9January2012 MarcDjandji,HeadofResearch marc.djandji@vcsc.com.vn +84338145588 MichelTosto,HeadofInstitutionalSales michel.tosto@vcsc.com.vn +84338145588 RaphaelWilhelm,TechnicalStrategies raphael.wilhelm@vcsc.com.vn +84338145588 Tableofcontent Predictionsfor2012 Economy5.5%GDPgrowth Balanceofpayments+USD2.

2012 Economy5.5%GDPgrowth Balanceofpayments+USD2.9bn Bankingsectorrelaxed,buttight Stockmarket+20% Risks BankingsectorLeverage&NPLs Electricityprices Fuelprices WhatVietnamreallyhasgoingonfor Strongexportsperformance Stableforeignfundflows Stablecurrency(sofar) Technicalsonmediumtermpositive HowtoplayVietnamIdeasfor2012 Chasingvalue ConsolidationthroughM&A TheDragonyearboom Vietnamsagriculturalpowerhouse
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Vietnam2012Outlook

Strategy Growth story intact on the back of financialsectorstresses

We believe that although Vietnam is going through a deleveraging cycle that exposesseriousissuesinthebankingsectoramidaburstingrealestatebubble, thebackboneoftheeconomy,thatisagriculture,manufacturingandserviceshas been and will remain strong in 2012. Pains will be inevitable, but we do not adheretotheArmageddonscenariothatsomepeoplehavebecomeaccustomed to believe in. We argue that Vietnam will fare better than most other Asian countriesaswesterncountrieseconomicgrowthslowsdown. NoArmageddonWhileissuesinthebankingsectorareseriousandpainwillbe inevitable, we do not adhere to the Armageddon scenario. At this time last year, someinternationalinvestmentbankswerecallingforanimminentBOPcrisistohit Vietnamsometimesin2011andthisnevercame,aswepredictedaboutayearago (see No BOP Crisis note of 25 January 2011). As a matter of fact, the country actually ran a BOP surplus of USD 2.5bn according to the State Bank of Vietnam (SBV).Wethinkthatmainstreetisdoingjustfineallthingsconsideredandthatthe stressesarealmostexclusivelycenteredonthebankingsectorandinefficientSOEs. Slower,albeitdecentgrowthWeexpectGDPgrowthtoslowerto5.5%astight monetary policies and slower growth in Vietnams traditional export markets hit, butgrowthwillremaindecentthankstogrowingexportsandrobustconsumption. Construction will remain subdued however. With inflation and interest rates abating, companies should be able to find space to grow, although monetary conditions will remain subdued compared to previous years as credit growth will continue to be closely monitored and we dont expect a relaxation of credit for nonproductivesectors.Thiswillputacaponstockmarketperformance. TheeconomyismorestablethanneighboursAlbeitmacroeconomicdifficulties, we also believe that Vietnams economy will do better than most in the region thankstocompetitivemanufacturingcostsandlowervalueadded,inelastic,export goods.Also,thelackofhotforeignflowsinandoutofthecountryenablesVietnam toseelessvolatilityinitscurrency. NPLs, an inflationary waiting game With NPLs estimated close to 10% system wide, everyone wonders where Vietnam will find the money to recapitalise its banks.Thelargebankshaveampleliquidity,sowerenotoverlyconcernaboutan imminent collapse. Also, as inflation and interest rates fall, so should NPLs, alleviatingpartoftheproblem.However,webelievethecountrywillhavetoprint money to pay for its banks and its SOEs past excesses and that would mean inflationcouldmoredifficulttobringdownthanmostpeoplethink. Ideas to play Vietnam We finish our report with a few ideas on how to play Vietnam in 2012. We have four compelling ideas; (1) while valuations are at historicallows,wethinknotalliswarranted,(2)withassetpricesdepressed,cash rich companies could go on an M&A spree, (3) the year of the Dragon means a huge boost in babies and companies that cater to infants, (4) Vietnams has becomeoneofAsiastopagriculturalgoodsexporter.
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Predictionsfor2012
Thetablebelowsummarisesourpredictionsfor2012. Figure1:VCSCspredictionsfor2012 Unit 2010 Theeconomy
GDPgrowth CPIHeadline CPICore TradeDeficit Exports Imports FDIDisbursed Remittances ErrorsandOmissions BalanceofPayments ForeignReserves(est.) FXrate(interbankrate) %YOY %YOY %YOY USD USD USD USD USD USD USD USD VND/USD 6.8% 11.8% 9.3% 12.6bn 72.2bn 84.8bn 11.0bn 8.0bn 9.5bn (3.1bn) 10.0bn 20,780 13.5% 17.7% 29.8% 32.3%

2011
5.9% 18.1% 13.6% 9.5bn 96.3bn 105.8bn 11.0bn 9.0bn 9.2bn 2.5bn 12.5bn 21,275 14.0% 19.0% 10.2%VND 18.7%USD 12.4%VND 21.9%USD 350

2012
5.5% 12.0% 10.0%

%11/12

6.8% 33.7% 26.5%

Thebalanceofpayments

8.8bn 115.5bn 124.3bn 11.0bn 9.0bn 7.0bn 2.9bn 15.4bn 22,130

7.4% 19.9% 17.5% 0.0% 0.0% 23.9% 16.0% 23.2% 4.0%

Thebankingsector
Depositrates Lendingrates Creditgrowth Depositgrowth

% % % %

12.0% 16.0% 16.0%VND 17.5%VND

14.3% 15.8% 56.9% 41.1%

Thestockmarket
VNindex

VNI 484

420

20.0%

Insummary,webelieveeconomicgrowthwillslightlyslowdown,albeitpostareasonablegrowthof 5.5%. However, the right set of policies is in place to improve Vietnams most critical macroeconomic imbalance: inflation. On the back drop, exports will continue to grow at a faster pace than the region, thanks to an export mix that is low on elastic goods and increasing competitivenessofitsmanufacturingsector.Economicgrowthwillalsocontinuetobesupportedby robust domestic consumption, although at a slightly slower pace than before as salaries will probably not keep pace with inflation. The BOP should also slightly improve thanks to ongoing strengthinFDIandremittances,puttingtheBOPbalanceinpositiveterritoryforasecondyearina row, which somewhat will alleviate pressure on the currency. As inflation abates, we should see interest rates gradually come down and help companies reduce interest expenses. All in all, we pencilearningstogrow18%in2011andwouldseeamodest20%riseoftheVNIbyyearend. Wefurtherexplainthebasisofourpredictionsbelow.

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Theeconomy
GDPtogrowthat5.5%Vietnamislikelytoexperienceamildslowdownin2012withGDPcoming inat5.5%against5.9%in2011.Sofarthedomesticeconomyhasbeenrelativelyresilientdespite domesticandinternationalconcernsandwethinkthiswillcontinueforward. ManufacturingiskeyThethreemainpillarsofsupportoftheeconomyin2011wereagriculture, manufacturing, and services. However, international soft commodity prices, which peaked in February,havebeenonadecliningtrend(FAOFoodPriceIndexisdownmorethan10%)thatcan verywellcontinueinto2012.Weexpecttheagriculturalsectortoslowsomewhatasinternational pricesfall,butthedropshouldbeoffsetbyresilientmanufacturingandservices.Manufacturinghas becomeanincreasinglyimportantcontributortoGDPgrowthandweexpectthistocontinuethanks to a notable shift in FDI from real estate into productive industries in 2011. We think FDI inflows intoindustrialswillsupportthelongtermprospectsofGDPgrowth.Thewildcard,however,isthe construction sector which shrank in 2011 and remains under a lot of pressure as the country is currentlygoingthroughadeleveragingofarealestatebubble.Asexports Consumption unlikely to be a major source of growth in 2012 Domestic consumption proved resilient since the Great Financial Crisis despite rampant inflation thanks to remittances and gold savings. Though data is not available, we believe that the large amounts of gold savings in the economy (estimated to 40% of GDP) means that households are generally able to protect their wealth, which probably helped support domestic consumption again in 2011. However, domestic consumptionin2012mayexperiencesomeheadwindsasmanycompanieshavenotbeenableto pegsalariestoinflationandweexpectbuyingpowerwillfurthershrinkinrealterms. Exportstogrowatafasterpacethantheregionthatis,thankstoanexportmixthatislowon elasticgoodsandincreasingcompetitivenessofitsmanufacturingsector.Wethinkthetrendislikely to continue in 2012 thanks to stronger orders from traditional markets for Vietnams low value added, inelastic, goods, and that, despite the economic slowdown anticipated in western economies. Imports are highly correlated with exports while other types of imports are tightly controlled,andshouldthereforecontinuetogrowataslowerpacethanexports,asithasbeenthe trendinthepast3years. CredittoremaintightStabilisationpoliciesinitiatedinearly2011willlikelycontinueinto2012,at least in Q1, and could impact growth as companies find it increasingly difficult to find financing. Downsiderisksmayarisefromreformsnecessarytoreducethebuildupofdebt. InflationtodeclineInflationhasbeenonthedeclinesinceAugustontightermoneysupplyand weakeningfoodprices,thoughitremainednear18%atyearend.HeadlineinflationYoYdropped thankstolowerfoodpricesbutcoreinflationhasbeensticky.Movingforward,inflationarypressure islikelytoeasein2012onthebackofstableorlowercommoditypricesandcontinuedmonetary and fiscal austerity. Also, plans are in place for the government to adjust utility prices up, which likelywillputaflooronhowmuchinflationcouldfall.Assuch,weexpect11%inheadlineinflation, slightlyhigherthanthegovernmentstargetof910%.

