Special Report Monthly Report

Vietnam

Vietnam: End of Credit Crunch?

Does weakness provide attractive entry points?
Min (% ) Ma x (% ) La st (bps)

10 Sep 2013
Vietnam Market Valuation Sum m ary r 1M
1- Y history

Interbank m arket (% p.a)

ON 1W 2W 1M P rima ry Ma rke t (% p. a ) 1Y 2Y 3Y 5Y 6.25 7.30 7.70 7.65 2 70 n.a n.a 6.43 6.43 6.75 7.30 9.80 9.80 10.00 9.79 2.90 4.25 4.43 5.00 - 225 - 100 - 82 - 25 0.75 0.75 0.75 1.75 8.00 8.50 8.25 8.75

Both Vietnam equity and bond market, attributed by worse global market, have deteriorated since August. A strong net outflows in August was led by geopolitical turmoil in the Middle East and concerns on premature QE tapering. Macroeconomic: Vietnams bussiness environment remains weak since the updated data in August do not display any significantly break-out the sluggish trend. Inflation went up due to food and food stuff. In addition, industrial activities continued to see modest growth. Primary statistic of GSO shows that trade balance turned to deficit of US$300 million after a 2 moths of surplus. Vietnam trade deficit runs lower than 1% of GDP, not put any press on the Vietnam dong. Some catalysts have occurred as we expect inflation hit its short-term peak in August. The government has moved on the right track to stabilize the currency and intervene to interbank rate. That could be an important catalyst to revive confidence of investors. Fixed income: Vietnam bond market also sees weakness in last 2 months, the 3-year bond yield heads up 170bps from its bottom in June and is heading to new high. The main reason for the rally of yields is subject to accelerating inflation. However, we expect that yields will reach near term peak in short-run and it is good time to long front-end bond. Equities: In August VN-Index retreated 4.44% over the prior month to break down 480 level as of 30 August and average trading volume increased slightly by 5.70% m/m. However, the index still outperforms other regional EMs by increasing 12.74% year-to-date. The catalyst of Foreign Ownership Limit (FOL) and VAMC establishment could not offset heavy foreign outflows. Vietnam market is currently trading at 12.25x of PER, a 31% discount from average ASEAN market. The correction of equity market also reflects not high-as-expected earnings results. In our statistic of 651 listed companies results, sale declined by 4.61% y/y and profit growth was at 9.34% y/y in 1H13.

S e c onda ry Ma rke t (% p. a ) 1Y 2Y 3Y 5Y 7Y 10Y 15Y Fore x & Equity Ma rke t USD/VND VN- Index 21,250 472.7 - 90 - 19 20,860 375.3 21,900 521.5 6.88 7.66 7.90 8.68 8.80 8.80 9.20 25 11 5 19 -7 - 40 - 15 5.63 6.07 6.20 7.23 8.70 8.95 9.13 9.27 10.00 10.24 10.38 10.40 10.50 10.60

So urce: B lo o mberg & M A S Research *Data updated to 30 A ugust

Vietnam credit rating

Agency S&P Moodys Fitch Rating BBB2 B+ Outlook Stable Stable Stable Date 28-Jun-13 29-Sep-12 29-Jan-13

2013 may be a turning point for a crunch end, but it may take 2-3 years to get out of its bad effect. The relatively cheap valuation cannot be a trigger for Vietnam equities to turn bullish in near-term view. In that context, fixed income is still the most safe efficient investment channel in Vietnam in the short and mid-term.

