950-5455-5960-6465-6970-74

Male (%) Female (%)


27 August 2013 19

Fig 26 Share of FDI buy 5 largest industries

Fig 27 Wage differentials – Vietnam vs. China (Avg textile worker salary US$ month)

Source: World Bank, Macquarie Research, Vina Securities, Aug 2013 Source: Macquarie Research, Vina Securities, August 2013

Fig 28 Coastal vs. in-country population density

Source: Columbia University, Macquarie Research, Vina Securities, August 2013

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

% o

f Cum

ula

tive

Reg

iste

red

Cap

ital

Manufacturing and ProcessingReal EstateAccomodations and foodConstructionElectricity, Gas, Water, Air Conditioning Production & Distrib.

0

100

200

300

400

500

600

2008 2009 2010 2011 2012

Indonesia CambodiaVietnam ChinaPhilippines


27 August 2013 20

VIETNAM

FPT VN Outperform

Price (at 06:52, 23 Aug 2013 GMT) VND45,400

Valuation VND 49,100 - PER

12-month target VND 49,100

Upside/Downside % +8.1

12-month TSR % +12.1

Volatility Index Low

GICS sector Technology Hardware & Equipment

Market cap VNDbn 12,490

Market cap US$m 592

Free float % 70

30-day avg turnover US$m 0.0

Number shares on issue m 275.1

Investment fundamentals Year end 31 Dec 2012A 2013E 2014E 2015E

Revenue bn 24,594 26,342 29,278 32,668 EBIT bn 2,232 2,279 2,592 2,964 EBIT growth % -12.9 2.1 13.7 14.3 Reported profit bn 1,540 1,546 1,759 1,976 EPS rep VND 5,665 5,648 6,392 7,184 EPS rep growth % 12.8 -0.3 13.2 12.4 PER rep x 8.0 8.0 7.1 6.3 Total DPS VND 3,635 1,508 1,500 2,501 Total div yield % 8.0 3.3 3.3 5.5 ROA % 15.3 15.3 15.5 15.6 ROE % 25.4 22.3 22.0 21.2 EV/EBITDA x 4.9 4.7 4.1 3.5 Net debt/equity % 11.8 2.9 -5.6 -12.5 P/BV x 2.0 1.7 1.4 1.3

FPT VN rel Vietnam Ho Chi Minh performance, & rec history

Note: Recommendation timeline - if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period.

Source: FactSet, Macquarie Research, August 2013

(all figures in VND unless noted)

Analyst(s) Jeff Su +886 2 2734 7512 [email protected]

Vina Securities Gigi Nguyen +848 3821 9316 [email protected]

27 August 2013 Macquarie Capital Securities Limited, Taiwan Branch

FPT Corp. Vietnam’s infocomm leader The company

FPT is a proxy on Vietnam’s fast-growing Info-Communications (ICT) market.

It has a leading market share in sales in each segment in which it operates:

software outsourcing (1st), systems integration (1st), IT products distribution

(1st) and broadband telecommunication services (3rd).

Founded by 13 partners in 1988, FPT Corporation (FPT) became a public

company in Mar-02 and listed on the Ho Chi Minh stock exchange (HoSE) in

Dec-06. Over the last 25 years, the group has established its reputation in

Vietnam’s information and communication technology (ICT) sector with

market-leading positions in software outsourcing (1st), systems integration

(1st), IT and mobile product distribution (1st) and broadband service (3rd).

The group employs nearly 15,000 staff and operates under five main

divisions: FPT IS, FPT Software, FPT Telecom, FPT Trading and FPT Edu.

Recent results & key drivers

Pre-tax profit for the first seven months of FY13 totaled VND1.4tn (+5.7%

YoY), or 57.6% of our FY13 estimate. This was underpinned by FPT Telecom

(+8.5% YoY), which contributed 42.3% to blended profit, and the software

outsourcing division (+60% YoY). IT and mobile distribution remain a drag on

the bottom line, with segment pre-tax profit down 29.8% YoY.

We believe that Vietnam’s core ICT market (which includes broadband,

software outsourcing and systems integration) will continue to grow, driven by

1) Competitive advantages in software outsourcing on lower wages and

comparable skills, 2) broadband penetration rising off a low base and the

introduction of value-added services such as IP TV and 3) improved

performance in the systems integration division as e-Govt and other banking

tenders grow.

FPT is in exclusive negotiations to acquire the state’s 50.2% stake in FPT

Telecom. We expect any transaction to be largely funded by stock issuance

and to be concluded late this year. On our estimates, VND592.3bn–719.8bn

in FPT Tel profits will accrue to the State Capital Investment Corporation

(SCIC) in the next two years.

Earnings and target price revision

No change.

Price catalyst

12-month price target: VND49,100 based on a PER methodology.

Catalyst: Strong growth in software business, recovery in the IS segment and

ongoing negotiations to consolidate FPT Telecom.

Action and recommendation

We maintain our OP rating and value the stock at VND49,100, for a 12.1%

TSR. We note that FPT trades at a significant discount to peers, but given our

forecast for EPS growth of 13.2% for FY14 and a full foreign limit, we believe

a valuation re-rating will likely come with full consolidation of FPT Tel and

more visibility on consolidated EPS growth. Our target price reflects the

simple average of FY13E and FY14E fair values for FPT based on a target

PER of 8.7x.


27 August 2013 21

FPT Corp. (FPT VN, Outperform, Target Price: VND49,100) Interim Results 2H/12A 1H/13E 2H/13E 1H/14E Profit & Loss 2012A 2013E 2014E 2015E

Revenue bn 13,353.0 12,267.2 14,075.2 15,208.1 Revenue bn 24,594.3 26,342.4 29,278.4 32,668.2 Gross Profit bn 2,674.6 2,763.6 2,980.3 3,440.2 Gross Profit bn 5,091.8 5,743.9 6,622.9 7,762.2 Cost of Goods Sold bn 10,678.4 9,503.6 11,094.9 11,768.0 Cost of Goods Sold bn 19,502.5 20,598.5 22,655.5 24,906.0 EBITDA bn 1,276.8 1,437.9 1,356.6 1,686.9 EBITDA bn 2,631.3 2,794.5 3,247.6 3,770.6 Depreciation bn 205.3 205.3 310.1 340.7 Depreciation bn 399.7 515.4 655.9 807.1 Amortisation of Goodwill bn 0.0 0.0 0.0 0.0 Amortisation of Goodwill bn 0.0 0.0 0.0 0.0 Other Amortisation bn 0.0 0.0 0.0 0.0 Other Amortisation bn 0.0 0.0 0.0 0.0 EBIT bn 1,071.6 1,232.6 1,046.5 1,346.2 EBIT bn 2,231.6 2,279.1 2,591.7 2,963.5 Net Interest Income bn 42.7 3.7 125.6 134.9 Net Interest Income bn 86.4 129.3 259.7 370.6 Associates bn 3.3 8.0 24.6 17.0 Associates bn 32.7 32.7 32.7 32.7 Exceptionals bn 33.0 40.9 -0.0 0.0 Exceptionals bn 55.7 40.9 0.0 0.0 Forex Gains / Losses bn 15.4 -32.5 3.9 -18.0 Forex Gains / Losses bn 34.1 -28.6 -34.6 -38.0 Other Pre-Tax Income bn 35.5 23.9 -0.0 0.0 Other Pre-Tax Income bn -33.9 23.9 0.0 0.0 Pre-Tax Profit bn 1,201.5 1,276.7 1,200.5 1,480.1 Pre-Tax Profit bn 2,406.6 2,477.2 2,849.5 3,328.7 Tax Expense bn -205.9 -217.7 -215.7 -259.0 Tax Expense bn -421.1 -433.4 -498.6 -632.5 Net Profit bn 995.6 1,059.0 984.8 1,221.1 Net Profit bn 1,985.5 2,043.8 2,350.9 2,696.2 Minority Interests bn -208.2 -255.9 -241.8 -307.6 Minority Interests bn -445.2 -497.7 -592.3 -719.8

Reported Earnings bn 787.4 803.1 743.0 913.5 Reported Earnings bn 1,540.3 1,546.1 1,758.6 1,976.4 Adjusted Earnings bn 754.4 762.2 743.0 913.5 Adjusted Earnings bn 1,484.6 1,505.3 1,758.6 1,976.4

EPS (rep) hào 2,896 2,934 2,714 3,320 EPS (rep) hào 5,665 5,648 6,392 7,184

PE (rep) x 6.2 8.0 7.1 6.3

EBITDA Margin % 9.6 11.7 9.6 11.1 Total DPS hào 3,635 1,508 1,500 2,501 EBIT Margin % 8.0 10.0 7.4 8.9 Total Div Yield % 10.3 3.3 3.3 5.5 Earnings Split % 50.8 50.6 49.4 51.9 Weighted Average Shares m 272 274 275 275 Revenue Growth % -0.4 9.1 5.4 24.0 Period End Shares m 272 274 275 275 EBIT Growth % -14.8 6.3 -2.3 9.2

Profit and Loss Ratios 2012A 2013E 2014E 2015E Cashflow Analysis 2012A 2013E 2014E 2015E

