ANNUAL REPORT

VIETNAM: 2011 MACRO ECONOMIC REVIEW AND OUTLOOK FOR 2012

1. 2. VN-INDEX target in FY2012: 345 (+/- 19.6%). 2012 scenario: initial reduction, recovery since Q2, but then drop back to 345 at year end.
RESEARCH TEAM: Le Quang Minh Manager Phan Khanh Hoang Pham Binh Phuong minh.le@miraeasset.com hoang.phan@miraeasset.com phuong.pham@miraeasset.com

03 January 2012

Vietnam Economic in FY2011

Moderate GDP growth Turning point: success to curb inflation.

Remarkable Indicators in FY2011

Budget deficit (%) Investment/GDP (%) Saving/GDP (%) NDF 12M (VND) CDS (bps) 4.9 39.0 27.0 23,859 411.3 19.5 347 26.7 57

Fiscal policy: The Resolution No. 11 has not been obeyed strictly. BoP: the only sparkle in macro-economic picture VND encounters risk of devaluation in early months of FY2012. Which policy to affect financial market in FY2012? 14

Net bond issuance (VND bn) Bond market scale (VND bn) VN-Index downed by (%) HNX reached bottom at (pts)

Fixed Income

Vietnam country risk and credit rating

S&P Moody's Fitch Ratings 2008 BB Ba3 BB2009 BB Ba3 BB2010 BB Ba3 BB2011 BBB1 B+

Coupon interest rate declines but short term bond yield hikes: Sign of vulnerability? Potential bond market size. FY2012 bond market prospect Bond swap: a new OMO tool?

Source: S&P, Moody's and Fitch Rating

Market valuation Indicators

Equity Market

Both Vietnam indices underperformed. Low market valuation: risk or opportunity? TA: Risk of strong selling momentum remains.

18
EPS PER PBR VNINDEX Forecast

FY2011E 42.81 8.55 1.41

FY2012F 43.21 8.47 1.45 345

Market dropped continuously: HNX made low record.

Source: Bloomberg and MASVN Research

Vietnam Equity FY2012 Outlook: need more patience.

FY2006 FY 2007
8.63 12.65 46.10 10.20 (7.09) 17.73 23.75 16,114 6.00 6.50 8.73

Key economic indicators and Mirae Asset Vietnam forecast

FY 2008
6.18 19.89 20.30 0.47 (10.79) 12.34 24.18 16,977 7.50 9.50 10.00

FY 2009
5.34 6.52 29.00 (8.88) (6.02) 6.76 16.80 17,941 6.00 8.00 11.68

FY 2010
6.78 11.75 33.30 (1.77) (4.25) 5.63 12.30 18,932 7.00 9.00 14.00

FY2011E
5.89 18.13 9.00 1.60 (3.00) 8.60 14.50 21,043 13.00 15.00 12.00

FY2012F
5.90 12.00 15.00 1.00 (4.50) 9.50 15.00 23,500 11.00 13.00 11.00

GDP Growth (YoY, % change) Inflation (YoY, % change) Money supply growth M2 (YoY, % change) Overall balance (USD bn) Current account (USD bn) Capital account (USD bn) Foreign currency reserves (USD bn) FX rate (end of year, VND) Discounting rate (%) Refinancing rate (%) 5-Y G-bond yield (average, %) Source: ADB, IMF and MAS VN Research

8.18 6.57 33.60 4.32 (0.16) 3.09 13.59 16,504 4.50 6.50 8.29

VIETNAM MACRO STRATEGY

MIRAE ASSET VIETNAM RESEARCH

VIETNAM FY2011 OVERVIEW

Vietnam has a moderate growth rate in FY2011. Industry and construction sectors, which accounts for 40% in GDP, tends to slow down. Retail sales decelerate when purchasing power of consumers was weakened by high inflation. SOEs continued to attract attention by their ineffectiveness and smaller contribution to GDP. "Middle income trap" requires Vietnam needs more innovation. This innovation will likely be a chain of restructures on all sectors. Even positive outcome expectation, FY2012 will remain volatile on the restructured sectors. Inflation peaked at 20% plus, was blamed on demand pull, cost push, inflation psychology, internal inflation, etc... and was caused by multiple factors such as higher imported raw material price, high credit growth in the past, inefficiency of capital use, outdated economic structures, large budget deficits, etc... Facing to the inflation, the government has also implemented Resolution 11. However, effect of the Resolution was not strong enough to tighten fiscal policy, monetary policy when the total investment grew, budget deficit ratio in FY2011 is expected to remain at 5% of GDP. Excessive NPLs and alert illiquidity persist in banking system. In the grey Vietnam economic picture, BOP of payments sparkled thanks to high exports growth and foreign capital flows. In FY2011 Vietnam may have a record on remittances, FDI disbursement remained and moved to manufacturing sectors. After 2-year deficit, Vietnam is projected overall balance surpluses in FY2011. FY2012 is a hinge year of Vietnam's economy when massy "restructure" thinking dominates. Restructuring activities in banking system is carried out parallel with curbing of inflation and in line with the warming real estate market. Accordingly, interest rate can be pulled down, but not a big drop. VND devaluation is a main risk of concern even though it is inevitable. Among those volatilities in FY2012, we expect there will be a modest economic growth.

