FPT Corporation

We remain positive on Vietnam equities in the long term due to the following structural catalysts: better domestic demand, companies’ earnings prospect, economic activities and FDI inflows on the back of broader economic reopening and fiscal stimulus package disbursement. We reiterate our Accumulate recommendation on sectors such as Banks, Real Estate, Consumer, and Technology - our top preferred industries in our model portfolio for 2022, all of which have generated alpha ytd.

FPT posted 10M 2021 business results with net sales and PBT growing by 19% yoy and 20% yoy, respectively, to VND28,215bn and VND5,206bn. These results have accomplished 82%/79% of our full-year revenue/PBT forecasts, which were in line with our expectation. In terms of revenue, the IT sector continued to lead growth, jumping by 25% yoy. Education & Investments maintained a healthy growth at 24%. 10M 2021 PBT growth of IT/Telecommunications/Education & Investments sectors reached 29% yoy/20% yoy/flat yoy. We maintain our 2021/22 forecasts and target price of VND108,800, reiterating our Accumulate recommendation.

The outperformance of smaller market cap stocks compared with the returns on VN Index in July was generally in line with our expectations. We expect this attractive valuation level to be supportive of a continued rally in H2 21 considering a 33% yoy growth in earnings forecast from the stocks that we cover, which consists of 45 stocks listed on HSX and accounts for 43% of HSX market cap. Additionally, other sector like consumer staples (MSN – Buy) is also expected to perform well given the skyrocketing demand for packaged food during the pandemic.

FPT posted 5M 2021 revenue of VND13.3tn (+18.6% yoy) and PBT at VND2.4tn (+21.8% yoy), slightly below our expectations by completing 36%/40%, respectively, of the corresponding forecasts due to lower-than-expected global IT services performance. Product mix changes have resulted in enhanced labour productivity and, thus, a higher profit margin for the technology segment (5M 2021 PBT margin 14.7%, +160bps yoy). Besides, the same reason applied to onshore contracted revenue, which shot up 88% yoy in 5M 2021. The current TP of VND90,000 is under revision as well.

FPT’s revenue grew by 6%, amounting to VND7,553bn, while NPAT went flat at VND929bn in Q3 20. Global IT services PBT maintained despite rising salaries in the IT industry. Revenue from internet broadband increased 10% yoy, in line with the estimated number of customers’ growth. Besides, over the next two years, another DC, which FPT claims to be the largest one in Vietnam, will come into operation. In the short term, given that FPT recorded large labour costs and bonus expenses in Q4 19 and created a low-base for earnings, profit should experience a double-digit rise in Q4 20, which may positively drive the stock price.

Vietnam's stock market increased sharply in August and became one of the best markets in the world as the VNIndex increased by 10.4% m/m. However, we believe that the recent uptick of the market is not sustainable when, based on our observations, the margin outstanding may have increased sharply along with the recent rise. Strong volatility of the global stock market would be one of them. After a series of consecutive declining days, the VIX index rebounded to over 30 points, warning of potential weakness ahead. Looking back at these times, the movements of the VNIndex was not too positive. Hence, any negative flows could affect the stock market.

With the second wave of the coronavirus pandemic, economic recovery will take longer than we expected because of weaker domestic consumption. Average liquidity from the start of the second wave until now was only VND4,200bn, fading out in the past few sessions to VND3,000bn, lower than the VND4,000bn-VND5,000bn in the recovery period in April and May. We do not change our view on the market at this time. Therefore, with the government’s concerted effort to contain the second wave, we believe that the market can “bottom” around 4-8 August. Elsewhere, livestock companies (DBC) will enjoy the benefit of high domestic pork prices.

In Q2 20, Vietnam’s GDP grew 0.24% yoy, better than consensus expectations as most industries recovered well after the “social distancing” period. Companies that have a domestic focus on their business activities will be better than those businesses that are export oriented. Companies in the construction and real estate will not be busy until Q3 20 or Q4 20. Meanwhile, banking sector’s results in Q2 may reveal some surprises. This is an accounting issue, however. The company possesses many strengths because of its young power units, competitive investment outlays and efficient operations.

The outbreak of Covid-19 in countries outside of China since mid-March resulted in an extreme reaction by financial investors globally, raising concerns of an upcoming economic crisis. A slowdown of the economy will negatively impact companies’business results in 2020. It is a demand shock much more than a supply shock. Our adjusted market forecast NPAT and EPS growth for 2020 are 11% and 7% yoy, respectively, significantly lower than the forecasted growth of 22% and 18% yoy at thebeginning of the year. Therefore, we predict that high volatility for the stock market will be with us for a while until there are signals that the pandemic is controlled globally.

Bottom-up, we assess the trends in each sector, while in our stock-by-stock analysis of our entire coverage we provide detailed forecasts, investment rationale and operating risks for the coming year. The impact on market sentiment, therefore, will not be too strong. We forecast that the VNIndex will fluctuate in the range of 950 – 1,120.With capital flows likely to be less abundant in 2020 than in late 2016 to early 2018, investment should be aimed at businesses with organic growth from core businesses. The main drivers should be domestic consumption and infrastructure investment, and companies exposed to these factors should benefit.

All business segments recorded healthy growth yoy. The technology segment continues to sign more synergistic contracts with Intellinet in the US, with an estimated contract value for this year at US$4-5mn. FPT is trading at a trailing PE of 12.5x. The main growth driver will come from software outsourcing. The company has recently divested from retail & trading, while the proportion of information system has become insignificant. Therefore, with the increase in the contribution from software outsourcing and education, we believe that FPT's growth story will be more sustainable.