Revenue Growth % -3.1 7.1 11.1 11.6 EBITDA bn 2,631.3 2,794.5 3,247.6 3,770.6 EBITDA Growth % -10.4 6.2 16.2 16.1 Tax Paid bn -421.1 -433.4 -498.6 -632.5 EBIT Growth % -12.9 2.1 13.7 14.3 Chgs in Working Cap bn 201.4 -731.3 -1,168.2 -1,313.2 Gross Profit Margin % 20.7 21.8 22.6 23.8 Net Interest Paid bn 0.0 0.0 0.0 0.0 EBITDA Margin % 10.7 10.6 11.1 11.5 Other bn 260.5 98.3 1,003.2 1,195.6 EBIT Margin % 9.1 8.7 8.9 9.1 Operating Cashflow bn 2,672.1 1,728.1 2,584.0 3,020.6 Net Profit Margin % 8.1 7.8 8.0 8.3 Acquisitions bn 0.0 0.0 0.0 0.0 Payout Ratio % 66.6 27.4 23.5 34.8 Capex bn -716.5 -1,017.6 -1,283.8 -1,300.0 EV/EBITDA x 3.9 4.7 4.1 3.5 Asset Sales bn 0.0 0.0 0.0 0.0 EV/EBIT x 4.6 5.7 5.1 4.4 Other bn 201.3 23.9 0.0 0.0

Investing Cashflow bn -515.2 -993.7 -1,283.8 -1,300.0 Balance Sheet Ratios Dividend (Ordinary) bn -988.4 -412.8 -412.8 -688.0 ROE % 25.4 22.3 22.0 21.2 Equity Raised bn 652.9 13.5 0.0 0.0 ROA % 15.3 15.3 15.5 15.6 Debt Movements bn -1,718.6 -331.8 -7.2 -7.2 ROIC % 22.5 23.7 23.8 23.8 Other bn -686.3 243.2 -34.6 -38.0 Net Debt/Equity % 11.8 2.9 -5.6 -12.5 Financing Cashflow bn -2,740.4 -487.9 -454.6 -733.2 Interest Cover x nmf nmf nmf nmf Price/Book x 1.5 1.7 1.4 1.3 Net Chg in Cash/Debt bn -583.5 246.5 845.6 987.4 Book Value per Share 22,735.1 26,769.4 31,529.3 36,211.8

Free Cashflow bn 1,955.7 710.5 1,300.1 1,720.6

Balance Sheet 2012A 2013E 2014E 2015E Cash bn 2,318.9 2,565.4 3,410.9 4,398.3 Receivables bn 3,208.6 3,436.7 3,819.7 4,261.9 Inventories bn 2,699.5 3,135.7 3,449.9 3,793.6 Investments bn 1,147.9 1,147.9 1,147.9 1,147.9 Fixed Assets bn 2,348.6 2,903.3 3,583.7 4,129.1 Intangibles bn 485.5 433.0 380.5 328.0 Other Assets bn 2,000.3 1,906.2 2,038.2 2,185.4 Total Assets bn 14,209.2 15,528.1 17,830.7 20,244.3 Payables bn 3,097.3 2,838.0 3,090.7 3,369.4 Short Term Debt bn 2,859.7 2,807.2 2,807.2 2,807.2 Long Term Debt bn 293.6 14.3 7.2 0.0 Provisions bn 297.3 532.9 592.3 660.8 Other Liabilities bn 567.0 597.0 656.6 721.8 Total Liabilities bn 7,114.9 6,789.3 7,153.8 7,559.2 Shareholders' Funds bn 6,181.8 7,328.6 8,674.5 9,962.8 Minority Interests bn 912.5 1,410.2 2,002.4 2,722.3 Other bn 0.0 0.0 0.0 0.0 Total S/H Equity bn 7,094.3 8,738.8 10,676.9 12,685.1 Total Liab & S/H Funds bn 14,209.2 15,528.1 17,830.7 20,244.3

All figures in VND unless noted. Source: Company data, Macquarie Research, August 2013


27 August 2013 22

VIETNAM

HPG VN Outperform






Volatility Index High

GICS sector Materials


Market cap US$m 639

Free float % 56




Revenue bn 16,827 18,663 22,023 25,993 EBIT bn 1,624 1,948 2,928 3,585 EBIT growth % -27.9 19.9 50.3 22.5 Reported profit bn 994 1,500 2,110 2,636 EPS rep VND 2,157 3,580 5,036 6,290 EPS rep growth % -27.8 66.0 40.7 24.9 PER rep x 14.9 9.0 6.4 5.1 Total DPS VND 791 2,000 2,000 2,000 Total div yield % 2.5 6.2 6.2 6.2 ROA % 8.9 9.5 13.2 16.3 ROE % 12.7 16.6 22.5 24.1 EV/EBITDA x 8.3 7.0 4.9 4.2 Net debt/equity % 58.4 87.9 54.1 16.9 P/BV x 1.7 1.5 1.3 1.1

HPG VN rel Vietnam Ho Chi Minh performance, & rec history




Analyst(s) Gary Pinge +852 3922 3557 [email protected]

Vina Securities Duong Dinh +848 3821 9316 [email protected]

27 August 2013 Macquarie Capital Securities Limited

Hoa Phat Group JSC Vietnam’s most profitable steel company The company

HPG is the second- biggest player (14.3% market share) in Vietnam’s steel

industry, with long steel capacity of 650,000 TPA. HPG secured its

competitive market position by leveraging an integrated production chain,

which includes: 1) six iron ore mines with total reserves of 50.0mn tonnes, 2)

an internal coke production factory with capacity of 700,000 TPA and 3) an

ongoing project to double its steel production capacity.

HPG’s market share has steadily risen, to 14.3% in May-13 from 12.0% in

Dec-10, despite a gloomy construction and real estate market. HPG has

opportunistically grabbed market share away from weaker competitors.

For 1H13, HPG achieved VND8,410.4bn in revenue (-3.9% YoY) and

VND1,012.6bn in net profit (+86.7% YoY), which accounted for 45.0% and

67.5% (from asset disposals) of our FY13E revenue and profit forecasts,

respectively.


HPG’s phase II steel capacity project (500,000 TPA) will complete the group’s

blast furnace production chain, doubling capacity to 1.15mn TPA, and lower

production costs (- 8.1%) given internal coke & iron ore supply. The phase II

plant is expected to come on-stream in late-3Q13.

We estimate that the operation of this Basic Oxygen Furnace (phase II) will

help HPG achieve sales volume of 703,000 tonnes (+15.0% YoY) in FY13E

and 829,900 tonnes (+18.0% YoY) in FY14E.

We thus forecast core EPS growth (construction steel) will be 14.9% in

FY13E, rising to 45.1% in FY14E. This growth reflects higher sales volumes,

lower production and input costs (-8.1%) and a substantial drop in interest

expense (given an 800bp in rate cuts since Jan-12 ).

HPG’s legacy property project (Mandarin Gardens) has now sold 600 of 1,000

units. The company is slowly selling down its unsold inventory. We estimate

revenue of VND5,885.9bn and net profit of VND745.4bn over the FY13–15E

period.


No change.

Price catalyst


Catalyst: Volume growth in 2H13, following the phase II commercialisation.


HPG shares are now trading on a FY13E P/E of 8.5x (a 40.6% discount to

Peers). EPS is back on a growth path, with a CAGR of 29.1% in FY12–14E.

ROE is also back to 20.0%, and HPG has promised a dividend yield of 6.5%.

We note that our valuation is based on the company’s core steel business

earnings and excludes its real estate interests.


27 August 2013 23

Hoa Phat Group JSC (HPG VN, Outperform, Target Price: VND34,000) Interim Results 2H/12A 1H/13E 2H/13E 1H/14E Profit & Loss 2012A 2013E 2014E 2015E

Revenue bn 8,192.9 8,398.2 10,264.4 9,910.2 Revenue bn 16,826.9 18,662.6 22,022.6 25,993.1 Gross Profit bn 1,550.4 1,596.1 1,950.8 2,175.7 Gross Profit bn 3,081.5 3,546.9 4,834.9 5,605.3 Cost of Goods Sold bn 6,642.5 6,802.1 8,313.6 7,734.4 Cost of Goods Sold bn 13,745.4 15,115.7 17,187.7 20,387.8 EBITDA bn 957.9 1,182.9 1,445.8 1,701.5 EBITDA bn 2,220.5 2,628.8 3,781.2 4,446.4 Depreciation bn 293.3 306.5 374.6 384.1 Depreciation bn 596.2 681.1 853.6 861.1 Amortisation of Goodwill bn 0.0 0.0 0.0 0.0 Amortisation of Goodwill bn 0.0 0.0 0.0 0.0 Other Amortisation bn 0.0 0.0 0.0 0.0 Other Amortisation bn 0.0 0.0 0.0 0.0 EBIT bn 664.6 876.5 1,071.2 1,317.4 EBIT bn 1,624.2 1,947.7 2,927.6 3,585.3 Net Interest Income bn -189.9 -121.2 -148.2 -147.4 Net Interest Income bn -457.8 -269.4 -327.6 -243.1 Associates bn -0.2 -0.3 -0.3 -0.3 Associates bn -0.5 -0.6 -0.6 -0.6 Exceptionals bn 24.5 47.7 58.2 0.0 Exceptionals bn 14.9 105.9 0.0 0.0 Forex Gains / Losses bn 41.5 -26.4 -32.2 -30.7 Forex Gains / Losses bn -5.3 -58.6 -68.1 -78.0 Other Pre-Tax Income bn 42.7 0.0 0.0 0.0 Other Pre-Tax Income bn 42.7 0.0 0.0 0.0 Pre-Tax Profit bn 583.1 776.3 948.8 1,139.1 Pre-Tax Profit bn 1,218.2 1,725.0 2,531.3 3,263.6 Tax Expense bn -76.2 -93.2 -113.9 -170.9 Tax Expense bn -187.7 -207.2 -379.7 -554.8 Net Profit bn 506.9 683.0 834.8 968.2 Net Profit bn 1,030.6 1,517.9 2,151.6 2,708.8 Minority Interests bn -53.0 -8.0 -9.8 -18.6 Minority Interests bn -36.5 -17.9 -41.4 -72.8