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VIETNAM ECONOMIC FY2011 REVIEW

Moderate GDP growth

GDP growth rate of Vietnam in FY2011 definitely decelerates. In the first 3 quarters of FY2011, GDP reached a growth rate of 5.76%, sharply declined from 6.54% compared to that in 2010. This is a subsequence affected by the countrys key measures to curb inflation and stabilize the macroeconomics situation. However, an improvement in GDP growth rate has been gradually formed quarterly with 5.4%, 5.7% and 6.1% in Q1, Q2 and Q3 respectively and it is expected that GDP growth rate will accomplish its peak at 6.4% in Q4/2011. Totally, GDP FY2011 is forecasted to grow at 5.89%.
Figure 1: GDP growth decelerated but managed to improve quarterly (%)
GDP - YoY 10% 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% 2 per. Mov. Avg. (GDP - YoY)

GDP growth could reach 6.4% YoY in Q4 and 5.89% in FY2011.

Source: General Statistics Office (GSO)

Leading role of industrial sector is at defiance. All sectors face a lower growth. According to the fixed prices in the first nine months of FY2011, agro-forestryfishery sector grew 2.39%; industry construction sector rose 6.62% and service sector increased 6.24%, falling by 0.65%, 0.66% and 1.01% respectively compared to the same period in 2010. Construction sector had the sharpest fall from 10.3% to 4.9% due to freezing real estate market. Weak retailed sale as high inflation. Weak demand is reflected through the total retail in 11 months. If excluding price factor, retailed sale only rose 4.1%, which strongly fell from 14.7% in Jan Nov period in FY2010 and led to the highest inventories ever since, bringing about lower GDP growth rate in FY2011.
Based on this, we forecast GDP growth in FY2011 can be hardly higher than 6%. Although economic growth in FY2011 is lower than in FY2010, but we think this is necessary tradeoff between growth target to achieve macroeconomic stability, restructuring the economy towards more efficient, as prerequisite for the return to strong growth in the period FY2013-FY2015.

Tightening fiscal and monetary policy, high inflation and interest rates made production in difficult.

Retail sales expected to rise again when inflation was pushed back.

FY2011E GDP is hardly higher than 6%.

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Figure 2: Construction and Industry sector remained key driver of growth (%)
12% 10% 8%

Figure 3: Real (deflator) retail growth remain low level and is in downtrend (%)
35% 30% 25% 20% 120 80 200 160

6% 4% 2% 0%

15% 10%

5%
0%

40
0

GDP Agriculture

Construction and Industry Service

Retail Sales (LHS)

Nominal Growth

Real Growth

Source: General Statistics Office (GSO)

Source: General Statistics Office (GSO)

Vietnam is still in top economic growth in Asia despite slowing down The economic growth in Asia have lagged as being affected by the global financial crisis. Vietnam ranks at the 5th position in term of economic growth in Asia, behind China, Sri Lanka, Indonesia and India. Vietnams moderate growth imposes an larger income gap between Vietnam and other coutries. The gap implies a more challenge for Vietnam as the country is facing to midle income trap1 because its economic growth depends on capital endownment, trade openness, real estate, ODA, FDI, remitance, To deal and overwhelm the trap, Vietnam needs more renovated policies to achieve higher productivity.
Figure 4: Vietnam was 5th FYFY2011 economics growth in Asia (%)
10 9 8 7 6 9.1 7.9 7.6 6.5 6.0

Vietnam needs more renovated policies to achieve higher productivity.

5.6

5.3

5
4 3 2 1 0 CN SL IN ID VN HK SG

4.8

4.7
3.7 3.7 3.5 2.7

TW

MY

KR

PH

PK

TH

Source: Bloomberg, General Statistics Office (GSO), MAS VN Research

According to ADB, countries stuck in middle income trap are unable to compete with low income economies in manufacturing or with advanced economies in high skill innovations. They enjoy short periods of growth followed by stagnation or even decline and are stuck at low growth rates

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Turning point: success to curb inflation.

Inflation causes Inflation is one of the most risky factor dominating Vietnams economy. Vietnam has nd experienced two-digit CPI stage and its inflation ranks at 2 position in the world. Inflation generated from: (1) Fiscal policy: persistant and large fiscal deficit, inefficient public investment, sluggish SOE restructure and (2) Prolonged loosen monetary policy (see further in the Monetary policy). Then high inflation comes, VND devaluation, unstable gold and foreign currency market and lower belief on VND. Inflation was on peak in August FY2011 The most significant turning point is that after inflation was on peak in August FY2011, then it decline thanks to long-lasting tightening monetary policy. Inflation FY2011 is forecasted at 18.1% and the Government has targeted to pull FY2012 inflation down to one digit number. However, increase of electricity, water, coal prices at 10-15%, and the possibility of VND devaluation will obstruct the deceleration of inflation in FY2012. In general, inflation FY2012 may fall to 11-12%. CPI may fall to the lowest after June FY2012 then surge again.
Figure 5: CPI cooled down and expected to lower to single digit by end of FY2012 (%)
30 25 20 5 4 3

Fiscal policy is the core blame for high inflation.

Even CPI is decreasing, but hard to be one-digit CPI.

