Recession fear clouded export prospects in the second half of 2022

• Export growth has slowed down in May 2022.
• Recession fear clouded export prospects in the second half of 2022.
• Imports remained robust in May 2022.
• Biden administration intends to remove tariffs on Chinese good

Banking sector – The continuous pressure motivates an accommodative intervention

• The liquidity position continued the previous abundant status for VND. On the other hand, the tension on USD liquidity intensified due to the Fed’s decision, the SBV’s target to support the economy and the persistent trend of USD outflow.
• The highly negative USDVND rate gap put pressure on the exchange rate which had moved sideways before rising steadily recently. The SBV has started doing outright bill sales with short-dated term, substantial amount and auctioned interest rate. It is probable that this intervention is to withdraw VND and propel VND interbank rates for the short terms, thereby, narrowing the swap rate gap, monitoring the pace of exchange rate and relieving the pressure on FX reserves.

Stagflation?

• The reality of stagflation has certainly been confirmed by the latest US data both as regards to inflation and wage growth.
• US real wages are down, meaning that consumer purchasing power is eroding.
• The US Fed is tightening into a slowing economy.

US headline CPI inflation rose from 8.3% YoY in April to 8.6% YoY in May (Figure 1), the highest inflation print since December 1981. Core CPI inflation was 6.0% YoY in May, though down from the recent high of 6.5% in March.

NKG – Domestic market to lead sales in 2H2022

• Stable recovery of the domestic market compensated for export slowdown in Q1. Revenues jumped 47% YoY to VND 7,151 billion and NPAT-MI grew better at 59% YoY to VND 507 billion, thanks to the reversal of inventory devaluation provisons.
• Q2 exports will benefit from high demand from overseas. The HRC price gap between Vietnam and Western markets expanded in March implying a better export gross profit margin. The situation will reverse in 2H with domestic market leading sales while export outlook turns dim due to high inflation and high inventories in Western markets.
• For 2022, we project total selling volume to fall 31% to 743.6 thousand tons. Average HRC price will rise 12%, while ASP increase 4%. Thus, the gross profit margin could reach 10.2%, lower than 15.2% of 2021. Revenue and PAT are expected to come at VND 20,030 billion (-29% YoY) and VND 1,185 billion (-47% YoY).
• The plan to expand capacity from current 1.1 million tons to 2.3 million tons from 2027 will support growth quality in mid- and long-term. However, as the capacity increase won't come any earlier than 2024, therefore, is unlikely to support the stock price in the short term.
• NKG is now trading at a TTM PER of 1.8x, lower than 2.3x of 2021. However, as this year profit will be lower compared to the peak of last year, the PER forward for 2022 is 3.7x. Thus, the stock seems unattractive at the current valuation. We recommend to OBSERVE this stock as we think profits will rebound next year, when inflation eases globally.

Overview of Intelligent Transport System in “Smart City”

• Intelligent Transport in urban areas is a sustainable development trend of countries around the world, aiming to reduce traffic congestion, reducing the number of traffic accidents, saving transportation time.
• The application of Intelligent Transport System (ITS) has been popular in Vietnam. Up to 41/63 provinces/cities directly under the central government have installed operation centers and traffic monitoring camera systems.
• ITS construction trend in the period 2021 - 2030, prioritizing completing existing services and adding services for public transport.

PGV – Await to finish the equitization settlement

• AGM approved the 2022 financial guidance, which targeted revenue and NPAT to be VND 45,417 bn (or USD 1,974 mn, +22% YoY) and VND 1,827 bn (or USD 79 mn, -40% YoY), respectively. A growth of 10% in volume would drive the company’s revenue. Hence, the company’s core earnings are forecasted to increase yet financial expenses are going to eat part of it, resulting in a fall in NPAT.
• Holding a well-diversified electricity portfolio including coal thermal, gas turbine, hydropower plants and solar power, the company’s core earnings are quite stable. However, its NPAT is sensitive to the FX rate due to high leverage. We have to closely monitor the FX rate to forecast its NPAT-MI. Fortunately, the company is able to book FX revert revenue in the future, which becomes the potential earnings in the following years.
• Currently, free float is relatively low, and forward P/E ratios are relatively fair (equivalent to 12.x). Investors can accumulate this stock to enjoy dividends as the dividend yield is roughly at 4%.