Reported Earnings bn 453.9 675.0 825.0 949.6 Reported Earnings bn 994.1 1,500.0 2,110.2 2,636.0 Adjusted Earnings bn 429.5 627.3 766.8 949.6 Adjusted Earnings bn 979.1 1,394.1 2,110.2 2,636.0

EPS (rep) VND 1,083 1,611 1,969 2,266 EPS (rep) VND 2,157 3,580 5,036 6,290

PE (rep) x 9.7 9.0 6.4 5.1

EBITDA Margin % 11.7 14.1 14.1 17.2 Total DPS hào 791.4 2,000 2,000 2,000 EBIT Margin % 8.1 10.4 10.4 13.3 Total Div Yield % 3.8 6.2 6.2 6.2 Earnings Split % 43.9 45.0 55.0 45.0 Weighted Average Shares m 461 419 419 419 Revenue Growth % -4.7 -2.7 25.3 18.0 Period End Shares m 419 419 419 419 EBIT Growth % -10.7 -8.7 61.2 50.3


Revenue Growth % -5.7 10.9 18.0 18.0 EBITDA bn 2,220.5 2,628.8 3,781.2 4,446.4 EBITDA Growth % -20.6 18.4 43.8 17.6 Tax Paid bn -187.7 -207.2 -379.7 -554.8 EBIT Growth % -27.9 19.9 50.3 22.5 Chgs in Working Cap bn -1,311.8 -1,498.2 -246.8 446.1 Gross Profit Margin % 18.3 19.0 22.0 21.6 Net Interest Paid bn 0.0 0.0 0.0 0.0 EBITDA Margin % 13.2 14.1 17.2 17.1 Other bn 1,548.4 -911.2 266.4 302.7 EBIT Margin % 9.7 10.4 13.3 13.8 Operating Cashflow bn 2,269.4 12.2 3,421.1 4,640.3 Net Profit Margin % 6.1 8.1 9.8 10.4 Acquisitions bn 0.0 0.0 0.0 0.0 Payout Ratio % 37.4 60.1 39.7 31.8 Capex bn -1,828.1 -2,238.3 -100.0 -100.0 EV/EBITDA x 6.2 7.0 4.9 4.2 Asset Sales bn 0.0 0.0 0.0 0.0 EV/EBIT x 8.5 9.5 6.3 5.2 Other bn 168.4 -0.6 -0.6 -0.6

Investing Cashflow bn -1,659.7 -2,238.9 -100.6 -100.6 Balance Sheet Ratios Dividend (Ordinary) bn -361.8 -838.1 -838.1 -838.1 ROE % 12.7 16.6 22.5 24.1 Equity Raised bn 0.0 0.0 0.0 0.0 ROA % 8.9 9.5 13.2 16.3 Debt Movements bn -118.9 2,848.2 -1,476.7 -2,651.4 ROIC % 10.3 12.6 14.3 18.3 Other bn 101.1 -58.6 -68.1 -78.0 Net Debt/Equity % 58.4 87.9 54.1 16.9 Financing Cashflow bn -379.6 1,951.6 -2,383.0 -3,567.5 Interest Cover x 3.5 7.2 8.9 14.7 Price/Book x 1.1 1.5 1.3 1.1 Net Chg in Cash/Debt bn 230.2 -275.1 937.5 972.2 Book Value per Share 19,293.8 20,873.4 23,909.1 28,199.4

Free Cashflow bn 441.3 -2,226.1 3,321.1 4,540.3

Balance Sheet 2012A 2013E 2014E 2015E Cash bn 1,294.5 1,019.4 1,956.9 2,929.2 Receivables bn 1,150.5 1,191.4 1,384.2 1,566.5 Inventories bn 3,884.2 5,543.9 6,395.1 7,430.0 Investments bn 240.4 240.4 240.4 240.4 Fixed Assets bn 6,840.9 8,420.7 7,689.7 6,951.2 Intangibles bn 1,084.8 1,062.2 1,039.7 1,017.1 Other Assets bn 4,520.5 4,691.9 3,597.7 1,661.5 Total Assets bn 19,015.7 22,169.9 22,303.6 21,795.8 Payables bn 1,520.6 1,674.9 1,912.9 2,253.0 Short Term Debt bn 4,850.2 5,633.4 5,106.5 2,540.7 Long Term Debt bn 1,455.7 3,520.8 2,571.0 2,485.4 Provisions bn 209.9 209.9 209.9 209.9 Other Liabilities bn 2,401.7 1,873.5 1,932.5 1,865.3 Total Liabilities bn 10,438.2 12,912.6 11,732.8 9,354.4 Shareholders' Funds bn 7,790.6 8,452.5 9,724.6 11,522.5 Minority Interests bn 492.4 510.3 551.6 624.4 Other bn 294.5 294.5 294.5 294.5 Total S/H Equity bn 8,577.5 9,257.3 10,570.8 12,441.5 Total Liab & S/H Funds bn 19,015.7 22,169.9 22,303.6 21,795.8



27 August 2013 24

VIETNAM

PVD VN Outperform


Valuation VND 69,100.00 - EV/EBITDA

12-month target VND 69,100.00



Volatility Index Medium

GICS sector Energy


Market cap US$m 588

Free float % 50




Revenue m 572.8 650.6 656.6 723.2 EBIT m 90.9 112.5 119.8 140.2 EBIT growth % 26.7 23.8 6.5 17.0 Reported profit m 62.6 84.9 88.2 97.8 EPS rep ¢ 29.9 37.1 35.5 39.4 EPS rep growth % 18.3 24.2 -4.3 10.9 PER rep x 9.4 7.5 7.9 7.1 Total DPS ¢ 0.4 0.4 0.4 0.4 Total div yield % 0.1 0.1 0.1 0.1 ROA % 10.1 11.9 11.5 12.3 ROE % 19.1 20.3 17.1 15.9 EV/EBITDA x 5.3 5.1 4.8 4.2 Net debt/equity % 78.2 36.0 35.6 11.1 P/BV x 1.7 1.5 1.3 1.0

PVD VN rel Vietnam Ho Chi Minh performance, & rec history



(all figures in USD unless noted)

Analyst(s) James Hubbard, CFA +852 3922 1226 [email protected]



PetroVietnam Drilling and Well Services Placement finished successfully Event

We reiterate our OP rating for PVD, increase our TP by 19.9% to VND69,100

(+17.1% upside). This is due to the decline in net debt given USD68.5mn in

private placement’s proceeds, a delay in raising loans for a high-spec jack-up

and increased FY13E profits of USD2.9mn.

Placement finished: PVD was able to sell a total 38.0mn shares at an avg.

price of VND38,262/sh (19.6% higher than our trailing BVPS assumption).

PVD has indicated they will now not invest in a new build high–spec jack-up

(to be completed in late 2013) with Falcon Energy. Instead, PetroVietnam

Drilling Overseas (PVDO) – a joint venture between PVD (55% stake), Falcon

(10% stake) and Joy Pride – Keppel (35% stake) has ordered an USD210mn,

400 ft WD jack-up from Keppel FELS (scheduled for delivery in 1Q15).

1H13A results: USD313.4mn in Rev (+30.9% YoY) and USD41.5mn in NP

(+41.2% YoY). These account for 50.1% and 50.1% of our previous FY13E’s

forecasts respectively. Finally, another leased-in rig was secured, Key

Gibraltar (1+1 year contract), for PVEP. PVD now has 6 leased-in rigs.

Impact

With approximately USD68.5mn proceeds from the placement, PVD’s net

gearing ratio should drop to 36.7% by FY13E from the 82.1% at FY12A.

We are lowering our FY14E NP estimates to USD88.2mn vs. USD92.8mn

given the decision not to invest in the new build rig. We now estimate 3.9% in

FY14E NP growth, but a 4.3% contraction in EPS growth given dilution.

We like the participation of Keppel in PVDO as this will ensure timely delivery.