Figure 6: Money supply (M2) and food are key drivers of inflation (%)
60% 50% 40% 30% 20% 10% 0%

15 10
5 0

2 1
0 -1

CPI (m-o-m) - RHS

CPI (y-o-y) - LHS

CPI (y-o-y) Money Supply M2 Source: General Statistics Office (GSO), SBV

Food & Food Stuff

Source: General Statistics Office (GSO), MASVN Research

Fiscal policy: The Resolution No. 11 has not been obeyed strictly
No public investment cutback. In order to curb inflation, stabilize macroeconomic, fiscal policy has been strongly tightened in FY2011, in which reduction on national investment and on government budget deficit are the most important measures. However, some sectors and localities have not strictly followed the resolution. In specific, 638 projects which use state budget have not been newly carried out in FY2011 but still received VND1,763 billion for new implemenation. In addition, over 2,000 projects which use local budget also have been fund allocation. Moreover, many local authorities request for more fund allocation from goverment.
Public investment has not been reduced.

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Extremely high state budget overspending: Pursuant to Resolution No. 11 issued by the Government, national spending should be restricted. However, total national budget overspending is extremely high, exceeding the approved number to 9.7%. Public investment rose 15.1% or VND23,000 billion. According to Ministry of Finance, state budget deficit ratio per GDP FY2011 could reach 4.9%, which will intensify pressure on CPI in early months of FY2012.
Table 1: State budget in FY2011 (VND tn) Item Total revenues Total expenses Budget Deficit Budget Deficit/GDP Source: GSO FY2011E 674.5 796 121.5 4.9%

State expenditure plans to be restricted but total state expenditure is higher 9.7% than approved number, in which state investment increases 15.1%

More investment, less savings.

The total investment in FY2011 is estimated to reach VND930,000 billion, up by 16.3% YoY and equaling to 41-41.5% of GDP, whereas savings tend to fall from 30.4% GDP in 2010 to 27.6-27.9% in FY2011. To compensate for the imbalance between savings and investments, foreign direct investment (FDI) is expected to increase 5.8% in FY2011 or VND226.9 trillion, occupying 25.9% of the total investments All the figures have shown that, Vietnams economic growth much still depends on foreign capital flows. If the foreign capital flows weaken, the economic growth may be sluggish.
Figure 7: The gap between Saving/GDP and Investment/GDP widened (%)
45 43 41 39 37 % Saving of GDP % Investment of GDP

Low savings but high investment: economic growth depends on foreign capital (FDI, FII and ODA).

35
33 31 29 27 25

Source: General Statistics Office (GSO)

FDI disbursement positive: Despite the fact that FY2011 is forecasted a year of difficulty in attracting FDI, FDI disbursement is still positive. By the end of November FY2011, FDI disbursement has reached USD11 billion, up 5.8% YoY. Stumbling FDI commitment: -25%. But, newly registered FDI is USD14 billion only, or equivalent to 85% in the same period in 2010. Intrinsic macroeconomic turmoil (high CPI, FX devaluation pressure) eroded investors confidence on business environment. World Economic Forum (WEF) announced the Global Financial Development Report FY2011, in which Vietnam fell four spots to 50th out

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of 60 countries and territories covered in the Financial Development Index. Global Competitiveness Report FY2011FY2012 recently announced by WEF ranked th Vietnam at the 65 out of 142 countries surveyed, dropping 6pts from last year. Those are negative causes for a further FDI reduction in FY2012.
Table 2: FDI statistics Item FDI Statistics FDI Commitment Newly registered Registered capital increased No. of Project Newly registered Registered capital increased
Source: Ministry of Planning and Investment (MoPI)

11M2010 (USD mn) 9.95 15.148 13.29 1.858 1.168 383

11M2011 (USD mn) 10.05 12.697 9.914 2.783 919 324

% Change 101% 84% 75% 150% 79% 85%

By sector, production and manufacturing industry ranks in the 1st in attracting foreign investors with 382 newly registered projects with total amount of USD6.24 billion, occupying 49.1% of the total investment registered in 11 months. Ranking in the 2nd is electricity distribution and production with total newly registered amount of USD2.53 billion, occupying 20% of the total investments. Standing at the 3rd is construction sector with 119 newly registered projects with total amount of USD1.19 billion or 9.4% of the total investments
Figure 8: The positive shift in the structure of FDI disbursement (%) 2010
Others, 11.0%

Positive signs: The foreign investment is shifting to the production area.

11MFY2011
Real Estate, 3.7%

Constructio n, 9.0%

Others, 18.0% Real Estate, 37.0%

Electricity, 16.0%

Constructio n, 9.4%

Processing , 49.1%

Electricity, 19.8% Processing , 27.0%

Source: Ministry of Planning and Investment (MoPI)

Stable ODA disbursement: The ODA disbursement in 11 months of FY2011 is nearly USD3 billion and this figures could reach USD3.65 billion, increasing by 3% YoY, which is far below compared to USD7.9 billion that investors committed in 2010, said Ministry of Planning and Investment (MoIP). This is still a positive signal for Vietnam under the circumstance that FDI commitment falls.

Once FII and FDI commitment decrease, ODA is an important funding for CA deficit.

