Vietnam Daily Market Watch with a note on VEA (Outperform)

Market commentary – The VN Index rose a third of a percent, closing below intraday highs but regaining the 990pts mark. The HN Index closed a whisker lower after trading narrowly through the day. Turnover was again at sound levels in the South, and above normal levels in the North on further trades in VGC. Market breadth was again little changed, as we saw that 29 stocks went to the ceiling while 23 stocks fell to the floor. Foreigners were less active, although they again remained net buyers in Ho Chi Minh, and net sellers In Hanoi, for the reason mentioned above. The put through market was again active, being dominated by massive deals in VGC and GTN. Large deals in the E1VFVN30; DHG and LGC  were also seen going through.

Foreigners were active buyers and sellers of VNM, being net buyers by a narrow margin. Foreigners also actively bought the E1VFVN30; MSN; HPG and PVD, while actively selling GTN; VHM; VJC and VIC.

• Bank shares retreated again today, led by VCB; CTG and TCB. EIB, on the other hand, was the only stock to rebound strongly, while BID and MBB marked time.

• Non-banks shares were mixed again, although today insurers rose, led by BVH, while brokers, despite strong gains by VCI, mainly fell.   

• Consumer and retail names fell further today, as losers led by MCH and BHN outnumbered gainers including VNM and PNJ by two to one. KDF traded sideways.

• Tech stocks were mixed to higher, as YEG again rose.

• Manufacturing names were firmer today, as gainers led by BMP; TCM and HSG outnumbered losers led by stop low STK by two to one. NKG and RAL both failed to trouble the scorers.

VEA (Outperform) held their analyst meeting today. It was an uneventful meeting and all key information relating to VEA’s business had already been mentioned in our previous note on January 31, 2019. Therefore, below are our key points from today’s meeting.

FY2018 audited consolidated results will be trimmed by VND 150-200 billion, equivalent to 2.1-2.8% of FY2018 unaudited PBT given additional provisioning as expected. In our previous note, we mentioned that the Company hadn’t booked any provisions against inventory devaluation. Particulars of the inventories are as set out below.

–     We note that, at the end of FY2017, the Company held about 5,288 vehicles including 2,604 Hyundai trucks, 2,494 VEAM trucks and 190 MAZ units. All of these inventory vehicles are qualified under Euro 2 standards. However, diesel automobiles makers have to apply Euro 4 standards from the beginning of FY2018.

–     Therefore, the Company has struggled with the sales speed of these Euro 2 trucks for a while, with little change after 9 months in terms of both inventory volumes and value. Accordingly, as of the end of September FY2018, these inventories were valued at VND 2.2 trillion, with a total of 4,601 units including 1,977 Hyundai vehicles and 2,473 VEAM vehicles.

–     We learnt that VEA successfully sold 2,411 Hyundai vehicles, with most of them were sold in December FY2018. As of the end of FY2018, the Company retained 2,950 units (-44.2% y/y) in inventory, including 193 Hyundai vehicles (-92.6% y/y), 151 MAZ units (-20.5% y/y) and 2,609 VEAM vehicles (+4.6% y/y).

–     Therefore, the inventory value for these vehicles came to around VND 1.2 trillion (-53.3% y/y).

–     We further understand and estimate that against the VEAM and MAZ truck inventories that the Company will make a provision in the range of VND 150-200 billion in FY2018. HSC had estimated that the value of these provisions could come to VND 180 billion in FY2018, equivalent to roughly 10-15% of the book value of these inventories.

FY2019 parent company targets looks very impressive thanks to strong dividends to be received from J/Vs – We note that FY2018 parent company NPAT will be reduced by about VND400-450 billion including: (1) VND150-200 billion related to provisioning as mentioned above, with (2) the remaining VND 270 billion coming from the booking of Ford dividend payments. The parent company already booked VND 270 billion in dividends paid from Ford in Q4 last year but Ford hadn’t released any resolution for profit allocation yet. According to Vietnam accounting practice, this profit then will be excluded from the audited profits of the parent company in FY2018, until they issue a final resolution on profit allocation. Therefore, we assume that FY2018 audited NPAT for the parent company will decline by around 7.5% to VND 5,100 billion (+877% y/y) from the reported number of VND 5,512 billion (+956% y/y) previously.