Vietnam key economic indicators

GDP (y/y %) CPI (y/y, %) Trade balance (USD bn) FDI disbursemt (USDbn) Refinancing rate (%) Deposit rate (%) 3-Y VGB yield (%) 2012 5.03 6.81 0.75 10.46 9.00 8.00 9.25 1H13 2013F 4.90 5.20 6.69 7.00 -1.49 5.70 7.00 7.50 7.22 -4.00 11.00 7.00 7.50

See the last page of this report for important disclosures

Le Quang Minh, minh.le@miraeasset.com Phan Khanh Hoang, hoang.phan@miraeasset.com

Economic data remains challenging

Consumer price reaches its peak? Vietnam CPI has climbed for 3 months consecutively and increased significantly by 0.83% m/m in August. The fastest pace of monthly CPI in the last 5 months results in a breakout from sluggish tendency of inflation. The inflation has accelerated for a fourth consecutive month and jumped to 6.88% y/y in August from 6.67% in July. Higher inflation was mainly driven by cost-push from government-administrative areas such as healthcare service, education, electricity and energy costs. Healthcare services cost climbed 4.11% m/m as Hanoi city approved to increase its hospital fees. Education cost hike 0.90% m/m as usually due to back-to-school period. In our opinion, the increase in price of two first groups will not occur in the following months. Electricity price that has gone up by 5% since August and gasoline price rose by VND420-470 per litter in July, causing a lingering chain reaction in relevant sectors as Transportation (1.11% m/m); Housing & Material (0.88%). However, the Food and Foodstuff accelerated sharply by 0.54% y/y in August against 0.10% in July, which is the most disturbing component. Vietnam monthly consumer price, in our view, is subjected to have further increase in nearterm due to (1) the lagging effects of gasoline and electricity price hike, (2) education fees of Ho Chi Minh city is increased by three to four-fold and (3) domestic energy price is vulnerable to global oil price due to geopolitical tensions. However, a sizable increasing in prices in September, the y/y inflation may decrease based on cyclical effects. Hence, we expect inflation to reach its peak in August and set around 7% by year-end.
Figure 1: Vietanm inflation performance (%)
4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 -0.5 Dec-10 Dec-11 Dec-12 Oct-10 Oct-11 Apr-11 Apr-12 Oct-12 Aug-10 Aug-11 Aug-12 Apr-13 Aug-13 Jun-11 Jun-12 Feb-11 Feb-12 Feb-13 Jun-13 0 5 15 10 20 m/m y/y 25

Figure 2: Vietnam credit and money supply (%)

50 45 40 35 30 25 20 15 10 5 0 Dec-10 Dec-11 Dec-12 Oct-10 Oct-11 Apr-11 Apr-12 Oct-12 Aug-10 Aug-11 Aug-12 Apr-13 Aug-13 2 Jun-11 Jun-12 Feb-11 Feb-12 Feb-13 Jun-13 Credit Growth (y/y) Money Supply Growth (M2) (y/y)

Source: GSO

Source: SBV and MAS research

End of Credit Crunch? A credit crunch is often caused by a sustained period of careless and inappropriate lending which results in losses for lending institutions and investors in debt when the loans turn sour and the full extent of bad debts becomes known. As a result, financial institutions facing losses may then reduce the availability of credit, and increase the cost of accessing credit by raising interest rates. In some cases, lenders may be unable to lend further because of earlier losses. Data also shows that SBV has taken measures to protect banks against another credit crunch by offering them access to a sizable supply of M2 since 2012 with around 20% year over year. Consequently, credit growth enlarged to 5.40% year-to-date as of 20 August, which is far lower than money supply (M2) and deposit growth at 8.40% and 9.50% respectively. Moreover, Vietnam Asset Management Company (VAMC) started operation since August and the government set target for VAMC to write-off VND10 trillion of NPLs in 4Q13. Hence, banks

