Vietnam Daily Market Watch with a corporate note on POW (BUY)

Market commentary – The VN index increased with turnover still below recent averages. Market breadth widened while we also see that 25 stocks went to the ceiling and 10 stocks fell to the floor. Foreigners were more active net sellers to a noticeable degree. The put through market was less active with large deals in EIB & MWG and then a smaller deal in CTD seen going through.

 

Foreigners were active buyers of VNM; CTD and VRE. And net sellers of CTG and VPB.

 

  • Bank shares were mostly higher, led by STB and BID.

     

 

  • Non-banks shares were mixed to higher, led by brokerage stocks.

     

 

  • Consumer and retail names were mixed with gains for VNM and MSN while there were losses for KDF and QNS.

     

 

  • Tech stocks were mixed with a gain for FPT while YEG lost ground.

     

 

  • Manufacturing names were broadly higher, led by HSG and STK.

     

 

  • Resource names were all higher, led by PXS and GAS.

     

 

  • Real estate and construction stocks were mixed with gains for SJS and VRE while there were losses for NVL and TDH.

     

 

  • Agriproducts and aquaculture stocks were mixed to higher, led by GTN and PAN.

      

 

  • Pharmaceutical stocks mostly had sideways movement.

      

 

  • Utilities, transport and logistics stocks were mixed to higher, led by VSH and HVN.

 

Corporate Action. POW to list on HoSE on January 14th at a reference price of VND 14,900. Forward prospects positive. Reiterate BUY. PV Power (POW; Buy) will be listed on HoSE on January 14th, 2019 at a reference price of VND 14,900 per share. At the reference price the market capitalisation of the company comes to VND 32,444 billion (US$ 1,392 million).

 

Quick conclusion – Rating BUY. We see fair value for PV Power at VND 19,000 per share, which gives us 27.5% upside from the listing reference price of VND 14,900 per share. At this price, PV Power would trade at a FY2019 forward P/E of 10.7 times and an FY2019 forward EV/EBITDA of 6.5 times which values it close to regional comparatives. However, it has above average forward growth prospects. In FY2019 alone, we see NPAT expanding by 38% y/y. PV Power is the second largest independent power generator in Vietnam where it has a 12% market share of generating capacity in a market that is seen as one of the fastest growing SEA markets with demand likely to grow at a CAGR of 10% over the next 3 years. PV Power is a well-managed company and in our long-term earnings model we see them increasing their share of total EVN generation to 15% by end 2026. Given our model assumption of a 160% increase in generating capacity from 4,208 MW to 10,958 MW. Based primarily on building additional thermal power plants using natural gas as a fuel.

 

Best of breed player in utility sector as the second largest IPP – POW is by far the second largest IPP in Vietnam. Then given the PVN Group’s dominance in gas procurement and supply, we think PV Power is particularly well placed to judge the long-term future of the natural gas industry in Vietnam. And while input prices are levied at the regional wholesale price level, their strong industry connections give access to ample supply.

 

In our model, we have GPM increasing from 13.4% in FY2016 to 17.29% in FY2020. Based in a falling depreciation burden. However, once the Nhon Trach facilities come on stream from FY2021 we see a rising depreciation burden squeezing GPM again.

 

We assume that their connectivity to both PVN and EVN will enable them to remain the dominant IPP player over the medium to long term. In our opinion, PV Power’s earnings outlook looks positive over the next 3 years, supported by;

 

  • Higher utilization of the Vung Ang power plant.
  • Reducing depreciation expense and interest expenses as Ca Mau 1&2’s equipment is fully depreciated, and the associated debt will be fully paid off from FY2018 without making any assumptions about an adjusting in the PPA price.

 

For FY2018 we see a flat NPAT y/y – For FY2018, HSC forecasts net sales of VND 31,993 billion (+7.6% y/y) and an NPAT of VND 2,197 billion -1.6% y/y. Based on the following assumptions;

 

  • That total generating volume will increase by 4.8% y/y to 21,037 million kWh.
  • Growth of 6.4% y/y in ASP on higher variable cost prices.
  • Gross profit margin will decrease from 19.2% to 16%, due to higher average gas prices.
  • Net financial loss reduces by 17% y/y to VND 1,578 billion due to a fall of 18% in the net FX loss and a fall 14% in interest expenses.

 

This would then generate an EPS of VND 1,009 and if we exclude the likely FX loss, we see core EPS of VND 1,216. Therefore, at the listing reference price this values the company at a P/E of 14.77xs.

