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This report has been prepared by UBS Securities (Thailand) Ltd. ANALYST CERTIFICATION AND REQUIRED DISCLOSURES BEGIN ON PAGE 43. UBS does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

Global Research 4 September 2018

Vietnam Strategy Financial deepening, the next leg higher

Vietnamese capital markets are still at a very early stage of development The next five years should witness significant financial deepening in Vietnam. It is still the only country in the region (ex. China) where bank credit exceeds the sum of listed bonds and equities outstanding. We expect a pivot from dependence on bank loans in favour of capital markets. The government plans to divest shares in 400 SOEs by 2020 and we expect many new private companies to seek listings. For Vietnam to converge on the average for East Asia we estimate the value of outstanding bonds would have to grow by circa US$200bn, or 400%, and equities by US$173bn (+100%) by 2023. Our index targets are 1,070 (Dec/2018) and 1,360 (Dec/2019), equating to a total increase of 36%. This is based on the historic earnings yield gap and assumptions about 1) EPS growth and 2) benchmark bond yields. The sensitivity to changes in rates is significant, and remains one of the largest risks for investors (note, the consolidation since April correlates with the inflection in bond yields). Our most preferred stocks are Mobile World (Link), Military Bank (Link) and Techcombank (Link).

A positive feedback loop between financial deepening and growth Total system credit has grown from 20% of GDP in 1997 to 130% in 2017. At the current rate, credit outstanding could exceed 250% by 2027. We believe this is unsustainable. Other challenges include: relatively high public debt and persistent fiscal deficits; lingering concerns around the level of banks' capital and profitability; and the size of the State and stagnant productivity. The good news is that we believe the government recognises these challenges and that capital markets can offer a solution. Financial deepening should allow for better allocation and pricing of credit. For these reasons we believe there is a positive feedback loop between financial deepening and growth. However, the converse is also true and thus it is key the government executes on its commitment to put the market economy at the heart of policy.

The signposts to watch for In this report we discuss the signposts to watch out for to test our thesis: 1) the draft securities law to be discussed in parliament in October (it represents the next stage in development of local capital markets); 2) changes in foreign ownership for companies as a whole and banks in particular; 3) progress on equitisation and proposals for a new committee to manage State assets; 4) how many of the 700+ companies on 'UPCoM' get transferred to the main Board (UPCoM is a mezzanine exchange designed to prepare companies for a full listing); and 5) long standing speculation that Vietnam might make it onto the watch list to be reclassified as an 'emerging market' by MSCI.

Today we are initiating upon six stocks with an average upside of 35% Our most preferred names are Mobile World, Military Bank and Techombank. Our least preferred name is Vietcombank (Link), on valuation; we rate it NEUTRAL. Whilst our positive stance on the banking sector is consensus, we believe our rationale is quite different. We do not believe the model of the past (rapid credit growth, especially to large corporates) is sustainable. Rather, we think growth should be driven by household credit and fee income; similar to what we have observed elsewhere in the region over the past 15 years. For consumer names, we believe the market is still under-estimating the growth in both Mobile World (Link) and Vinamilk (Link). The former because of the changing profile of growth; the latter because of weak sales of FMCG in Vietnam in Q118.

Equity Strategy

Asia

Ian Gisbourne Analyst

[email protected] +662-613 5758

For the exclusive use of Dung Hoang Nguyen ([email protected]) at Albizia Capital Pte Ltd

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Vietnam Strategy 4 September 2018

2

Vietnam Strategy

P2

UBS Research THESIS MAP a guide to our thinking and what's where in this report

MOST FAVORED LEAST FAVORED

Mobile World, Military Bank, Techcombank

PIVOTAL QUESTIONS Q: Can Vietnam sustain rapid rates of economic growth? Yes if, we believe, financial deepening complements growth in trade and investment. The economy faces a number of particular challenges: over-dependence on bank credit; relatively high public debt and persistent fiscal deficits; lingering concerns around the level of banks' capital and profitability; and the size of the State and stagnant productivity. Financial deepening should allow for better allocation and pricing of credit. One of the biggest risks we see is delay in implementing reforms.more

Q: Financial deepening, could this offer substantial opportunities? Yes. Six of the eight largest listed companies are former SOEs. The government plans to divest some or all of its shares in another 400 SOEs by 2020. The bond market is currently the smallest in East Asia; in order to reach a similar depth to peers it would have to quadruple over the next five years. We also see the potential for exponential growth in contractual savings e.g. life assurance. more

Q: Are there structural factors particular to Vietnam behind recent volatility? Our base case is that Vietnamese equities will continue to get 'more valuable' but that government policy, limited liquidity and information and increasing foreign flows should also mean the market remains highly volatile. more

UBS VIEW Vietnamese capital markets are still at a very early stage of development. Our base case is that the next five years will witness significant financial deepening. Vietnam is also the only country other than China where bank credit exceeds the sum of listed bonds and equities. We expect a pivot away from dependence on bank loans to capital markets. For Vietnam to converge on the average for East Asia we estimate the value of outstanding bonds would have to grow by circa US$200bn, or 400%, and equities by US$173bn (+100%) by 2023. Our VNINDEX targets are 1,070 (Dec/2018) and 1,360 (Dec/2019), equating to a gain of 7% in the remainder of 2018 and a total gain of 36%.