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Figure 9: ODA disbursement in FY2011 is not as high as the previous year but expected to improve (USD bn)
4.0 3.5 3.65 3.5

3.5
3.0 2.5 2.0 1.5 1.0 0.5 0.0

Source: Ministry of Planning and Investment (MoPI)

Balance of Payment: the only sparkle in macroeconomic picture

Vietnam has recognized a positive balance of payment in FY2011. After facing up with deficit in two consecutive years (USD8.9 billion in 2009 and USD1.6 billion in 2010), Vietnams BOP in FY2011 has a surplus of USD1.6 billion, which is a bright point in the macroeconomic picture of Vietnam and helps to strengthen its forex reserves.
Table 3: Balance of Payment (USD bn)
FY2009 Current Account Trade deficit Income and services account Transfers Capital Account Net FDI FII Short-term debts Long-term capital Money and Deposits Emission and Errors Overall BOP Source: ADB and MASVN Research -6.0 -8.3 -4.2 6.5 6.7 6.9 0.0 0.2 4.4 -4.8 -9.6 -8.9 FY2010 -4.2 -7.1 -5.8 8.7 5.6 7.1 2.4 2.8 1.0 -7.7 -3.0 -1.6 FY2011E -3.0 -6.0 -6.0 9.0 8.6 10.0 1.0 0.5 2.6 -5.5 -4.0 1.6 FY2012F -4.5 -7.0 -7.0 9.5 9.5 9.0 1.0 1.0 3.5 -5.0 -4.0 1.0

After 2 year of negative overall balance, FY2011 marked up a surplus in the balance.

Surplus of overall balances in FY2011 relies on:

Balances of merchandise trade, services and income improved. Trade deficit in December alone fell to USD700 million, bringing the total trade gap in FYFY2011 to USD9.5 billion, down by 10.1% against the same period last year and equaling to 10.2% of the total export turnover. By the end of December, export has reached a growth rate of 33.3% compared to 29.2% of the import growth rate, which help to decline the trade deficit in FY2011, the lowest level in last 5 years.

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Figure 10: Trade deficit narrowed in 2H011 (USD bn)

Trade balance 1,000 2 per. Mov. Avg. (Trade balance)

Figure 11: NDF Sign of unstable FX rate in FYFY2012

NDF +3M 24,000 23,000 NDF +12M Parallel Market Rate

0 22,000 -1,000 21,000 -2,000 -3,000 20,000 19,000 18,000

-4,000

Source: Bloomberg, SBV, VCB and MAS VN Research

Source: Bloomberg and SBV

Steady forex supply: both FDI and ODA disbursement are higher than FY2011. In addition, overseas remittance may reach USD9 billion, up by 12.5%. Those numbers are essential for an overall balance surplus in FY2011. Risk issues in FY2012: larger trade deficit (due to surge of credit growth, public investment), lower capital account surplus because of an expected FDI fall.

VND encounters risk of devaluation in early months of FY2012

VND has been under tough pressure of devaluation against USD in the past years. The reason for the devaluation of VND can be explained by the economic structure (significant trade deficit), instability of the macroeconomic (high inflation, state budget deficits) Exchange rate is still considered as the hottest variable of Vietnams economy in FY2011 as State Bank of Vietnam (SBV) officially adjusted the exchange rate to huge amount: 9.3% in February. The adjustment of exchange rate is to narrow the gap between official and free exchange rate. Then SBV increased triple times (1% each) of required forex reserve in banking system (6%). At the same time, SBV set a cap twice on FCY deposit interest rate at 3% (in April) and 2% (in June) for residential deposit. Those policies showed to be successful to stabilize FX rate (of course with a selling of USD 1.5bn from SBV-Reuters). Even though, we think that administration measures will be effective in the short term only. To keep the valuation of VND in the mid and long term, inflation, trade deficit and budget deficit must be declined. Thus, we are cautious to forecast that exchange rate will be under tension pressure in the early months of next year because:

Vietnam dong is one of the weakest currencies in the Asia.

Vietnam dong is fixed vs. USD while other currencies are weakened, as a basis for devaluating forex rate in early FY2012.

Trade deficit will still be a concern in the next year. It is unlikely to raise the price of commodities for export in FY2011. Furthermore, export activity

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may not achieve a significant growth as world economic outlook is not on recovery track, particularly some largest export markets of Vietnam including EU, USA which are still facing up with economic recession.

The restructuring of banking system will request SBV to pump considerable amount of M2 to refinance NPLs (mainly for property loans) or support liquidity for small banks. CPI is forecasted to decline in FY2012, yet it may remain at two digits. Hence, inflation is still a risk towards exchange rate fluctuation. High pressure from FII foreign investors to withdraw from Vietnam market. In FY2012, there will be de-investment movements with a potential mount up to USD2 billion. In addition, global public debt crisis will not be recovered in the short run, and foreign investors may withdraw from Vietnam and invest in some key markets with lower risk as what had happened in 2008. The policy to lower loan deposit rate by SBV in coming months boosts VND loan demand then intensifies pressure on VND devaluation. Annual phenomenon: FX often changed after TET holidays. SBV has maintained stable FX rate for almost a year. After a long period of fixed FX rate, there would be a sudden and big devaluation.
Figure 13: VND the most stable currency?
25% 20% 15% 10% 5% 0% -5% -10% -15%

Figure 12: Pressure made USD/VND rate unstable (VND)

22,500 22,000 21,500 21,000 20,500 20,000 19,500 19,000 18,500 18,000

VCB Ask

Parallel market

Interbank

RUB Source: Bloomberg and SBV

INR

BRL

VND

Source: Bloomberg, SBV, VCB and MAS VN Research

Tightening monetary policy:

In the last 15 years, M2 growth rate was higher than GDP growth rate from 3x to 4x but, in FY2011, this ratio is 1.67x. This is a positive signal for the economy since the economy just needs 1.67% loan growth to achieve 1% GDP growth. In other words, cost of GDP growth becomes cheaper than that in 1996-2010. If the low ratio was maintained, the economy has been in effectiveness.