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Le Quang Minh, minh.le@miraeasset.com Phan Khanh Hoang, hoang.phan@miraeasset.com

are still struggling in creating new loans while deposit stock keeps increasing. Many experts projected that the crunch may last for 2-3 years, but in our view, 2013 may be a turning point for a crunch end. Industrial activities and retail sales recovered slightly Domestic demand and industrial activities posted moderate recovery in August. The HSBC PMI in August has recorded at 49.4 points, a slight improvement from 48.5 points in July and the highest level since April. Although the index is still below 50 point, which indicates contraction, the pace of contraction has shown signs of slowing. The index of industrial production (IIP) in August has strong correlation with HSBC PMI when it rose by 2.1% m/m, leading to a 5.3% y/y increase for the first 8 months of the year. Consumption has been improving gradually in slow pace. In such business condition and no more stimuli, we retain our forecast for Vietnam economic expansion at 5.3% y/y.
Figure 3: Vietnam HSBC PMI (%)
52 50 25 48 46 44 5 42 Nov-12 Dec-12 Oct-12 Apr-12 Aug-12 Sep-12 Apr-13 May-12 May-13 Aug-13 Jun-12 Jan-13 Feb-13 Mar-12 Mar-13 Jun-13 Jul-12 Jul-13 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Apr-09 Apr-10 Apr-11 Apr-12 Aug-08 Aug-09 Aug-10 Aug-11 Aug-12 Apr-13 Aug-13 Jul-13 0 20 15 10

Figure 4: Vietnam retail sales growth (%)

35 30 Nominal Retail Sale Growth Real Retail Sales Growth 20 18 16 14 12 10 8 6 4 2 0

Source: Markit, HSBC

Source: GSO

Trade balance turned to deficit Vietnam trade balance shifted to negative territory of US$300 million after posting two consecutive months of trade surplus. The trade deficit is at US$577 million ytd. Moreover, the deficit may incur by SBVs gold import of 60 tons (estimated about US$ 2.5-3bn). Thus, trade deficit is no longer a key concern for the Vietnam dong depreciation. The abating export growth (0.9% in August) was the main cause of trade deficit rather than higher import growth (5.1% in August). The main components of export increase in descending order of contribution included Phones and Phone accessories (15.8%), Garment and textile (13.2%) and Electronics and computers (7.9%). The export growth is still driven in major parts by FDI enterprises
Figure 5: Vietnam monthly Trade balance (USD bn)
1.5 1.0 0 0.5 0.0 -0.5 -1.0 -15 -1.5 -2.0 Dec-10 Dec-11 Dec-12 Oct-10 Apr-11 Oct-11 Apr-12 Oct-12 Aug-10 Aug-11 Aug-12 Apr-13 Aug-13 Jun-10 Jun-11 Jun-12 Feb-11 Feb-12 Feb-13 Jun-13 -20 -5 3.0 -10 2.0 1.0 Nov-12 Dec-12 Apr-12 Oct-12 Aug-12 Sep-12 Apr-13 May-12 May-13 Aug-13 3 Jun-12 Jan-13 Mar-12 Feb-13 Mar-13 Jun-13 Jul-12 4.0 Trade Balance (RHS) 12-month trailing 5

Figure 6: Vietnam FDI (USD bn)

6.0 5.0 FDI Commitment FDI Disbursement

Source: GSO

Source: FIA

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Le Quang Minh, minh.le@miraeasset.com Phan Khanh Hoang, hoang.phan@miraeasset.com

FDI commitment has turned south, but disbursement unchanged The outlook for foreign direct investment (FDI) has been more positive though Vietnam has jumped five notches to 70th among 148 economies listed in the World Economic Forums 2013-2014 Global Competitiveness Report. The FDI commitment value in August stands at US$720 million, halved from US$1,440 million in July. However, the FDI disbursement has been less volatile and is recorded at US$910 million in August, little changed from US$950 million in July, leaving the year-to-date disbursement capital at US$7.56 million (up 3.85% y/y).