EVIDENCE The Financial Sector Road map until 2020 and a paper published in 2016 by the World Bank and Vietnamese Ministry of Planning and Investment (MPI) entitled 'Vietnam 2035, Toward Prosperity, Creativity, Equity and Democracy' are significant statements of intent. They acknowledge the challenges described above and commit to targets for deepening capital markets.

WHAT'S PRICED IN? The forward PE for Vietnam on 2019 EPS remains below the average for ASEAN despite superior growth prospects. This is despite circa. 80% outperformance over the past five years. Most of the gains were achieved between April 2017 and April 2018. Since then, the Index has corrected by 20% in US$-terms. Why? Five-year yields have increased by circa 200 bps since March. We believe this is discounted in current share prices but further, sharp increases in yields would cap any equity gains, in our view. more

UBS recommendations and valuations

PE P/BV Div Yld

Price UBS PT Upside Mkt Cap ADV, 30D 2018 2019 2018 2019 2018 2019

Company (Local) (Local) (%) (US$m) (US$000) (x) (x) (x) (x) (%) (%)

Military Bank 23,700 33,500 41% 2,197 6,219 9.0 7.4 1.6 1.4 2.5% 2.5%

Mobile World 120,000 160,000 33% 1,663 2,924 12.9 11.4 5.4 4.8 1.5% 1.7%

Techcombank 26,300 42,500 62% 3,946 1,740 11.3 10.2 1.8 1.5 0.0% 0.0%

Vietcombank 62,500 64,500 3% 9,650 5,885 20.0 16.5 3.7 3.2 1.3% 1.3%

Vietnam Dairy 156,700 190,000 21% 9,760 6,880 26.8 23.6 7.9 6.9 3.2% 3.7%

VP Bank 25,900 38,000 47% 2,693 5,292 7.8 6.9 1.7 1.3 0.2% 0.0%

Average 35% 4,985 4,824 14.6 12.7 3.7 3.2 1.5% 1.5% Source: UBS estimates


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3

Vietnam Strategy UBS Research

Sector Q1

SIGNPOSTS – Vietnam Strategy

In order to see whether our thesis is playing out, here’s what we’ll be tracking:

WHAT WE EXPECT

Oct 2018 Draft Securities Law The next stage in development of capital markets

The State Securities Commission is drafting a new Securities Law. It is, to be presented to the National Assembly this October. We expect it to address issues such as information disclosure, market conduct, regulatory and supervisory authority, listing procedures and foreign participation in local capital markets.

Oct 2018 Foreign ownership To provide for greater foreign participation

It should have been a significant reform when three years ago Decree 60 removed restrictions on foreign ownership limit (FOL) for all companies not in a 'conditional sector'. To date, however, only a handful has relaxed their FOL. Firstly, many listed companies are in restricted sectors e.g. banking. Secondly, others fear the practical consequences if foreign investors were to own 51% of their share and they were classified as foreign. We look for the government to raise the FOL for banks (something it has committed to do) and any further measures to address the practical issues.

Dec 2018 State capital management An acceleration in the equitisation process

The aim of the government is to divest some or all of its shares in more than 400 enterprises by 2020. In many cases this will be via listing of the shares on the Stock Exchange. In June the Ministry of Finance urged SOEs to hasten their equitisation and divestment plans. The government had approved plans for 181 SOEs to divest capital this year but so far only one had completed its preparations. In Q118, the government announced that responsibility for capital management in 20 of the largest SOEs would be transferred to a new committee to be established by the end of this year with the view to accelerating the process.

Ongoing IPOs Pivotal to development of local capital markets

UPCoM is effectively a mezzanine exchange, established to encourage firms to participate in the securities market. A company does not have to be a former SOE to trade on UPCoM but many of the largest are. Currently, there are more than 700 companies on UPCoM, including Airports Company of Vietnam. We expect more companies to move from UPCoM to the Ho Chi Minh Exchange, in the process boosting liquidity and shares available to foreign investors.

Reform dependent

MSCI classification The potential to be added to MSCI's watch list for EM status

Vietnam is currently classified as a frontier market for the purposes of MSCI Indices, not an emerging market. This is important because of the very different pool of money benchmarked against the respective indices. We believe that Vietnam already satisfies the size and liquidity criteria for being upgraded; the obstacles are primarily around market accessibility criteria. Our hope is that the new Securities Law will address some of MSCI's concerns, enabling Vietnam to be put on the watch list for upgrade to emerging market status. Previous markets which have been added to this list have benefitted from significant inflows of foreign capital and higher valuations, all other things being equal.