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10

Figure 14: GDP and Money supply M2

40 35 30 25 20 15 34.0 7.0 7.5 25.5 7.0 1.5 30.7 6.0 9.0 0 1996-2000 GDP (%) - LHS 2001-2005 2006-2010 2011E M2/GDP - RHS 4.9 4.4 3.4 5 4 3 2 1 6

10
5 0

Money Supply M2 (%) - LHS

Source: GSO, SBV and MASVN Research

Credit and M2 supply strongly tightened in FY2011. The credit growth of Vietnam in the last few years has been high at 30 50% p.a. with total outstanding loans of 130% GDP. It is obviously that the loosen monetary policy in previous years is the cause for current inflation boom. With the aim to fight inflation, SBV adjusted credit growth ceilings in FY2011 to below 20% from 23% and M2 growth to 15-16% from 21-24%. Two targets have been strongly revised compared to 2010 (credit growth in 2010 was 32.4% and M2 was 33.3%).
Figure 15: Credit growth and money supply FY2011 (%)
60%

Credit increased by 12% and M2 money supply will increase by 8-9% by the end of FY2011.

Figure 16: Policies rate increased made banking system to be in trouble (%)
21 19

50%
40% 30% 20% 10%

17 15 13

11
9 7 5

Credit Growth (YoY) Source: SBV

Money Supply (YoY)

O/N

Refinacing rate

Discounting rate

Source: SBV and Bloomberg

Policy interest rates succeed in curbing inflation but cause instability for the economy. Inflation in FY2011 exceeds 20% and urges SBV utilize tightened monetary policies. SBV has raised discount rate from 7% to 13% in two times since the beginning of this year and to raise refinancing rate to 15% from 4% in five times. Besides, SBV also stipulates to reduce non-production credit growth to 22% in October FY2011 and 16% in FY2011. As a result, inflation has been curbed, however, lending rates surged over 20%, which leads many companies to face up with difficulties. Then, SBV applies the deposit ceilings at 14% with expectation of loan interest rate reduction , but this cap tosses small banks into insufficient liquidity (as nominal deposit interest rate of 14% means a negative real interest rate), higher

Commercial banks look for loans with higher interest rates even on the interbank market.

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NPLs (higher loan interest rates cast debtors profits or even lead them to loss). Because of illiquidity, small banks have to run a race on interbank market to mobilize enough fund, leading not only to higher VNIBOR, but also some default on the interbank market. In addition, SBV also restricts to offering FCY loans for unnecessary good import, limits gold bar trading. All these measures reveal a drastic effort in tightened monetary policies. By 20th October 2010, credit growth and M2 growth reached 8.61% and 7.5% compared to 2010 respectively. Credit growth and M2 growth in FY2011 is estimated to reach 12% and 9%.
Is inflation control and support economic growth parallel?

Which policy to affect financial market in FY2012?

Monetary policy: loosening. According to the press release by SBV, key monetary policies in FY2012 will be:

Target M2 growth: 14-16%; Target credit growth: 15-17%;

SBVs message is to achieve dual goals: (1) to curb inflation, stabilize the macroeconomic and (2) to support for economic growth at reasonable rate. In order to fulfill the goals, we forecast deposit and lending rates may fall 1-2% and exchange rate will be adjusted in Q1-FY2012 to ease difficulties for businesses and boost export activity. Banking restructure: no bankruptcy but elimination. There will be many banks willing to be merged in FY2012. Regardless of merging methods, NPL will not be erased. Under the rough economic circumstances, NPL will jump to above 3.2% since NPL at leasing companies (subsidiaries of many commercial banks) has reached 45%; CAR at minus 10.92% (Reported by National Financial Supervisory Commission - NFSC). To save illiquid banks, SBV has to pump considerable amount to support banking liquidity. For the small banks, they also need to reduce NPL ratio. The fastest method to reduce NPL ratio is to hike chartered/equity capital, bringing in about more money in circulation. Then crowding out effect is inevitable. And banks themselves will be debtors in loan attraction and in interest rate racing. Thus, it is hard to control inflation and to reduce lending interest rates sharply in FY2012. Restructure of stock market with four targets: restructure securities companies; stock exchange merge; stocks and bonds qualification upgrade and investment vehicle development. According to PhD Nguyen Son, Head of Market Development (State Securities Commission SSC), the restructuring will base on financial safety. Accordingly, securities companies will be classified into three groups: normal operation; under supervision and strictly under supervision. The specific plan about securities companies restructuring will be accomplished from now till 1st April FY2012. Two stock exchanges are proposed to be merged. The restructure of listed stocks and bonds will be considered to upgrade qualification and to have few bond codes to make better liquidity for the market. A resolution on this matter will be released in this December. SSC also transfers treasury bills from State Treasury into the secondary market. Development of investment vehicle will focus in open and pension fund.
To restructure the banks, the total payment will rise and appear "overwhelming." Inflation and interest rates have decreased but remained high in FY2012.

"There are at least 20 securities companies have problems, they must quickly restructure" (PhD Nguyen Son).

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Restructure of gold bar market: monopoly in gold bar production. Pursuant to the Decree draft on management of gold bar production, SBV will consider to issue licenses for companies to produce gold bar if they meet 4 criteria: (1) set up under the Enterprise Law and register to produce gold fine in registered business license; (2) has chartered capital higher VND500 billion; (3) has equipment and facilities for gold bar production and (4) occupy higher than 25% of the gold bar market share in three latest years. The market statistics has shown that, SJC occupies 90% of the gold bar market share, so only SJC meets this requirement. If this draft is approved, 12,000 companies and gold producers legally will be eliminated. FY2012 will be a busy year for restructure movement. The whole country will be a large construction site. In our view, whether the result achieved is either bad or good, the roadmap to this success is full of obstacles with inevitable shocks. Thus, investors should also restructure their investment portfolio/strategy to avoid any risk that may cause by the restructure movement in FY2012.

