Vietnam Daily Market Watch with an earnings preview on HVN (Outperform)

Ngày đăng January 9, 2019

Market commentary – The VN index increased with turnover still below recent averages. Market breadth widened while we also see that 17 stocks went to the ceiling and 17 stocks fell to the floor. Foreigners were more active net buyers to a small degree. The put through market was less active with large deals in EIB & HDB and then a smaller deal in HNG seen going through.


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


  • Bank shares were all higher, except VPB closing flat.



  • Non-banks shares were mixed with gains for insurance stocks while there were losses for brokerage stocks.



  • Consumer and retail names were mixed to higher, led by KDF and MWG.



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



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



  • Resource names were all up, led by PXS and PVS.



  • Real estate and construction stocks were all higher, except minor losses for DIG, KBC and KDH.



  • Agriproducts and aquaculture stocks were mixed with gains for VHC and BFC while there were losses for HNG and HAG.



  • Pharmaceutical stocks mostly had sideways movement.



  • Utilities, transport and logistics stocks were mixed to higher, led by HVN and NT2.


Earnings preview – HVN estimates FY2018 sales grew 22% y/y while EBT fell by 11% y/y. Positive outlook next year. Rating Outperform- Vietnam Airlines Corporation (HVN – Upcom) has given final guidance for consolidated FY2018 results suggesting net sales of VND 102,000 billion (+22% y/y) and an EBT of VND 2,800 billion (-11% y/y). This would enable the company to fulfill 103% of HSC’s sales forecast and 93% of HSC’s EBT forecast. While it would fulfill 105% of the company own sales target and 115% of the company’s own EBT target. For FY2018, HSC forecast net sales of VND 99,878 billion (+20% y/y) and an EBT of VND 3,009 billion (-5% y/y). For the parent company only, HVN estimated net sales of VND 73,500 billion (+13% y/y) and an EBT of VND 2,012 billion (+5% y/y).


Quick conclusion – Rating Outperform. We have a fair value price of VND 36,000 which values the stock at a forward FY2019 PE of 16.xs. Based on our table of regional peer comparisons. HSC expects NPAT will increase by 27% y/y in FY2019. The main driver being our assumption of growth of 5% y/y in the number of passengers carried and a fall of 15% y/y in average fuel prices. Moreover, we expect that Jetstar Pacific will become profitable from 2019 onwards thanks to a large expansion in their fleet and of course our expectation of lower fuel costs. We also see a short-term catalyst for the stock as HVN plans to list on HOSE in April 2019. This will trigger a likely addition to the VN30 index in due course given its large size and force many institutions to take a serious look at the stock.


During 2018, HVN carried 22 million passengers (+0.4% y/y) and 350,000 tons of cargo (+8% y/y). The company has not disclosed any other details behind their estimated numbers. However, HSC estimates;


  • The growth in sales was driven mostly by an increase of around 13% y/y in average fares thanks to (1) greater contribution from international passengers who pay higher fares; (2) higher fuel charge component in fares as average fuel price rose by 32% y/y.
  • The fall in HVN’s 2018 consolidated earnings likely came from the decrease in profit from the sale and leaseback transactions of Jetstar Pacific (here HVN owns a 68.85% stake). Plus, the impact of higher fuel costs which were not fully offset by higher charges. In 2017, Jetstar recorded 7 sale and leaseback aircraft transactions while in 2018, they recorded only 2 sale and leaseback aircraft transactions.


For FY2019, HSC calls for flat net sales growth and growth of 27% y/y in NPAT – We forecast net sales of VND 101,327 billion (-0.06% y/y) and an NPAT of VND 3,047 billion (+27% y/y). Our main assumptions are as follows;


  • Revenue passenger kilometers (RPK) of 40.81 billion passenger kilometers (+5.4% y/y) as the number of passenger carried came to 23.44 million passengers, up 7% y/y including 13.89 domestic passengers (flat y/y) and 9.55 international passengers (+5% y/y).
  • However, we also expect the average sales per RPK decreases by 6% y/y as fuel charges drop.
  • Available seat kilometers (ASK) of 45.24 billion seat kilometers (+5.5% y/y).
  • Gross profit to increase by 6% y/y to VND 14,400 billion while gross profit margin expands from 13.6% to 14.2% mainly due to our assumption of a 15% y/y fall in fuel costs.
  • Net financial loss narrows by 4% y/y to VND (2,041) billion.
  • The SG&A to net sales ratio remains stable at 8.6%.