Fixed income: Outperform

Vietnam bond price is a moving lower when yields extend to move new high in August, partly on higher inflation concern. Besides, bond market has been suffering heavy outflows from foreign funds. Bond yields have moved above far neutral when the SBVs refinancing rate versus 3Y Vietnam government bond yields spread around 90bps. The O/N interbank rate currently is trading around 3.05%, down 200bps from end of July, so banks can therefore access funding to hold front-end bond safely (3Y at 7.90%). We project more Outperform for bond market and it is likely a good time to long for short end (less than 5Y of remaining maturity) bonds. In addition, inflation is expected to be around 7% by year-end. The main disturbing problem now comes from foreign fund outflows.
Figure 7: Vietnam bond yield appear realtively attractive (% pa)
16 15 14 13 12 11 10 9 8 7 6 Nov-10 Nov-11 Aug-10 Sep-11 Sep-12 Dec-12 Apr-11 Apr-12 May-13 Aug-13 4 Jan-10 Jun-10 Jan-11 Jun-11 Feb-12 Feb-13 Mar-10 Jul-12 3-Y yeild Refinancing rate

Source: HNX

Primary market: increase in supply? Bond appetite has gradually recovered in August thanks to higher fixings yields. Moreover, fiscal deficit extends firmly with total VND 119.8 tn in 8 months. To finance the shortage, MoF has issued VND 134.8 tn from January to August. The G-bond matured amount is VND48.5 tn, so the net issuance is only about VND48.5 bn. As schedule, MoF will issue G-bond amount at VND170 tn in 2013. Hence, the real amount issuance may be much higher than the planned amount. For G-bond: In August, VST was successful to sell only VND5.70 trillion of T-bond and VND2.57 trillion of T-Bill, accounting for 41% and 64% offered amount respectively. By the last auction, the fixings inched up 2 bps to 7.30% for 2Y bond and 5 bps for 3Y bond from the prior auction.

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Le Quang Minh, minh.le@miraeasset.com Phan Khanh Hoang, hoang.phan@miraeasset.com

For G-Backed bond: VDB was able to sell only 17% of total offered amount at VND0.68 trillion. VBSP was able to place only VND500 billion out of VND0.40 trillion-offered amount.
Figure 8: Primary market performance (VND tn)
16 14.00 14 12 10 8 6 4.00 4 2 0 T-Bill Source: T-Bond VDB VBSP 2.57 0.68 0.40 5.70
8

Figure 9: Primary market fixings (% pa)

Accpeted Vol.
13 12 11 10 9 2-Y 3-Y 5-Y

Offered Vol.

4.00

4.00
7 6 Feb-12 Mar-12 Mar-12 Mar-13 Jun-12 Jan-13 May-12 May-13 Nov-12 Dec-12 Jun-13 Oct-12 Apr-12 Apr-13 Jul-12 Aug-12 Sep-12 Jul-13 Aug-13

Source: Bloomberg

Secondary market: volume improved, yields up 5-25 bps.

Secondary market turnover increased slightly by 6.6% m/m. Domestic investors have re-entered bond market on bargain activity while yield has climbed 5-25 bps for front-end bonds from the end of July. Total turnover was up slightly by 6.6% m/m to VND29.7 trillion in August. Foreign fund outflows from EMs were weighted on geographic turmoil and premature QE tapering. Fortunately, the bond outflows from Vietnam market was in lower pace in August, which totaled VND1.45 trillion and decreased 66.9% from net outflows in July.

Figure 10: Vietnam Secondary market turn over (VND tn)

Outright 50 45 40 35 30 25 20 15 10 5 Apr-13 May-13 Aug-13 Jan-13 Feb-13 Mar-13 Jun-13 Jul-13 Repos

Figure 11: Vietnam Weekly net bond flows (VND tn)

2.0 1.0 0.0 -1.0 -2.0 -3.0 12-Apr 26-Apr 02-Aug 16-Aug 10-May 24-May 30-Aug 5 05-Jul 11-Jan 25-Jan 07-Jun 01-Mar 15-Mar 29-Mar 08-Feb 21-Jun 19-Jul Net Flows Trailing 12-Mth 18 16 14 12 10 8 6 4 2 -

Source: HNX

Source: HNX

Bond yields head up with slower pace. The yields have risen for front-end bonds by 5-25 bps in August. However, yield rally dynamics seem to be slowing down when reaching 2month high. We expect yield to form near term peak as inflation is also expected shape a top in September, a good time to long front-end bond.

