THE FUND
The fund advanced 2.9% in December, compared to the benchmark index which increased 7.2%. Our natural underweight in most heavy-weight index names such as Vinamilk (VNM), Masan Group (MSN), Hoa Phat Group (HPG), and Vingroup (VIC) contributed to the majority of the underperformance in the month. These stocks had a very strong month thanks to significant foreign inflows. On the other hand, our overweights in Financials and Industrials together with the off-benchmark bets in Phu Nhuan Jewelry (PNJ), VNDirect Securities (VND), Dong Hai Ben Tre JSC (DHC), and Da Nang Rubber (DRC) contributed positively to the relative performance of the fund. There were no additions/removals to the portfolio in December.
For FY2017, the fund increased 26.1% in total return (SEK), versus 35.4% gain of FTSE Vietnam Net (SEK). Most of the underperformance came from Consumer Staples (VNM, MSN), Materials (HPG), and Real Estate (VIC). Most large-cap tickers had a strong run in the year and brought in negative relative performance for the fund. Our bets in cement (BCC, HT1) did not work out as well as expected due to strong competition in the sector driving down profit margins. Tire producers (DRC, CSM) also had a tough year due to a hike in the price of natural rubber that ate into gross profit margins. On the positive side, our overweight in Consumer Discretionary, Energy, and Information Technology contributed well to the relative gain of the fund. The off-benchmark bets in Dry Cell & Storage Battery (PAC), Phu Nhuan Jewelry (PNJ), Military Bank (MBB), Vietnam Commercial Bank (CTG), VNDirect Securities (VND), FPT Corporation (FPT), and Vietnam Electrical Equipment (GEX) performed positively and added to the relative performance. The fund added PAC, KBC, DPM, VRE, SVC, KDF, LPB and removed HVG, PVS, FCN, NVL, as we explained in earlier monthly updates. The fund has a significant tilt to the mid-cap segment which we believe is likely to narrow the valuation gap vs the blue chips during 2018.
THE MARKET
Vietnam’s market continued its upward momentum in December and completed 2017 as one of the most successful years of the market. The Index reached a 10-year-high to become the top performer in Asia. FTSE Vietnam Net (SEK) added another 7.2% in December, compared to 1.5% and 2.0% gain in MSCI Frontier Market Net (SEK) and MSCI Emerging Market (SEK) respectively. For FY2017, FTSE Vietnam Net increased an impressive 35.4%, outperforming both MSCI Frontier Market Net (19.5%) and MSCI Emerging Market (24.4%). Foreign investors were net buyers (USD 73.5m) in the month and raised its total net buy position in the whole year to an all-time high of USD 1.1bn. An encouraging number for a frontier market. Liquidity remained upbeat at USD 279m in average daily trading value. The market’s strong performance in December was further buoyed by the state’s successful auction of 53% stake in Saigon Beverage Company (SAB). Despite the high minimum price (VND320k/share, P/E 40x), the full number of shares were successfully sold to a related company, Thai Beverage from Thailand. Total transaction value equaled USD 4.9bn, making this one of the biggest stock deals in Asia in 2017. Looking ahead, the IPO/State divestment schedule is still rather busy with a series of interesting blue chips including: PetroVietnam Power (PVP) – Vietnam’s second largest power generator, PetroVietnam Oil (PVO) – Vietnam’s second largest petroleum retailer with 23% market share, and Binh Son Oil refinery (BSR) – Vietnam’s top oil refinery with a total capacity 6.5m ton/year. Foreign investors will have several new opportunities to access the stock market and businesses in Vietnam. This activity could inspire another year of foreign inflows to the stock market and further improve trading activity.
In terms of macroeconomic activity the economy is in very healthy shape and successfully achieved all yearly targets:
– GDP growth surged to an impressive 6.81% in FY2017 (vs target 6.7%). Q4 GDP growth was 7.65%. The government forecasts that GDP will grow at 6.5% – 6.7% in 2018 to reach USD 234bn.
– Inflation was kept at 3.53% in FY2017. The target for 2018 is below 4%.
– Committed FDI achieved a record high at USD 35.9bn (+44.4%), while disbursement accelerated to USD 17.5bn (+10.8%).
– Foreign FX reserves shot up to an all-time high of USD 51.5bn.
– Total retail sales grew 9.46% year-on-year vs 8.33% in 2016.
– Total trade rose to USD 420bn, in which trade surplus was USD 2.7bn.
– Budget deficit was 3.43% (vs target 3.5%). The target for 2018 is 3.7%.
– The currency remained stable and consistent for the whole year. VND only depreciated 0.24% in 2017 (vs target 1%).
The stock market’s prospects in 2018 are promising despite the not-so-cheap valuations at the moment (FY2017 P/E 19.3). Some of the main catalysts include:
– Strong earnings growth: The favorable macro environment allows companies to expand. Consensus forecasts are for 18% – 20% earnings growth in 2018-2019. Valuation of the market is likely to improve to P/E 17.1x and 14.4x in FY2018 and FY2019 respectively.
– IPO/State divestment of quality companies: The government is accelerating its divestment plan and IPOs of a series of companies in the portfolio. This will give investors access to sectors that were previously closed to public equity investors, such as telecom, power generation, oil refinery, petroleum retail, etc. Companies on the list include market leaders and have significant room to expand and improve profitability such as PVP, PVO, BSR, etc. Lack of access used to be a major constraint of Vietnamese equity markets in the last few years. The expected IPOs/State divestment roster offers foreign investors new access to the market, potentially spurring foreign inflow in 2018.
– Potential re-rating of valuations in the mid-cap group: As most of the gains made by the market in 2017 were derived from large-cap stocks, valuation of mid-cap companies remain very reasonable. A re-rate in valuations, thanks to strong earnings growth, of this group could offer good upsides to the market.
– A turnaround in Oil and Gas sector: The recent improvement in oil prices has helped to significantly change the sector’s prospects. The current oil price (USD55-60/barrel) is considered favorable for PetroVietnam and could boost their exploration and investment activities. This would bring in new jobs/revenue for companies in both upstream and downstream, thus performance could largely improve from a low base.