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Thebalanceofpayments
BOPsurplusof2.9bnin2012TheSBVestimatesaBOPsurplusofUSD2.5billionin2011compared todeficitofUSD3.1billionin2010thankstoimprovementsinthetradedeficitandrobustFDIand remittancesinflows.Weareconfident2012willseesimilartrends. Errors and omissions to decline, but remains the main risk to our scenario The errors and omissionswillcontinuetobethewildcard,thoughtheyhavebeenonadecliningtrendsince2008, albeit not at the speed we expected. That being said, the SBVs efforts to focus on stability and administrative measures should help boost dong sentiment and prevent domestic residents from hoardinggoldandforeigncurrenciestoofar.Theonlywaytoreducetheerrorsandomissionsisto putinplaceacredibleplantofightinflation.Suchaplanisinplace,butwhetheritwilldeliversingle digitinflationremainstobeseen. Currencypressuresremains,albeitlessThecurrencyhasremainedrelativelystrongonthegrey andinterbankmarketssincethedevaluationofFebruary2011.Wedonotexpectthecurrencyto depreciate as much in 2012, thanks to improvements in the countrys balance of payments and foreign reserves. We still, however, expect a 4% devaluation in 2012 as stubborn inflation (albeit declining)couldleadtodomesticcapitalflighttowardsalternativecurrenciessuchasgoldandUSD continuesandwesuspecttheSBVtoprintmoneytocoverthecountrysNPLs.Thestrengthofthe VNDultimatelydependsonthegovernmentsabilitytorestoreconfidenceinthecurrencyandthis willbeputtothetestin2012again,butwedothinkthesituationhasimprovedmarkedly.

Thebankingsector
InterestratestodropThegovernmentsmessagehasbeenclear:itwantstoseelowerinterest. Throughout2011,theSBVhasmadereferencetoloweringdepositratesandpotentiallyreinstating aceilingonlendingratesin2012,butthetalkhassomewhatreducedoflate,perhapsbecauseit nowseeshowstickycoreinflationisandthatitwilltakemoretimetobringitinlinewithtargets. Thatbeingsaid,theSBVtargetsdepositratesat10%andlendingratesat14%bytheendof2012. These targets are optimistic as lending rates are currently set by market forces rather than administrativemeasuresandasliquidityissuestowardstheendof2011haveforcedsomebanksto againcontravenethe14%ratecapinordertomobilisefunds. Creditgrowthrelaxed,butnotexcessiveTheSBVstargettolimitcreditgrowthto1617%in2012 putscreditavailabilitytoareasonablelevelthatshouldntleadtoinflationaryexpectationstohaunt the country in 912 months. We are comfortable with these levels, but would be cautious if they surpassthemasabove1516%creditgrowthisprobablyinflationary.

Thestockmarket
We believe the Vietnam Index could end the year at 420, up 20%. Our forecast is based on the consensuswithinoursalesteamandtakesintoaccountseveralfactors.
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Pros: InflationcontinuesitsdeclineAlthoughwenotecoreinflationisrathersticky. Interest rates should fall along We think the SBV will have room to decrease rates startingearlyMarch,butwehopetheydontdosobeforeJune.WethinktheSBVlooksat coreinflationsothatswhatinvestorsshouldwatch,notonlyheadlineinflation.Asinterest ratesfall,sowillinterestexpensesofcompaniesandwecanexpectbetterearnings.Also,it wouldhelpborrowingforconsumptiontograduallycomeback. Greater visibility of the banking sector As the SBV moves forward with its thorough assessment, transparency (we hope) and acceptance of the facts over time should graduallybringbackconfidence. Cons: MargincallsSecuritiescompaniesarecurrentlystillmakingmargincallsandweexpect thattocontinueforthefirsthalfof1Q. CaponloansfornonproductivesectorsWillnotbeliftedthisyearwethinkandthat meanssecuritiescompanieswontbeofferingmarginlendinganytimesoon.Evenifthecap isremoved,wethinkthecaponlendinggrowthsystemwideandtheclearpreferenceof the SBV that lending should be in productive sectors will seriously limit any margin lendingactivityinthestockmarket. Bad newsonthe health ofthe banking sector News and rumourson the sectorcould depress market sentiment and put a cap on how high any rally will go. We think retail investorswilltakeinprofitinthe510%range,making. Risks: Inflationdoesntcomedownasquicklyaseveryonethinks(highprobability),especiallyif EVNincreaseselectricitypricesby20%intheyear(weexpectanincreaseof1015%)and fuelpricesarefurtherincreased(expected,butnotsurehowmuchorwhen).Surprisesin globalcommoditypricescouldalsobringfurtherdownsidetoourscenario,butconsidering globalgrowthisslowing,wegivethinkthatprobabilityislow. Theassessmentintothebanksfailstoprovideanylightastowhatsreallygoingoninthe sectorandnoroadmaptoaddresstheseissuesisproposedandseriousimplemented. NPLsaremuchhigherthanwethink(roughly10%systemwide),whichwillfurthercurtail theabilityofbankstolendtocompanies,whichinturnwillstiflegrowthpotentials(great timetobeinprivateequityhowever). Overall: Takingallthesefactorsintoconsideration,wethinktheindexcangrowbyroughly20%if only because we started the year in depressed territory. Interest rates coming down will help the market, but without margin lending coming back and clarity about the banking sector, retail investors will be quick to take profits in any rally, which make the sustainabilityofsuchralliesrathershaky,butoverall,wethinkmarketswillbepositive,if volatile.Liquidityislikelytoremainthroughoutmostoftheyearhowever.

Risks
The most crucial events of 2012 for investors will stem from the developments of the banking system,itsdeleveraginganditsNPLs.Thiswillposethemostrisktoourpredictions,possiblytothe downside.OtheritemstowatchstemfromtheneedtostrengthenVietnamsfiscalbalancesheet which will come in the form of increased prices, especially water, electricity and fuel, which will haveanimpactonhowlowinflationwilldeclinethisyear.

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NPLsandrestructuringofthebankingsystem
OfficialNPLsinVietnamhaveincreasedfrom2.5%in2010to3.1%in1H2011and3.7%attheendof 2011,translatingintoUSD4.9bninNPLs.However,webelieverealNPLstobeatleast10%system wide,orUSD13.3bn(12%ofGDP).HowNPLsaredealtwithandtheimpedingrestructuringofthe bankingsystemwilllikelyheadline2012andbringvolatilitytothemarket. Tight policies exposes the ravages of past excesses Rampant inflation, exorbitant lending rates and tight monetary policies has made it hard for SOEs to hide their losses and has exposed the chronicallylaxriskmanagementandpoorperformanceinsuchcompanieswhich,inouropinion,is wherethebulkoftheNPLslie.Tobeprecise,SOEsloansmakeuproughlyathirdofthecountrys total outstanding credit of USD130bn. Detailed breakdowns of NPLs are unavailable, but with the countryslargestSOEssuchasEVN,VinashinandVinalinesmakinglossesyearafteryear,wethink ourestimateisgrounded. NPLs, an inflationary waiting game With NPLs estimated close to 10% system wide, everyone wonderswhereVietnamwillfindthemoneytorecapitaliseitsbanks.Byourestimates,thewhole banking system is now underprovisioned and may only be able to cover half of the officially announcedNPLs.ConsideringrealNPLsareprobably3timesthatofofficiallyannouncednumbers, things look bad. The large banks (which account for roughly 80% of all bank lending) have ample liquidity,sowerenotoverlyconcernaboutanimminentcollapse,butinordertopreventacrisis, banks will need to strengthen their balance sheet through recapitalization or mergers. Also, as inflationandinterestratesfall,soshouldNPLs,alleviatingpartoftheproblem. TheM&ArouteThefirstconsolidationbetweenSCB,TinNghiaandFicombankhasbeen completed and a run on those banks was averted right after the announcement of the consolidation.Tobesure,depositorsconfidencewasbuoyedlargelyinpartbytheSBVs directive to have BIDV support liquidity in those banks which implicitly guaranteed deposits.Fromwhatweknow,therearefivemorebankscategorizedasweakthatcould soongetthesametreatment. RecapitalisationWethinkM&Aisgoodforsmallbanks,butforthelargeones,theywill need to be recapitalized. Of course, they could turn to foreigners, especially strategic investors,likeVietcombankdidwithMizuhoin2011,butwerenotsoconfidentthiswill workoutforallbanks.WhatwethinkwillhappenisthattheSBVwillmaintainliquidityin thelargebankswhilewaitingfortheeconomytopickupandNPLstofallnaturally.Where itwillfindthemoneytomaintaintheliquidity?Wethinkitwillprintit,butwereallyhave no idea how much will be printed. Such a scenario could make inflation more stubborn thanmostpeopleanticipate. NorunonthebanksMostlargebankshaveampleliquidityandaslongasarunonthebanksis averted, they should be able to deal with their NPLs over time. Also, as inflation and, as a consequence,interestratesease,itmightbreathesomelifebackintocompanies,enablingthemto paybacktheirloans,andreducingNPLsaltogether.Inanutshell,thesystemisntterminallyill,but itsconditionshouldbetakenseriously.Withalotofconcertedeffort,webelieveVietnamwillbe
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able to weather the storm, but dont expect free flow of capital, which led to the stock markets previousspectacularrises,toreturnanytimesoon.WebelievetheSBVishandsonandwillcontinue toactivelymanageliquidityandconsolidationofthesector. Wewillobviouslymaintainaclosewatchofthebankingsectorin2012asdevelopmentsinthisarea coulddictatemuchofthemarketsmovementsinthecomingmonths.