One Decree, 12,000 gold bar producers and entities will be disappeared.

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13

FIXED INCOME MARKET

In FY2011, bond holders faced difficulties when policy interest rates were higher and coupon was lower than CPI and deposit interest rate. It seems to be the same in FY2012 when (1) tightened monetary policy remains, (2) VND is devaluated and (3) bank restructure occurs. G-bond primary market: Newly listed value: Delisted value: Net issuance value:

VND 62.3 trillion. VND 43 trillion. VND 19.3 trillion.

Secondary market: Market size: VND 347 trillion. G-bond: VND 314 trillion (VDB: VND 130 tn and ST-Bills: VND 184 tn). C-bond: VND 37.5 trillion.

Coupon interest rate declines but short term bond yield hikes: Sign of vulnerability?
After soaring in the first 6 months of FY2011, bidding interest rate of G-bonds tend to decline. Specifically, coupon interest rates for three-year bond jumped from 13.3% in Q2 then dropped to 12.1% in Q4. Reduction in bond interest rates signal decline in deposit interest rate in FY2012. In the eleven months, there were 130 auctions and underwriting of G-bond and treasury bills. 111 bonds are on maturity with total value of VND439,710 billion and outstanding value of 458 bonds worth at VND280,000 billion. Bidding and winning volume increased compared to that in 2010.
Figure 17: Vietnam G-Bond yield, short term is higher than long term (%)
13.5
13.0 500 1 -Y 3 -Y 10 -Y 600

Figure 18: Vietnam CDS is highest in Asia (bps)

RU KR CH TH VN

12.5
12.0 400 300 200 100 0

11.5
11.0

10.5
10.0

Source: Bloomberg

Source: Bloomberg

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Bond yield reached peak by year end but secondary market trading activity is dull. The total trading value in FY2011 is VND73,000 billion, down by 9.88% YoY with the average trading value of VND280 billion per session, decreasing by 17.65% compared to 2010.
Figure 19: Daily average secondary bond trading value
VND bn 900 800 700 600 500 400 300 200 100 0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2009 Source: HNX 2010 2011 Source: HNX

Figure 20: Vietnam bond market composition

180000 160000 140000

120000
100000 80000 60000 40000 20000

2009 Foreign Investors

2010 Domestic Investors

2011

Short term bond yield hikes again: macro economic turmoil remains? 1-Y Gbond yield increase 2.59% from the beginning of the year and 1-Y G-bond yield has higher 10-Y G-bond at 0.4%. When short term bond has little higher yield than long term bond, this flat yield curve implies a new uncertainty2. This releases a worrisome for investors, signaling uncertainties still exist in FY2012.
Figure 21: Bond issuance value
VND bn 60,000 50,000 40,000 30,000 20,000 10,000 0 Source: HNX 2009 2010 2011 27,000 37,500 56,000

Potential bond market size.

Bond market size is USD17 billion, plus 22.2% than 2010. However, the market size is pretty low compared to regional countries. Vietnams bond market value stay at 15.2% of GDP, much lower than Malaysia (100.7%), Singapore (75.7%), This comparison

A flat yield curve is observed when all maturities have similar yields, whereas a humped curve results when short-term and long-term yields are equal and medium-term yields are higher than those of the short-term and long-term. A flat curve sends signals of uncertainty in the economy. This mixed signal can revert to a normal curve or could later result into an inverted curve.

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shows that bond market has not been a efficient capital raising tool for enterprises.
Figure 22: Asia countries bond market value/GDP in FY2011
120

Figure 23: Bond market value (USD bn) and growth rate in FY2011 (%)
300 263 225 22.2 20 30

80 60.5 42.2

200 16.5 110

186

100
40 40.2 0 11.9 1.9 IN 30.3 4.3 PH 52.3 33.5 12.2 13.8 1.4 VI 0 0 IN MA

11.2 74 6.8 2.5 PH SI TH 17

10

0 VI

MA

SI

TH

G-Bond (% of GDP) Source: ADB and HNX

C-Bond (% of GDP)

Bond market scale to 2011Q3 - LHS Growth rate (YoY) - RHS Source: ADB and HNX

FY2012 bond market prospect

Long-term view: The Vietnams bond market occupies some 15.2% of GDP, which is quite low compared to other countries in the world with the ratio at 50-100% of GDP. Therefore, its very potential for Vietnams bond market to develop. Bond market not only helps to mobilize capital effectively, it also plays an important role in macroeconomic signaling. Plan for FY2012:

New Issuance value: Maturity Value: Net issuance value:

VND 45 trillion. VND 80 trillion. VND -35 trillion. Government will net inject VND35 trillion via bond market?

For the State, this is a backward in the financial market since the budget will lose VND35 trillion to settle for bonds on maturity. For credit institutions, a considerable amount will be injected into the market in FY2012. And liquidity will be cooled down if the Government strictly follows this plan. Bond swap: a new OMO tool? Ministry of Finance (MoF) on 9 November FY2011 issued Circular No. 150/2011/TT-BTC on bond swap management with following conditions: Bond to be exchanged should be listed on Hanoi Stock Exchange and more than 1-Y remaining maturity. MoF decides discount rate to define bond price to be swapped. State Treasury will negotiate with bond holders about discount rate, which is set under a range of discount rate set by MoF.
th

Bonds swap must deal with the State, enterprises dare to deal?

