The challenge for steel producers in 2023

• Input price fluctuations will continue challenging steel producers, both upstream and downstream. Many upstream steel makers have been facing unprecedented obstacles because material prices swing more strongly than sales prices do.  
• Current market conditions might cause almost all steel producers to be more flexible in terms of inventory policies to ensure sustainable profitability. As a result, these firms’ short term business performance will become more difficult to forecast.

ACV – Q4-2022 Business Results Update: Lower Financial Income And Surging Provision Expenses Slowed The Earnings Growth Momentum

• Q4-2022 Revenue remains resilient compared to the last quarter despite lower passenger volume (25mn vs 30mn) owing to higher international passenger volume (5.3mn vs 4.1mn), staying at VND 4.1 trillion (or USD 174mn, +328% YoY).
• Q4-2022 NPAT was down 46% QoQ, coming at VND 1.3 trillion (or USD 54mn, +289% YoY), due to lesser financial income (JPY appreciated) and abrupt surge of provision expenses for doubtful receivables from airlines.
• 2022 Net sales and NPAT respectively posted VND 13,834 bn (or USD 586 mn, +191% YoY) and VND 7,122 bn (or USD 302 mn, +803% YoY). While revenue is 7% ahead of our forecast, NPAT was in line with expectations, completing 99% of our forecast.
• We remain our positive view on ACV as we believe in the brighter outlook in 2023, driven by (1) stronger international air passenger inbound following Chinese relaxation on air travel, (2) partial reversals of receivables provision, while the downside risk is lower-than-expected financial income due to stronger JPY and decreasing term deposit (due to large CAPEX for key projects namely Long Thanh International Airport and Tan Son Nhat T3 Terminal).
• We’re pending a fuller review of 2023 forecasts for ACV, of which the current TP is VND 96,600 (an upside of 13%).

Update on monetary market in Jan 2023

• The deposit-loan gap is at a record low in 2022.
• System liquidity was stable in January 2023.
• We expect 2023’s credit growth to be lower than the target of 14-15%.

US mortgage market

• 2023 will test the ability of US households and companies to absorb a prolonged period of high interest rates.
• Rising rates have already had a chilling impact on home prices and rents.

We expect the Fed funds rate to reach 5% by the end of the first quarter (Figure 1), and the policy rate to remain unchanged until the end of 2023. This is largely consistent with the median forecast of the members of the Federal Reserve’s Open Market Committee. It is widely expected that supply and demand conditions are aligned for inflation to decline in 2023, but not to the extent to make the monetary authorities comfortable enough to begin cutting rates. That would have to wait until the first quarter of 2024.

FMC – Solid fundamentals allow the company to weather the storm

• In Q4/2022, FMC delivered net revenue of VND 1,211 Bn (or USD 51 Mn, -16% YoY) and NPAT of VND 78 Bn (or USD 3.3 Mn, -26% YoY).  For the whole year of 2022, net revenue and NPAT achieved VND 5,702 Bn (or USD 237 Mn, +10% YoY) and VND 308 Bn (or USD 13 Mn, +15% YoY).
• We expect that the weak demand can prolong until Q1/2023 then gradually recover along with the inflation cooldown.  In general, we believe that business results in 2023, although decelerating compared to the previous optimistic plan, are still able to maintain a single-digit increase thanks to well-managed operation and steady customer base.
  
• We are reviewing our 2023 earnings forecast after 2022 earnings were slightly below our previous forecast. While it takes time to scrutinize, we see not much change in FMC's 2023 onwards outlook and valuation compared to previous reports. Our previous target price of 45,000 VND/share, plus a cash dividend of 2,000 VND/share expected for 2022. This is equivalent to an expected return of 27%, based on the closing price on January 19th, 2023. At the target price, P/E 2023 is at 8.3x, corresponding to 2023 EPS of VND5,450.

Industrial Park Real Estate – FDI inflows are expected to slow down in 2023

• Global GDP growth (2.1% YoY) and Vietnam (5.6% YoY) are expected to slow in 2022.
• The impact of economic recession cycles on newly registered FDI inflows into Vietnam is merely moderate.
• The most recent trade agreements, such as the CPTPP, UKVFTA, EVFTA, and RCEP, are expected to drive a new wave of FDI into Vietnam as the global economy turns back on its growth trajectory.