Realestate
2011wastough,2012willbetougherGiventheliquiditycrunchandthefactthatloansforthe realestatesectorwillcontinuetobefrownupon,2012lookslikeanothertoughyearforthereal estatesector.Manydeveloperssuspendednewprojectsandlocalbanksendedupwithmounting NPLsontheirbooks.Eventually,asbanksputpressureondeveloperstosettletheirdebts,wecould seepricesdropfurtheraspropertycompaniestrytoacceleratethesaleoftheirassets.Priceshave fallensomewhatthisyear,butwearestillawayfromaclearingpriceswhichwouldenabledemand toreturn.Withalargeportionofitspopulationatfamilyformationageandconsideringthequality of accommodation throughout the country, we believe demand for real estate is real, but unaffordable for a large part of that population, especially as mortgages are hard to come by. However, until the SBV relaxes limits on lending to nonproduction sectors and excess supply is absorbed,therealestatemarketislikelytoremaindepressed.

Electricityprices
Settoincreasebetween1016%WhatwegetfromthemessagessentbytheMinistryofFinance isthatelectricitypriceswillincreasebetween1016%in2012.Asamatteroffact,sinceSeptember, EVNhasbeengiventheauthoritytoincreaseitssellingprice,withouttheapprovaloftheMinistry ofIndustryandTrade,byamaximumof5%perquarterdependingonincreasesofitsinputcosts. Vinacominrecentlyannounceditmayhavetoraisethesellingpriceofcoalforelectricitygeneration in2012possiblybyupto30%toreduceitsownfinancialburden.Needlesstosay,costincreasesto EVNwillmostlikelybepassedthroughtoconsumers.GivenEVNsseverelypoorfinancialsituation andtheentitlementtoadjustingelectricityprice,weourthinkthereisariskthatelectricityprice increaseexceedthe16%thresholdsetbytheMoF.Nevertheless,tomoderatethepotentialimpact ofelectricitypricehikesoninflation,webelievethatelectricitypriceswillbeincreaseatagradual paceratherthanalarge,onetimejump,asin2011.Thisiswhywethinkinflationwontcomedown asquicklyassomesay.

Fuelprices
With Vietnams refining capacity unchanged, domestic gasoline prices will remain dependent on global prices. Considering that the government recently increases import tariffs on petroleum productsby5%,webelievethatevenwithslowerglobaldemandandpricesoftnessforthebarrel, theprobabilityofadownwardrevisionongasolinepricesisrathersmall.Thiswillagainputacapon howmuchinflationwillfallthisyear.

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WhatVietnamreallyhasgoingfor
If youre a financial investor in Asia, youve probably started to have concerns about hot money flows reversing out of Asia, currencies being under pressure and exports suffering as the worlds largestconsumermarketsarefacingmountingeconomicdifficulties.Turnsoutalltheseproblems cometonaughtinVietnam.WearguethatVietnamsbiggestissuerightnowisitsbankingsystem, notitsmainstreet.

OneofthestrongestexportperformancesinAsia
Some peoplehave argued that asthe global economy slows in 2012,as expectedby many, Asian countries will feel the pinch and will see exports decline substantially, eroding their balance of payment and possibly the value of their currency. While probably true for many countries in the region,wethinkVietnamwillbeoneoftheleastaffectedbysuchglobalslowdown.Hereswhy: 1 Resilient exports: Vietnamese exports in 2011 were one of the fastest growing in the region (see figure 2), even thought the world economy has already slowed, and even thoughUSandEUarestillthecountryslargestexportdestinations,withJapancatchingup fastsincetheBTAwassigned. 2 Demandisconcentratedinlowelasticitygoods:MostofVietnamsexportsarelowvalue added, inelastic, goods for which demand dies last (see figure 3). The slowdown in IT relatedexports,whichhurtmanyoftheothercountriesintheregion,arentaconcernfor Vietnam yet, even though they are becoming more important of late, especially with SamsungandIntelopeningtheirmegafactories. 3 Cost advantage over China: As the cost of manufacturing in China is increasingly more expensive relative to Vietnam, despite high inflation and accompanying wage pressures, more and more production, and exports as a consequence, will continue to move to Vietnam.AsaresultofhighercostsinChina,weseemoreandmoreUSandEUcompanies shiftingpartoftheirsourcingtoVietnam.Mostlargesizeexportproducingfactories(who produce shoes, garments, belts, etc) for Vietnams top trading partners have 2 years of advanceorders.Sourcingagentsnowhavetogofurthertofindsmallerfactoriestosource goodsfortheirclients.Wehearordersfor2012arealotstrongerthanfor2011.Reasons tobebullishonVietnamsexportgrowthforthefuture,despiteitsotherproblems. 4 MoreFDIinmanufacturing:FDIdisbursementsin2011werethesameasin2010atUSD 11bn, but unlike last year, the manufacturing sector received 50% of that FDI this year against 37% in the previous year. The country is increasingly becoming the +1 in the China+1expression.Anecdotal,butitgivescolourstothenumbers,oneofthecountrys leading readymade steel building manufacturers was telling us how most of hisclients in 2011wererepeatcustomers,mainlymultinationals,whoexpandedtheirfacilitiesdespite inflation.WethinkstrongFDIinthemanufacturingsectorwillcontinuetoprovideareason tobebullishonVietnamsfutureexportgrowth.

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Figure2Exports(%3m/3msa) Indonesia 15 10 5 0 1 5 10 Figure3Vietnamsexportcomposition
Netexportstextilegarment,footwear Netexportswood Netexportsagriculture Netexportsoilandenergy Netexportssteelandmetal NetexportsMachinery NetexportsChemical Netexportsplastic NetexportsElectronicsandPc Dec07 5,489 1,380 5,854 1,893 (5,099) (11,104) (1,466) (1,796) (802) Dec08 6,863 1,728 7,351 615 (6,785) (12,053) (1,481) (2,082) (1,069) Dec09 6,681 1,692 6,671 1,274 (5,056) (10,622) (1,261) (2,006) (1,192) Dec10 7,661 2,284 8,653 558 (5,105) (10,512) (1,703) (2,727) (1,618)

Strategy

Thailand

Philippines

Malaysia

Vietnam

Dec11 9,744 2,588 11,540 (445) (4,630) (11,085) (2,078) (3,412) (3,050) %10/11 27% 13% 33% 180% 9% 5% 22% 25% 89%

Stableforeignfundflows
Theresacommonfearinthemarketthattheresahighriskthatforeignindirectinvestorswillleave Vietnamequitymarketsinmasses,leadingtoacollapseofthestockmarketandofthecurrencyWe thinkthatwhilesomeforeignfundsareindeedclosingandexitingVietnam,thevolumeisrelatively smallandsuchamassiveexodushasalowprobabilityofhappening,inouropinion.Thisiswhy: 1 Fund flow data are positive: Probably themost important argument is that according to Bloomberg,VietnamisoneoftheonlythreecountriesinAsiawithpositivefundflowsfor 2011(seefigure4,werewetookoutSouthKoreaandTaiwanforeaseofcomparisonas theysawoutflowsofUSD8.5bnand9.2bnrespectively).Indeed,theSoutheastAsiaregion isseeingmassiveoutflowsfromforeignersasinflationisstartingtocreepupandgrowthis softening. This is not happening in Vietnam as inflation is moderating and as growth for 2012willprobablybesubdued,butrelativelybetterthantheregion. 2 Frontier market: Vietnam is the only country in Southeast Asia classified as a frontier market. All the others are either not classified at all (Cambodia, Laos) or classified as an Emergingmarket.Asaconsequence,hotmoneyflowsintoVietnamin2009and2010were quasiabsent,whichmeanshotmoneyflowsoutarealsonegligible. 3 Vietnamdedicated:MostoftheforeigninvestmentfundsinVietnamarecountryfocused funds,whichmeanstheydonotrotatetheirinvestmentintoothercountries.Whilethey might increase cash positions at certain times, the money will come back into Vietnams stockmarket(unlesstheycloseentirelythatis). 4 Closeended:MostoftheforeigninvestmentfundsinVietnamarecloseended.Although more and more are converting to open ended and do face some redemptions as a
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consequence,weseethattheredemptionsvarybetween1020%ofNAVasthefundshave beengoodatconvincingtheirshareholdersthatsellingnearthebottomofacycleisntthe wisestthingtodo.Webelievethatargumentisvalidaswell. Figure4Netforeigninstitutionalinvestmentinequities,YTD,selectedcountries VietnamisoneofthefewcountriesinAsiawhohavereceivednetforeigninflowsin2011(we omittedTaiwanandSouthKoreaastheoutflowswerestaggeringandskewingthegraph)