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Figure 24: Bond swap procedure

Source: Circular No. 150/2011/TT-BTC on Nov 09 2011

In our opinion, bond swap will impact financial market in three directions:

Bond swap is not much different from OMO activities and the State will adjust money pumping or withdrawing. If the State faces up with serious budget deficit, possibility to refund bond (at par value) will be difficult then Government may issue new bonds to swap with bond matured-to-be. To restructure loan easily: normally, it is difficult to adjust maturity time for issued bonds. With bond swap, the State can extend or shorten the average maturity time easily.

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EQUITY MARKET
Market dropped continuously: HNX made low record.
The volatility of Vietnam market showed an unstoppable downtrend, reflecting prolonged tighten monetary policy since end-2010 and economics restructuring activities. Money flow was narrow by the limit of full-year non-product loans growth at 16% by SBV. Vietnam market passed 2 wash-out phases in FY2011.

Phrase 1: Commercial lenders withdrew non-product loans, in which margin trading accounts is one of the main sources. Therefore, many securities companies implemented margin call with huge amount in May FY2011. Phrase 2: Signs of a wave of divestments from investments fund in late of FYFY2011.

Figure 25: Major downward trend of Vietnam market in FY2011 reflects tighten monetary policy and illiquidity of banking system
550 530 510 490 470 450 430 410 390 370 350 Dec 06: First 3 banks informed to merge. VND devaluated by 9.3% vs USD Gasoline price increase by 30% Electricity price increased by 5.28% Securities firms reduced margin trading ratio SBV Governor confirmed on lending rate reduction Oct 13: Issued list of stocks accepted to margin trading Dec 20: Electricity price increased by 5% Commercial banks pushed margin call Investing Fund began to sold out bluechips

Source: HSX and MAS VN Research

Both Vietnam indices underperformed. In FY2011, VN-Index lost about 26.7% year-to-date, HNX-Index even decreased by 47% and both bourses continue a downtrend. Vietnam, China (Shanghai), India (BSE 30) and Hong Kong (HangSeng) were most underperformed markets (see Figure 26). The same characteristic of these markets was tightening monetary policies to curb inflation. Particularly, the continuously devaluation of Vietnam dong made FII decline.

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Figure 26: Vietnam market worst performance (%)

US (DJIA) Phillipines (PCOMP) Indonesia (JCI)

Figure 27: Lowest market valuation but high discount

5.3

KR

1.15 1.98 1.99 1.93 1.81 1.29 1.32 1.27 0.90 0 5 4.99 10 15 13.42 12.89 12.57 11.67

18.35

3.2
1.9 -2.4 -3.8 -8.3 -12 -17.3

IN
US TH CH BR HK VN RU

Malaysia (KLCI)
Thailand (SET) UK (FTSE) Korea (KOSPI) Singapore (STI) Japan (Nikkie 225) HongKong (HangSeng) Taiwan (TWSE) China (Shanghai) India (BSE 100) Vietnam (VN-Index)

-19.3
-20.5 -21.2 -22.7 -23.5 -26.7

9.33
8.33 7.69 PBR PER

-35 Source: Bloomberg

-15

20

Source: Bloomberg

Market valuation is low: risk or opportunity? Low PER shows negative investors' outlook of business. Confidence of investors has declined significantly in FY2011, securities market was not longer an attractive investment channel, so that share prices decreased continuously even though improving business results of companies. Vietnam market PBR is not as quite attractive as other regional markets, raising of equity capital of many companies led to significant dilution. By the end of FY2011, Vietnam market trades at PER and PBR of 7.69x and 1.27x respectively (down sharply from 10.43x and 1.85x since beginning of the year).
Even thought market valuation is low (see Figure 27), Vietnam's market is facing a series of structural risks (low liquidity, small-scale but lack of transparency and the uncertainty economic outlook) so that the market does not seem attractive.
Table 4: Vietnam market composition Mkt cap Weighted Sector (VND bn) Mkt cap Oil & Gas Material Industry Consumer Medical & Health Care Consumer Services Utilities Finance Information Technology Banking Market
Source: Stoxplus

High structural risks made low market valuation become not attractive.

PER 4.9 4.5 6.1 9.7 6.6 17.2 7.5 13.0 8.5 7.1 8.2

PBR 1.0 2.4 0.8 3.2 1.8 3.3 0.8 3.0 1.7 1.3 2.3

ROA 6.3% 16.3% 6.7% 19.2% 16.6% 4.6% 8.9% 5.1% 9.9% 1.4% 8.7%

ROE 19.9% 24.5% 13.6% 29.3% 25.6% 10.5% 15.3% 18.0% 27.3% 19.2% 21.0%

10,892 43,213 45,387 129,195 7,989 21,436 10,514 143,116 13,936 142,331 568,009

1.9% 7.6% 8.0% 22.7% 1.4% 3.8% 1.9% 25.2% 2.5% 25.1% 100.0%

Market Composition: There are 700 listed firms on Vietnam stock exchange in

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FY2011, with 54 newly listed companies. In which, there are 25 new listed companies on HSX and 29 on HNX. The poor performance of securities market and low share price did not motivate companies to list on stock exchange, so the new list stock decrease significantly. Number of listed companies on the market is most concentrated in the industry sector with 292 codes. Banking and finance has the highest capitalization in the market with similar scales at over VND140 trillion.