Based on these adjusted parent company results, the Company has now set a FY2019 NPAT target of VND 6,429 billion (+26.1% y/y) for the parent company, mainly thanks to a 22.9% increase in financial income from JVs, of which, the Company targets to receive VND 6,648 billion (+22.9% y/y) from J/V dividend payments. In addition, interest received is targeted to increase to VND 598 billion (+68.2% y/y) thanks to better cash deposit management.

Dividend policy to remain at high levels in the upcoming years – For FY2018, the Company targeted dividend payments of 28% of par value (VND 2,800/share). However, the Company is considering increasing its FY2018 cash dividend to VND 3,500–3,800/share, equivalent to a dividend yield of 7-7.6%. The final decision on FY2018 cash dividends will be finalized at the upcoming AGM, which is expected to be held in May this year. The FY2018 cash dividend will be paid one time after the AGM.

The Company further plans to pay cash dividends in FY2019 of up to 50% of par value, equivalent to VND 5,000/share. This will generate an attractive dividend yield of 10%.

The Company also plans to reduce its stakes in its subsidiaries and affiliates going forward – At the meeting, the Company stated that it is considering reducing its stakes in subsidiaries and affiliates if needed. For the time being, they will focus on supporting businesses like the VEAM foundry. Besides that, we note that VEAM currently has three companies in the supply industry including Machinery Spare parts No.1, Pho Yen Mechanical JSC and the Song Cong Diesel Company. About 70% of these companies’ output is supplied to Honda. The supporting industry will be a key focus for VEAM in the future.

The Government’s divestment of its stake in VEAM will not happen soon – At the meeting, the Company stated that the timeline for divestment is unclear at this stage. Initially, the Government planned to reduce its stake in VEAM to 36% in the first phase from the current 88.5%. However, there are some subjects for discussion over timing relating to terms in the capital contribution agreement between VEA and J/Vs (like Honda and Toyota), the details of which are set out below.

–     We understand that the J/V agreements may include terms regarding government ownership of VEAM. Therefore, the Government plan to reduce its stake in VEAM will be subject to discussions with each J/V.

–     Honda Vietnam (HVN) was established in 1996. There is an agreement between VEAM and the Honda Group regarding the VEAM investment in Honda Vietnam, under which VEAM, Honda Motor (Japan) and Asian Honda Motor (Thailand) hold stakes of 30%, 42% and 28% respectively. The agreement period is 40 years from its inception in 1996. This means that this cooperation will officially come to an end in 2036, although there is still room for an extension to this cooperation to be discussed if necessary.

–     Toyota Vietnam (TMV) was established in 1995 and VEA has held a 20% stake in TMV from its inception to date. There is also a 40-year agreement between VEA and Toyota Group which runs until 2035. Most of terms of the investment in TMV are similar to HVN. However, there are trigger terms for this particular cooperation relating to the VEAM ownership structure, such as buy back rights for the VEAM stake in TMV if the Government reduces its stake in VEAM below 51%.

–     For HVN, there aren’t any terms relating to a possible buy back of VEAM’s stake in HVN yet, however, if the buyer of the Government’s stake in VEA is an industrial player which is a potential threat to HVN’s business in Vietnam, the share buy back may be activated if needed.

Based on this improvement in the J/V stories, HSC believes that the Government will consider this plan carefully before making any decision regarding divestment. Given that, we do not expect that the divestment will happen any time soon.

The listing timeline on HSX is likely to be delayed – At the meeting, the Company also shared that they haven’t finished IPO finalization procedures with the Government yet due to some technical issues. The Company still targets a timeline for this to happen within FY2019, however, HSC expects the listing timeline would be late this year at the earliest.

For FY2019 as a whole, HSC maintains our forecasts calling for net sales of VND 7,427 billion (+5.0% y/y) and NPAT of VND 7,672 billion (+7.6% y/y).

–     HSC forecasts that Honda Vietnam will deliver FY2019 net sales and NPAT of VND 116.9 trillion (+8.6% y/y) and VND 19.7 trillion (+4.4% y/y) respectively, due to the higher base effect. The profit contribution to VEA will then come to VND 5,922 billion (+4.4% y/y). Sales volumes of motorbikes and cars are forecast at 2.7 million units (+5% y/y) and 30,621 units (+13% y/y). We expect Honda Vietnam’s GPM will be squeezed slightly to 29.6% from 30.4% last year.