 

For FY2019, we see NPAT growth of 38% y/y – For FY2019, HSC forecasts net sales of VND 32,645 billion (+2% y/y) and NPAT of VND 3,033 billion +38% y/y. Based on the following assumptions:

 

  • That total generating volume will increase a bit to at 21,400 million kWh (+2% y/y).
  • Flat in ASP given higher coal price while average gas price will be lower compared to FY2018.
  • Gross profit margins will expand from 16% in FY2018 to 17.5% in FY2019.
  • Net financial loss reduces by 25% y/y to VND 1,187 billion due to a fall of 22% in net FX loss and a fall 20% in interest expenses.

 

This would then generate an EPS of VND 1,393 and if we exclude the likely FX loss, we see a core EPS of VND 1,557. Therefore, at the listing reference price this values the company at a forward P/E of 10.7xs.

 

PV Power was established in 2007 – and is 100% owned by Petro Vietnam-PVN. They are the largest IPP in Vietnam, behind Vietnam Electricity-EVN. These plants have a total capacity of 4,208.2 MW, accounting for 12% of the total power generation capacity of Vietnam. PV power owns;

 

  • 1 coal thermal power plant – Vung Anh 1 Coal Fired with a capacity of 1,200 MW.
  • 3 gas thermal power plants including Ca Mau 1&2 (1,500 MW), Nhon Trach 1 (450 MW), and Nhon Trach 2 (750 MW).
  • 3 hydropower plants including Hua Na (180MW), Dak Drinh (125MW) and Nam Cat (3.2 MW).

 

Gas fired power plants are PV Power’s main income stream – Gas fired plants account for most of the sales and all of the profit at the moment;

 

  • The 3 gas fired plants account for 64% total generation capacity, but they contribute around 80% of sales and nearly 100% of NPAT.

 

  • The coal fired plants account for 29% total generation capacity, but it only contributes around 17% of sales without generating any profit given the low utilization rate.

 

Low dividend yield compared to other thermal power plants due to expansion – The 2018 AGM approved to pay a cash dividend at a rate of 3% par value (VND 300 per share). The company also give the guidance that the company will pay an annual dividend at a rate of 6% par value for FY2019 and FY2020 while they will pay an annual dividend at a rate of 5% par value for FY2021 and FY2022. At the reference price of VND 14,900, dividend yield comes to 3.3- 4.0%- lower than other thermal power plants such as PPC (13%) and NT2 (11.2%). We understand it is caused by capital requirement for NT3-4 plan.

 

Investment conclusion – Reiterate Buy. The second largest power producer in Vietnam with a total capacity of 4,208 MW.  We have a fair value price of VND 19,000 which values the stock at a PE forward FY2019 of 13.6x. With top line growth prospects at a CAGR 10% and bottom growth at a CAGR of 22% over the next 3 years, POW has decent prospects compared to its domestic competitors and also regional peers. And as a key member of the PVN group with a strong execution track record we see them increasing their market share in electricity generation over the medium to long term.

 

Vietnamese stocks regain more ground today – The markets rallied further today following the trend from regional markets. VNM was the biggest gainer today in terms of index points after recent weakness followed by resource play GAS. Other consumer names such as MSN and SAB also did well as did retailer MWG. Then selected banks improved led by BID; MBB; VPB; VCB; TCB and STB. Real estate related leaders such as VIC; VHM and VRE all advanced. Brokers made gains despite news that the minimum commission floor will be scrapped possible triggering a price war. 

 

On the other, NVL fell on news that some of its projects face procedural hurdles. Fellow real estate name NLG also lost some ground. CTG dropped as did HDB & EIB thus bucking the general trend for banks. YEG also slid in thin trade despite recent positive news.  

 

The four futures contracts made gains but trailed the VN30 cash index today. Which meant that all four futures contracts closed at an even greater discount to the cash index than on Friday. Suggesting some skepticism on the part of futures players as to how sustainable cash market gains are.

 

Bright start but the early surge in prices was partially unravelled by the close. A lack of follow-up buying and a more tentative note on regional markets made it hard to hold on to all the early gains. Volumes remain well below average which is a major drawback for any market rally. 

 

We are cautiously optimistic short term given the apparent improved narrative for global equities after the recent sharp correction. Weakness in the U.S. dollar plus gains in the oil price represents a perfect combination for emerging markets. Triggered by a more cautious stance on future U.S. rate hikes. And as long as this continues Vietnamese equities should move higher. In any event, this market along with others still looks oversold and we may well see further gains over the next few weeks.

