Vietnam Today - Vietnam shakes off Chinese manufacturing jitters - PVC, PVD, VIC

Vietnam Today - Vietnam shakes off Chinese manufacturing jitters - PVC, PVD, VIC

VNI  -0.1%   / +1.4% MTD / +5.0% YTD   Mkt Cap: USD 50b  P/E ttm 11.3x
HNI  +0.2% / +2.0% MTD / -5.4% YTD     Mkt Cap: USD 6b    P/E ttm 9.2x
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Foreign Buy % Turnover

* Vietnam shakes off Chinese manufacturing jitters
* PVC: Waiting for Block B and Oil to Recover – Initiation
* PVD’s 9M15 estimated result
* Vingroup (VIC) to partner up with Sai Gon Port to develop a 32ha prime site in HCMC

Vietnam shakes off Chinese manufacturing jitters. 
Earlier this morning, a preliminary reading of China’s “Purchasing Managers' Index” in September showed a drop to the 6 ½-year low of 47 points. This led to negative sentiment among major Asian indices including the Nikkei, SH composite, Hang Seng and KOSDAQ, which were all down 2%. However, Vietnam along with a few other markets in the region such as Singapore and Thailand were relatively indifferent to China, ended near flat or posted only slight losses.

* At home, today’s trading development was nearly a flipside of yesterday’s. Large caps such as VNM, BID, VIC, MSN and VCB were among the largest laggards with each stocking losing around 1% in price. Meanwhile, a late rush in oil & gas stocks such as GAS and PVD supported the VNI. Foreign activity was fairly interesting setting a record net-sell session month-to-date. However, almost the entirety of today's foreign net selling activity was attributed to a single ticker, BCI. Excluding this, foreign net selling was only about half of yesterday’s net-buy value. In other notable news, NT2 openly refuted an online media report suggesting that the company’s 2015 earnings would decline significantly (the result of a typo), by announcing that it has already completed 90% of this year’s earnings target through the end of 9M2015. The market cheered the news leading to a 2.5% surge to recoup points lost in the last 2 days attributable due to the erroneous reporting.

PVC: Waiting for Block B and Oil to Recover - Initiation

* We initiate on PetroVietnam Drilling Mud (PVC), the monopoly drill fluid supplier in Vietnam, with an UNDER PERFORM rating and DCF-based TP of VND 16,600. PVC’s earnings – up to 97% derived from its drilling fluids – are expected to drop by 50% in 2015 and by 40% in 2016 as E&P budget cuts have reduced the number of wells to be drilled in Vietnam at similar rates. Consensus calls for little recovery in oil prices over the next two years...

* ...which leaves growth prospects on PetroVietnam’s USD 10 billion Block B project. This is an offshore gas field that boasts the 2nd largest natural gas reserve in Vietnam requiring 50-60 wells to be drilled per year over the next 10-15 years starting from 2017. That’s roughly the average no. of wells drilled per year between 2012 and 2014 in all of Vietnam. Nonetheless, while we acknowledge its prospects, we exclude Block B from our valuation until the contracts materialize. To be fair, initial work on Block B started in June 2015.

* At closing price of VND 20,200 on 22 Sep 15, PVC is trading at PER of 8.1x VCSC FY15E EPS of VND 2,504. The current valuation is a 9.5% premium to the 7.4x avg of local oil & gas service suppliers, unjustified in our view, given the material decline in earnings over the next 2 years unless oil mounts a significant recovery or work on Block B ramps up sooner to warrant a forecast change.

PVD’s 9M15 estimated result 

* PVD estimates that 3Q15 revenue will sink 38% vs. 3Q14 due to 15-day maintenance of PVD II and reduction of number of leased rigs from 6 to 3. However, NPAT in the quarter is down only 5% thanks to the booking of shared profits from its Baker Hughes’s JV, which was equivalent to 35% of the third quarter NPAT figure. Thus, 9M15 revenue and NPAT will be lower by about 25% and 18% respectively vs. 9M14.

* These preliminary results validate our current forecasts, in which we project NPAT to fall by 24% in 2015 and by 25% in 2016 as E&P budget cuts amid low oil prices continue to squeeze rig demand and day rates.

* We reiterate our target price of VND 44,500/share for PVD (TSR of +27.8%). PVD is trading at PER of 7.5x based on our FY15 EPS forecast.
BH profit
  Note: PVD financials are in USD but preliminary estimates communicated in VND

Vingroup (VIC) to partner up with Sai Gon Port to develop a 32ha prime site in HCMC

* According to Sai Gon Port JSC (SGP)’s AGM documents, the site where its Nha Rong Khanh Hoi (NRKH) cargo port is located will be rezoned for real estate use as it is developing another port farther from the city centre to replace NRKH by end of 2016. SGP will partner up with VIC to develop a mixed-use project on the converted land via an entity in which SGP currently owns 26% while VIC owns 45%.

* The site is adjacent to HCMC’s CBD and has 1.8km river frontage, making it among the most valuable land plots of such scale in HCMC. SGP expects the project to commence sales in 2018.

* We note that VIC previously registered to buy 80% stake in SGP. Just recently, the government has allowed the state-owned Vinalines to sell down its stake in SGP from 64% currently to 20%. VIC will have a controlling interest in the real estate project if it manages to complete the aforementioned 80% stake acquisition.

* This again demonstrates VIC’s unrivalled ability to acquire land bank, following its remark in a recent investor meeting that it also obtained approval-in-principle to develop a similar project in Ba Son port (22ha in CBD, HCMC). These land acquisitions will enable VIC to expand its presence in HCMC’s residential market following the Vinhomes Central Park (VCP) project. As at 31 July 2015, VCP had sold 3,234 units out of 4,555 units launched (excluding wholesale transactions). There are roughly 11,000 apartments in total under development in VCP.  

* We have not modelled for these two projects (NRKH and Ba Son) given their early stage, leaving potential upside to our valuation. We reiterate our target price of VND 54,500 per share, implying a total stock return of 28% at today’s closing price.

VCSC report

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