Strategy Note /

Vietnam Strategy: After two months of volatility stock-picking is key

  • Cash inflows helped the market recover strongly in the first weeks of April before moving sideways due to oil shock.

  • Due to the outbreak of Covid-19, sales of most beverage companies have decreased since Q1 2020.

  • Falling oil prices has negatively affected the operations (as well as the price movement) of oil and gas companies.

Vietnam Strategy: After two months of volatility stock-picking is key
Lam Nguyen
Lam Nguyen

Banking, Market Strat

Hoang Nguyen
Tu Vu
Rong Viet
5 May 2020
Published byRong Viet

The strong market decline in March clearly created a certain attraction for investors. Cash inflows helped the market recover strongly in the first weeks of April before moving sideways due to the shock of world oil prices. After a period of V-shaped fluctuations in late March – early April, the market has returned to a more balanced level. For the remaining months of the second quarter in 2020, we believe that the market is facing more correcting pressure than supporting factors.

According to our observations from the past, after the market increased strongly and cash flow began to spread to VNMid and VNSmall, the market tended to correct soon. Besides, by entering the market at the bottom with a large amount of money, the accounts of many investors increased by more than 20%. Regarding to the current unclear economic outlook, investors may want to take profits.

While local retail investors may hesitate to continue pouring money into the stock market, the net-selling wave by foreign investors has not shown any sign of stopping when the prolonged possibility of the Covid-19 epidemic has not been exhausted, causing risk indicators such as Vietnam's 5-year CDS and VIX are still at high levels. We only expect the level of net selling by foreign investors to be reduced when the VFMVN Diamond ETF is listed on the exchange in May. However, the attraction of the ETF, partly solving the problem of limiting foreign ownership, is a question mark as recently some limited-foreign-room stocks have been net sold by foreigners through matching-order transactions.

Fundamentally, at the beginning of the year the market expected profits to increase by 22% in 2020, according to statistics from Bloomberg Consensus. However, this expectation has been revised down to -1%. Therefore, it can be said that the 20% decrease in the VNIndex is a clear reflection of the change in profit expectations for 2020. Net profit growth in the first quarter for the VNIndex decreased 13 % YoY. Therefore, the growth of net income needs to show a strong recovery for the remaining quarters, enough to compensate for the decline in 1Q2020 so that the VN-Index can stay at least at the current level. Nevertheless, we do not expect this to happen in the second quarter of 2020, the period when the epidemic is most serious.

The possible factor we expect to be able to bring some type of optimism is progress in disease control and the recovery of trade with the US and the EU. However, we believe that this factor will only support the short-term psychology. Prospects of recovering production and business activities after the epidemic are still factors to be watched for.

We expect VNIndex will fluctuate from 700 to 800 in May 2020.

In May or June, local investors may feel positive as news of limiting the damage from the pandemic and an easing of trade tensions globally could provide evidence that things are getting better. However, we believe that it is the recovery outlook of business activities after the pandemic that should be carefully considered when making investment decisions, rather than factors mentioned above. Based on our analysts reviews of Q1 2020 business results, as well as considering the Q2 2020 outlook of listed companies, we believe that investment opportunities will be more attractive in the next few months. Short-term investors should reduce their stock exposure and decrease margin borrowing to a safe ratio as the market rises.

Among our coverage, steel, technology and pharmaceuticals, with companies like HPG, FPT, IMP and PME, recorded both growth in sales and NPAT. These are also the sectors which we think will be least affected by the outbreak of COVID-19. We like HPG, FPT and IMP at this time.

Due to the outbreak of COVID-19, sales of most beverage companies have decreased since Q1 2020. In Q1 2020 revenue and NPAT growth were 1.6% and -2.9% YoY, respectively. We temporarily do not recommend SMB because the company is affected by not only the COVID-19 but also the circular which restrains the use of beer and alcohol. For VNM and QNS, the impact of the COVID-19 epidemic on the consumption of dairy products will probably last until the first half of Q2 2020 and recover slightly for the remaining of the quarter. Thus we expect that the Q2 2020 business results of VNM and QNS will improve compared to the first quarter. VNM and QNS are two leaders in the milk and soy milk beverage business, having healthy operating cash flow and a stable dividend payout ratio. Therefore, this gloomy period is an opportunity for investors to accumulate VNM and QNS at attractive prices.

The sharp decline in oil prices has negatively affected the operations (as well as the price movement) of oil and gas companies. However, on the positive side, falling oil prices have helped reduce input costs of industries such as plastics, tires and fertilizers,resulting in an improvement in profit margins of companies in these sectors. As a result, these industries still maintain positive profit growth, although revenue only increased slightly or decreased in Q1 2020. Our covered companies include BMP, DRC, BFC and DPM. We recommend reducing exposure to BFC and DPM due to the negative prospect of the fertilizer industry. We like BMP with has a high dividend yield and DRC with a high profit growth prospect (thanks to improved profit margin and long-term production expansion outlook). The continuous fall in oil prices and the cash dividend payment (for BMP) boosted prices of these two stocks which increased sharply and almost appoached our target prices at this time.

After a period of reporting high earnings growth in 2017 – 2018, the banking industry is experiencing a lower profit growth period. However, instead of being concerned about the ability for the sector to maintain a high profit growth in the short-term, we think that investors should focus on banks who prioritize controlling asset quality, especially in the unclear outlook of companies’ business activities post the epidemic. Compared to the relative valuation at the same period in 2019, banks’ current PBR has dropped sharply (down by 15-20% for state-owned banks and over 20-40% for commercial banks). Considering our target prices, some banks have dropped to attractive prices for long-term investment. Compared to SOCBs, which are under pressure to support businesses facing difficulties due to the COVID-19 and extreme selling pressure from foreign investors, we prefer commercial banks, including ACB and VPB.