Downtrend of palm oil price in 2H2022 supporting margins of edible oil producers

• According to CGS CIMB the crude palm oil (CPO) price is expected to be in a downtrend in 2H2022 due to improved global palm oil supplies. The CPO price has decreased in the beginning of June 2022 after Indonesia resumed palm oil exports in the end of May. On 17th June 2022, the CPO price was MYR 5,454 per ton (-10.8% MoM; +59.3% YoY).
• We believe that Vietnam edible oil producers will have the opportunity to purchase raw palm oil at a lower price compared to the 1H2022 level. Accordingly, the profit margins of Vietnam edible oil producers will start to recover in 2H2022.
• According to Kantar Worldpanel, one of the most prominent consumption trends across edible the oil industry during 2021 in Vietnam is the increasing consumer interest in premium edible oil after the Covid-19 pandemic. The higher contribution from premium segment will help to boost sales of edible oil producers.
• In Vietnam, Kido Group is the parent of the three Vietnam leading cooking oil producers. As a result, we believe that KDC will capture the growing edible oil sales value.

Time to buy gold?

• Price on the Comex exchange hit a bottom at $1800 per ounce.
• As we expect the USD to weaken, it should be supportive for gold price.

Overview of intelligent transportation

• Wide application of technology in the field of intelligent transportation in the world and Vietnam.
• Accelerating the application of intelligent transportation systems in Vietnam.
• Synchronously building an intelligent transportation system at the key project of the North-South Expressway in the East.

Rising pressures on the dong’s stability

• The dong has depreciated about 1.7% ytd but is the least volatile compared to other currencies.
• A more hawkish Fed will keep USD at its record high for a while.
• The yuan’s depreciation is expected to ease in 2H22.
• Vietnam’s balance of payments faces turbulences in 2022.
• The dong to depreciate about 2.0-2.5% in 2022.

FMC – 5M2022 business results

• In 5M 2022, Vietnam's shrimp exports reached USD 1.8 Bn, up 38% YoY. However, shrimp exports in May 2022 decreased slightly by 6% MoM due to a shortage of raw materials and cooling-down demand. VASEP forecasts that shrimp exports in 2Q 2022 are likely to slow down QoQ.
• FMC's 5M 2022 revenue recorded USD 100 Mn (~ VND 2,300 Bn, +33% YoY). We maintain our forecast for FMC's revenue and NPAT-MI at VND 6,551 Bn (+26% YoY) and VND 360 Bn (+35% YoY), respectively.
• FMC's long-term outlook is bolstered by expansion of both farming area and operating capacity. In 2022, two new factories will double capacity and a 40% increase in farming area will come into operation. In the period of 2022 - 2026, we forecast that FMC's revenue and NPAT-MI will achieve a CAGR of 12% and 21%, respectively. Our current target price remains unchanged at VND69,500/share, equivalent to a P/E 2022 of 12.6x with a 2022 EPS of VND5,536. We recommend to ACCUMULATE this stock with an expected return of 19% including 3% cash dividend yield.

VCB – Lasting revenue pressures and positive cost cuts in the first half

• VCB maintained its growth momentum in 1Q22 with moderate earnings results (15% YoY), driven by robust net interest income and net profit margin. Non-interest income was impacted by the bancassurance fee bonus, zero transaction fee package and high comparison base. Credit cost margin was a minor growth factor despite the reversals of provisions for interbank lending.
• We expect the provisioning level in the next quarter to be sustained and become the leading growth factor. NIM will be maintained from 1Q22 but still suffer from the high comparison base effect, putting tension on the net interest income growth despite the resiliency of credit expansion. Total operating income will be supported by the bancassurance segment. Earnings growth is projected to pick up strongly to 56% YoY, reaching VND 7.7 trillion.
• We maintain our positive view on the capital raising catalyst, while being neutral on the zero-dong bank deal. Given the weak sentiment towards the banking sector and the recent valuation multiple re-rating on a sector-wide basis, we revise down our target price by 14% to VND 96,900/share. This is equivalent to a BUY recommendation with an upside of 26% from the closing price of June 14^th, 2022.