3,000 2,500 2,000 USDmn 1,500 1,000 500 0 500 Indonesia Philippines Vietnam Pakistan Thailand India Japan

Source:Bloombergasof30December2011,VCSC

Figure5Cumulativenetforeigninstitutionalinvestmentinequities Vietnamisfarlessvolatileintermsofforeignportfolioflowsandnooneisrunningtothedoor
Indonesia 8,000 6,000 4,000 USDmn 2,000 Jan2008 2,000 4,000 6,000
Source:Bloombergasof30December2011,quarterly,VCSC

Phillipines

Thailand

Vietnam

Pakistan

Jul2008

Jan2009

Jul2009

Jan2010

Jul2010

Jan2011

Jul2011

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Acurrencythathelditsmettleinrecenttimes
NohotmoneyflowsTheVNDhasbeenquiteoutofsyncwiththerestofAsiancurrenciesasit depreciatedyearafteryearwhilethecurrencyofmanyofitsneighbourswasactuallyappreciating, especially as large amounts of QE money found its way into these countries, but not Vietnam. NobodyislaughingabouttheVNDanymore.Nowthathotmoneyflowshavereversedandexports softened,manyAsiancurrencieshavecomeunderpressure.Asamatteroffact,Vietnamhasbeen the3rdbestperformingcurrencyinAsiainthepast6months. StabilitydependonconfidenceintheSBVspoliciesWelongarguedthemainculpritfortheVND devaluationhasbeenthelackofconfidenceoftheVietnamesepopulaceinthegovernmentsability tokeepinflationundercontrolinaneconomywhereUSDandgoldisaquasistandardcurrency.We believethatthenewfoundstabilityhasalottodowiththeSBVspoliciesintroducedthisyearto curbexcessivespeculativeactivitiesonthecurrencybyitsownpopulation.Theothergoodreason that the currency is now stable is that Vietnams trade deficit has shrunk a fair bit and as capital inflowsfromFDIandremittancesmorethancoversthetradedeficit. VND:cautious,butoptimisticWeremaincautiousonthecurrencyasthisisthefirsttimetheSBV isabletoenforcesuchregulations.Localpressuresremain,butwerepositiveasthisisalsothefirst timethecurrencyhasbeenstableforthatlongwithoutshowingsignsofstresses.Normally,atthis timeoftheyear,itsimpossibletogetUSDinthemarket.Thistimeisdifferentandtheeconomyis flushwithUSD. Thanks to quasiinexistent hot money flows, strong enforcement of monetary policies, falling inflationanddecliningtradedeficit,werepositivethecurrencywillremainonethelessvolatileand bestperformingcurrencyinAsiain2012andpencila4%depreciationintotal. Figure6YTDand6monthcurrencyperformanceversustheUSDinAsia Yeartodate, the VND has been weak due to a Over the past 6mo, the VND has been quite 8%devaluationinFebruary stable as exports perform and theres no hot moneyoutflows CNY HKD PHP IDR SGD MYR KRW TWD THB VND INR CNY HKD PHP VND THB SGD MYR TWD IDR KRW INR 5% 0% 5% 10% 15%
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5% 0% 5% 10% 15%

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Technicalsshowingmediumtermbuyingopportunity
Ourtechnicalviewgivesa70%probabilityforpositivereturnanda30%forroughlyflatreturnsfor 1H2012. Beyond that point, we feel using technical analysis for forecasting isnt appropriate. Our forecast is based on absolute price patterns and relative strength analysis into consideration. We discusseachfactorinouranalysisbelow. Scenario#1:Bestcase Targetprice1H: 425(+20%) Probability: 70% RelativestrengthversusAPACmarkets: Positive,outperformanceexpected Inthisscenario,theVNIturnsaroundinJanuaryaswethinkthatthe330markisacyclicalmedium termlowbasedonthefactthatpricetargetsofthreepopulartechnicalpatternsarecoincidentally pointing towards the 330 mark. The expected reversal will lift the VNI back to the multiple support/resistance mark at 425, which equals to an upside of 20% (same results as under the fundamental and event driven prediction). We give this scenario a probability of 70%. From a relativeperspective,versustheMSCIAPACexJapanIndex,theVNIhasunderperformedbyabout 7%(bothindicesinlocalcurrencies)in2011.However,themediumtermmomentumontheratio spreadchart(seefigure7)isabouttobottomandtheVNIshouldoutperformrelativetotheMSCI APACexJapanIndex. Conclusion: Mediumterm oriented investors should BUY now as we expect a move back to 425, which equals a +20% return in 1H2012. Investors can also expect the Vietnamese market to outperformthemajorityofitsregionalpeers,astherelativepatternisabouttostabilize. Scenario#2:Worstcase Targetprice1H: 330360(5%to+3%) Probability: 30% RelativestrengthversusAPACmarkets: Neutral,equalperformanceexpected In this scenario, the mediumterm bull cycle fails to materialize in 1H2012 and is postponed to 2H2012. This could materialize in the advent that the overall macro picture doesnt improve as expected. Together with positive technicals as described in the first scenario andthetendency of themarkettoperformwellin1Q,especiallyinJanuary,wecanexpectthemarkettoatleasttrade inarangeof330to360,thiswitha30%probabilitywebelieve.Inanycase,wedontexpecttheVNI toclosebelow330.Onarelativebasis,webelievetheperformanceoftheVNItobeneutralvisvis theMSCIAPACexJapanIndex. Conclusion:EvenifQ1doesntturnouttoproducedecentgains,wedontexpectthemarkettofall below330.AtleastallocatingaportionofaninvestorsportfoliototheVietnamesemarketshould betakenintoconsiderationgiventhatwebelievethe330mark(5%belowtodayslevel)isstrong resistancelevel.
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PricePattern#1AbsolutepriceanalysisfortheVietnamIndexSupportingthe330mark 1. Thelongtermuptrend,ashighlightedbythedashedgreentrendlineinfigure7,isstillintact. Theindexisnowjust5%abovethe2003uptrendlineat330.Wethereforeexpectareboundto happen from around this mark. The rally will not have the same magnitude like the previous uptrendsastodaysworldisquitedifferentfrombackthen,butatleastadecentpositivereturn canbeexpected. 2. ThesimpleFibonacciretracement76.4%support,basedonthelastsignificantuptrendphase fromtheFebruary2009lowtotheAugust2009high,coincideswiththelongtermuptrendline from2003,underliningtheimportanceofthe330level. 3. Ameasuredmoveanalysistoguessthemagnitudeofanexistingtrend,ashighlightedbythe orange horizontal line, shows that the latest significant downtrend period was from the February2011hightotheMay2011low.Wecanthereforeassumethatthecurrentdowntrend phase,whichbegunonSeptember2011andisabouttoendnow,shouldhavethesamelength (160 points) as the previous bear phase. We therefore deducted 160 points from the September top at 475. This results in a target of 315, slightly lower than 330 but another argumentthatthemarketiswellsupportedaroundthe330areaanddownsideriskislimited. Figure7MonthlychartofVNIndexfrom2000to2012
VNINDEX (380.470, 396.290, 346.480, 351.550, -29.1400) 1300

3
0.0%

1100 1000 900 800 700 600 500

1x 76.4% 1x

400 300

100.0%

2 1

200

100

2000 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 PricePattern#2Vietnamstechnicalrelativestrengthversusotherregionalmarkets Figure8showstheratiospreadchartoftheVietnamIndexversustheMSCIAPACexJapanIndex (Ratio spread = VNI Index price / MSCI APAC Index price). The VNI is underperforming when the spread is in a downtrend and outperforming when the spread is moving higher. This ratio spread builtoutadoublebottomat0.7inMayandJuly2011(highlightedbythetwohalfcirclesinfigure 8). This was followed by a distinctive period of relative outperformance of the VNI from the beginningofAugustuntiltheendofSeptember.ThespreadmarkeditshighinSeptemberat1.05.

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VNI vs. MSCI APAC ex Japan (0.76027, 0.76482, 0.75329, 0.76482, -0.00244) 1.3 1.2 1.1 1.0 0.9 0.8 0.7 50 40 30 20 10 0 -10 -20 -30 Momentum Viet Cap(M) (-18.4263, 0.000)

Strategy

Figure8WeeklyratiospreadchartoftheVNIversusMSCIAPACexJapan(localcurrencies)
1.3 1.2 1.1 1.0 0.9 0.8 0.7 50 40 30 20 10 0 -10 -20 -30

J A S O N D 2010 A M J J A S O N D 2011 A M J J A S O N D 2012 The Vietnamese market has since then underperformed its regional peers. However, the current pricepatternlookspromisingasweareagainclosetothedoublebottomsupportat0.7,whilethe mediumterm momentum oscillator also about to bottom. We therefore expect the spread to rebound from this mark, which will result in an outperformance of the Vietnamese market comparedtotheMSCIAPACexJapanIndex.