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Le Quang Minh, minh.le@miraeasset.com Phan Khanh Hoang, hoang.phan@miraeasset.com

Figure 12: Vietnam bond yields performance (% pa)

1Y 11 10 9 5Y 10Y

Figure 13: Vietnam bond yield curves (% pa)

10.5 10.0 9.5 9.0 % pa 8.5 8.0 7.5 30-Aug 1-Week 1-Month 1-year ago 7.0

8 7 6 Nov-12 Dec-12 Dec-12 Oct-12 Aug-12 Sep-12 Apr-13 May-12 May-13 Aug-13 Jun-12 Jan-13 Mar-13 Jun-13 Jul-12 Feb-13 Jul-13

6.5 Time-to-Maturity 6.0 1Y Source: Bloomberg 2Y 3Y 5Y 7Y 10Y 15Y

Source: Bloomberg

Monetary market:
VNBOR rates extend losing momentum.
Monetary market shows signal of stability in August, though VAMC has not shown any movement to clean up balance sheet of banking system. In addition, credit growth has increased for a sixth straight months with higher pace, but has not put any pressure on liquidity of commercial banks. Notably, the interbank slumped in August and widened the gap between bond yields, which open arbitrage opportunity to hold bond. The overnight VNBOR rate fell significantly by 95 bps to 2.90% as of 30 August against early of July. Longer term moved higher 25-40 bps but overall in losing trend.
Figure 14: Vietnam interbank rate performance (%)
8 7 6 5 4 3 2 1 Nov-12 Dec-12 Sep-12 Apr-13 Oct-12 May-13 Sep-13 Jan-13 Jun-13 Mar-13 Jul-13 0 ON 1W 2W

Table 2: The interbank rate movement

ON 30-Aug-13 1-week ago 1-month ago 1-year ago
Source: Bloomberg

1W 4.25 3.85 5.75 3.75

2W 4.43 4.15 6.00 4.25

1M 5.00 4.75 5.50 7.50

2.90 3.85 5.75 2.50

Source:Bloomberg

The SBV continues to support liquidity. Net injection of the SBV in August via OMO was at VND4.7 trillion, down 34% m/m since banking system showed signal of stability. In which, the SBV pumped out VND16.9 trillion via selling outright (which came from falling due SBV notes), and withdrew VND12.2 trillion via repo reverse. The SBV is still cautious in using OMO to stabilize the interbank rate and support illiquid commercial lender, without putting more pressure on inflation.

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Le Quang Minh, minh.le@miraeasset.com Phan Khanh Hoang, hoang.phan@miraeasset.com

Figure 15: Open Market Operation (VND trillion)

30 20 10 0 -10 -20 -30 -40 -50 Nov-12 Dec-12 Oct-12 Aug-12 Sep-12 Apr-13 May-13 Aug-13 Jan-13 Mar-13 Jun-13 Feb-13 Jul-13 Repo reverses Sell Outright

Figure 16: Outstanding SBV notes in FY2013

5,000 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 24-Jul 25-Jul 26-Jul 31-Jul 01-Aug 02-Aug 05-Aug 06-Aug 07-Aug 08-Aug 09-Aug 21-Aug 22-Aug 23-Aug 24-Aug 28-Aug 29-Aug 30-Aug 04-Sep 05-Sep 10-Oct 11-Oct 14-Oct 15-Oct 16-Oct 17-Oct 18-Oct Source: Bloomberg