The 400ft WD rig will help PVD achieve double digit EPS growth again of

10.9% and 22.4% for FY15/16E on our estimates.


We raise our FY13E revenue forecast to US$650.6mn from US$624.5mn and

our net profit by 3.5% to US$84.9mn from US$82.0mn respectively, on the

back of strong margin. Our TP jumps by 19.9% to VND69,100.

Price catalyst

12-month price target: VND69,100.00 based on an EV/EBITDA methodology.

Catalyst: Progress of the high-spec jack-up project, and a rising dayrate trend.


Regional jack-up dayrates look to remain robust averaging over

USD160,000/day. At 6.3x our FY14E EBITDA forecast of US$153.1mn, PVD

trades at a 32.5% discount to its peer group, and at a prospective FY14E PER

of 7.8x EPS and PB of 1.2x BVPS respectively.


27 August 2013 25

Valuation

We revise up our target price by 19.9% from VND57,600 to VND69,100/sh. Our estimated equity

value has increased to USD747.9mn (+46.5% vs previous forecast) and USD830.3mn (+2.2% vs.

previous forecast) respectively for FY13E & 14E. These are due to the decline in net debt (with the

placement’s proceeds and delay in raising new debt for high-spec jack-up project) as well as more

EBITDA expected for FY13E. The increase in EBITDA is mainly due to higher gross margin and one

more leased rig, Key Gibraltar with 1+1 year contract for PVEP.

PVD finally and successfully closed its long running private placement, receiving proceeds of

USD68.5mn. In particular, 20.1mn shares were sold at VND31,758 to PetroVietnam (with a three

year lock-up), 17.8mn shares (with a one year lock-up) were sold at average of VND45,605 to PYN

fund management Ltd, PENM Partners – Private Equity New Market II & VOF – Vietnam Investment

Property Holding Ltd. The proceeds have helped PVD to lower the net debt to equity to 36.7% at

FY13E from 82.1% as of FY12E.

As of the end of FY13E, we estimate PVD’s target price of VND69,100, implying upside of 17.1%.

Going forward to FY14E, our fair value rises further to VND73,389 (+24.4% upside).

Fig 1 Valuation

Year Ended FY13E FY14E FY15E

Reported EBITDA 163.3 172.1 197.0 Less Minority EBITDA from TAD rig (19.2) (19.0) (34.1) PVD's Proportionate EBITDA 144.1 153.1 163.0 Net debt 175.6 204.4 110.4 Less Minority Net Debt in TAD (15.7) (70.2) (55.4) PVD's proportionate Net Debt 159.9 134.2 55.0 Target EV @ 6.3x 907.8 964.5 1,026.7 Less proportionate net debt (159.9) (134.2) (55.0) Equity Value 747.9 830.3 971.7 Outstanding shares after issuance 247.6 247.6 247.6 Equity Value/Sh (US$) 3.02 3.35 3.92 VND/US$ Fx rate 21,453 21,882 22,976 Equity Value/Sh (VND) 64,810 73,389 90,179 Target price (VND/sh) 69,100 Upside 17.1% 24.4% 52.8% Share price 59,000 59,000 59,000

Source: Company data, Macquarie Research, Vina Securities March 2013


27 August 2013 26

PetroVietnam Drilling and Well Services (PVD VN, Outperform, Target Price: VND69,100.00) Interim Results 1H/13A 2H/13E 1H/14E 2H/14E Profit & Loss 2012A 2013E 2014E 2015E

Revenue m 313 337 309 348 Revenue m 573 651 657 723 Gross Profit m 102 104 101 114 Gross Profit m 178 206 215 245 Cost of Goods Sold m 211 233 207 234 Cost of Goods Sold m 395 445 441 479 EBITDA m 83 80 81 91 EBITDA m 140 163 172 197 Depreciation m 25 26 25 28 Depreciation m 49 51 52 57 Amortisation of Goodwill m 0 0 0 0 Amortisation of Goodwill m 0 0 0 0 Other Amortisation m 0 0 0 0 Other Amortisation m 0 0 0 0 EBIT m 58 54 56 63 EBIT m 91 112 120 140 Net Interest Income m -5 -8 -4 -5 Net Interest Income m -13 -13 -9 -12 Associates m 1 6 3 4 Associates m 3 7 7 8 Exceptionals m -3 3 0 0 Exceptionals m 0 1 0 0 Forex Gains / Losses m 0 0 0 0 Forex Gains / Losses m 0 0 0 0 Other Pre-Tax Income m 0 0 0 0 Other Pre-Tax Income m 0 0 0 0 Pre-Tax Profit m 51 56 55 62 Pre-Tax Profit m 81 107 117 136 Tax Expense m -6 -7 -10 -11 Tax Expense m -12 -13 -21 -24 Net Profit m 45 49 45 51 Net Profit m 69 93 97 112 Minority Interests m -3 -5 -4 -5 Minority Interests m -6 -8 -9 -14

Reported Earnings m 42 43 41 47 Reported Earnings m 63 85 88 98 Adjusted Earnings m 45 40 41 47 Adjusted Earnings m 63 84 88 98

EPS (rep) 0.20 0.17 0.17 0.19 EPS (rep) 0.30 0.37 0.35 0.39 EPS (adj) 0.02 0.02 0.02 0.02 EPS (adj) 0.03 0.04 0.04 0.04 EPS Growth yoy (adj) % 44.8 5.7 -21.4 17.1 EPS Growth (adj) % 18.3 24.9 -4.8 10.9

PE (rep) x 6.0 7.4 7.5 6.8 PE (adj) x 60.3 73.2 75.2 67.8

EBITDA Margin % 26.6 23.7 26.2 26.2 Total DPS 0.00 0.00 0.00 0.00 EBIT Margin % 18.6 16.1 18.2 18.2 Total Div Yield % 0.2 0.1 0.2 0.2 Earnings Split % 52.7 47.3 47.0 53.0 Weighted Average Shares m 210 229 249 249 Revenue Growth % 30.7 1.3 -1.5 3.2 Period End Shares m 210 249 249 249 EBIT Growth % 33.1 15.1 -3.2 17.0


Revenue Growth % 27.4 13.6 0.9 10.1 EBITDA m 140 163 172 197 EBITDA Growth % 31.6 16.7 5.4 14.5 Tax Paid m -12 -13 -21 -24 EBIT Growth % 26.7 23.8 6.5 17.0 Chgs in Working Cap m 71 15 -1 -34 Gross Profit Margin % 31.1 31.7 32.8 33.8 Net Interest Paid m 0 0 0 0 EBITDA Margin % 24.4 25.1 26.2 27.2 Other m -70 -52 -20 40 EBIT Margin % 15.9 17.3 18.2 19.4 Operating Cashflow m 129 113 130 179 Net Profit Margin % 12.0 14.4 14.7 15.5 Acquisitions m 0 0 0 0 Payout Ratio % 13.9 10.9 11.5 10.4 Capex m -40 -40 -156 -51 EV/EBITDA x 3.9 5.0 4.7 4.1 Asset Sales m 0 0 0 0 EV/EBIT x 5.9 7.1 6.6 5.7 Other m -3 -31 7 8

Investing Cashflow m -42 -71 -149 -43 Balance Sheet Ratios Dividend (Ordinary) m -9 -10 -10 -10 ROE % 19.1 20.3 17.1 15.9 Equity Raised m 0 68 0 0 ROA % 10.1 11.9 11.5 12.3 Debt Movements m -52 -78 66 -81 ROIC % 11.8 15.7 14.9 14.9 Other m -6 0 0 0 Net Debt/Equity % 78.2 36.0 35.6 11.1 Financing Cashflow m -68 -20 56 -91 Interest Cover x 6.9 8.5 12.8 11.9 Price/Book x 1.1 1.4 1.2 1.0 Net Chg in Cash/Debt m 19 22 37 45 Book Value per Share 1.7 1.9 2.2 2.7

Free Cashflow m 90 73 -26 128

Balance Sheet 2012A 2013E 2014E 2015E Cash m 51 73 110 155 Receivables m 144 147 148 163 Inventories m 38 42 42 45 Investments m 2 2 2 2 Fixed Assets m 633 660 763 757 Intangibles m 7 7 7 7 Other Assets m 42 42 42 42 Total Assets m 916 972 1,114 1,172 Payables m 107 109 108 117 Short Term Debt m 93 66 81 81 Long Term Debt m 234 182 234 153 Provisions m 14 14 14 14 Other Liabilities m 116 113 104 99 Total Liabilities m 563 484 540 464 Shareholders' Funds m 299 442 520 608 Minority Interests m 1 10 18 33 Other m 52 37 35 67 Total S/H Equity m 353 488 574 707 Total Liab & S/H Funds m 916 972 1,114 1,172

All figures in USD unless noted. Source: Company data, Macquarie Research, August 2013


27 August 2013 27

VIETNAM

DPM VN Outperform


Valuation VND 48,000.00 - DCF

12-month target VND 48,000.00



Volatility Index Low/Medium

GICS sector Materials


Market cap US$m 733

Free float % 39




Revenue bn 13,322 10,612 10,583 10,568 EBIT bn 3,013 2,220 2,011 1,828 EBIT growth % -0.9 -26.3 -9.4 -9.1 Reported profit bn 3,002 2,335 2,101 1,775 EPS rep VND 7,924 6,144 5,530 4,671 EPS rep growth % -3.3 -22.5 -10.0 -15.5 PER rep x 5.2 6.7 7.5 8.8 Total DPS VND 4,500 3,000 3,000 1,500 Total div yield % 8.5 7.3 7.3 3.6 ROA % 30.3 20.5 17.5 15.1 ROE % 34.9 25.0 20.9 16.7 EV/EBITDA x 3.2 4.2 4.6 5.1 Net debt/equity % -61.0 -59.4 -62.8 -64.8 P/BV x 1.7 1.6 1.5 1.5

DPM VN rel Vietnam Ho Chi Minh performance, & rec history




Analyst(s) James Hubbard, CFA +852 3922 1226 [email protected]



PetroVietnam Fertilizer & Chemical An agricultural cash cow The company

PetroVietnam Fertilizer and Chemical Corp is the largest fertilizer producer

and distributor in Vietnam. The company’s key product is prilled urea (gas

feedstock), marketed domestically gand regionally under the Phu My Urea

brand. The company, 60% owned by PetroVietnam Oil & Gas Group, has

several distribution and associate companies located throughout the country.