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Sector Q1

PIVOTAL QUESTIONS return

Q: Can Vietnam sustain rapid rates of economic growth? UBS VIEW

Vietnam's real GDP expanded by more than 7% in Q118; it is currently one of the fastest growing economies in the world. Foreign direct investment has been an important engine of growth – and continues to be so. However, the economy faces a number of other challenges e.g. over-dependence on bank credit; relatively high public debt and persistent fiscal deficits; lingering concerns around the level of banks' capital and profitability; and the size of the State and stagnant productivity. Is FDI alone sufficient to sustain rapid rates of growth over the medium term? We do not believe so. We believe financial deepening to be pivotal. We believe that deeper capital markets would improve both the allocation and pricing of credit. It should also free up capacity for banks to lend to the private sector, supporting private investment and consumption.

EVIDENCE

The following extract is from the IMF's latest Article IV Consultation Paper on Vietnam, published in July 2018: "Slow SOE reform progress, barriers faced by SMEs to reach economies of scale and credit misallocation and weaknesses in financial intermediation impede the development of a productive and vibrant economy outside the FDI sector despite rapid growth…..Gross capital formation has been below most countries in the region. Excluding the FDI sector, investment has fallen by 10 percentage points, to 20% of GDP, in the last decade. This partly reflects cutbacks in SOE capital formation in heavy industries and barriers to the development of private manufacturing firms and SMEs, as well as declining public investment despite high fiscal deficits. Saving has remained at about 30% of GDP, which is high relative to peers, reflecting ineffective financial intermediation of high profits in the FDI sector into productive investment opportunities in the domestic economy because of foreign ownership limits and weaknesses in the banking system."

WHAT'S PRICED IN?

Conversations with colleagues and clients suggest to us that it is consensus Vietnam will remain one of the fastest growing economies in Asia for the foreseeable future. That is also the base case of UBS economists.

Vietnam faces a number of challenges to sustaining current rapid rates of growth over the medium term. They include: 1) over-dependence on bank credit; 2) relatively high public debt and persistent fiscal deficits (demography and climate change will only add to pressure on public finances); 3) lingering concerns around the level of banks' capital, profitability and legacy NPLs; and 4) the size of the State and stagnant productivity.

Growth in foreign direct investment over the past 10 years has been the stand-out bright spot in the economy. However, we question whether this is sufficient on its own to sustain rapid rates of growth over the medium term. We do not believe so.

Vietnam faces a number of challenges to sustaining current rapid rates of growth

FDI alone is unlikely to be sufficient




5

We believe financial deepening to be the key. By this, we are referring to the interaction of different markets, instruments and stakeholders, with a view to allocating public savings to their most productive uses. In the case of Vietnam, we believe it is not only desirable, but necessary. In addition to supporting growth, it could also increase the resilience against economic shocks.

In this section we the address challenges currently facing Vietnam. In the following section we discuss the potential impact for investors if financial deepening does indeed occur. In short, we believe the opportunities could be substantial.

However, conversely, if we do not see financial deepening then not only would investors be disappointed, but we believe we should expect weaker growth in the future. This in turn should have a negative impact on asset prices. In other words, we believe there is a feedback loop between financial deepening and economic growth.

Challenges facing Vietnam

1. Over-dependence on bank credit

There are 172 credit institutions in Vietnam. Of these, 43 banks represent 98% of the assets in the financial system. The largest of which are government-owned. Total system credit has grown from 20% of GDP in 1997 to 130% in 2017. At the current rate, credit outstanding could exceed 250% by 2027. We believe this is unsustainable.

IMF already has voiced similar concerns. In the 2018 Article IV Consultation paper, it said "Strong credit growth and asset price inflation may be contributing to the build-up of risks in the financial system". UBS believes credit growth of 13-14% is more sustainable. But, this would require capital markets to fill the gap.

Figure 1: private debt vs GDP across Asia

Source: Haver, CEIC, UBS estimates

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2. Relatively high public debt and persistent fiscal deficits

Vietnam's fiscal deficit for 2017 was 4.7% of GDP. Whilst an improvement on the 6.3% deficit the previous year, it remains much higher than regional peers.

Figure 2: General government net lending/borrowing (% of GDP)

Source: IMF World Economic Outlook Database, April 2018, IMF

Together with already relatively high outstanding public debt, this could limit the government's ability to meet significant short and medium-term spending demands. The government has a self-imposed ceiling for public debt-to-GDP of 65%; at the end of 2017 the ratio stood at 58%.

Figure 3: General government gross debt (% of GDP)

Source: IMF World Economic Outlook Database, April 2018

Public debt at 58% of GDP is far from critical; many emerging markets have higher levels of public debt (not to mention developed countries e.g. Japan at 236% and the US at 108%). Our concerns are two-fold. Firstly, the trend: public debt-to-GDP in Vietnam was the lowest amongst peers in 2001; it is now the highest. Secondly, the pressure on public finances is only likely to increase in the future.