–     We further forecast that Toyota Vietnam will deliver 21.3% growth in FY2019 NPAT to VND 4,963 billion, with sales forecast to be VND 41.7 trillion (+16.0% y/y). The profit contribution to VEA will then come to VND 993 billion (+21.3% y/y). This assumes that sales volumes of cars come to 74,856 units (+12.7% y/y), and that the GPM will continue to improve to 18.5% from 17.8% a year earlier.

–     Ford Vietnam is forecast to generate NPAT of VND 1,323 billion (+15.0% y/y) on a 13.5% y/y recovery in sales volumes. The 25% stake in Ford will contribute VND 331 billion (+15.0% y/y) to VEA’s consolidated profits for the year.

–     We further forecast that VEA will continue to make additional provisions against devalued inventories carrying on from last year. HSC forecasts that provisions for this may come to VND 200 billion.

–     Better management of cash on hand should help the Company to increase financial income, which we forecast will increase to VND 656.3 billion (+57.5% y/y) in FY2019, while net financial income is forecast to be VND 572.5 billion (+69.9% y/y).

–     All in all, we expect FY2019 NPATMI to come to VND 7,608.4 billion (+7.6% y/y). Assuming no change in AOS, FY2019 EPS will come to VND 5,668, giving us a forward P/E of 8.8x.

Investment conclusion – Reiterate Outperform on this stock. We have a fair value of VND 48,178 per share, which values the Company at a FY2019 target P/E of 8.5x. Although the stock price has reached our fair value price level, we still see some medium-term price momentum behind the stock relating to VEA plans to list on HOSE within FY2019, coupled with the very attractive level of dividend yield. The forward outlook is also promising thanks to a better product mix in its motorbike operations, as well as healthy growth in automobile operations. Better cash deposit management at the Group level, together with profitability improvement in core businesses, are other factors supporting the bottom line. However, we may see some negative impact on stock price in the short-run relating the likely downward revision in FY2018 earnings.

VEA has been one of the best performers across all three stock exchanges recently. The stock is up 89.1% since listing in early July FY2018, and also up nicely 30.4% YTD, in line with foreign inflows into the stock. For the next three years, HSC forecasts that bottom line CAGR will be 9.7% on the higher base effect from Honda in FY2018. The rising penetration of auto scooters will continue to help Honda Vietnam to improve their bottom line in a mature market for the time being. Meanwhile, profits from Toyota and Ford will improve gradually from FY2019 onwards thanks to double-digit growth in car sales.

• Resource names were mixed to lower as gains at GAS and PVS were offset by losses at PXS; PVD and PLX.

• Real estate and construction stocks rose strongly today, led by CII; TDH and HBC. Losers KDH and NLG were outnumbered six to one, while VRE marked time.

• Agriproducts and aquaculture stocks however, were mixed as gains by stop high GTN and others, were offset by stocks in retreat led by VFG and DPM.

• Pharmaceutical stocks rose strongly, again led by DHG.

• Utilities, transport and logistics stocks were yet again mixed to higher, as gains at HVN; PPC et al more than offset more modest losses at NT2; ACV and others. VNS was unchanged.

Vietnamese stocks mixed – The VN Index rebounded, albeit modestly, today and is likely to retest resistance again in coming sessions. The HN Index essentially traded sideways. While we cannot rule out the possibility that the VN Index may correct back to around 960pts, we still feel that the greater probability lies in it looking to consolidate at these levels. Further, as noted previously, in the immediate future we still feel that the 1,000pts mark is unlikely to be breached sustainably.

The four futures contracts today underperformed the VN30 Index cash equities market overall, with discounts again expanding to between 6.04-8.84 index points. Turnover remains sound, and with advancers clearly outnumbering stocks in retreat, today’s correction seems more associated with profit taking in some of the larger issues that rallied early. Foreign participation, while somewhat lower is still at solid levels compared to last year, and, apart from isolated issues such as VGC yesterday and today, remain net buyer, which again we take as positive.

In terms of sectors, manufacturers, pharma names and real estate and construction stocks were the only sectors to perform well, with banks and financials, as well as consumer stocks performing poorly, while other sectors were mixed. On the Southern bourse today VIC and VNM were doing the heavy lifting, while VCB made the only negative contribution of any note. In Hanoi, VCS and VCG made positive, if somewhat more muted, contributions, while ACB again played the part of the villain.