DPM’s stock price has fallen sharply since March and although there is no

change to our fundamental view, with almost 24% upside to our target price,

we upgrade the stock from Neutral to Outperform.


1H13A results: Revenues fell 14.4% YoY to VND6.1tn with net profit falling

17.4% YoY to VND1.6tn. Gross margins, improved to 35.8% from 34.8%.

These results represent 59.7% and 69.7% of our FY13 forecasts. Part of the

revenue decline came from falling avg. urea prices as well as the absence of

revenues from Ca Mau urea, in which DPM no longer distributes. Net profits

were down, due to a 17.1% YoY increase in selling expenses and a 26.1%

decrease in interest income from lower rates.

Increased global urea production capacity and abundant natural gas

inventories continue to place downward pressure on urea global prices.

DPM’s ASP for urea fell to about US$410/tonne in 1H13A.

Domestic supply: DPM’s sister company (PVFCM) Ca Mau relied heavily

upon DPMs distribution network and will now need time to develop its own.

Vinachem’s Ninh Binh Nitrogenous Fertilizer Plant has experienced various

setbacks and inconsistent production since its launch in March 2012.

Longer-run, DPM still plans to invest in a JV for a USD900mn Ammonia plant

and is planning a USD63mn investment in a NPK facility for FY14. It will also

look to participate in the PVCFC (Ca Mau) equitization next year.

DPM’s FY12A final dividend of VND2,000/sh brought dividend payments to

VND4,500/sh, (a T12M yield of 10.68%). With a growing cash position and no

major CAPEX projects underway this year, we believe DPM can easily raise

its payout ratio above our forecast 50% (equiv. to VND3,000/sh).


No change.

Price catalyst

12-month price target: VND48,000.00 based on a DCF methodology.

Catalyst: Higher DPS, treasury management, urea prices and competition


DPM trades at 6.7x FY13E EPS, with a prospective dividend yield of

VND4,348/sh and 7.3% (with upside potential). DPM is in a net cash position

and in the mid term is expected to invest FCF for expansion or acquisition.


27 August 2013 28

PetroVietnam Fertilizer & Chemical (DPM VN, Outperform, Target Price: VND48,000.00) Interim Results 2H/12A 1H/13E 2H/13E 1H/14E Profit & Loss 2012A 2013E 2014E 2015E

Revenue m 6,232,830 5,147,021 5,465,393 5,132,863 Revenue m 13,321,853 10,612,414 10,583,223 10,568,135 Gross Profit m 1,966,346 1,671,906 1,775,323 1,567,118 Gross Profit m 4,537,322 3,447,229 3,231,172 3,047,174 Cost of Goods Sold m 4,266,484 3,475,114 3,690,070 3,565,745 Cost of Goods Sold m 8,784,531 7,165,184 7,352,051 7,520,961 EBITDA m 1,200,442 1,181,654 1,254,746 1,080,253 EBITDA m 3,226,234 2,436,401 2,227,326 2,044,759 Depreciation m 105,933 104,887 111,375 104,887 Depreciation m 212,835 216,262 216,262 216,262 Amortisation of Goodwill m 0 0 0 0 Amortisation of Goodwill m 0 0 0 0 Other Amortisation m 0 0 0 0 Other Amortisation m 0 0 0 0 EBIT m 1,094,509 1,076,767 1,143,372 975,366 EBIT m 3,013,399 2,220,139 2,011,064 1,828,497 Net Interest Income m 258,296 224,021 237,878 199,514 Net Interest Income m 565,032 461,899 411,368 349,754 Associates m -41,741 -23,133 -24,563 -23,133 Associates m -47,696 -47,696 -47,696 -47,696 Exceptionals m -1,897 0 0 0 Exceptionals m 0 0 0 0 Forex Gains / Losses m -3,837 0 0 0 Forex Gains / Losses m -4,966 0 0 0 Other Pre-Tax Income m 339 0 0 0 Other Pre-Tax Income m 1,279 0 0 0 Pre-Tax Profit m 1,305,669 1,277,656 1,356,686 1,151,747 Pre-Tax Profit m 3,527,048 2,634,342 2,374,736 2,130,555 Tax Expense m -221,751 -127,766 -135,669 -115,175 Tax Expense m -474,402 -263,434 -237,474 -319,583 Net Profit m 1,083,918 1,149,890 1,221,018 1,036,572 Net Profit m 3,052,646 2,370,908 2,137,263 1,810,972 Minority Interests m -21,617 -17,460 -18,540 -17,460 Minority Interests m -50,796 -36,000 -36,000 -36,000

Reported Earnings m 1,062,301 1,132,430 1,202,478 1,019,112 Reported Earnings m 3,001,850 2,334,908 2,101,263 1,774,972 Adjusted Earnings m 1,064,198 1,132,430 1,202,478 1,019,112 Adjusted Earnings m 3,001,850 2,334,908 2,101,263 1,774,972

EPS (rep) hào 2,804 2,980 3,164 2,682 EPS (rep) hào 7,924 6,144 5,530 4,671 EPS (adj) hào 2,809 2,980 3,164 2,682 EPS (adj) hào 7,924 6,144 5,530 4,671 EPS Growth yoy (adj) % -35.8 -41.7 12.6 -10.0 EPS Growth (adj) % -3.1 -22.5 -10.0 -15.5

PE (rep) x 5.2 6.7 7.5 8.8 PE (adj) x 5.2 6.7 7.5 8.8

EBITDA Margin % 19.3 23.0 23.0 21.0 Total DPS hào 4,500 3,000 3,000 1,500 EBIT Margin % 17.6 20.9 20.9 19.0 Total Div Yield % 8.5 7.3 7.3 3.6 Earnings Split % 35.5 48.5 51.5 48.5 Weighted Average Shares m 379 380 380 380 Revenue Growth % 32.9 -27.4 -12.3 -0.3 Period End Shares m 379 380 380 380 EBIT Growth % -31.8 -43.9 4.5 -9.4


Revenue Growth % 44.4 -20.3 -0.3 -0.1 EBITDA m 3,226,234 2,436,401 2,227,326 2,044,759 EBITDA Growth % -0.1 -24.5 -8.6 -8.2 Tax Paid m -474,402 -263,434 -237,474 -319,583 EBIT Growth % -0.9 -26.3 -9.4 -9.1 Chgs in Working Cap m 315,763 -496,228 -10,600 -7,668 Gross Profit Margin % 34.1 32.5 30.5 28.8 Net Interest Paid m 0 0 0 0 EBITDA Margin % 24.2 23.0 21.0 19.3 Other m 211,922 175,686 159,217 136,757 EBIT Margin % 22.6 20.9 19.0 17.3 Operating Cashflow m 3,279,517 1,852,425 2,138,469 1,854,265 Net Profit Margin % 22.9 22.3 20.2 17.1 Acquisitions m 0 0 0 0 Payout Ratio % 44.3 48.8 54.3 32.1 Capex m -714,542 -200,000 -200,000 -200,000 EV/EBITDA x 3.2 4.2 4.6 5.1 Asset Sales m 0 0 0 0 EV/EBIT x 3.4 4.6 5.1 5.7 Other m 849,103 0 0 0

Investing Cashflow m 134,561 -200,000 -200,000 -200,000 Balance Sheet Ratios Dividend (Ordinary) m -1,330,000 -1,140,000 -1,140,000 -570,000 ROE % 34.9 25.0 20.9 16.7 Equity Raised m 0 0 0 0 ROA % 30.3 20.5 17.5 15.1 Debt Movements m 28,380 7,762 0 0 ROIC % 59.9 55.9 45.1 39.2 Other m -553,500 -219,976 0 -570,000 Net Debt/Equity % -61.0 -59.4 -62.8 -64.8 Financing Cashflow m -1,855,120 -1,352,214 -1,140,000 -1,140,000 Interest Cover x nmf nmf nmf nmf Price/Book x 1.7 1.6 1.5 1.5 Net Chg in Cash/Debt m 1,558,958 300,211 798,469 514,265 Book Value per Share 23,663.9 25,497.6 27,363.7 28,474.1