HowtoplayVietnamIdeasfor2012
Asinflationfaltersandthemacroeconomyfurtherstabilisesunderthehelmofthemorehandson SBV,2012couldbeaturnaroundyearforequitymarket.Weestimatecorporateearningswillgrow byonparwithconsensusof18%,thankstofallinginflation,lowerinterestexpense,naturalgrowth indomesticandexportmarketsand,nottheleast,growthviaM&Aforsomecompanies. IdeastoplayVietnamin2012 1. Chasingvalue 2. ConsolidationthroughM&A 3. TheDragonyearboom 4. Vietnamsagriculturalpowerhouse Weve put our heads together and came up with what we believe could be good ways to play Vietnam in 2012. Some old, but still very actual ideas appear, but we also have some new and interestingideaswebelieve.

Idea#1:Chasingvalue
Cheap valuation, not all warranted Thanks to over pessimism on speculation over government policies,bothindexesaretradingatorneartheiralltimelowsintermsofpricetobookvalueand 80%ofalllistedequitiesarecurrentlytradingbelowtheirbookvalue.Netmarginsshrankdueto highermaterialandfinancialcosts,butmanagedtostayaboverecordlowlevelsof2008.Corporate earningsoflistedcompaniesmanagedtogrowby4%in2011.Asaresult,manystocksdeservetobe cheap,butwecontendthatnotallstockswarrantso. Improving Fundamentals The macro picture improved markedly towards the end of the year. InflationpeakedandMoMtrendhasbeenunder1%forthelastfivemonthsandremainedbelow monthly tenyear average for two consecutive months. Exports continue to improve, domestic
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demand remains resilient and the SBV is willing toprovide more creditto productivesectors.We believecriticalfactorsthatwillenablecorporateearningstoimprovein2012areinplace.OurFY12 earningsgrowthestimateforlistedequitiesisessentiallyinlinewiththeconsensusof18%. Figure10 BVatdiscounttoAsianpeers Figure9 PEatdiscounttoAsianpeers
16x 14x 12x 10x 8x 6x 4x 2x x MA IN PH ID SG TW TH CH HK KR VN Average: 11.7x

3x

Average: 1.8x 2x

1x

x ID IN PH MA TH CH TW HK SG KR VN

Source:Bloomberg,FY2012

Source:Bloomberg,FY2012

WefeelthatcurrentvaluationsprovideanopportunityforaturnaroundinVietnamsunloved,deep discounted equities. Vietnamese equities are currently trading at 8.5x FY11F consensus EPS estimatesandFY12F7.5xconsensus,whichis36%belowtheirAsianpeers. Onaggregate,Vietnameseequitiesaretradingathistoricallowsof1.0xbook(itwas1.20xduring theGFC),whichrepresentsanundemandingdiscountof44%totheirAsianpeers.Thoughbuying stocks at these levels would not guarantee a return, we feel current valuations should provide a goodmarginofsafetyforinvestors.Atthesametime,weestimateGDPgrowthat5.5%inFY2012 which would place it as the 4th fastest growing country in the region. Vietnams Achilles Heel remainsinflation,estimatedtoremainthehighestinAsiain2012. Figure11ComparativevaluationtableinSouthEastAsia
Country Malaysia India Philippine Indonesia Singapore Taiwan Thailand China HongKong Korea Vietnam Consensus FY12PE 14.8x 13.5x 13.1x 12.8x 12.7x 12.5x 12.3x 10.6x 10.2x 9.0x 7.5x PB 2.3x 2.5x 2.4x 2.8x 1.3x 1.6x 1.9x 1.8x 1.4x 1.2x 1.0x Dividend Yield 5.4% 5.3% 3.5% 2.9% 1.8% 3.0% 3.7% 3.9% 2.6% 3.9% 5.5% FY12F GDP Growth FY12FCPI 4.9% 7.5% 4.7% 6.2% 3.6% 4.1% 4.4% 8.5% 4.0% 3.8% 5.5% 2.7% 7.1% 4.5% 5.4% 3.0% 1.3% 3.5% 3.5% 4.5% 3.2% 11.0%

Source:Bloomberg,ConsensusEconomics

We believe that there is a potential for a more sustainable rally in the latter part of 2012 as domesticinvestorsreturntoequitiespromptedbyfallinginterestrates.Webelievethatinflowsof
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fundsintotheequitymarketcombinedwithhistoricallylowvaluationswillbethecatalystforarally, whichshouldbebothliquiditydrivenandfundamentallydriven. Companieswelike:PVDandDIG Belowaresomeofourfavouritecompaniescurrentlytradingathistoricallylowvaluationsdespite robust earnings growth. We believe we could see upside from (i) earnings growth assuming investors pay the same multiple for HSX earnings and/or (ii) higher valuation multiple as investor confidencereturnandrushtoundervaluedstocks. PetroVietnamDrillingServices(HSX:PVD)maybeoneofthecompanieslessaffectedbythetwo currentthreatstoVietnameseenterprises:highinterestratesandVNDdevaluation.For2011,we estimate PVD will generate USD439.6mn of revenues (+8.1% YoY growth in USD term) and USD52.4mn of NPAT (+10.2% YoY). Looking into 2012, we the expect core businesses to further strengthenwithsalesandNPATreachingUSD464.2mnandUSD55.7mnrespectivelyonthebackof itsnewdrillingrigandwelltechnicalservicesshiftingintohighervalueservices.Our2012estimates areonlybasedonbacklogcontractvalues;thusleavingthedooropenforupwardrevisionsshould thecompanysecurenewleasingcontracts.Thestockistradingat6.5xourFY11FEPSestimatesof VND4,930 and 5.7x our FY12F EPS estimates of VND5,576. Based on its FY12F PER, the stock is trading at its lowest PER since listing. On a PB basis, the stock trades at a 14% discount to its regionalpeersandbelowourreplacementcostestimateofVND38,200/share(USD1.82). PVDHistoricalPEandPB DIG HistoricalPEandPB
PER 30x 25x 20x 15x 10x 5x x P/E P/B PER 10x 9x 8x 7x 6x 5x 4x 3x 2x 1x x P / 1. 1. .5 .x 3. 3. 2. 2.

Source:Bloomberg

Source:Bloomberg

DICCorp(HSX:DIG):Whilewerestillbearishonthepropertysector,webelievesomestockswith good fundamentals have bottomed out from a market overcorrection and could provide positive returnsoncethetechnicalreasonsthatdrovedownthestockpricehavebeeneliminated.Welike DIGforthreereasons.First,itownsoneofthelargestlandbankswithaSFAof260,361sqmanda MLAof121.6hainsatellitecitiesinbothnorthernandsouthernVietnam.Itslandbankislocatedin concentratedareasthataresuitablefortownshipdevelopmentandcouldsignificantlyincreaseits value. Second, we feel that DIGs stock price has been overly punished by ETFs rebalancing their portfolio lately. Van Ecks Vietnam ETF reduced its position in DIG by nearly 3 million shares in December. The ETF selling pressure was aggravated by domestic and foreign investors front runningthetrade.DIGnowtradesata61%discounttoits9M2011balancesheetbookvalueand 66%discounttoourNAVestimate,offeringalargemarginofsafetyforthepricetobounceback. Third,thecompanysfinancialfundamentals,especiallyitsliquiditypositionremaindecentenough, considering the current state of the property sector. Consequently we think the company is relatively well positioned to weather any financial distress risks that are threatening most other listedrealestateplayers.
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Idea#2:ConsolidationthroughM&A
RisingM&AactivitiesinadevelopingeconomySubstantiatingthatVietnamsmediumandlong termgrowthprospectsremainsintact,totalM&Atransactionvalueinthefirsttenmonthsof2011 exceeded full year 2010 levels despite global and local uncertainties. As is generally the case in a developingeconomygiventhenatureandscaleofthebankingsystemcomparedtotherestofthe economy,financialsleddealflowinsizeandvolume.Clearlythebiggestdealin2011wasMizhuos 15%stakeinVietcombankforUSD550mn.Wealsosawstrongdealflowintheconsumerspaceas buyerswanttotapintothestrongconsumptiongrowthofthe13thlargestcountryintheworldby populationandgrowing. Drivenbyhighcostofdebtandchallengestosourcecapital,weexpecttoseecontinuedgrowthin M&Adealvolumesandvaluesin2012.

