Vietnamese stocks that should benefit from a prolonged US-China trade war  

Ngày đăng September 20, 2018

Vietnamese stocks that should benefit from a prolonged US-China trade war  

HSC has taken another look at the likely impact of a lengthy trade war between the U.S. and China on the Vietnamese economy and the stock market. And we now take a much more nuanced view. Seeing positives as well as negatives for both the economy and the stock market. And overall, we have now shifted our view from cutting 0.3% or so from our previous FY2019 GDP forecasts due to a trade war impact to keeping our base case forecast unchanged at 6.7%.  

In our most likely case, we now believe that the positive and negatives impacts will completely offset each other at the macro level. And that over a multiyear horizon, the impact of a sustained trade war will be positive for the Vietnamese economy. Leading to an acceleration in FDI and also more business for existing domestic and FDI enterprises.  

Quick conclusion – HSC now takes the view that the escalating trade war between China and the U.S offers both risks and opportunities for the Vietnamese economy. And the same for the stock market. Our view has evolved somewhat in recent weeks and we are now more optimistic. For example, we now expect FY2019 GDP growth to be similar to that of FY2018. Partly due to the continuing strong trend for Vietnamese exports. And partly based on what we hear and read. This now leads us to believe that the macro environment will not be much affected by a prolonged trade dispute. And that some sectors and stocks should benefit over the medium to longer term. Mainly as North Asian manufacturers are forced to rethink their China strategy and perhaps relocate some factories to Vietnam. While existing players will also see more business especially from the U.S.  

HSC now sees opportunities for Vietnam from a prolonged trade war – Several months ago, many investors took the view that a trade war between the U.S. and China was a uniformly bad thing for Vietnam which needed to be priced in to the currency and the stock market. However, those views have now changed and turned into a more nuanced outlook. There is some clear anecdotal evidence that some North Asian manufacturers are actively considering re-locating some factories to Vietnam. While existing Vietnam based manufactures; both FDI and domestic players in sectors such as textiles; furniture; light manufacturing and technology are reporting increasing sales from key overseas market as U.S. based buyers there reportedly switch some of their orders from Chinese firms. This trend has emerged in recent months; however it is only recently that the media has begun to comment on it.  

Macro environment looks positive still with a stable currency and decelerating inflation in the last month or so – It is not only the micro environment that looks fairly healthy despite the escalating trade war. The macro environment looks in good shape too. We note that the GDP target for next year may be fairly similar to this year. As the authorities see opportunities and risks from the current external environment largely balancing each other out. The trade numbers have held up well while the balance of payments looks very healthy.  

We would draw the following macro conclusions;  

  • As long as the trade weighted US$ remains below 97 and the overseas Yuan stays below 7 then we think the VND will continue to depreciate within the official range. We now this as a lot more likely given the recent stable trends.
  • Balance of payments will remain strong given a trade and current account surplus.
  • We see FY2019 GDP growth at around 6.7% or similar to our revised target for this year. We see no major positive or negative net impact from the trade dispute.
  • We see CPI at around 4% at the year-end accelerating only slightly to 4.5% next year. Higher tariffs in overseas markets such as China or the U.S. will not accelerate inflation in Vietnam by much.  

At this stage we would also draw the following conclusions at the micro level;  

  • The trade war could last for longer than expected given that both sides appear to be digging in for the long haul.
  • The U.S government’s motives appear to be broader than simply reducing the Chinese-U.S. trade deficit and therefore a quick solution may be hard to come by.
  • This realization of a long drawn out affair will affect the strategic decision making of all North Asian and foreign manufacturers with significant Chinese operations.
  • And we are likely to see an increasing trend of some of those firms relocating some factories to other countries in the region.
  • Vietnam stands out as the obvious choice for any manufacturer with a China centric manufacturing base given its location; political stability; favourable cost base and FDI friendly industrial policy.
  • Existing Vietnam based local and FDI firms should see an increased share of business as U.S buyers look to reduce their exposure to China.  

Impact from a trade war on Vietnam now seen as neutral or even slightly positive – Therefore we think that Vietnam’s macro environment may even slightly benefit on a net basis from a prolonged trade war. Although this may take several quarters before showing up in the numbers. On the one hand, we concede that exports of commodities and other products from Vietnam to China will slow down. However, on the other hand we will see an increasing flow of intermediate products from China to Vietnam for final manufacturing from (1) firms with an existing base in both countries and (2) new firms wishing to reduce their Chinese risk.    