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Vietnam's fiscal deficit for 2017 was 4.7% of GDP

General government gross debt at 58% of GDP, the highest amongst peers


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There is an immediate necessity for Vietnam to invest in infrastructure; the country's level of capital stock is the lowest amongst peers. Secondly, there will be significant medium term pressures to invest in: 1) education (particularly upper secondary and tertiary if the country wishes to escape the middle-income trap); 2) healthcare and welfare (Vietnam has passed the point at which it is starting to age quite rapidly); and 3) to mitigate the impact of climate change (geography means that Vietnam is particularly vulnerable).

Regarding demography, the median age in Vietnam has risen from 24 in 2000 to 30 currently and is forecast to rise to 37 by 2030. The only developing country in ASEAN with a higher median age is Thailand. Vietnam's old age dependency ratio had been stable at around 10% of the working population. However, the UN Population Division forecasts it to inflect upwards, to 18% by 2030 and 26% by 2040.

Figure 4: Old age dependency ratio (Age 65+ / age 15-64) (%)

Source: United Nations, Department of Economic and Social Affairs, Population Division (2017). World Population Prospects: The 2017 Revision, DVD Edition.

Regarding public debt sustainability, the IMF in its latest Article IV paper was positive on recent progress but maintained its assessment that the risk was low-to-moderate reflecting uncertainty in a number of key areas:

"Compared to the 2017 analysis, the projected debt trajectory is more benign, primarily due to the greater planned use of non-debt creating equitization revenues for budget financing, a lower 2017 deficit, lower interest payments due to lower financing needs in 2016 and 2017, and lower interest rates. Notwithstanding, staff continues to assess the debt sustainability risk as low to moderate, reflecting uncertainty about fiscal consolidation measures and equitization revenues and risks from potential contingent liabilities related to banks and SOEs."

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IMF: "Public debt risk is low-to-moderate"


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3. Banking sector; lingering concerns around the level of capital, profitability and legacy NPLs

Rapid growth in recent years and a recovery in 2011/12 real estate crisis means that the health of the banking sector is much improved on the perilous state of five years ago. However, there are lingering concerns. The upshot is that we believe the sector still requires re-capitalising. Given the constraints on public finances highlighted above, capital markets are again likely to prove to be key to achieving this.

We see three challenges:

Limited capital. Even systemically important State-owned commercial banks (SOCBs) –struggle to meet Basel II requirements, let alone Basel III.

Legacy NPLs. NPLs remain relatively high and in the assessment of the IMF "…could be higher still if ever-greening and connected lending were fully accounted for". Against regional peers, we estimate most Vietnamese banks are still under-provided.

Profitability. It varies sharply across the sector, but even for some of the largest banks it remains very low, and is too dependent on interest income.

The average capital adequacy ratio (CAR) for Vietnam's largest banks is 12% at the end of 2017. UBS estimates this falls to 9% under Basel II. A number of the smaller private banks would be significantly below this number.

Figure 5: CAR for Vietnam remains much lower than peers (%)

Source: Financial statements, UBS estimates

To get a complete picture of system NPLs, you need to add back NPLs sold to VAMC and those which are still hidden in the receivables of some banks. Adjusted, we estimate total NPLs in Vietnam to be 5.3%. This would be higher than official data from the State Bank of Vietnam's (SBV) and higher than regional peers.

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Figure 6: NPL ratios (%)

Source: Financial statements

Vietnamese banks are also under-provided against NPLs. Our estimates for provisioning adequacy assume that 1) all banks fully provide against the VAMC bonds; and 2) the loss ratio on Special Mention loans is consistent with regional experience (this would be above the 5% most banks are currently providing). On this basis, we estimate provisions to be equivalent to only 47% of outstanding NPLs.

Figure 7: Provisioning reserves to NPLs (%)

Source: Company data as of 2017,

Regarding profitability, returns on equity for the sector have improved markedly over the past three years. However, this was driven predominantly by the leverage (the ratio of assets-to-equity increased), not RoA improvement.

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Figure 8: RoE, adjusting for expenses 'below the line'

Source: Company data, UBS estimates

The good news is that comparison with banks in other emerging ASEAN countries such as Indonesia, Philippines and Thailand suggests there is significant room for Vietnamese banks to grow earnings in the future.

Figure 9: Fee income / Assets 2017 (%)

Source: Financial statements, UBS

4. The size of the State and stagnant productivity

The fourth challenge touches on separate but related concerns. Firstly, the size of the State itself. State-owned enterprises (SOEs) dominate many areas of Vietnamese economic life. Not only have many tended by be unprofitable but they have crowded out potentially more efficient private sector companies.

Private companies have struggled to gain access to markets and capital. This has contributed to poor productivity gains in Vietnam over the past 10 years. In fact, since 2001 the World Bank estimates that productivity improvements have contributed nothing to growth.

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If this is correct, how to explain the 6% real GDP growth over the past 10 years? FDI has contributed significantly to growth. And the data continues to be very positive with record amounts of direct investment disbursed in recent years. However, to date, productivity improvements in the FDI space, according to the World Bank, have only served to mitigate value destroyed elsewhere in the economy.