Source: Bloomberg

The USD/VND exchange rate has been stable within the range. Vietnam dong has firmed its value though foreign outflows from all risk asset remains, which may deteriorate the capital account surplus.
Exchange rate USD/VND on both interbank and grey market is now trading below the upper bound regulated by the SBV. Notably, the USD/VND exchange rate fall VND90 per US Dollar to as of 30 August to 21,250, narrowing the gap between interbank exchange rate and unofficial ones. The Non-Deliverable Forward (NDF) has mixed performance in August. The 12-M NDF almost stay flat in August at VND22,993 per US Dollar, while the shorter term 1and 3-M increased by VND100 per USD.
Figure 17: USD/VND exchange rate
21,900 21,700 21,500 22,000 21,300 21,500 21,100 21,000 20,900 20,700 Apr-13 May-13 Aug-13 Jan-13 Feb-13 Mar-13 Jul-13 20,500 Nov-12 Dec-12 Oct-12 Oct-12 Sep-12 Apr-13 Aug-13 May-13 Sep-13 7 Jan-13 Jun-13 Feb-13 Mar-13 Jul-13 Interbank Ex. Rate Unoffical Ex. Rate Upper bound

Figure 18: USD/VND NDF performance

23,000

22,500

NDF 1M NDF 3M NDF 12M

Source: SBV, VCB and others

Source: Bloomberg

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Equities: The second change to long equities

Vietnam equities slumped to 2-month low. August was another bearish month for Vietnamese equities as the VN-Index recorded 4.44% decline over the last month. The VNIndex fell as low as 480, the lowest in the last 2 months. However, the index still managed to outperform other regional EMs by increasing 12.74% year-to-date.
Figure 18: Vietanam Market performance
530 510 490 470 450 430 Thailand 410 China 390 MSCI EMs 370 Nov-12 Dec-12 Oct-12 Aug-12 Sep-12 Apr-13 May-13 Aug-13 Jan-13 Feb-13 Mar-13 Jun-13 Jul-13 Singapore -50 Source: Bloomberg -40 -30 -20 -10 0 10 20

Figure 19: Vietnam YTD outperform peer markets

Vietnam Philipines Malaysia Indonesia Korea

Source: Bloomberg

Market activity picked up slightly thanks to late bargain trading, recording an average trading volume of 39.5 million shares, up 5.70% from Julys average of 37.4 million shares. The catalyst of higher Foreign Ownership Limit (FOL) and VAMC establishment could not offset the negative effect from heavy foreign outflows (US$43 million in August and from US$15 million in July). The tendency seems to be expanding due to Vietnam markets ETF redemption.

Earning results in 1H13 look worse but strong divergence. The correction of equity market also reflects not high-as-expected earnings results. In our statistic of 651 listed companies results (including banks and property companies), sales declined by 4.61% y/y and profit increased 9.34%y/y. Property sector recognizes a huge profit increase (116.5%) as VIC realized its profit (VND3,772 bn) from selling its properties recently.
Vietnam market 1H13 earning results overview Sector No. Net income 1H12 VNDbn 161 1,231 2,060 913 1,319 728 5,911 232 1,292 446 3,097 285 1,290 5,248 66 852 522 10,482 36,137 1H13 VNDbn 134 924 4,460 904 1,583 650 9,374 188 1,474 427 2,576 452 1,490 4,719 62 270 577 9,249 39,513 +/VNDbn -26 -307 2400 -9 263 -77 3463 -45 182 -19 -521 167 200 -529 -4 -582 54 -1233 3,377 Growth rate % -16.34 -24.92 116.48 -1.01 19.95 -10.65 58.58 -19.31 14.10 -4.37 -16.82 58.71 15.48 -10.08 -6.12 -68.27 10.43 -11.76 9.34

Retail Insurance Property IT Oil & Gas Financial Services Utilities Tourism & Entertainment Services Industry Consumer Goods Chemicals Automobile & Parts Natural Resources Food & Beverage Communication Construction & Material Healthcare & Pharmaceutical Banking Total

8 7 62 21 4 21 30 13 101 21 22 11 59 55 24 168 18 8 653

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