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USDBn 4 3 2 1 0.9 0 2008 2009 Value(USDBn) 2010 2011 Number 1.15 112 93 3.2 3.35 236 194 200 150 100 50 0

Strategy
No. 250

Figure12M&AdealsinVietnam2008toOctober2011

Source:KPMG

Figure13Top10dealstoOctober2011
Target Vietcombank GTELMobile MasanConsumer Diana DaiTinBank MasanResources PVIHoldings HoanMy Tate&Lyle HanoiLiquor
Source:KPMG

Industry Financials Telecom Consumers Consumers Financials Materials Financials Healthcare Consumers Consumers

Buyer Mizuho VimpelCom KKR UniCharm FirstGulfBank MountKelletCapital HDIGerlingIndustries FortisHealthcare THMilkFood Diageo

Buyercountry Japan Netherlands US Japan UAE US Germany Singapore Vietnam UK

Value(USDmn) 546 196 159 128 96 94 92 64 54 48

CashrichcompanieswillleadthewayTheVietnamesestockmarkethasgenerallybeenderided for having too few investment options with many listed companies lacking three important investment criteria: growth prospects, scale, and liquidity. Issues such as mismanagement, inefficiencies, fragmentation, lack of inputs and shortage of capital experienced by private companies can impede their ability to grow, build economies of scale and boost liquidity to be deemed investable. But these shortcomings, especially in times of depressed valuations, could present opportunities for companies with strong balance sheets to strengthen longterm competitiveness through M&A. We expect activities will be concentrated in financial services (driven by the SBVs plan to consolidate the banking sector), consumer goods, fisheries, retail, pharmaceuticals,logistics,andrealestate.Thisinturncouldcreatenewinvestmentopportunities notonlyforprivateequityinvestorsbutforlistedequityinvestorsaswell. Companieswelike:FPTandMSN Among all the potentials, two listed companies, through their M&A plan, could provide listed equitiesinvestorswithaccesstointerestinggrowthstories.

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Masan HistoricalPEandPB
PER 10 45x 9. 40x P/E P/B 8. 7. 6. 5. 10.x 5.x .x 4. 3. 2. 1. .x 35x 30x 25x 20x 15x 10x 5x x P/E P/B PER 25.x 20.x 15.x

Strategy

FPTHistoricalPEandPB

Source:Bloomberg

Source:Bloomberg

FPT(HSX:FPT):Althoughnotlackingscalenorliquidity,FPTsgrowthprospectshasbeenquestioned oflateasthecompanyexperiencedsignificantgrowthoverthepastfewyears.Thecompanysnew CEOMrTruongDinhAnhhashissightsonbuildingcriticalmassandenteringnewsegmentsthrough M&A.Thecompanyhasalreadyexpresseditsintentiontobuyback100%ofFPTTelecomofwhichit owned 44%. We heard of several other acquisition opportunities that management has hinted aboutsuchasthepurchaseofaCambodiatelecommunicationsfirmandthepossiblepartnershipor acquisition of retail stores. A war chest of USD150mn should facilitate FPTs acquisition strategy. Despite thecompanys EPS 20% growthprospect andconsensus FY12F estimate of VND9,800per share,thestockistradingatitslowestPEinitshistoryatjust5.1xforwardearnings.Webelievethis is an unjustified discount for a bluechip that remains profitable and is relatively liquid with USD 638,826worthofsharestradedperdayonaverageoverthepast3months. Masan(HSX:MSN):M&AisMSNsmantra.Thecompanyhasbeenactivelyseekingvalueenhancing dealsgivenitsheftywarchest.WenotethatnootherprivatesectorcompanyinVietnamhashad such unparalleled access to capital. We estimate that by the end of 2011, the companys cash balance stood at c.USD600mn, positioning MSN for potentially aggressive M&A plans. MSN has alreadymadenotableacquisitionsandaproventrackrecordwiththeNuiPhaomineandVinacafe, whichbroughtthecompanyimmediateleadershipinitsrespectivesectors.Thecompanyislooking at building scale through acquisitions within its three key verticals: Financials, Consumers, and Mining. We expect to see M&A activity in 2012 as the company takes advantage of the markets favorable valuations and tight liquidity that afflicts many businesses. Also, we expect that the restructuringofMasanFoodintoMasanConsumerwouldcreateascalableplatformforentriesinto otherconsumercategories.WeexpectthatMSNwillreachVND2,700bninnetincomein2011.The stock is trading at 16.9x our FY11F EPS estimates of VND5,240 and 14.9x FY12F EPS estimates of VND5,930. Our forecasts only take into account organic growth from MSNs current business portfolios;webelieveMSNsgrowthstorywillcontinueatleastoverthenextfiveyearsdrivenbyits organic and inorganic growth. We remain bullish that MSNs market leadership and extensive distribution channel will continue to bring favourable winds to the business. We note that easing macroeconomicpressureandthelaunchesofnewproductsitcouldleverageitsalreadyextensive distributionchannelcouldformcatalyststodeliverupsidetoourestimates.

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Idea#3:TheDragonyearboom
2012babyboomWhilehighinflationmighthavehaditstakeondecliningconsumptiongrowth, wearepositivethat2012couldbeagoodyearforinfantrelatedproducts.AccordingtotheChinese andVietnamesezodiactheyearofthedragonisassociatedwithwealthandpowerandisbelieved to be very favourable to children born during the year, thus the rush to have dragon babies, an opportunitythatcomesonlyevery12years.Traditiondictatesthatachildbornintheyearofthe dragonwillbeanaturalleaderwhowillbesuccessful,confident,wise,braveandbeautiful. More than just a belief The last time we had a dragon year in Vietnam, the number of births jumpedby8.3%comparedtothepreviousyear.Consideringthattodayanevengreaterportionof thepopulationisatfamilyformationagecomparedtotwelveyearsago,wethinkthezodiaceffect willbeevenmoresignificantthistimearound.Webelieve2012isgoingtobeanexceptionalyear for births in Vietnam. Some of the O&G doctors we spoke to confirmed that they have already beguntoseeincreasesofupto2.5xthenumbersofpatientscomparedtothesametimelastyear. Such fluctuations are more than trivial as they can bear significant economic consequences and providealucrativeopportunityforinfantrelatedproductmakersinthenearterm. Investors should look at Vinamilk (HSX: VNM) and Duc Thanh Wood Processing (HSX: GDT), two listedcompanieswefeelarebetterpositionedtobenefitfromthedragonyeartheme. VNMHistoricalPEandPB GDT HistoricalPEandPB
PER 30x 25x 20x 15x 10x 5x P/E x P/B x P PER 6x 5x 4x 3x 2x 1x P/E P/B .0 .5 1. P 1.

Source:Bloomberg

Source:Bloomberg

Companieswelike:VNMandGDT Vinamilks(HSX:VNM)infantpowderedmilkhasgraduallygainedmarketshareasconsumershave acknowledgeditsqualityandpricepointcf.otherforeignproducts.Infantformulaaccountsfor27% of the companys total revenues. According to management, VNM has raised market share from 22%in2010to27%in2011.In2012,weexpectinfantformulatobenefitfromtwokeytrendswe haveobservedoflate.First,BuyVietnamisacampaignthathasstartedtopickupsteamamong consumers willing to do their part in helping the country prosper. Second, as a consequence of rampantinflation,consumershavebeenswitchingfromhigherpricedimportedpremiumproducts to slightly more economical brands such as Vinamilks products. We are positive that VNM will continuetogainmarketsharethankstoitsestablishedbranding,competitivepricingandextensive distributionpresence.Weexpecttoa40%jumpinrevenuefrominfantformulain2012.Thestockis trading at 11.6x FY11F EPS consensus estimates of VND7,286 and 9.2x FY12F EPS consensus estimatesofVND9,218.
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DucThanhWoodProcessing(HSX:GDT)istheonlylistedwoodenhousewareandchildrenstoys manufacturer. Childrens toys count for 17% of total revenue in 2011 compared to 4% in 2009, proving managements longterm strategy to focus on growing this segment. We think there are substantialopportunitiesinthechildrenstoysmarket,whichisstilldominatedbyimportedChinese products.Recently,assafetyissueshavebeenraisedagainstimportedChinesetoys,GDThasgained reputationforprovidinghighqualityproductswithbetterdesigns.Inaddition,GDTsproductshave importantpriceadvantagesoverWesternbrandedtoys.Thecompanys2011earningsisestimated atVND45bn,translatingtoEPSofVND4,338andaPERof3.9x.