Going forward, we believe that reform of SoEs, shrinking the footprint of the State and levelling the playing field when it comes to access to credit between private and public domestic companies are all important in sustaining rapid rates of growth in the future.

The following are extracts from a paper published in 2016 by the World Bank and Vietnamese Ministry of Planning and Investment (MPI) entitled 'Vietnam 2035, Toward Prosperity, Creativity, Equity and Democracy':

"Driven by multiple objectives (profit not high among them) and by distorted incentives, SOEs have stayed unproductive…Despite a long-running (albeit uneven) SOE equitisation process, the public sector’s presence in production and its control over factor markets remain pervasive. The state still retains a majority stake in more than 3,000 SOEs, which account for about a third of GDP (same as in 1990) and close to 40% of total investment. The state sector also maintains a virtual monopoly (or oligopoly) in critical sectors such as fertilizer, mining, utilities, banking, construction, and agriculture."

"Driven by reforms to first legalize and then facilitate private enterprise, the private sector grew exponentially after the late 1980s. But its growing presence has been marked by worsening productivity, so much so that there is little daylight between the productivity of labour and that of assets in the domestic private and SOE sectors…Vietnamese private firms are overwhelmingly small and informal, which prevents productivity gains through specialization and economies of scale…The innumerable tacit and explicit preferences handed out to firms with connections (such as all SOEs, most foreign-invested firms, and some large domestic private firms) by officials who also give inadequate attention to economic efficiency make it very difficult for many private firms to thrive, even if they are productive"

The extracts above refer to Vietnam's on-going equitisation programme. The assumption is that publically listing the companies will increase transparency and accountability. However, the process to date has been slower than the government would like.

Against this backdrop, the government recently announced a major, new initiative: the establishment of 'The Committee for State Capital Management at Enterprises'. It will oversee approximately US$200bn of government assets at 20 enterprises. This represents approximately half of all assets at Vietnamese SOEs.

Currently, many State assets are under the management of different ministries. The new committee may accelerate the process of disposing of some or all of the State's shares in the enterprises. We emphasise the word 'may'; it remains to be seen whether this will occur in practice and not least how the new Committee will work with existing State Capital Investment Corporation (SCIC).

The World Bank and Vietnam's own MPI appear to agree. These are extracts from a 2016 major policy paper

Using capital markets to increase transparency and accountability

The new government committee could accelerate new listings




12

However, even if we do see an acceleration in equitisation of SOEs, simply turning a state-owned monopoly into a private one won't necessarily deliver the productivity gains required to sustain 6%+ growth. It requires that management of the newly listed enterprises change and that the playing field is levelled for the private sector – not least for capital.

We believe levelling the playing field in the market for credit requires change both to its allocation and pricing. We believe capital markets can play a pivotal role here, and particularly the bond market which as we highlight in the following section is currently significantly smaller than any of its peers in emerging East Asia.

Even with the best will in the world, in order for the government to divest shares in SOEs and for the government and corporates to issue bonds there has to be demand. This would be significantly improved if the government were able to stimulate growth in contractual savings (e.g. life assurance).

These and other critical factors behind the rapid growth in Vietnam are also discussed in the note by UBS economist, Alice Fulwood, released on 30 January 2018, "Vietnam: Too compelling to ignore" (Link)

Equitisation is a necessary but not sufficient solution to the problem of low productivity

Deeper bond markets could improve both the allocation and pricing of credit


https://neo.ubs.com/shared/d2eMAqZOwR0bU



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Sector Q2


Q: Financial deepening, could this offer substantial opportunities? UBS VIEW

We believe that financial deepening offers substantial opportunities. Under the government's Financial Sector Roadmap, it envisages the bond market doubling by 2020. However, for Vietnam to catch up with emerging peers in East Asia we estimate it would grow significantly in excess of this; four times in fact by 2023. Regarding equities, the market has already doubled relative to GDP over the past three years. However, again it still lags behind peers. We estimate the value of listed equities could double again by 2023.

EVIDENCE

For Vietnam to converge on the average for emerging East Asia will require addressing both the demand and supply side factors. In terms of supply, the government plans to divest shares in some or all of 400 SOEs by 2020. There are also on-going initiatives to raise the foreign ownership limits and make it easier for foreign investors to own shares. Regarding demand, potential re-classification as an emerging market by MSCI would enable Vietnam to access a much greater pool of institutional savings. And a comparison with regional peers and an understanding of government policy also suggests we could witness exponential growth in contractual savings.

WHAT'S PRICED IN?

Vietnamese equities have significantly outperformed regional peers over the past five years. However, in terms of size, they continue to lag behind, and certainly relative to the bank-dominated financial sector.

Currently, Vietnamese domestic credit as a percentage of GDP is 142%. This is above the average for all emerging East Asia of 133%, and significantly above that for Indonesia (42%) and the Philippines (67%).