Asian shares & major currencies – Asian shares were broadly higher today, despite weakness on Wall Street and across US bourses on overnight. As for currencies, the US$ (96.14) again edged lower over the last twenty four hours when measured against its trade weighted ICE index. The Euro (1.1377) was buying slightly more greenbacks, while the Pound Sterling (1.3247) had advanced noticeably against the US currency. The dollar was buying slightly fewer Japanese Yen (110.56), and had also lost ground against the Chinese Yuan (6.6855).

Oil prices edge higher – Crude oil firmed from this time a day ago, with active month WTI futures crude oil contracts trading around US$0.50 higher at US$55.98 per barrel, and Brent crude trading up over a dollar at US$65.73 at the time of writing. The American Petroleum Institute (API) published its weekly estimate of US crude oil inventories overnight showing a drop of 4.2 million barrels in the week to February 22, which no doubt was welcomed by the markets.

Traders will also want to know what the official Energy Information Administration numbers published later today say. The markets have shrugged off recent comments by President Trump calling for lower prices. And the principle narrative which focuses on OPEC’s determination to soldier on with supply cuts plus falling Venezuelan supply continues to provide important support even at current levels. Even so, the market has already priced in a lot and will likely await new incentives such as a possible China/US trade agreement before trying to push higher.

In global macro and general news –  The Chairman of the Federal Reserve Bank Board of Governors, Jeffrey Powell continued his semiannual testimony to the Senate Banking Committee and reiterated the Fed’s recent more dovish tone. Noting conflicting data on the U.S economy such as poor retail sales which contrasted with strong numbers for jobs and wages. He went on to say that the baseline outlook was good despite the apparent drag  effect from slowing overseas economies.  And confirmed that the Fed would be patient with interest rates while it clarified the U.S. economy’s direction.

Tension between India and Pakistan has escalated further today with the shooting down of two Indian fighter jets apparently over Pakistani territory. Given that India is facing a general election and that the Pakistani military has an important  voice the risk of a continued tit for tat is quite high. Neither side can back down without third party intervention. This crisis are not new, however, in the past countries like the U.S. were able to intervene and calm things down. Whether the U.S. or a group of countries are able to intervene and mediate a solution is more open to question than usual. Markets will largely ignore this for the time being, but if things continue to get worse that will have to eventually price it in.. 

HCMC – The VN index rose today as turnover narrowed to VND 4,915.26 billion or US$ 210.96 million. The index gained 0.33% and closed at 990.27. 163 stocks up while 142 stocks down. And 8 stocks went to the ceiling while 12 stocks dropped to the floor. Foreigners accounted for 15.56% of the buying value and 14.48% of the selling value.

Foreign buying fell in actual terms and also in percentage terms. While foreign selling also fell further in actual terms and also in percentage terms. Foreigners turned net buyers to the tune of VND 53.13 billion worth of shares in HCMC. And we saw thirty eight transactions in the put through market today.

Foreigners were active buyers of E1VFVN30; MSN; HPG; VNM and PVD. They also actively sold GTN; VHM; VJC; VIC and VNM. The put through market was more active today with two enormous; five super jumbo; six jumbo; seven large and some medium sized & smaller deals accounting for 17.63% of total turnover.

We saw 21,506,440 shares of GTN; 6,550,000 shares of E1VFVN30; 500,000 shares of DHG; 4,900,000 shares of LCG and 5,983,460 shares of SAM going through. Foreigners were more active in the put through session in the E1VFVN30 & MBB deals and then eighteen other smaller deals today in the market.

E1VFVN30 was up 0.46% today closing at VND 15,440.

Hanoi – The Hanoi market went down today while turnover came to VND 799.59 billion or US$ 34.32 million. The HN index was down 0.03% to close at 107.63. 103 stocks up while 55 stocks down. And 21 stocks went to the ceiling while 11 stocks dropped to the floor. Foreigners accounted for 3.90% of the buying value and 43.95% of the selling value.

Foreigners were net sellers to the tune of VND 320.24 billion worth of shares. And we saw fifteen medium and small sized deals today during less active put through session in Hanoi accounting for 45.45% of total turnover.

We saw 16,927,600 shares of VGC; 674,000 shares of TVC and 300,000 shares of DBC along with some smaller transactions in the put through market today.

HSC