Risk of a global slowdown or a recession in late 2019 or 2020 remains however – The issue is a complex one and the current positive feeling might eventually be lost in the noise of the next global recession. Which many observers are forecasting for late 2019 or 2020. And if global trade slows next year, then Vietnam’s relative advantage in terms of attracting more FDI and trade flows might not be enough to overcome the macro effects of a general slowdown. Even so, for the time being, we think that the next downcycle is 12-18 months away. Which enables us to take an optimistic view on the net impact of the trade dispute over the next 6-9 months.  

The sectors and stocks we like on this theme – Seeing more opportunities than risks. On a 6-12-month time horizon between now and next summer. Below is our list of likely beneficiaries;  

Port Operators should see increasing trade flows (Recommendations – VSC, GMD) – The trade war between US and China could speed up FDI into Vietnam as North Asian and other foreign manufacturers may seek to reduce their exposure to China. Hence, the volume throughout Vietnamese seaport could be boosted. VSC and GMD are the biggest private port operators in Vietnam with available capacity to pick up incremental volume growth. We prefer VSC here as access to GMD is very difficult.  

  • VSC –  VSC is the most profitable private port operator in Hai Phong area with a market share of about 7% nationwide. VSC operates 2 container ports in Hai Phong area with total capacity of 850,000 TEUs per year (Vip Green port with 500,000 TEUs and Green port with 350,000 TEUs). In FY2017, VSC handled 802,000 TEUs (+31% y/y), generating a CAGR of 18% in the 2012-2017 period. Their ports handle mainly imports of capital goods & raw materials for non- IT FDI companies such as machines, textile, footwear and plastic.  

HSC calls for FY2018 growth of 27% y/y in net sales and 25% y/y in NPAT for this year and growth of 9% y/y in net sales and 11% y/y in NPAT for next year. HSC now sees fair value price at VND45,000 per share giving us a PE 8.8 xs.  

  • GMD – GMD is the largest private ports operator in Vietnam with a nationwide market share of 10%. GMD operate 4 container ports and 1 ICD, and 1 bulk port located in all major economic regions; North; Central and South. With a total capacity of 2.1 million TEUs per year and 2.5 million Tons per year. In FY2017, GMD handled 1.46 million TEUs (+11% y/y) and it grew at a CAGR of 20% in the period 2012-2017. Their container ports handle mainly imports of capital goods & raw materials for non- IT FDI companies. Moreover, GMD is the only company with a full-service logistics offering. GMD also owns a 32.56% stake in Saigon Cargo Service Corporate (SCS – Upcom).  

For FY2018, HSC call for a fall of 32% y/y in net sales and growth of 194% y/y in NPAT mostly on divestment related one off items. However, for next year, we forecast growth of 12% y/y in net sales and a fall of 67% y/y in NPAT as one-off items drop out and profit normalizes. We see fair value of VND 34,000 which values the company at an FY2018 forward EV/EBITDA of 10.5 xs.  

Air cargo services companies should likewise see more flows (Recommendations – SCS) – The trade war between US and China focuses heavily on technology products. Given a growing strategic rivalry between the two countries. This opens an opportunity for Vietnam to increase its share of manufacturing and final assembly of technology products. And given that components are mainly transported by air it bodes well for air cargo service companies. In this sector we prefer SCS to NCT mainly on liquidity grounds.  

  • SCS – SCS is the most profitable air cargo services company in Vietnam. This company operates an air-cargo terminal covering 14ha in Tan Son Nhat airport with a capacity of 200,000 tons/year. In FY2017, they handled volumes of 186,140 tons (+15% y/y) for a market share of 14%.   

For FY2018, we expect 24% growth in sales and 26% growth in NPAT. Then for next year, we call for growth of 15% y/y in net sales and 17% y/y in NPAT. HSC sees fair value of VND 160,000 per share giving us a FY2018 forward P/E of 20 xs times.  

IPs will be medium to long term winners as more firms relocate to Vietnam (Recommendations – KBC & VGC) – Industrial parks in Vietnam are obvious early beneficiaries from an increase in incoming FDI. YTD FDI has risen by 9.2% y/y up to US$ 11.25 billion as of August 20th. IPs such as KBC (a leading player in the North) and VGC.     