Idea#4:Vietnamsagriculturalpowerhouse
Major shifts in global demographics, wealth and food demand in conjunction with limited natural resources, erratic weather patterns, and declining arable land and water supplies are impacting a widerangeofagriculturalcommoditiesandfoodprices.Vietnamhasprogressedfromanationof chronic food shortages to one of the worlds leading exporters of soft commodities and food. Vietnamranksfirstinexportsofpepperworldwide,secondinrice,coffeeandcashewnuts,andtop five of natural rubber and seafood. Clearly, agricultural is very significant to the economy on accountoftheworkforceithiresandtheexportrevenueitgenerates,butwehaveonlybegunto see the potential of Vietnams agribusiness sector. Agriculture accounts for over 22% of the country's combined GDP, and employs over 70% of its workforce. In 2011, agricultural export earningsreachedUSD19.7bn,makingup20%ofthecountrystotalexportvalue,andthesegment thatgeneratesthelargesttradesurplus,bringinginUSD11.5bnofhardcurrencyintothecountry. Figure14Majoragriculturalexportsandimports
Exports(USDmn)
Fisheries Rice Rubber Coffee Dairy Fruits&Veggies Cashew Pepper Tea 0 Source:GSO 2,000 4,000 6,000 Source:GSO Wheat Fisheries Vegetable 0 1,000 2,000 3,000

Imports(USDmn)
Farminputs Fertilisers Edibleoils

For investors, there are opportunities all along the value chain. Listed equities do not necessarily provideaccesstothefullgamutofagriculturalinvestmentopportunitiesasprivateequitycould,but stockmarketinvestorscangetaccesstoaquaculture,sugar,rubber,andfarminputs. AquaculturelookatVHCandHVG Therearenowover120companiesoperatinginVietnamfisheriessectorissettoundergosomesort of consolidation in 2012. Many small companies are facing with a barrage of difficulties due to challengingexportstoforeignmarkets,particularlyEU,plustighteningcredittofisheriessector.The ongoing EU public debt crisis make banks in the zone hesitate to give loans to importers, thus delaying their payments to Vietnamese partners. This payment risk is more critical to small
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exporters since most of their importing partners have more limited access to bank credits. VHCHistoricalPEandPB HVG HistoricalPEandPB
PER 14x 12x P/E 10x P/B 8x 6x 4x 2x x PB PER 4 8x 3 7x 3 6x 2 5x 2 4x 1 3x 1 2x .5 1x .x x P/E P/B

Source:Bloomberg

Source:Bloomberg

VinhHoan(HSX:VHC)wasrankednumberonepangasiusexporterinthefirst10monthsof2011, exporting a total value of USD122.4 mn and accounting for 8.23% of total exports of the fish. In 3Q2011,VHCsawasignificantincreaseinitsnetsalesofVND2,990.9bn,up39.3%YoY,andamuch largerincreaseofitsbottomlinestoVND288.3bn,up70.3%YoY.Atthesametime,NPATmargin roseto9.6%from7.9%thankstoefficientmanagementwhichreducedsellingexpensewhichwere equaltoonly4.3%ofnetsalescomparedto7.3%YoY.ThedepreciationoftheVNDby9%earlyin 2011alsogaveVHCalargeamountofrealizedforeignexchangegain(VND63.6bn,up105.3%YoY) asthecompanyhadlotsofUSDstashedaway.VHCsmainmarketistheUSandEUwhichaccount for 44% and 27% of its sales respectively. VHC also enjoys relatively higher average selling price (USD 3.5 per kilo of fillet) compared to other Vietnamese exporters thanks to its strict quality managementandfullyintegratedvaluechainfromfishfeed,fishfarms(nowsupplying70%ofits raw material needs) and processing factory. We forecast FY2011 net revenue and net income at VND4,066billionandVND350billionrespectively.VinhHoanCorporationiscurrentlytradingataPB of1.4x,slightlyaboveitsalltimelowsof1.1xinNovember2008.Thestockiscurrentlytradingat 3.7xourFY11FEPSestimatesofVND7,430and3.3xourFY12FEPSestimatesofVND8,385.Wefeel the stock price could benefit from a strong catalyst in new projects such as raising area and processingcapacityexpansion,collagenproductsandricefactory. Hung Vuong Corporation (HSX: HVG) is actively growing its capacity and revenue through acquisitions. Alone, it ranks number two pangasius exporter, but if we take into account its 51% stake of AGF the third largest exporter, HVG would take the first position. We also believe managementisquiteknowledgeableaboutindustrydynamics;in2010,predictingtherewouldbea raw material shortage in 2011, management decided to expand farming areas in order to supply 60%ofitsmaterialneeds.In3Q2011,HVGenjoyeda91.3%YoYjumpinrevenuetoVND5,856bnand a68.9%YoYincreaseinEBTtoVND349bn.Grossmarginsimproved135bpsthankstoinvestments madetoverticallyintegrate,fromfishfarmstoprocessing,enablingthecompanytobettercontrol its material costs in the context of rising live fish prices in 2011. The company will continue to improveitsproductionsystemandexpanditsfarmingareatosupplyallofitsmaterialneeds,hence weexpectgrossmarginimprovementstocome.Toexpandintonewexportmarkets,HVGacquired 51%ofAgifish(HSX:AGF)whichhasbeensellingtotheUSmarketforyearsandalreadyhassome brandrecognitionthere.Moreover,todiversifyintoshrimpcultureandprocessing,HVGboughta 24.18% stake of Ben Tre Forestry And Aquaproduct Import Export (HSX:FBT). We think that consolidationinthelocalseafoodsectorislikelytocontinue,whichwillplacethesectorinabetter conditionforsustainabledevelopment.ThestockiscurrentlytradingatPB0.65x,closetoitsalltime
Seeimportantdisclosureattheendofthisdocument

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low of 0.49x it hit last August. The stock is trading at an undemanding 3.0x FY11F EPS consensus estimatesofVND6,908and2.5xFY12FEPSconsensusestimatesofVND8,045. ThericetradelookatVLF,FDGandAngimex InvestorswantingtogetaccesstoVietnamssecondlargestagriculturalexporthavelimitedoptions. Therearethreelistedstocks,VinhLongFood(HSX:VLF),Docimexco(HSX:FDG),andAngimex(OTC, planningtolistearly2012).However,thesethreericestockshaveverylowliquiditysincethetwo largest shareholders, Nguyen Kim, the investment arm of the electronic store chain, and the SCIC togetherownabout80%ofeachcompany. SugarsectorlookatLSS Though not an export oriented play, we are positive about the longterm prospect of Vietnams sugar sector as demand continues to outpace supply at a relentless pace. However, the sector is quite small and scattered. There are currently 39 sugar companies operating on approximately 248,000haofcultivationareas,comparedtoatotalof1mnhainThailand,1.3mnhainChinaand 5.3mn ha in Brazil. In addition, sugarcane production yields and sugar conversion ratios among Vietnamesesugarcompaniesvarysignificantlydependingonthecompaniesmachineryqualityand investmentsinplantation.Wethinkasectorconsolidationisnecessarytoincreaseproductivityand sustainabilityespeciallyoncethesectorwillnolongerbeprotectedasVietnamhastoremovethe current tariffs on imported sugar from Thailand and Brazil under WTO agreements. Some consolidation is already ongoing however. Thanh Thanh Cong JSC (TTC), a private trading and investmentfirmanditsrelatedcompanieshavebeenacquiringstakesinsugarcompanies.Usingthe ownershipratiosinthelistedcompanies,wecalculatethatTTCgroupcurrentlyownsabout20%of nationalsugarproduction.WebelievethenumberislargerasTTCalsoownsstakesinsomeother private sugar companies. We think the consolidation will continue in 2012 and should focus on eliminatingoperationalinefficiencies. WithinthesectorwecontinuetolikeLSSsfundamentalswhichincludehighproductivity,capacity, andheavyinvestmentstosecuresugarcanesupplies.WealsothinkSBTwillbenefitfromthesector consolidationasthecompanynowhasmoreaccesstomaterials. LSSHistoricalPEandPB
PER 14x 12x 10x 8x 6x 4x 2x x .5x .x 1.5x 1.x P / PB 2.5x 2.x

Source:Bloomberg

LamSonSugar(HSX:LSS)isastockthatwefeelhasbeenunfairlypunishedalongwiththerestof theVietnamIndexdespiteitsresilientgrowthpotentials.Welikethecompanysfundamentalsand are positive about its earnings growth in 2012. We estimate that LSS can make VND351bn in net
Seeimportantdisclosureattheendofthisdocument

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profit (+19% YoY) in 2011, translating to FY11FEPS of VND7,025 and aPER FY11F 2.8x. For 2012, thingsshouldimprovethankstoitsnewcapacity.WeforecastVND2,447bninrevenue(+41%YoY) andVND463bninnetprofit(+27%YoY)in2012,translatingtoFY12FEPSofVND9,258aPERFY12F 2.1xthelowestlevelsinceitlisted.Weareconfidentthatthecompanycanmaintainitsleading positioninthesugarmarketandbelievethestockshouldnotbetradingatitscurrent18%discount todomesticpeers. AgriculturerelatedopportunitieslookatDPMandAPC Petrol Vietnam Fertilizer and Chemicals Corporation (HSX:DPM) An upstream agriculture opportunityexistsinDPMwhichhasbeenoneoftheflagshipsofVietnameseequities.Thestockis now trading at a record low PER of 3.04x FY11F EPS of VND7,597 and 4.4x against FY12F EPS VND5,212. Moreover, DPM is also trading at historically low PB of 1.09x. The corporation, 61% owned by the staterun group PetroVietnam, is the leading urea producer and distributor in Vietnam with over 50% market share. In 2012, we expect DPM to record revenue of VND14,221 billion,up53.9%butexpectnetprofittodrop31%toVND1.992billion.Weexpectgrossmarginsto shrinktoc.26%from43.5%asaresultofthecompanyactingasthesoledistributorfortheCaMau fertilizerplant,andofgaspricesincreasing40%YoYmateriallydrivingupinputcosts.Meanwhile, the country may start to see an oversupply of urea in 2012 when the Ca Mau and the Ninh Binh plants come online. Furthermore, Chinese urea, most of which is imported via crossingborder trading,alsofuelsgreatercompetition.Therefore,FY12sellingpriceofureawouldhardlyincrease asmuchaslastyeartooffsetthehikeininputcosts. DPMHistoricalPEandPB
PER 25x P/E 20x P/B PB 4.x 3.5x 3.x 2.5x 2.x 10x 1.5x 1.x .5x x .x