Free Cashflow m 2,564,975 1,652,425 1,938,469 1,654,265

Balance Sheet 2012A 2013E 2014E 2015E Cash m 5,629,403 5,929,614 6,728,083 7,242,348 Receivables m 46,193 110,394 110,091 109,934 Inventories m 1,171,462 1,427,139 1,448,804 1,466,674 Investments m 62,077 62,077 62,077 62,077 Fixed Assets m 1,896,165 1,928,165 1,960,165 1,992,165 Intangibles m 770,898 722,636 674,374 626,112 Other Assets m 1,004,337 936,465 888,552 840,743 Total Assets m 10,580,535 11,116,490 11,872,146 12,340,054 Payables m 398,388 317,363 316,490 316,038 Short Term Debt m 27,737 50,000 50,000 50,000 Long Term Debt m 8,477 0 0 0 Provisions m 124,031 124,031 124,031 124,031 Other Liabilities m 851,974 730,449 741,867 752,251 Total Liabilities m 1,410,607 1,221,843 1,232,387 1,242,320 Shareholders' Funds m 5,775,353 6,266,581 6,765,566 7,010,044 Minority Interests m 205,561 205,561 241,561 277,561 Other m 3,189,014 3,422,505 3,632,631 3,810,128 Total S/H Equity m 9,169,928 9,894,647 10,639,758 11,097,733 Total Liab & S/H Funds m 10,580,535 11,116,490 11,872,146 12,340,054



27 August 2013 29

VIETNAM

VNM VN Outperform

Price (at 13:00, 23 Aug 2013 GMT)VND136,000





Volatility Index Low/Medium

GICS sector Food, Beverage & Tobacco


Market cap US$m 5,360

Free float % 85




Revenue bn 26,562 32,779 40,316 49,059 EBIT bn 6,206 7,765 9,445 11,335 EBIT growth % 43.8 25.1 21.6 20.0 Reported profit bn 5,819 6,831 8,313 10,190 EPS rep VND 4,296 8,194 9,972 12,223 EPS rep growth % 55.6 90.7 21.7 22.6 PER rep x 31.7 16.6 13.6 11.1 Total DPS VND 1,926 3,801 4,002 4,446 Total div yield % 1.4 2.8 2.9 3.3 ROA % 35.2 35.4 34.6 33.2 ROE % 39.6 39.0 38.4 37.2 EV/EBITDA x 16.6 13.2 10.8 9.0 Net debt/equity % -8.1 -14.2 -27.7 -42.7 P/BV x 7.3 5.9 4.7 3.7

VNM VN rel Vietnam Ho Chi Minh performance, & rec history




Analyst(s) Gary Pinge +852 3922 3557 [email protected]

Vina Securities Gigi Nguyen +848 3821 9316 [email protected]


Vietnam Dairy Products More milk for the masses Event

We upgrade VNM to Outperform from Neutral and raise our target price by

11.8% to VND170,000/sh. We see a TSR of 27.9%, inclusive of a 2.9% div

yield.

VNM’s shares have fallen by 9.9% off their recent high of VND151,000 and

now trade at 13.6x and 4.7x our FY14E EPS and BVPS estimates,

respectively.

VNM ended 1H13 with net revenue of VND14,746.9bn (+14.4% YoY), EBIT of

VND3,833.5bn and NP of VND3,373.6bn (+21.5% YoY), which represents

45%, 49.4% and 49.4% of our full-year forecasts, respectively.

Impact

We think that VNM’s fundamental growth story remains intact. Why?

1) Organic Growth: Dairy consumption in Vietnam stands at only 16kg per

capita (incl. butter), much lower than that of China and Thailand, which

consume nearly 23kg and 35kg per capita, respectively.

2) Sustainable gross margins: VNM typically holds close to three months of

raw material in inventory. This gives the company significant visibility on input

prices, allowing ex-factory pricing to be adjusted ahead of COGS pressure.

Management seeks to maintain gross margin in the 30%+ range.

3) Insulated from recent controversies: VNM was unaffected by the 2008

China melamine scandal and did not receive any of the contaminated whey

protein concentrate behind Fonterra’s (a VNM supplier) recent global recall.

All in, we believe that VNM gives the investor sustainable earnings growth

above 20%, strong FCFF of VND4.3tn in FY13E and a net cash position. The

company also produces one of the highest ROEs of any listed Vietnamese

firm. FY12’s ROAE came in at 41.6% and we believe future ROEs will remain

over 35.0%, on our estimates.

Currently trading at 13.6x FY14E EPS and 4.7x FY14E BVPS, the stock’s

approximate 30% PER premium relative to the VNINDEX does not look

unreasonable to us given the company’s higher profitability. In addition, we

note that VNM is currently trading at a significant 29.5% discount to its

regional dairy peers.


We raise our target price by 11.8% as we roll our valuation forward to FY14E.

No changes to our estimates.

Price catalyst


Catalyst: Higher sales volumes and high GMs may drive an earnings surprise.


We upgrade VNM to Outperform on strong fundamentals as we roll our

valuation forward to FY14E. In our view, the recent price correction offers

investors a good buying opportunity.


27 August 2013 30

Vietnam Dairy Products (VNM VN, Outperform, Target Price: VND170,000) Interim Results 2H/12A 1H/13E 2H/13E 1H/14E Profit & Loss 2012A 2013E 2014E 2015E

Revenue bn 13,674.3 14,746.9 18,032.0 19,910.7 Revenue bn 26,561.6 32,778.8 40,316.4 49,059.1 Gross Profit bn 5,137.9 5,913.6 6,086.6 7,276.3 Gross Profit bn 9,608.2 12,000.2 14,733.6 17,688.7 Cost of Goods Sold bn 8,536.4 8,833.3 11,945.3 12,634.4 Cost of Goods Sold bn 16,953.3 20,778.6 25,582.9 31,370.4 EBITDA bn 3,558.0 4,168.6 4,299.4 5,136.3 EBITDA bn 6,737.3 8,468.0 10,400.3 12,427.3 Depreciation bn 282.4 335.0 367.8 471.7 Depreciation bn 531.5 702.9 955.2 1,092.5 Amortisation of Goodwill bn 0.0 0.0 0.0 0.0 Amortisation of Goodwill bn 0.0 0.0 0.0 0.0 Other Amortisation bn 0.0 0.0 0.0 0.0 Other Amortisation bn 0.0 0.0 0.0 0.0 EBIT bn 3,275.5 3,833.5 3,931.6 4,664.6 EBIT bn 6,205.8 7,765.1 9,445.1 11,334.7 Net Interest Income bn 114.9 191.9 46.5 278.4 Net Interest Income bn 281.7 238.4 563.6 1,085.5 Associates bn -0.8 12.3 0.0 0.0 Associates bn 12.5 12.3 0.0 0.0 Exceptionals bn 154.3 73.2 0.0 0.0 Exceptionals bn 287.3 73.2 0.0 0.0 Forex Gains / Losses bn 11.2 36.8 0.0 0.0 Forex Gains / Losses bn 41.8 36.8 0.0 0.0 Other Pre-Tax Income bn 4.9 -32.8 39.2 0.0 Other Pre-Tax Income bn 100.5 6.5 6.5 6.5 Pre-Tax Profit bn 3,559.9 4,114.9 4,017.3 4,942.9 Pre-Tax Profit bn 6,929.7 8,132.3 10,015.2 12,426.7 Tax Expense bn -516.6 -740.9 -560.3 -840.8 Tax Expense bn -1,110.2 -1,301.2 -1,702.6 -2,236.8 Net Profit bn 3,043.3 3,374.1 3,457.0 4,102.1 Net Profit bn 5,819.5 6,831.1 8,312.6 10,189.9 Minority Interests bn 0.0 0.0 0.0 0.0 Minority Interests bn 0.0 0.0 0.0 0.0

Reported Earnings bn 3,043.3 3,374.1 3,457.0 4,102.1 Reported Earnings bn 5,819.5 6,831.1 8,312.6 10,189.9 Adjusted Earnings bn 2,889.1 3,300.8 3,457.0 4,102.1 Adjusted Earnings bn 5,532.1 6,757.9 8,312.6 10,189.9

EPS (rep) VND 3,651 4,047 4,147 4,921 EPS (rep) VND 4,296 8,194 9,972 12,223

PE (rep) x 20.5 16.6 13.6 11.1

EBITDA Margin % 26.0 28.3 23.8 25.8 Total DPS hào 1,926 3,801 4,002 4,446 EBIT Margin % 24.0 26.0 21.8 23.4 Total Div Yield % 2.2 2.8 2.9 3.3 Earnings Split % 52.2 48.8 51.2 49.3 Weighted Average Shares m 1,355 834 834 834 Revenue Growth % 17.2 14.4 31.9 35.0 Period End Shares m 834 834 834 834 EBIT Growth % 58.2 30.8 20.0 21.7