Contrast the high penetration of bank credit with the local capital markets (bonds in particular). The Vietnamese domestic bond market is equivalent to 23% of GDP vs the regional average of 68%. In 2017, the Vietnamese equity market significantly outperformed the region; this closed the gap to the rest. However, at 79% this is still below the average for emerging East Asia of 93%.

From the chart below, a couple of things stand out. Firstly, credit outstanding relative to the size of Vietnam's economy is high. Against the other emerging East Asian economies, only China (228%) and Korea (179%) is higher. Secondly, Vietnam is also the only country other than China where bank credit exceeds the sum of listed bonds and equities. (Note, that in China's case we are not capturing the value of overseas listed companies, which is substantial.)

Vietnamese bond and equity markets equal to 23% of GDP and 79%, respectively

Vietnam is also the only country other than China where bank credit exceeds the sum of listed bonds and equities


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Figure 10: Financial sector composition for emerging East Asia (%)

Source: Thomson Reuters Datastream, Asian Development Bank, CEIC, Haver, UBS

Our base case is that Vietnamese capital markets will continue to converge on peers in East Asia. Using medium-term forecasts for nominal GDP from the IMF and given the average penetration of bonds and equities across the region, we can model the implied change in financial depth in Vietnam.

The IMF forecasts for nominal GDP in US$-terms equate to a cagr of 9.2%. Assuming inflation of circa 4% per annum we believe this is relatively conservative and probably discounts modest currency depreciation. However, even against these estimates, the local bond market would have to grow to circa US$250bn, four times its current size to reach the average depth for East Asia. And the capitalisation of the equity market would have to double to US$340bn over the same period.

Both these estimates assume no further financial deepening elsewhere. The obvious caveat is that it's not clear there is yet sufficient local institutional demand to hit these numbers but they serve to illustrate the potential. We discuss the importance of growth in domestic contractual savings below.

228%

179%

142% 141% 129%

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Domestic bank credit/GDP Total bonds and equities outstanding/GDP

Our base case is that Vietnam will continue to converge on peers in East Asia




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Figure 11: Modelling Vietnamese capital markets, 2017-2023E (US$, %)

(US$ bn) 2017 2018E 2019E 2020E 2021E 2022E 2023E

GDP, current prices 220 241 265 291 317 345 374

- Growth (%)

9% 10% 10% 9% 9% 8%

Target for LCY bonds/GDP

68%

Implied value

254

Current value

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Current value

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Source: Thomson Reuters Datastream, Asian Development Bank, IMF, CEIC, UBS estimates

For equities, there are a number of potential catalysts

Looking ahead, we believe there are a number of potential catalysts for share prices.

Equitisation. Currently, six of the eight largest listed stocks are former State-owned enterprises; the equitisation process has clearly been at the heart of developing Vietnamese capital markets and is on-going. The government's goal is to divest all or part of its shares in 400 SOEs by 2020.

Foreign demand (both institutional and from strategic foreign investors). Prices paid by strategic investors for shares in Vietnam Diary and Saigon Brewery, for example, led to a sharp jump in prices. Similarly the sharp increase in foreign buying in the secondary markets in 2H17 and 1Q18 coincided with the periods of strongest equity performance.

Growth in domestic contractual savings. This should boost domestic demand for financial assets. Could be particularly relevant in improving liquidity in mid cap stocks, which appear to offer some of the greatest value.

MSCI benchmark classification. Something which has long been speculated. Vietnam companies already meet the size and liquidity; the focus is now on market accessibility.

Foreign ownership limits. Important if Vietnam is to attain MSCI emerging market status, but also to increasing the available supply of equities for foreign institutions.

New securities Law. The draft is scheduled to be put before parliament in October 2018. Another step towards modernising Vietnamese equities, and again, potential MSCI re-classification.




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Equitisation

Equitisation is the process of turning SOEs into Joint Stock Companies, with a view to the government then divesting some or all of its shares in the company. This process has been pivotal to development of Vietnamese capital markets and is ongoing.

Typically, once an enterprise has been restructured as a JSC, the government will list a small proportion of shares (often less than 5%) on the Unlisted Public Company Trading Platform (UPCoM). When the company is ready, it will be transferred to the main exchange, at which point the government will divest more shares. This could be to a strategic investor (e.g. Saigon Beer) or to portfolio investors.

UPCoM is effectively a mezzanine exchange, established to encourage firms to participate in the securities market. A company does not have to be a former SOE to trade on UPCoM but many of the largest are. It has a number of advantages vs over-the-counter trading e.g. centralised dealing and settlement and improved visibility and accessibility.

The prospects of future listing on the main exchange together with the relatively small float can lead to significant volatility in share prices; Airports of Vietnam is one example. It was initially listed UPCoM at VND28,000 per share approximately 18 months ago; earlier this year it hit a high of VND120,000. It has since corrected and its current price is VND82,900.

Figure 12: Share price of Airports Corp of Vietnam, currently the largest stock traded on UPCoM (VND)

Source: Thomson Reuters Datastream

To date there have been a number of practical problems to the government's privatisation programme. This includes: the fact it is illegal to sell state assets at a loss; the level of indebtedness in some SOEs; poor profitability; they may have a large number of non-core assets; the interest of management and officials may not be aligned.