Overall, in our model, we forecast EBITDAR will come to VND 22,966 billion (+11% y/y) while EBITDA comes to VND 11,014 billion (+4% y/y), generating an EV/EBIDAR of 3.07 times and an EV/EBITDA of 6.39 times at the current price of VND 34,000 per share. EBT then comes to VND 3,808 billion (+36% y/y).


We then forecast NPAT will come to VND 3,046 billion (+27% y/y). EPS would come to VND 2,151 per share, generating a forward P/E of 15.81 times at current price of VND 34,000 per share.


Hope to list on HOSE in April 2019 – HVN sent in the paperwork for this as of December 28th, 2018 and hope to be approved to list on HOSE in April 2019. Listing on the HoSE will improve liquidity in the stock and also opens the way towards;


  • Inclusion in the VN30 in 6-9 months given a market capitalisation of VND 50,365 billion (US$ 2.17 billion) at the current price compared to the market capitalisation of VND 2,478 billion for the smallest member of the current VN30.
  • Addition to various ETF indices in due course.
  • Margin trading after six months as a listed stock.


The largest carrier in Vietnam consists of both a full service and discount airline – Establishing in 1956, Vietnam Airlines is the national carrier and also the largest carrier with a 58% domestic market share and 35% international market share. They operate both a full-service airline named Vietnam Airlines and a low-cost carrier named Jetstar Pacific (where HVN owns a 68.85% stake).


HVN has lost market share to Vietjet Air steadily since 2012 when they had a 100% domestic market and 49% international market share. Last year HSC estimates that they lost an additional 2% domestic market share and 6% international market share. As Vietjet added a lot more international routes. However, from now on, we think Jetstar Pacific’s planned expansion should help HVN claw back some lost market share while the market share of Vietnam Airline should stabilise as they also expand more rapidly. 


Plan to expand the fleet by 38% in the 2019-2025 period – HVN plans to expand their fleet from 98 aircraft by the end of FY 2018 to 135 aircraft by the end of FY2025. Due to the slow-down in the growth of domestic market, Vietnam Airlines plan to focus on increasing their presence in the international market by expanding their wide-body fleet. While the narrow- body fleet will be fitted with new engines. Which not only reduces the fuel burn by around 15%. But also expands capacity as the new aircraft will have about 220-240 seats versus the current 200 seats on the current narrow body aircraft.


Vietnam Airlines focus on expand international market. North Asia is Vietnam Airlines’ largest international market accounting for some 54% of their international capacity, followed by South Asia with a 34% share international capacity and Europe with a 7% international capacity share.


  • Opening new long-haul routes – In comparison with domestic airlines, Vietnam Airlines has the advantages in long-haul routes as they are a flag-airlines offering a full-service. They plan to launch flights to the US in 2019.


  • Expand in Europe by adding frequencies on existing routes – Vietnam Airlines currently operates 7 routes which seems to cover many popular destinations in Europe, but none are served daily while the annual growth of Europeans tourist coming to Vietnam is still in the double- digits. Hence, raising frequencies of existing routes in this market is required.


  • Expanding in North Asia by using more widebody aircrafts – The potential growth of North Asia market is still very high. However, it’s hard to expand the number of flights as the number of airport slots in HCMC and Hanoi is approaching full capacity. Hence HVN plans to switch from using narrow-body aircraft with (150-180 seats) to wide-body aircraft (280-300 seats) in some trunk routes such as Hanoi-Osaka, Ho Chi Minh-Osaka, Hanoi-Shanghai and Ho Chi Minh- Guangzhou. This will not only expand their capacity but also improves their services in this market.


  • Open new charter flights to China – In order to catch the strong growth of tourists coming from China, Vietnam Airlines has opened new charter flights connect Chinese cities to Vietnam’s tourist destinations such as Da Nang, Cam Ranh, Phu Quoc. Moreover, the frequency of some charter flights has been increased on routes such as Phu Quoc- Shanghai, Da Nang- Lanzhou and Cam Ranh-Changzhou…


Shift to sales and leaseback has improved the balance sheet – HVN switched from outright purchasing since 2016 and as of the end of FY2018, 6 aircraft came under the sales and leaseback method. HVN currently has a total of 98 aircraft. As follows;


  • 52 aircraft are fully owned
  • 40 aircraft are held under operational leases
  • 6 aircraft are held under sales and leaseback


And over the next 3 years, they plan to receive 21 new aircrafts. Of which, 2 aircraft will be funded by sales and leaseback while 19 aircraft will be funded by operating leases. However as 5 of these will be used to replace existing leases the total net fleet expansion will be just 14 aircraft or 14%. Although it will be significantly greater in terms of the numbers of seats added given the prevalence of wider bodied aircraft. We understand that HVN would like to maintain a ratio between leased and owned aircraft of around (40/60). Moreover, we also see a potential downward trend in new aircraft prices due to the supply from new player- Chinese producers. In this case, operating leases are seen as preferable to sales and leaseback or outright purchasing.