Revenue Growth % 22.8 23.4 23.0 21.7 EBITDA bn 6,737.3 8,468.0 10,400.3 12,427.3 EBITDA Growth % 41.7 25.7 22.8 19.5 Tax Paid bn -1,110.2 -1,301.2 -1,702.6 -2,236.8 EBIT Growth % 43.8 25.1 21.6 20.0 Chgs in Working Cap bn -1,572.5 -2,365.2 -2,733.0 -3,194.4 Gross Profit Margin % 36.2 36.6 36.5 36.1 Net Interest Paid bn 0.0 0.0 0.0 0.0 EBITDA Margin % 25.4 25.8 25.8 25.3 Other bn 1,862.3 2,047.2 2,756.3 3,653.4 EBIT Margin % 23.4 23.7 23.4 23.1 Operating Cashflow bn 5,916.8 6,848.9 8,720.9 10,649.5 Net Profit Margin % 21.9 20.8 20.6 20.8 Acquisitions bn 0.0 0.0 0.0 0.0 Payout Ratio % 39.5 46.9 40.1 36.4 Capex bn -3,134.0 -2,267.1 -1,439.6 -560.6 EV/EBITDA x 10.7 13.2 10.8 9.0 Asset Sales bn 0.0 0.0 0.0 0.0 EV/EBIT x 11.6 14.4 11.9 9.9 Other bn -2,462.0 18.7 6.5 6.5

Investing Cashflow bn -5,596.0 -2,248.4 -1,433.2 -554.1 Balance Sheet Ratios Dividend (Ordinary) bn -2,223.0 -3,168.3 -3,335.8 -3,705.9 ROE % 39.6 39.0 38.4 37.2 Equity Raised bn 2,782.6 -0.0 0.0 0.0 ROA % 35.2 35.4 34.6 33.2 Debt Movements bn 0.0 0.0 0.0 0.0 ROIC % 55.9 45.8 47.7 53.2 Other bn -2,784.9 36.8 0.0 0.0 Net Debt/Equity % -8.1 -14.2 -27.7 -42.7 Financing Cashflow bn -2,225.3 -3,131.5 -3,335.8 -3,705.9 Interest Cover x nmf nmf nmf nmf Price/Book x 4.7 5.9 4.7 3.7 Net Chg in Cash/Debt bn -1,904.4 1,469.0 3,951.9 6,389.5 Book Value per Share 18,587.3 22,981.8 28,952.6 36,731.5

Free Cashflow bn 2,782.8 4,581.7 7,281.3 10,089.0

Balance Sheet 2012A 2013E 2014E 2015E Cash bn 1,252.1 2,721.0 6,673.0 13,062.5 Receivables bn 1,269.8 1,644.3 2,017.3 2,449.3 Inventories bn 3,472.8 4,409.6 5,447.6 6,663.8 Investments bn 3,975.8 3,975.8 3,975.8 3,975.8 Fixed Assets bn 7,788.7 9,319.7 9,770.0 9,203.4 Intangibles bn 267.3 300.6 334.7 369.3 Other Assets bn 1,671.3 1,856.4 2,081.3 2,342.4 Total Assets bn 19,697.8 24,227.4 30,299.6 38,066.6 Payables bn 2,247.7 2,761.4 3,411.4 4,173.1 Short Term Debt bn 0.0 0.0 0.0 0.0 Long Term Debt bn 0.0 0.0 0.0 0.0 Provisions bn 334.0 334.0 334.0 334.0 Other Liabilities bn 1,623.2 1,976.2 2,421.5 2,942.9 Total Liabilities bn 4,204.8 5,071.5 6,166.9 7,449.9 Shareholders' Funds bn 14,815.3 18,478.2 23,455.0 29,939.0 Minority Interests bn 0.0 0.0 0.0 0.0 Other bn 677.7 677.7 677.7 677.7 Total S/H Equity bn 15,493.0 19,155.9 24,132.7 30,616.7 Total Liab & S/H Funds bn 19,697.8 24,227.4 30,299.6 38,066.6



27 August 2013 31

Important disclosures:

Recommendation definitions

Macquarie - Australia/New Zealand Outperform – return >3% in excess of benchmark return Neutral – return within 3% of benchmark return Underperform – return >3% below benchmark return Benchmark return is determined by long term nominal GDP growth plus 12 month forward market dividend yield

Macquarie – Asia/Europe Outperform – expected return >+10% Neutral – expected return from -10% to +10% Underperform – expected return <-10%

Macquarie First South - South Africa Outperform – expected return >+10% Neutral – expected return from -10% to +10% Underperform – expected return <-10%

Macquarie - Canada Outperform – return >5% in excess of benchmark return Neutral – return within 5% of benchmark return Underperform – return >5% below benchmark return

Macquarie - USA Outperform (Buy) – return >5% in excess of Russell 3000 index return Neutral (Hold) – return within 5% of Russell 3000 index return Underperform (Sell)– return >5% below Russell 3000 index return

Volatility index definition*

This is calculated from the volatility of historical price movements. Very high–highest risk – Stock should be expected to move up or down 60–100% in a year – investors should be aware this stock is highly speculative. High – stock should be expected to move up or down at least 40–60% in a year – investors should be aware this stock could be speculative. Medium – stock should be expected to move up or down at least 30–40% in a year. Low–medium – stock should be expected to move up or down at least 25–30% in a year. Low – stock should be expected to move up or down at least 15–25% in a year. * Applicable to Asia/Australian/NZ/Canada stocks only

Recommendations – 12 months Note: Quant recommendations may differ from Fundamental Analyst recommendations

Financial definitions

All "Adjusted" data items have had the following adjustments made: Added back: goodwill amortisation, provision for catastrophe reserves, IFRS derivatives & hedging, IFRS impairments & IFRS interest expense Excluded: non recurring items, asset revals, property revals, appraisal value uplift, preference dividends & minority interests EPS = adjusted net profit / efpowa* ROA = adjusted ebit / average total assets ROA Banks/Insurance = adjusted net profit /average total assets ROE = adjusted net profit / average shareholders funds Gross cashflow = adjusted net profit + depreciation *equivalent fully paid ordinary weighted average number of shares All Reported numbers for Australian/NZ listed stocks are modelled under IFRS (International Financial Reporting Standards).

Recommendation proportions – For quarter ending 30 June 2013

AU/NZ Asia RSA USA CA EUR Outperform 49.80% 57.68% 48.05% 41.13% 61.75% 47.10% (for US coverage by MCUSA, 8.12% of stocks followed are investment banking clients)

Neutral 39.85% 24.45% 42.86% 54.70% 34.42% 30.89% (for US coverage by MCUSA, 6.60% of stocks followed are investment banking clients)

Underperform 10.35% 17.87% 9.09% 4.17% 3.83% 22.01% (for US coverage by MCUSA, 0.00% of stocks followed are investment banking clients)

Company Specific Disclosures: Important disclosure information regarding the subject companies covered in this report is available at www.macquarie.com/disclosures.

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Recommendations contained in one type of research product may differ from recommendations contained in other types of research, whether as a result of differing time horizons, methodologies, or otherwise. Before making an investment decision on the basis of this research, you need to consider, with or without the assistance of an adviser, whether the advice is appropriate in light of your particular investment needs, objectives and financial circumstances. There are risks involved in securities trading. The price of securities can and does fluctuate, and an individual security may even become valueless. International investors are reminded of the additional risks inherent in international investments, such as currency fluctuations and international stock market or economic conditions, which may adversely affect the value of the investment. 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27 August 2013 32

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Asia Research Head of Equity Research John O’Connell (Global – Head) (612) 8232 7544 Peter Redhead (Asia – Head) (852) 3922 4836

Automobiles/Auto Parts Janet Lewis (China) (852) 3922 5417 Amit Mishra (India) (9122) 6720 4084 Clive Wiggins (Japan) (813) 3512 7856 Michael Sohn (Korea) (82 2) 3705 8644

Banks and Non-Bank Financials Ismael Pili (Asia, Hong Kong, China) (852) 3922 4774 Suresh Ganapathy (India) (9122) 6720 4078 Nicolaos Oentung (Indonesia) (6221) 2598 8366 Alastair Macdonald (Japan) (813) 3512 7476 Chan Hwang (Korea) (822) 3705 8643 Matthew Smith (Malaysia, Singapore) (65) 6601 0981 Alex Pomento (Philippines) (632) 857 0899 Gilbert Lopez (Philippines) (632) 857 0892 Dexter Hsu (Taiwan) (8862) 2734 7530 Passakorn Linmaneechote (Thailand) (662) 694 7728

Conglomerates Alex Pomento (Philippines) (632) 857 0899 Gilbert Lopez (Philippines) (632) 857 0892 Somesh Agarwal (Singapore) (65) 6601 0840

Consumer and Gaming Gary Pinge (Asia) (852) 3922 3557 Linda Huang (China, Hong Kong) (852) 3922 4068 Amit Mishra (India) (9122) 6720 4084 Lyall Taylor (Indonesia) (6221) 2598 8489 Toby Williams (Japan) (813) 3512 7392 HongSuk Na (Korea) (822) 3705 8678 Alex Pomento (Philippines) (632) 857 0899 Somesh Agarwal (Singapore) (65) 6601 0840 Best Waiyanont (Thailand) (662) 694 7993