PC1 – New projects will support growth in the coming years

• For 9M2022, PC1 earned VND 262 bn (or USD 10.7 mn) in net profit, -10% YoY. In terms of gross profit, the power generation group grew by 145% thanks to new contribution from wind power farms while other sectors dropped. Utilizing USD-denominated loans at low-interest rates to finance power projects used to be one of the company’s edges yet it becomes the headwind during growing uncertainties. As of Dec 31st, 2022, VND appreciated compared to that of Sep 30th 2022. We forecast the company to gain financial income in 4Q2022.
• FX has hampered earnings during 2022, especially in 2Q22 and 3Q22. However, EBITDA has been on an upward trend since 2019, with +39% and 23% in 2022 and 2023, respectively. Meanwhile, the bottom line will likely reach a trough in 2022 and is expected to recover from 2023 to VND 664bn (or USD 28 mn, +172% YoY).
• Our latest target price for PC1 is VND 26 000, offering an upside of 6% compared to the closing price as of Jan 16th, 2023. We recommend investors to BUY this stock when the market has a deep correction due to its high beta nature. We will update our target price in our next report.

2022 trade recap and some expectations for 2023

• December 2022 ends with negative signals for Vietnam’s trade picture.
• Pessimistic trade outlook in 2023.

NT2 – Better dividend prospects in 2023

• 9M22 electricity output recovered, earnings exceeded full-year target. For 2022, we expect net revenue and NPAT-MI to be VND 8,916 bn/ USD 380 mn (+45% YoY) and VND 762 bn/ USD 32.5 mn (+43% YoY), respectively, assuming that NT2 continues to make the remaining VND 173 bn for bad debt provision in Q4/2022 (total provision in 2022 was VND 360 bn).
• 2023 awaits higher earnings, better cash dividends. For 2023, we expect NT2 to record the remaining financial revenue from FX reversal. As a result, we forecast NT2’s net revenue and NPAT-MI to be VND 8,849 bn/ USD 377 mn (-1% YoY) and VND 839 bn/ USD 35.8 mn (+10% YoY) in 2023, respectively. Core revenue and NPAT from electricity production were VND 8,769 bn/ USD 374 mn (+2 YoY) and VND 804.5 bn/ USD 34.3 mn (+3 YoY), respectively .
• We maintain an ACCUMUALTE rating with the one-year target price of VND 29,300/share. With an expected cash dividend of VND 2,500/share in the next 12 months, it implies a total return of 11%, based on the closing price of Jan 13th  2023.

Expected downtrend of raw milk powder prices will enhance profit margins of Vietnam dairy companies

• Global prices of raw milk powder went down since Mar-2022 because of 1) easing of global grain prices (e.g., corn) and 2) lower demand from China due to the lockdown policy. According to JACOBY, the 2022 situtation that saw global raw milk production deficit and record-breaking Chinese dairy demand will no longer replay in 2023.
• For 2023, we expect that global raw milk powder prices will continue moving on a downward trend for three main reasons: 1) higher supply and lower demand from China; 2) fertile global raw milk production; and 3) expected downward trend of global grain costs.  
• Expected decline in input costs in 2023 will help the gross margin of Vietnam dairy producers to recover. Notably, we did a regression test and find out that when WMP fluctuates between the range of USD/tonne 2,500-3,000, VNM will have a gross margin between 45% and 47%, which is strongly higher than their Q3 2022 margin of 39%.

Shipping container industry – Low domestic sea container freight rates will drag back the profits of companies

• Sea container freight rates in 2023 will return to a low level as (1) domestic freight demand weakens due to production will be less active (2) total domestic carrying supply has increased since the end of 2022.
• GPM of companies in the industry such as HAH, VOS, VFC will narrow due to the low domestic sea container freight rates, and the growth rate of revenue/NPAT is forecasted to be negative in 2023.
• For HAH stock, it is trading at a P/B valuation of 1.0x, although this valuation is still 40% higher than the average P/B for the period 2028 - 2019 (the period of sea freight and charter rates remained low), however, HAH currently has more than three ships for time charter and the charter rate is more than 2 times higher than in the previous period. This valuation has also been deeply  discounted compared to the average P/B of 2Y 2021 - 2022 (the period of sea freight and charter rates increased rapidly), so we see not much downside risk price for HAH.

An Overview of VNZ

• VNZ is one of the Vietnam tech giants, specializing in the fields of Online Games, Platforms, FinTech (Digital Payments) and Cloud Services.
• While the online games segment is the main source of profit for VNZ, the FinTech business (developing and managing ZaloPay – a mobile payment application) is still heavily weighing on VNZ’s profitability, leading to 9M-2022 accumulated NPAT-MI of VND -419 bn. Additionally, VNG’s investments in startups are also incurring a total loss of VND -83 bn in 9M-2022.
• Once a "Unicorn", VNZ now has an estimated market capitalization, at the current ceiling price of the trading day, of about USD410 million.