  • KBC – Most of their current industrial parks in the North are close to being fully occupied, mainly by high-tech Company such as LG, Samwang Co ltd and Rinnai. KBC’s long experience in developing IPs for high-tech manufacturers is a clear plus. They are also looking to win approval for Trang Due IP phase 3 with 687 ha (Hai Phong) which will drive medium term sales. Hai Phong is the transportation hub of the North with the advantage of a deep-sea port – Dinh Vu Port and the carries some special tax exemptions from the Government as well.  

For FY2018, HSC forecasts NPATMI at VND 702 billion (+20% y/y). Delivering a FY2018 forward EPS of VND 1,494/share (+20.0% y/y) and a current forward PE of 8.3 xs. While for FY2019, we forecast NPATMI of VND 776 billion (+10.5% y/y), equivalent to a FY2019 forward EPS of VND 1,651/share (+10.5% y/y) and current forward PE of 7.5 xs.  

  • VGC – a construction material conglomerate which is also a major player in IP development. Samsung is currently one of their main customers. This business of the Group will also benefit as manufacturers, especially Samsung suppliers gradually shift their facilities from China to Vietnam. VGC core business – construction material production – is seeing slowing growth. However, we keep an eye on its IPs business in case they might spin it off and list it separately in the future.  

For VGC in FY2018, we forecast an NPATMI of VND 624 billion (+4% y/y). Delivering a FY2018 forward EPS of VND 1,393/share (+4% y/y) for a current forward PE of 13.6 xs. While for FY2019, we forecast NPATMI of VND 689 billion (+10.4% y/y), equivalent to a FY2019 forward EPS of VND 1,538/share (+10.5% y/y) and current forward PE of 12.3 xs.  

Textile industry should win more international orders as higher tariffs hurt Chinese competitiveness (Recommendation – STK) – Given the average tariff of around 10% on Chinese textile products, Vietnamese textile products should gain market share in the US, which is currently their largest market. Looking at listed Vietnamese textile stocks, we prefer STK over TCM given better growth prospects for its core textile business. While TCM still has some exposure to real estate and often books one-off income from selling land.            

  • STK – STK is the second largest polyester filament yarn producer in Vietnam with a market share of 28%, after Formosa which has a market share of 41%. Currently, STK operates 5 yarn plants with a total capacity of 60,000 tons per year.  

Over the next 3 years (FY2018-2020), we forecast sales growth at a CAGR of 13% and NPAT growth at a CAGR of 27%. HSC now see fair value at VND 19,000 per share, giving us a forward P/E of 8.5 times.  

Aquaculture firms here may benefit as Chinese firms are priced out of the U.S. market (Recommendation – VHC) – There appears to be some opportunities for Vietnamese catfish exports into the U.S. as the Chinese aquaculture industry comes under tariff pressure. VHC is the leader and accounts for the bulk of Vietnamese exports into the U.S. And is tariff free having passed the onerous U.S. regulatory regime.  

  • VHC – VHC is the biggest Vietnamese pangasius exporter to the US. The company accounts for about 35% of total Vietnamese pangasius exported to the US in term of volume and 40% in term of value. VHC’s factories (excluding Van Duc Tien Giang) can provide maximum capacity of 616 tons of raw fish per day. The company has attracted zero tariffs for its U.S exports for several years already as its best of breed facilities have passed the Department of Agriculture’s strict hygiene regime.   

Over the next 3 years (2018 – 2020), HSC forecasts sales growth at a CAGR of 7.1% and NPATMI growth at a CAGR of 7.2%. For FY 2019 we forecast net sales of VND 9,642 billion (+6.7% y/y) and NPATMI of VND 854 billion (+6.5% y/y), generating FY 2019 EPS at VND 9,028. HSC now sees fair value at VND 90,280 giving us a FY 2019 forward P/E of 10 xs.  

Vietnamese stocks rally again – The markets closed in positive territory once again although earlier gains were trimmed. GAS was the leading gainer in terms of index points as optimism over higher oil prices remains even though actual oil prices were little changed today. Banks such as TCB; VPB; MBB; HDB and STB all made gains today playing catch-up to the state-owned banks. BVH edged higher also. Consumer name MSN rebounded on news that SK will buy US$ 470 million stake through the purchase of treasury shares. Sugar sector leader SBT also advanced.  