 

Asian shares & major currencies – Asian shares rose today following strong Wall Street’s gains on Friday. As for currencies, the US$ (95.947) fell back today when measured against its trade weighted ICE index. Then the Euro (1.1429) traded higher; Pound Sterling (1.2728) was almost flat; the Japanese Yen (108.2475) gained ground after a recent surge while the Chinese Yuan slipped at (6.8514).

 

Oil prices make some gains – Crude oil traded a little higher today with the active month WTI futures crude oil contract trading at US$ 48.95 in late Asian trade. Continued recent gains.

 

Last week’s monthly Reuters survey found that December OPEC oil supply shrank by 460,000 barrels per day (bpd), to 32.68 million bpd. Which is the first clear sign that Saudi Arabia is meeting its commitment to reduce supply. However, with U.S production still at a record high of 11.7 million barrels per day last week leading to inventories of 441.42 million barrels this is just one strand of a fairly complicated narrative for oil at the moment.

 

In general, concerns over demand growth this year and the fact that shale oil production continues to increase is putting an effective cap on prices. Although there is some limited upside. Not least as financial players have significantly reduced exposure and oil still looks oversold.

 

In global macro and general news – Several important developments on Friday such as reassuring words from Jerome Powell; Fed Chairman; a strong non-farm payroll number for December and a move by the Chinese to cut the RRR have all helped to boost markets in Asia today. The comments by the Fed chairman were the most important of the three as it appeared to mark a change in tone from his previous remarks after the most recent rate hike in December. In this case he hinted at a possible pause in rate hikes or to put it another to allow future rate moves to be data led. He also included remarks on the QT, where he suggested that his previous comments about it being on automatic pilot was not exactly the case. Markets rallied although some might wonder if he couldn’t have said all this a few weeks ago and spared markets a big correction in the meantime.

 

The U.S. employment numbers were also strong although this in no way counteracts the poor ISM manufacturing numbers previously as employment is always a lagging indicator. Indeed, markets will await the more important ISM service numbers this week to see where we are in terms of the U.S. economy. The move by the PBOC was expected and in this case serves to illustrate how limited their options are for the time being. However, as long as the trade talks between the U.S and China appear to be going well then markets will likely give prospects for the Chinese economy the benefit of the doubt.

  

HCMC – The VN index rose today as turnover narrowed to VND 2,434.06 billion or US$ 104.60 million. The index gained 0.99% and closed at 889.64. 195 stocks up while 95 stocks down. And 12 stocks went to the ceiling while 6 stocks dropped to the floor. Foreigners accounted for 14.64% of the buying value and 16.46% of the selling value.

 

Foreign buying rose in actual terms and also in percentage terms. While foreign selling fell further in actual terms but rose in percentage terms. Foreigners turned net sellers to the tune of VND 44.52 billion worth of shares in HCMC. And we saw twenty six transactions in the put through market today.

 

Foreigners were active buyers of VNM; CTD; VRE; VPB and VHM. They also actively sold CTD; VJC; VIC; CTG and VPB. The put through market was more active today with one enormous; two super jumbo; three jumbo; eight large and some medium sized & smaller deals accounting for 27.37% of total turnover.

 

We saw 21,800,000 shares of EIB; 924,999 shares of MWG; 324,000 shares of CTD; 480,000 shares of NVL and 1,366,990 shares of VPB going through. Foreigners were more active in the put through session in the CTD & VPB deals and then six other smaller deals today in the market.

 

E1VFVN30 was up 0.43% today closing at VND 13,980.

 

Hanoi – The Hanoi market went up today while turnover came to VND 1,054.67 billion or US$ 45.32 million. The HN index was up 1.07% to close at 101.93. 82 stocks up while 56 stocks down. And 13 stocks went to the ceiling while 4 stocks dropped to the floor. Foreigners accounted for 1.64% of the buying value and 0.67% of the selling value.

 

Foreigners were net buyers to the tune of VND 10.18 billion worth of shares. And we saw nine medium and small sized deals today during more active put through session in Hanoi accounting for 74.74% of total turnover.

 

We saw 30,057,641 shares of ACB; 1,632,202 shares of SHB and 369,000 shares of VGC along with some smaller transactions in the put through market today.

 

 

 

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