Emerging Leaders Jake Lynch (China, Asia) (8621) 2412 9007 Adam Worthington (ASEAN) (852) 3922 4626 Michael Newman (Japan) (813) 3512 7920

Industrials Janet Lewis (Asia) (852) 3922 5417 Patrick Dai (China) (8621) 2412 9082 Saiyi He (China) (852) 3922 3585 Inderjeetsingh Bhatia (India) (9122) 6720 4087 Andy Lesmana (Indonesia) (6221) 2598 8398 Kenjin Hotta (Japan) (813) 3512 7871 Juwon Lee (Korea) (822) 3705 8661 Sunaina Dhanuka (Malaysia) (603) 2059 8993 David Gambrill (Thailand) (662) 694 7753

Insurance Scott Russell (Asia, Japan) (852) 3922 3567 Chung Jun Yun (Korea) (822) 2095 7222

Software and Internet David Gibson (Asia) (813) 3512 7880 Jiong Shao (China, Hong Kong) (852) 3922 3566 Steve Zhang (China, Hong Kong) (852) 3922 3578 Nitin Mohta (India) (9122) 6720 4090 Nathan Ramler (Japan) (813) 3512 7875 Prem Jearajasingam (Malaysia) (603) 2059 8989

Oil, Gas and Petrochemicals James Hubbard (Asia) (852) 3922 1226 Aditya Suresh (Hong Kong, China) (852) 3922 1265 Jal Irani (India) (9122) 6720 4080 Polina Diyachkina (Japan) (813) 3512 7886 Brandon Lee (Korea) (822) 3705 8669 Sunaina Dhanuka (Malaysia) (603) 2059 8993 Trevor Buchinski (Thailand) (662) 694 7829

Pharmaceuticals and Healthcare Abhishek Singhal (India) (9122) 6720 4086

Property Callum Bramah (Asia) (852) 3922 4731 David Ng (China, Hong Kong) (852) 3922 1291 Jeffrey Gao (China) (8621) 2412 9026 Abhishek Bhandari (India) (9122) 6720 4088 Andy Lesmana (Indonesia) (6221) 2598 8398 Sunaina Dhanuka (Malaysia) (603) 2059 8993 RJ Aguirre (Philippines) (632) 857 0890 Tuck Yin Soong (Singapore) (65) 6601 0838 Corinne Jian (Taiwan) (8862) 2734 7522 David Liao (Taiwan) (8862) 2734 7518 Patti Tomaitrichitr (Thailand) (662) 694 7727

Resources / Metals and Mining Graeme Train (China) (8621) 2412 9035 Matty Zhao (Hong Kong) (852) 3922 1293 Rakesh Arora (India) (9122) 6720 4093 Adam Worthington (Indonesia) (852) 3922 4626 Riaz Hyder (Indonesia) (6221) 2598 8486 Polina Diyachkina (Japan) (813) 3512 7886 David Liao (Taiwan) (8862) 2734 7518 Chak Reungsinpinya (Thailand) (662) 694 7982 Andrew Dale (852) 3922 3587

Technology Jeffrey Su (Asia, Taiwan) (8862) 2734 7512 Steve Zhang (China, Hong Kong) (852) 3922 3578 Nitin Mohta (India) (9122) 6720 4090 Claudio Aritomi (Japan) (813) 3512 7858 Damian Thong (Japan) (813) 3512 7877 David Gibson (Japan) (813) 3512 7880 George Chang (Japan) (813) 3512 7854 Daniel Kim (Korea) (822) 3705 8641 Soyun Shin (Korea) (822) 3705 8659 Daniel Chang (Taiwan) (8862) 2734 7516 Ellen Tseng (Taiwan) (8862) 2734 7524 Tammy Lai (Taiwan) (8862) 2734 7525

Telecoms Nathan Ramler (Asia, Japan) (813) 3512 7875 Danny Chu (China, Hong Kong) (852) 3922 4762 Riaz Hyder (Indonesia) (6221) 2598 8486 Prem Jearajasingam (Malaysia, Singapore) (603) 2059 8989 Aaron Salvador (Philippines) (632) 857 0895 Joseph Quinn (Taiwan) (8862) 2734 7519

Transport & Infrastructure Janet Lewis (Asia, Japan) (852) 3922 5417 Bonnie Chan (Hong Kong) (852) 3922 3898 Nicholas Cunningham (Japan) (813) 3512 6044 Sunaina Dhanuka (Malaysia) (603) 2059 8993 Corinne Jian (Taiwan) (8862) 2734 7522

Utilities & Renewables Gary Chiu (Asia) (852) 3922 1435 Inderjeetsingh Bhatia (India) (9122) 6720 4087 Prem Jearajasingam (Malaysia) (603) 2059 8989 Aaron Salvador (Philippines) (632) 857 0895

Commodities Colin Hamilton (Global) (4420) 3037 4061 Jim Lennon (4420) 3037 4271 Duncan Hobbs (4420) 3037 4497 Graeme Train (8621) 2412 9035 Rakesh Arora (9122) 6720 4093

Economics Peter Eadon-Clarke (Asia, Japan) (813) 3512 7850 Aimee Kaye (ASEAN) (65) 6601 0574 Richard Gibbs (Australia) (612) 8232 3935 Tanvee Gupta (India) (9122) 6720 4355

Quantitative / CPG Gurvinder Brar (Global) (4420) 3037 4036 Josh Holcroft (Asia). (852) 3922 1279 Burke Lau (Asia) (852) 3922 5494 Simon Rigney (Asia, Japan) (852) 3922 4719 Eric Yeung (Asia) (852) 3922 4077 Suni Kim (Japan) (813) 3512 7569

Strategy/Country Viktor Shvets (Asia) (852) 3922 3883 Chetan Seth (Asia) (852) 3922 4769 Joshua van Lin (Asia Micro) (852) 3922 1425 Peter Eadon-Clarke (Japan) (813) 3512 7850 David Ng (China, Hong Kong) (852) 3922 1291 Jiong Shao (China) (852) 3922 3566 Rakesh Arora (India) (9122) 6720 4093 Nicolaos Oentung (Indonesia) (6121) 2598 8366 Chan Hwang (Korea) (822) 3705 8643 Yeonzon Yeow (Malaysia) (603) 2059 8982 Alex Pomento (Philippines) (632) 857 0899 Conrad Werner (Singapore) (65) 6601 0182 Daniel Chang (Taiwan) (8862) 2734 7516 David Gambrill (Thailand) (662) 694 7753 Find our research at Macquarie: www.macquarie.com.au/research Thomson: www.thomson.com/financial Reuters: www.knowledge.reuters.com Bloomberg: MAC GO Factset: http://www.factset.com/home.aspx CapitalIQ www.capitaliq.com Email [email protected] for access

Asia Sales Regional Heads of Sales Robin Black (Asia) (852) 3922 2074 Chris Gray (ASEAN) (65) 6601 0288 Peter Slater (Boston) (1 617) 598 2502 Jeffrey Shiu (China & Hong Kong) (852) 3922 2061 Thomas Renz (Geneva) (41) 22 818 7712 Bharat Rawla (India) (9122) 6720 4100 Chris Gould (Indonesia) (6221) 515 1555 Miki Edelman (Japan) (813) 3512 7857 John Jay Lee (Korea) (822) 3705 9988 Ruben Boopalan (Malaysia) (603) 2059 8888 Gino C Rojas (Philippines) (632) 857 0861 Eric Roles (New York) (1 212) 231 2559 Paul Colaco (New York) (1 212) 231 2496

Regional Heads of Sales cont’d Sheila Schroeder (San Francisco) (1 415) 762 5001 Erica Wang (Taiwan) (8862) 2734 7586 Angus Kent (Thailand) (662) 694 7601 Julien Roux (UK/Europe) (44) 20 3037 4867 Sean Alexander (Generalist) (852) 3922 2101

Regional Head of Distribution Justin Crawford (Asia) (852) 3922 2065

Sales Trading Adam Zaki (Asia) (852) 3922 2002 Phil Sellaroli (Japan) (813) 3512 7837 Kenneth Cheung (Singapore) (65) 6601 0288

Sales Trading cont’d Mike Keen (UK/Europe) (44) 20 3037 4905 Chris Reale (New York) (1 212) 231 2555 Marc Rosa (New York) (1 212) 231 2555 Stanley Dunda (Indonesia) (6221) 515 1555 Suhaida Samsudin (Malaysia) (603) 2059 8888 Michael Santos (Philippines) (632) 857 0813 Isaac Huang (Taiwan) (8862) 2734 7582 Dominic Shore (Thailand) (662) 694 7707

VIETNAM Vietnam Strategy - VN – INVESTOR · 2016-11-20 · Hoa Phat Group JSC 22 PetroVietnam...

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Transcript of VIETNAM Vietnam Strategy - VN – INVESTOR · 2016-11-20 · Hoa Phat Group JSC 22 PetroVietnam...