15x

5x

Source:Bloomberg

WerecognizetheseheadwindsagainstDPMinFY12,inadditiontowhichthereisverylittlevisibility onthepossiblepurchaseoftheCaMauplant;stillwebelieveatitscurrentstockpricewhichimplies valuationsfairlycheaperthanthemarket,DPMisanattractiveinvestmentopportunity. AnPhuIrradiationJSC(HSX:APC)isaleadingproviderofirradiationservicesforaquaticandfruits products. APC accounts for 60% of total market share for irradiation services in Vietnam. The company focuses on the irradiation of aquatic products (fish, shrimp, etc.) and fruits. We like the companys fundamentals and are positive about its earnings growth in 2012. We expect APC to continuetogrowearningsonthebackofincreaseddemandandmarginexpansionfromanewplant inVinhLong.ThenewfactoryisstrategicallylocatedbetweentheTienandHauRivers,directlyon themajortraderoutebetweentheeconomiccentersofCanThoandHoChiMinhCity.Thisisalso themajorrouteusedbycustomersintheSouthwesttodeliverproductstotheSaigonHarbourto
Seeimportantdisclosureattheendofthisdocument

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export. We believe that irradiated aquatic products will become a key revenue driver in 2012. Currently, irradiated aquatic products account for only 3% of total aquatic product exports. However, as more importing countries require Vietnamese products to be irradiated, we forecast thissegmenttogrow25%involumein2012. APCHistoricalPEandPB
PER 6x 5x 4x 3x 2x 1x x P/E P/B .6x .4x .2x .x PB 1.4x 1.2x 1.x .8x

Source:Bloomberg

Despitethecountryseconomicdifficulties,2011wasafantasticyearforAPCwhichsawa37%YoY jumpinnetincometoVND34bn.Thestockistradingat4.8xourFY11FEPSestimatesofVND3,000 and4.2FY12FEPSestimatesofVND3,439.

Seeimportantdisclosureattheendofthisdocument

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AnalystCertification
We,MichelTosto,MarcDjandjiandRaphaelWilhelm,herebycertifythattheviewsexpressedinthisreportaccuratelyreflect ourpersonalviewsaboutthesubjectsecuritiesorissuers.Wealsocertifythatnopartofmycompensationwas,is,orwillbe, directlyorindirectly,relatedtothespecificrecommendationsorviewsexpressedinthisreport.Theauthorsresponsiblefor the preparation of this report receive compensation based upon various factors, including the quality and accuracy of research, client feedback, competitive factors, and overall firm revenues, which include revenues from, among other businessunitsandInstitutionalEquities.

VCSCsRatingSystemandValuationMethodology Absolute performance, long term (fundamental) rating key: The recommendation is based on implied absolute
upside/downsideforthestockfromthetargetprice,definedas(targetpricecurrentprice)/currentprice,andisnotrelated tomarketperformance.Thisstructureappliesfrom1November2010. Equityratingkey BUY ADD HOLD REDUCE SELL NOTRATED Definition Ifthetargetpriceis20%higherthanthemarketprice Ifthetargetpriceis1020%higherthanthemarketprice Ifthetargetpriceis10%belowor10%abovethemarketprice Ifthetargetpriceis1020%lowerthanthemarketprice Ifthetargetpriceis20%lowerthanthemarketprice The company is or may be covered by the Research Department but no rating or target price is assigned either voluntarily or to comply with applicable regulation and/or firm policiesincertaincircumstances,includingwhenVCSCisactinginanadvisorycapacityina mergerorstrategictransactioninvolvingthecompany. Theinvestmentratingandtargetpriceforthisstockhavebeensuspendedasthereisnota sufficientfundamentalbasisfordetermininganinvestmentratingortarget.Theprevious investmentratingandtargetprice,ifany,arenolongerineffectforthisstock.

RATINGSUSPENDED

Unless otherwise specified, these performance parameters only reflect capital appreciation and are set with a 12month horizon.Futurepricevolatilitymaycausetemporarymismatchbetweenupside/downsideforastockbasedonmarketprice andtheformalrecommendation,thustheseperformanceparametersshouldbeinterpretedflexibly.

SmallCapResearch:VCSCResearchcoverscompanieswithamarketcapitalisationofuptoUSD50mn,inclusively.Clients shouldnotethatcoveragemaynotbeconsistentandthatVCSCmaydropcoverageofsmallcapsatanytimewithoutnotice. Targetprice: Inmostcases,thetargetpricewillequaltheanalyst'sassessmentofthecurrentfairvalueofthestock.The target price is the level the stock should currently trade at if the market were to accept the analyst's view of the stock, providedthenecessarycatalystswereinplacetoeffectthischangeinperceptionwithintheperformancehorizon.However, if the analyst doesn't think the market will reassess the stock over the specified time horizon due to a lack of events or catalysts,thenthetargetpricemaydifferfromfairvalue.Inmostcases,therefore,ourrecommendationisanassessmentof themismatchbetweencurrentmarketpriceandourassessmentofcurrentfairvalue. ValuationMethodology: Toderivethetargetprice,theanalystmayusedifferentvaluationmethods,including,butnot
limited to, discounted free cashflow and comparative analysis. The selection of methods depends on the industry, the company,thenatureofthestockandothercircumstances.Companyvaluationsarebasedonasingleoracombinationof one of the following valuation methods: 1) Multiplebased models (P/E, P/cash flow, EV/sales, EV/EBIT, EV/EBITA, EV/EBITDA),peergroupcomparisons,andhistoricalvaluationapproaches;2)Discountmodels(DCF,DVMA,DDM);3)Break up value approaches or assetbased evaluation methods; and 4) Economic profit approaches (Residual Income, EVA). Valuation models are dependent on macroeconomic factors, such as GDP growth, interest rates, exchange rates, raw materials,onotherassumptionsabouttheeconomy,aswellasrisksinherenttothecompanyunderreview.Furthermore, market sentiment may affect the valuation of companies. Valuations are also based on expectations that might change rapidlyandwithoutnotice,dependingondevelopmentsspecifictoindividualindustries.

Risks: Past performance is not necessarily indicative of future results. Foreign currency rates of exchange may adversely
affectthevalue,priceorincomeofanysecurityorrelatedinstrumentmentionedinthisreport.Forinvestmentadvice,trade executionorotherenquiries,clientsshouldcontacttheirlocalsalesrepresentative.
Seeimportantdisclosureattheendofthisdocument

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Contacts
Headoffice 67HamNghi,District1,HCMC +84839143588 Transaction 136 Ham Nghi, District +84839143588 Hanoi branch 109 Tran Hung Dao St, Hoan Kiem District, Hanoi +84462626999 office Transaction office HCMC 236238NguyenCongTru,District1,HCMC +84839143588

1,

Research
HeadofResearch MarcDjandji,M.Sc.,CFA,ext116 marc.djandji@vcsc.com.vn

InstitutionalSales&Brokerage
&ForeignIndividuals HeadofInstitutionalSales MichelTosto,M.Sc. +84839143588,ext102 michel.tosto@vcsc.com.vn EuropeanSales&TechnicalAnalysis RaphaelWilhelm,CFT +84839143588,ext134 raphael.wilhelm@vcsc.com.vn VietnameseSales NguyenQuocDung +84839143588,ext136 dung.nguyen@vcsc.com.vn JapaneseSales TranMinhHue +84839143588,ext122 hue.tran@vcsc.com.vn

Retail&CorporateSales&Brokerage
HoChiMinhCity ChauThienTrucQuynh +84839143588,ext222 quynh.chau@vcsc.com.vn

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Disclaimer
Copyright 2011 Viet Capital Securities Company. All rights reserved. This report has been prepared on the basis of information believed to be reliable at the time of publication. VCSC makes no representation or warranty regarding the completenessandaccuracyofsuchinformation.Opinions,estimatesandprojectionexpressedinthisreportrepresentthe current views of the author at the date of publication only. They do not necessarily reflect the opinions of VCSC and are subjecttochangewithoutnotice.Thisreportisprovided,forinformationpurposesonly,toinstitutionalinvestorandretail clients of VCSC, and does not constitute an offer or solicitation to buy or sell any securities discussed herein in any jurisdiction. Investors must make their investment decisions based upon independent advice subject to their particular financialsituationandinvestmentobjectives.Thisreportmaynotbecopied,reproduced,publishedorredistributedbyany personforanypurposewithoutthewrittenpermissionofanauthorizedrepresentativeofVCSC.Pleasecitesourceswhen quoting.

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