As a result of the application of the sales and leaseback method in some previous aircraft deals, net outstanding US$ borrowing & financial lease decreased by 22% y/y to in 2017 to US$ 2.07 billion and continued to decrease by 13% y/y in 2018 to US$ 1.81 billion (by the end of Q3.2018), generating a decrease in debt to equity ratio from 3.75 in 2016 to 2.7 in 2017 and 2.45 by the end of  Q3 FY2018.


HVN estimates the gross profit margin for sales and leaseback transactions – is around 3% or around US$ 2 million per aircraft. This is still much lower than some regional competitors who record a gross margin as high as 14% for sale and leaseback transaction.


We understand, that the lower margin might come from lower discounts for aircraft purchase as Vietnam Airlines buys in much smaller number than some regional competitors. However, we also see that if airlines sell aircraft to lessor at higher profit margins this obviously means the lessors are buying the aircraft at higher prices. And therefore, they in turn charge far higher leasing fees back to the airline. Hence the low 3% GPM could also suggest that HVN is taking a rather conservative line in this respect. And should translate into far lower leasing fees per aircraft.


Investment thesis – Rating Outperform. We have a fair value price of VND 36,000 which values the stock at a forward FY2019 PE of 16.xs. Based on our regional comparatives table. Although the stock price has reached our fair value price level, we still see some short-term price momentum behind the stock as HVN plans to list on HOSE in April 2019. Moreover, we expect strong results for the 1H 2019 given the steady expansion in passenger numbers and the sharp drop in fuel costs. HVN is moving towards a more aggressive expansion strategy to win back lost market share. They are also looking to use both operational leases and sales and leaseback to fund this expansion. In line with this more robust stance and its listing on HoSE and likely addition to the VN30 before year-end we think the stock could exceed our fair value price level for an extended period of time. As many institutions look at the stock for the first time.


Vietnamese stocks move higher today – The markets rallied nicely today following the regional trend. BID was the biggest gainer in terms of index points while there were also gains for banks such as VCB; TCB; CTG; MBB; TPB; HDB and EIB. News that VCB has raised a total of US$ 267 million by selling 111.1 million shares to GIC and Mizuho helped attract buyers to the whole sector. This deal has been expected for quite some time and it’s nice to see it completed. Investors will be hoping that other banks such as BID & CTG are also be able to raise capital soon.


Then VRE jumped while other real estate names such as VIC and NVL also rose. News that restrictions on some of NVLs projects have been lifted again helped the whole sector although this story hasn’t quite run its course yet. GAS continued to move higher along with oil prices while retailer MWG made some gains.


On the other hand, YEG fell sharply after equally sharp gains yesterday and was the biggest loser in terms of index points. No news that we know of just a fairly illiquid stock moving on thin volumes. Retailer FRT also lost some ground. Then brokers such as VND and HCM slipped today no doubt on concerns over a possible cut in brokerage fees under proposed regulatory changes. KBC the IP sector leader also lost out after previous gains. 


The four futures contracts rose by 5.5-8.1 index points today or lagging the increase in the VN30 cash index. Hence at the close they were trading at a discount of between 7.7-9.1 index points to the cash index. This is at the lower end of the range and indicates a certain amount of caution about the near-term outlook. Foreigners weren’t that active and were net sellers to a small degree in the cash market.


The VN index pushed higher today following in the wake of a continued global move to the upside on optimism over the U.S – China trade talks and U.S interest rates. And also buoyed by higher oil prices and a weaker dollar. In the belief that a likely pause on U.S. interest rate hikes and a trade deal with China should allow for the dollar to weaken further and for oil to climb.


Which creates a far more positive outlook for emerging markets including Vietnamese stocks than we would have dared hope for even a few weeks ago. Of course, this is all still a bit fragile as can be seen by the low daily trading volumes seen here and the rather tentative moves in a lot of blue chips such as banks in recent days. It’s still a two step forward one step backwards market for the time being. However, that could allow for a longer lasting run up in prices than would a sharp two-day spike.


Even so, it’s also important that we see trading volumes improve in coming days. Low volume runs are typical of bear markets and for the time being that is what we have. For it to turn into something more sustainable would require daily volumes to improve by at least 20-30%. We also need to see net foreign buying on a more regular basis.


