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The Vietnam stock market report 03-21-2012

Vietnam stock market daily: The SBV announced on its website today that it will limit commercial banks’ exposure in foreign currency to a maximum 20% of their capital. Pomina (POM) has announced that its new billet factory.

The markets managed to make some reasonable gains today albeit dropping off a bit in the latter stages of trading. Volumes picked up nicely; market breadth widened while 152 stocks hit the ceiling. However some high beta stocks that have been running up in recent sessions such as brokers did drop back in late trading suggesting that the instinct to take short term profits on gains has not been lost. Even so the market seems to be putting the petrol price increase behind it. Foreigners were less active today as there no few large put throughs on the foreign side today. However they were still net buyers on both exchanges. Blue chips enjoyed gains overall led by PVD; BVH; KBC and SJS.

In a further step to de-dollarize the economy, the SBV announced on its website today that it will limit commercial banks’ exposure in foreign currency to a maximum 20% of their capital down from 30% effective as of May 2nd. The central bank has also issued instructions limiting dollar lending to those companies who can prove they have dollar revenues to make repayments with¬out resorting to the forex market (interbank or black market).

Under the new rules only those enterprises that want to borrow FX to import (1) materials used to manufacture goods for domestic demand; (2) importing goods for domestic demand; (3) process¬ing exports using domestic raw materials can not now borrow FX loans. Both of these measures have been well signaled in advance and banks have been working to comply with them for some time already.

This is a clear attempt to reduce the speculative or arbitrage activities of the past whereby some corporates borrowed in US$ to convert into VND to take advantage of the interest rate differential. Then of course when the loan came due they had to scramble to collect US$ for repayment pur¬poses. This type of activity affected the currency in the 2-H of both FY2010 & FY2011. As a result of bank preparations for this new regulatory regime US$ loan balances have already dropped 10% from the peak of last summer and now account for just over 20% of total loans. The trend has accelerated in the first two months of this year and the short term effect though is to reduce overall credit growth which has fallen 1.5% or so YTD as at the end of February as corporates scramble to repay US$ loans to banks that are now applying the new rules.

Some have argued that an apparent inventory overhang in the economy was partly to blame for weak dollar credit currently (due to apparently lower imports of raw materials from manufacturers keen to work off existing inventories first before importing) but HSC would argue this is by far the lesser of the two effects. In fact inventories have already been dropping for several months already so the overhang is fast disappearing in most sectors while YTD imports are up 14% y/y which does not represent much of a slowdown in our book.

The regulatory change as always is having a far more significant impact. With this in mind we suspect that US$ loan balances will fall further between now and May suppressing overall credit growth as not all US$ loans will be directly replaced by VND loans. Two reasons for this (1) some US$ loans were an arbitrage to take advantage of higher VND deposit rates (2) some corporates are delaying making new loans anticipating lower VND interest rates over the next month or two.

Hence this rather strange phenomenon of falling interest rates and falling credit growth at the same time. However we suspect that credit growth will recover towards the end of Q2 and make up for lost time thereafter. Meanwhile it will add to the upward pressure on the dong to appreciate and allow the central bank to accumulate more foreign currency reserves. However in contrast it is also likely to suppress economic activity and lead to a very soft Q1 GDP number.

Then in corporate news we see that Pomina (POM) has announced that its new billet factory which has a designed capacity of 1 million tons per year came into operation as at March 16th, thereby increasing their total billet capacity to 1.5 million tons (up 3xs). With this new capacity POM can cease all imports billets and instead will import scrap steel to manufacture billet them-selves. The company estimates that they can save around US$300 million annually from this upstream integration based on 100% usage of their total billet capacity. We note that the current billet price now is US$660 per ton while the scrap steel price is US$445 per ton. HSC estimates that POM’s total cost per ton of billet is US$580 per ton. Which suggests that POM will save about US$80 per ton (this is after taking depreciation into account but not interest or SG&A).

In FY2011, POM generated VND12,008 billion of revenues (up 7.2% y/y completing 83.4% of their target) and VND409 billion of net profit (down 38.1% y/y and completing just 67% of their plan). For FY2012, we expect that POM will likely have revenues of VND12,609 billion (up 5% y/y) mainly driven by a price increase. However, with the new billet capacity, we believe the com¬pany’s net margin will improve from 3.4% in FY2011 to 5% enabling them to earn VND630 billion of net profit (up 53.9% y/y). Based on this the stock is currently trading at a forward P/E of 3.8xs and P/B of 0.8xs. Cheaper than HPG in fact.

Fiachra Mac Cana

Ho Chi Minh Securities

HCMS <GO>

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