Market Statistics:

In FY2011, total trading volume reached more than 15.8 billion unit with market value is at more than VND 236 trillion in FY2011. The market cycle was one boom month accompanied with two burst months. Boom months often are March, June, Sep and Dec. Foreign investors tend to sell higher than to buy in second half of the year and they only hold 14.63pct of total market shares. In downward channel, many stocks declined by more than 80pct, while there only 2 stocks gained 100pct. In last two years, the probability distribution on a monthly rate of return of the VN-Index skew to the right (with a long tail to the right, see Figure 22). The meaning of probability distribution is that investors have higher losing probability than gaining.

Figure 22: Monthly distribution of VN-INDEX

6 5 4

Frequency

3 2 1 0 -10% -7% -4% -1% 2% 5% 8% 11% More

Source: MAS VN Research

Technical Analysis: Risk of strong selling momentum remains in FY2012

Thus we expect that, in early of FY2012, Government will continue tightening monetary policy. And the authority may loosen monetary policy cautiously when macro indicators improve, however it is hard to support securities markets to have strong recovery. On the other hand, the pressure of divestments from many funds in FY2012 is quite strong. Before the decision of closing fund or shift to opened-end fund, VN-Index has high risk level. The bluechips is likely to have strong selling pressure and more underperformed. The sideway price chart is a quite reliability channel since Sep 09 has been broken. The heavy selling pressure broke this price channel by 13 black candles in the last 15 candles from the beginning of this trend. Therefore, the risk of VN-Index will continue to have more adjustment. Hence, new balance point for VN-INDEX will be under 330.

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Figure 29: Technical analysis of VN-INDEX

Source: MAS VN Research

Vietnam Equity FY2012 Outlook

Valuation indicators: Vietnam market FY2012 outlook may not have much different as in FT2011. The EPS, PER and PBR of market do not attract investors. Compared with other investment channels such as savings, and even holding savings in USD have high rate of return than investing in stocks. For example, if interest rates will be reduced to 12% in FYFY2012, the nominal rate of return is 12% (equivalent to PER at 8.3x). If buying bonds, the nominal rate of return is 12.5%. Whereas if you invest in shares, the expected rate of return will be only 11.7 to 11.8% (calculated by reversing of PER) plus the cost of reduction risk. This scenario is really discouraging investors.
Table 5: Vietnam market valuation indicators and forecast Item EPS* PER PBR
Source: Bloomberg

Securities market is not an attractive investment channel.

FYFY2011E 42.81 8.55 1.41

FYFY2012F 43.21 8.47 1.45

FY2013F 71.09 5.15 1.32

FY2012 Forecast: FED Model. The FED model indicates the correlation between the rate of return of the stock market in the future (E/P) and 10-Y government bond yields (Y). This correlation expressed by the equation E/P=Y. When E/P> Y, the profits of the stock higher bonds so investors should buy stocks. Conversely, when E/P<Y, investors should buy bonds. Only when E/P=Y, stocks are neither cheap nor more expensive than bonds.
Table 6: VN-Index FY2012 Table 7: The results increase the probability

Item
EPS 10Y G-Bond yield VN-INDEX Forecast SIGMA
Source: MAS VN Research

FY2011
42.81 12.5

FY2012
43.21 345.7 +/-19,6%

FY2013
71.09 568.7

Standard deviation (monthly) SIGMA % increasing % decreasing The probability of increasing

Source: MAS VN Research

5.60% 19.60% 121.60% 82.20% 78.90%

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As estimated above, amplitude of volatility of Vn-Index may be about +/- 19.6%. With a probability of 78.9% increasing, we believe that most of the time in FY2012 will range between 345+20%. However, with current market trends, market capacity will be in the range from 345 down - 19.6% starting in the first quarter in FY2012. Thus, one scenario VN-Index as the following chart:
Figure 30: Vietnam market scenario in FYFY2012
550 500

450
400 350 300 250

VNINDEX Source: MAS VN Research

2012

Lower band

Upper band

In conclusion, FY2012 welcomes investors with many difficulties and challenges. Macro situation will be even more unstable, not support for the strong recovery of the market. The price of important commodities such as electricity, water, coal and foreign currency, are expected to increase in 1Q2012. Hopefully, some new catalysts may appear to help market to improve in the short term as a legal barrier to establish opened-end fund, extend daily trading time and shorter clearing time subtraction. However, the most concerned risk of Vietnam market is low liquidity, this becomes the resistance to the attraction as well as the confidence of investors. Investment activities in the stock market in FY2012 will bring high risk when the target VN-Index is 345pts (comparative analysis) and 330pts (technical analysis). In our FY2012 market forecast market may decline at beginning of the year, short-term recovery from the second quarter, but then returned to its place of origin. Thus, FY2012 is a more difficult year for investors.

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DISCLAIMER:
The information, statements, predicts in this report including individual comments are based on reliable sources of information. The statements in this report based on detailed and careful analysis. Our subjective opinions are appropriate in the given reporting period. Any opinions or judgments in the report can be changed without prior notification. This report is to provide information and does not intend to advise readers to buy, sell or hold any securities. Mirae Asset Securities (MAS) will not be liable for all or any damage or event which is considered damages for the use of all or any information or comments of this report. The report is a property of MAS and under copyright protection. Infringement of copy, change and reprint of the report without permission of MAS is illegal. MAS owns the copyright on the report.