Asian shares & major currencies – Asian shares jumped today following Wall Street’s further gains on Tuesday. As for currencies, the US$ (95.747) fell back today when measured against its trade weighted ICE index. Then the Euro (1.1470) also traded higher; Pound Sterling (1.2770) advanced; the Japanese Yen (108.85) traded narrowly while the Chinese Yuan traded narrowly at (6.8327).


Oil prices continue to advance – Crude oil traded a little higher today with the active month WTI futures crude oil contract trading at US$ 50.35 in late Asian trade. Lower U.S oil stocks as estimated by the API plus continued optimism over the trade talks.

The American Petroleum Institute estimated overnight that U.S. crude oil inventories fell by 6.1 million barrels for the week ended January 4th. Even as gasoline stockpiles climbed by 5.5 million barrels. The official EIA data will be released later today and if they confirm the API estimates we can expect oil prices to get another moderate lift.


Prices continue to edge higher also as the principal narrative in oil at the moment ongoing trade talks between China and the U.S. To be fair, the technical picture, which is that of an oversold commodity is equally as important as it is taking very little good news to push the price higher at the moment. In this light, negative news such as falling German industrial output was ignored.


However, this still looks like a technical rally within a broader bear market for oil. Signs of slowing global demand abound and that means that demand for oil will also suffer. Now that has been priced in for now but at the same time it does also act as an effective cap on prices.


In global macro and general news – Bloomberg was reporting that the recent stock market volatility has persuaded President Trump of the need to do a deal with China over the next few weeks. This is not surprising as he touted the stock market rally in his first 12 months in office as one of his biggest achievements. Interestingly, then the stock market drop in December would have had the effect of forcing the Fed to consider a pause in rates and also lead to a far softer tone in trade negotiations. Talks have been extended into a third day amid signs that steady progress is being made.


The biggest risk to the talks has always been that the U.S. would talk a hard line on core issues such as Made in China 2025 and 5G. However, if the White House feels the heat of a bear market behind them then it’s much more likely that they will reduce their demands to a level that the Chinese can accept. And that is why global equity markets have been moving higher in recent days despite poor macroeconomic news such as the ISM service index and German industrial production numbers.


The World Bank’s has cut its forecasts for global economic expansion to 2.9% in 2019 and then 2.8% in 2020. Versus the latest downwardly revised estimate of 3% growth for 2018. Growth in the United States is likely to slow to 2.5% this year from 2.9% in 2018, while China is expected to grow 6.2% this year compared with 6.5% in 2018. The rest of Asia is expected to grow by 5.2%. Then emerging market economies are expected to grow 4.2% this year, with advanced economies expected to grow by 2%.



HCMC – The VN index rose today as turnover expanded to VND 2,786.66 billion or US$ 119.75 million. The index gained 1.08% and closed at 896.99. 176 stocks up while 100 stocks down. And 9 stocks went to the ceiling while 8 stocks dropped to the floor. Foreigners accounted for 18.32% of the buying value and 17.16% of the selling value.


Foreign buying rose in actual terms and also in percentage terms. While foreign selling fell further in actual terms and also in percentage terms. Foreigners turned net buyers to the tune of VND 32.32 billion worth of shares in HCMC. And we saw twenty seven transactions in the put through market today.


Foreigners were active buyers of HDB; VNM; VRE; HPG and CTD. They also actively sold HDB; NVL; VJC; VNM and CTG. The put through market was more active today with one enormous; one super jumbo; three jumbo; five large and some medium sized & smaller deals accounting for 22.94% of total turnover.


We saw 22,265,307 shares of EIB; 2,295,000 shares of HDB; 3,380,000 shares of HNG; 1,059,320 shares of HPG and 172,670 shares of VNM going through. Foreigners were more active in the put through session in the HDB & HPG deals and then ten other smaller deals today in the market.


E1VFVN30 was down 0.71% today closing at VND 14,000.


Hanoi – The Hanoi market went up today while turnover came to VND 693.05 billion or US$ 29.78 million. The HN index was up 0.86% to close at 102.13. 74 stocks up while 54 stocks down. And 8 stocks went to the ceiling while 9 stocks dropped to the floor. Foreigners accounted for 4.30% of the buying value and 0.68% of the selling value.


Foreigners were net buyers to the tune of VND 25.10 billion worth of shares. And we saw six medium and small sized deals today during more active put through session in Hanoi accounting for 48.98% of total turnover.


We saw 10,846,791 shares of ACB; 542,900 shares of HHC and 90,000 shares of VC3 along with some smaller transactions in the put through market today.


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