Against this backdrop, the government announced in February that it proposes to establish the Committee for State Capital Management at Enterprises (CSCME). The CSCME will be different from the existing State Capital Investment Corporation in that it will not be involved in managing the businesses; simply the state's investments in these enterprises. The idea, as we understand it, is that the CSCME will help to minimise the conflict of interests and accelerate the privatisation process.

Equitisation has been pivotal to development of Vietnamese capital markets and is ongoing

Listing prospects and the small free float can have a significant impact upon share prices

Practical obstacles to equitisation and privatisation…

…A new government initiative is designed to reduce these




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The CSCME will manage the capital of 20 SOEs, with a total capital of VND820trn (US$35bn). They represent approximately half of the total assets in the state sector. We understand the enterprises to be put under the new committee include: Airports Corporation of Vietnam, Bao Viet Holdings Insurance, Electricity of Vietnam, Hanoi Brewery, MobiFone, Saigon Brewery, Vietnam Oil & Gas, Vietnam National Coal-Mineral Industries, Vietnam National Petroleum Group, Vietnam Pharmaceutical Corporation, Vietnam Post and Telecommunications Group and Vietnam Rubber Group.

In all, the government plans to divest some or all of its shareholding in more than 400 SOEs by 2020. A number of these already trade on UPCoM. And again, if the government can achieve this, it could provide a significant fillip to the equity market.

MSCI classification

Vietnam is currently classified as a frontier market for the purposes of MSCI Indices, not an emerging market. This matters because of the very different pool of money benchmarked against the respective indices.

Previous countries put on watch to be admitted to MSCI emerging markets have witnessed sharp rises in share prices as investors sought to anticipate future inflows of foreign institutional capital. An announcement by MSCI that it was considering upgrading Vietnam could provide a significant boost to share prices.

But is it likely? The MSCI Classification Framework consists of three pillars:

(1) Sustainability of economic development

(2) Size and liquidity requirements

(3) Market accessibility criteria.

Under pillar (1), there is no difference between frontier and emerging status so we can ignore this.

Under pillar (2), the current requirements for MSCI emerging market inclusion is that a stock should have a minimum total capitalisation of US$1,594m, free float of US$797m and 15% annualised traded value ratio (ATVR). We estimate that Vietnam already has approximately a dozen companies which meet these criteria. Further, Vietnam is currently more liquid than Philippines, which is already classified as an emerging market.

So what is the impediment to emerging market inclusion? It is pillar (3). This requires: i) significant openness to foreign ownership; ii) ease of capital inflows and outflows; iii) good and tested efficiency of operational framework; iv) high competitive landscape; and v) stability of institutional framework. This is where we think further progress needs to be made if Vietnam's status is to be upgraded. It is possible we could see something in the forthcoming new Securities law (see below).

Specifically, availability of stocks for foreign investors remains a challenge, although we have seen progress (more on this below). Other issues include the fact there are still two exchanges, that information is not always available in English, foreign exchange conversion, over transparency and supervision and around the settlement and clearing mechanism. Government initiatives to raise foreign ownership limits and a new Securities law (below) should help.

New Committee to manage capital in 20 enterprises with US$35bn of state assets

In all, the government wishes to divest shares in 400 enterprises

Vietnam's frontier status limits its addressable pool of foreign capital

In other countries, expectation of an upgrade to emerging market status has resulted in sharp share price rises

Vietnamese companies meet size and liquidity criteria. Note that Vietnam is currently more liquid than the Philippines

Currently, we believe the biggest obstacles are qualitative

Government initiatives to address MSCI concerns




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Foreign ownership limits

Until three years ago, foreign ownership of companies in Vietnam was restricted to 49%. However, under Decree 60, that restriction was theoretically removed for many companies. The law stated that the Board of any company which was not in a "conditional sector" was allowed to remove its foreign ownership limit.

In practice, however, relatively little has changed to date. Firstly, there are still more than 200 restricted industries including some which are most in need of foreign capital e.g. banking. Secondly, many companies are wary that by allowing 51% foreign ownership the company will be subject to many operational restrictions e.g. owning land.

The net result is only a handful of companies has so far raised or removed its foreign ownership limit. However, this includes blue chip Vietnam Diary, which in July 2016 announced that it would be removing its foreign ownership limit. We do expect the government to come up with measures to encourage other companies to follow suit.

New Securities Law

The State Securities Commission (SSC) has been tasked with ensuring Vietnam is re-classified to emerging market status by MSCI. The SSC is in the process of drafting the new Securities Law, to be presented to the National Assembly (NA) this October. To the degree that it addresses MSCI's largely qualitative objections it could be very significant.

From media reports we have some sense of the objectives of the new law. The following is a summary of an article from the Vietnam News in January 2018. They appear to address a number of MSCI's qualitative concerns:

(1) To standardize the conditions, documents and procedures for securities listing; and improve the quality of public companies which come to market.