On the other hand, VIC lost some ground as did fellow real estate play NVL. Resource names PLX and PVD slipped on minor profit taking. Consumer names SAB and VNM both lost ground. YEG also slipped after recent nice gains. Foreigners were fairly active and returned to net buying today.  

The four futures contracts made small gains today and maintained their straddle of the VN30 cash index with the gap ranging from -1.2 to 0.1. Meanwhile the longest dated contract almost closed the gap with the short-dated contract and closed just below it. Once again, this sets a fairly positive tone for tomorrow with sentiment in the futures market suggesting that the bias is still to the upside.  

Equity markets in the region rallied for a second day almost as if the announcement of US$ 260 billion in goods being placed under tariffs (US$ 200 billion from the U.S. side and then US$ 60 billion in response from the Chinese) had a cathartic effect on investors. Vietnamese equities rallied in sympathy with the added incentive that many investors now see Vietnam as a potential long-term beneficiary of a prolonged trade stand-off between the U.S. and China.  

The dollar has remained stable while oil prices have been climbing and historically this has been good news for emerging markets. Beyond that, it seems news of pending tariffs has been circulating for months and may have led to a postponement of buying on fears that regional and indeed global markets might crash as a result. And then the very fact that markets shrugged off the bad news rather quickly yesterday led to a rush of buying energy.   

Clearly the VNindex appears to want to have a serious crack at the 200-day MA line in the fairly near future. Although the ground is still hard going with the market making heavy weather once its exceeds 990. A break above 1,000 today was immediately med by a minor wave of selling.  

To date we have been a little skeptical of whether or not it can break this level. Our concern was mainly based on fears over the (1) trade tension and (2) gradually rising U.S interest rates. The former is clearly not an issue for the time being as the markets have been teaching us over the last few days. While the latter is already baked into prices. While foreigners have turned to net buying for much of the last 5 trading days.  

This would then appear to increase the chances of a successful move above the 200-day MA in coming weeks. Especially if current market momentum and daily trading volumes can be maintained.   

Asian shares & major currencies – Asian shares were higher again today even as Wall Street made some gains on Tuesday. As for currencies, the US$ (94.396) fell back today when measured against its trade weighted ICE index. Then the Euro (1.1701) traded higher; Pound Sterling (1.3186) was a little stronger; the Japanese Yen (112.33) hardly moved while the Chinese Yuan gained a little ground today (6.8523).  

Oil prices halt for now – Crude oil traded flat today with the active month WTI futures crude oil contract trading at US$ 69.89 in late Asian trade. Some profit taking as U.S. inventories estimated to have risen a little last week.  The US$ 70 a barrel level for WTI remains a formidable psychological barrier just as US$ 80 a barrel is for Brent.  

The American Petroleum Institute (API) has released their weekly estimated of U.S. crude oil inventories showing an increase of 1.249 million barrels for the week ended September 14th. This follows several weeks of large declines and is not unexpected. Meanwhile gasoline stocks declined by 1.485 million barrels.  

Oil prices have been on a roll for about a week now led by higher Brent prices with WTI trailing behind it. News that Saudi Arabia was prepared to tacitly throw in the towel on higher oil prices near term led to a spike yesterday and this perhaps inevitably has set us up for some short-term profit taking. The increase in U.S. oil stocks, if indeed confirmed by the official EIA numbers overnight is quite minor in the wake of several weeks of major drawdowns.  

The central narrative for oil right now is that Iranian exports are down 35% since the May peak ahead of November sanctions. And this is not being offset fully by higher supplies from either the U.S; Saudi Arabia or Russia. Hence the decline in U.S. inventories reflects growing levels of U.S. exports to make up for the gap in global supply.  

This weekend, OPEC and its allies will meet in Algiers to discuss the current demand/supply environment. No doubt they will deplore the idea of a spike in oil prices and pledge to work to curb it. Behind the words, however, there appears to be a more pragmatic sensibility on the topic.  

Given that (1) spare capacity is simply not sufficient to offset a major drop in Iranian supply over a short period of time as has been seen in the past two months; (2) this problem has been created by the U.S imposing sanctions again and blaming OPEC for it is neither appreciated nor helpful; (3) a short term price spike helps fill coffers for oil producers and so far higher oil prices have been fairly well absorbed by the global economy with few signs of accelerating producer price inflation.  

Source: HSC.com.vn

en English