Vietnam market strategy 2012 summary:
One of the frequent asked questions is whether any past year had similarities with each others, as analysts usually use historical data to establish future expectations. We admit that 2011 was a similar year to 2008 year for certain reasons. So, if 2008 had some similarities with 2011, would 2012 be a replicate of 2009? We do not think it would be that simple. What we face ahead in 2012 is more challenging. Set aside global risks, we see some key specific challenges for Vietnam economy in 2012 as below:
1. Public investment will be tighter in 2012
2. Given pressures on consumer price still out there though less serious than 2011 as large part of the increase was made, we expect Vietnam’s 2012 CPI growth pressure to be lower than 2011, at around 12% higher YoY, on average. This is much different from 2009, when CPI only rose modestly by 6.52% by year-end.
3. In 2012, with the fact that many small banks are still facing high NPLs and liquidity risks, high credit growth is not feasible. Liquidity supports might be much more refined and focused on some particular groups.
4. Restructuring will aim at 2 sectors, namely banking sector & SOEs sector. This is the main difference from 2009. While year of Dragon is normally anticipated as a good year in Asian culture, depicted by the image of a flying dragon, it remains unclear about whether the picture of the “dragon who flies” or just some dragonflies, to best illustrate the year of 2012. Actually, we remain a “between scenario” with conservative view regarding the 2012 economic outlook, due to the long time required for restructuring, as there is no quick fix for any of the Vietnam issues and possible recession at global scale could weigh in. Big catalyst to observe is interest rates might be eventually reduced to support economic growth in Vietnam, by the time that inflation pressure should be eased in order to assure macro stability and sustainability.
2012 Equity outlook: 2009 will come back?
In short, we think that the type of aggressive policy loosening or generous stimulus packages witnessed in 2009 is unlikely to happen again. On the contrary, as discussed in the macro part, in order to pay back for the consistently high investment and money supply growth recently, and to reduce the risk of shaping an even bigger asset-price bubble in the future, government is likely to adopt a prudent monetary and investment policy and any policy loosening in 1H12 would only be temporary and limited. 2012 equity outlook therefore will be much different from 2009, and expected to be a special year with following themes.
1. Banking reform: we see the banking reform as the base for a sustainable interest rate reduction. In our view, the reform will include 3 courses: (1) stress-test of banks to specify weak ones and strong ones; (2) M&A of banks and (3) Recapitalization of banks (this phase will go together with the M&A).
2. Liquidity issue within the banking system.
3. Interest rate reduction will be among the key positive catalysts that the market expects.
4. Impact of the Restructure of SOE sector on market
5. Divestment by a number of close-end funds
Market valuation: Is that a true distress?
Our forward 2012 P/E for the 61 companies under coverage with market cap accounting for over 70% of total market cap is 7.22x. If excluding MSN, VIC and BVH, 2012 P/E will be 6.10x. Current P/E for 2011 that excludes MSN, BVH and VIC is 6.77x. While it is true that the low valuation does not mean that we have hit the bottom, we check the following questions:
1. Are the earnings are going to reduce further and short of expectation? The answer is NOT LIKELY, in our view, as according to interviews with companies this is the most difficult time and many understand that they are in a very difficult situation. While the interest rate has chance to reduce, most companies know that they are in deep difficulties therefore would set a very conservative target for 2012 (which will be officially announced in the AGM).
2. Besides earnings, are there any factors that can keep valuation at the distressed level? Our answer is Yes with all the above-mentioned factors. As a result, the low valuation of the market should be an opportunity for long-term investors once the banking issues can be solved fundamentally. If the VND interest rates can be reduced sustainably, people will look for other investment forms, of which equity is an option as valuation dropped strongly and can be in distressed in 1Q12. However, we should pay attention to How the interest rate can be reduced as it can have long-term negative impact. While we keep a conservative view on the market for the above-mentioned reasons, the chance for short-term rallies cannot be wiped out.
Recommendation
Consumer staple and pharmaceuticals continue to be our favorite sectors at this time owing to high sustainability and resistance. Beside this defensive choice, we are also in favour of a number of other companies, who can survive well in 2012 and bounce back strongly in a market rally. Our current Top recommendation include: CTG, DHG, DIG, DRC, EIB, FPT, HAG, HVG, NTP, SBT, VCB, VNM and VSH.
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