(2) To clearly define the organisational structure, operations, tasks and obligations of stock exchanges.

(3) To identify the organisational structure and operation of Vietnam's Securities Depository Centre and supplement the regulations on clearing and settlement and strengthen risk management and payment systems.

(4) To clearly define the foreign ownership limits for listed companies.

(5) To make it easier for foreign investors to participate in the Vietnamese securities market.

(6) To review the conditions for granting the establishment and operational licences to securities companies and fund management companies.

(7) To standardise regulations on corporate governance of public companies, securities companies and fund management companies.

(8) To enforce the obligation of information disclosure to enhance the clarity and transparency of the stock market.

(9) To define certain powers of the State Securities Commission to enable it to inspect, supervise, monitor and enforce regulations on the market.

A case of theory vs practice again

Fear of being classified as foreign and associated operational restrictions act as a disincentive to raise the foreign limit

New Securities law to be presented to NA in October…

…It appears designed to address a number of MSCI's concerns




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Bonds; the smallest bond market in East Asia

Vietnam is currently the smallest bond market in East Asia, with only US$51bn in local currency bonds outstanding. This compares to Thailand at US$366bn and China at US$9,126bn, for example.

Figure 13: East Asia local currency bond markets (US$bn)

(US$bn) CH ID KR MY PH TH VN

Dec 2007 1,688 86 1,027 165 58 139 10

Dec 2008 2,214 70 817 166 57 141 14

Dec 2009 2,568 99 1,016 185 63 177 12

Dec 2010 3,054 107 1,149 247 73 225 16

Dec 2011 3,453 110 1,229 263 77 225 19

Dec 2012 4,068 111 1,471 327 99 278 26

Dec 2013 4,684 108 1,641 312 99 275 32

Dec 2014 5,272 123 1,703 316 104 281 42

Dec 2015 6,248 127 1,720 261 101 278 42

Dec 2015 7,129 163 1,714 260 98 303 44

Dec 2017 8,739 184 2,020 318 110 346 48

Mar 2018 9,126 189 2,056 347 107 366 51

Source: AsianBondsOnline, ADB

With the benefit of a low base, Vietnam had been one of the fastest growing markets (cagr of 14%), just behind China. However, over the past three years, growth has slowed; we see that when we compare bonds outstanding to GDP. At the end of 2014, Vietnamese bonds were equivalent to 23% of GDP, the same ratio as today. A contributing factor to the lack of growth over the past three years could be the re-acceleration in bank lending.

Figure 14: East Asia local currency bond markets vs GDP (%)


In most emerging economies government bonds represent a majority of bonds outstanding. However, in Vietnam the skew is particularly extreme. Of total local currency bonds outstanding, 94% are government. We believe this reflects some of the challenges we discussed in the first part of this report: the dependence on bank credit by large Vietnamese companies (in particular SOEs) and the lack of access to formal capital for smaller, private companies.

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Currently, equivalent to less than 15% of the bond markets in both Thailand and Malaysia, and less than 1% of that in China

One of the fastest growing, but not over the past three years

94% of Vietnamese local currency bonds are government; testifies to the dependence by corporates on bank credit




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Figure 15: Composition of local currency bond markets (%)


The largest corporate issuers of local currency bonds in Vietnam are listed below. Just 20 issuances represent 95% of total corporate bonds outstanding by value! The list is dominated by banks and real estate developers. This data is as of March 2018.

Figure 16: Largest issuers of LCY corporate bonds in Vietnam (VND bn)

LCY bonds

(VND bn)

Masan Consumer Holdings Conglomerate 11,100

Vingroup Real Estate 9,600

Asia Commercial Bank Financials 4,600

Masan Group Corporation Conglomerate 4,500

No Va Land Investment Real Estate 4,250

Vietinbank Financials 4,200

Hoang Anh Gia Lai Real Estate 4,000

Techcombank Financials 3,000

Vietnam Prosperity Bank Financials 3,000

Vietcombank Financials 2,000

Ho Chi Minh Infrastructure Industrials 1,833

Vietnam Electrical Equipment Industrials 1,800

Saigon Securities Financials 1,650

Agro Nutrition Intl Consumer Staples 1,300

Mobile World Consumer Discretionary 1,135

DIC Corporation Materials 1,000


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Government Corporate

Just 20 issuers represent 95% of total LCY corporate bonds




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Growth in domestic contractual savings important to both debt and equity markets; there are promising signs

What should we expect in the immediate future? Under the government's Roadmap for 2020 the government's goal is to raise bond market capitalisation to 38% of GDP by 2020. Whilst more modest than the financial deepening we modelled above for 2023, it would still represent a more than 100% increase in the amount of bonds currently outstanding.

However, as we also highlighted above, issuance of bonds has slowed since the government's plan was published. We believe that to achieve the government's goal will require a significant increase in contractual savings. The government can help through supporting the growth in insurance products and provident funds.

UBS today also publishes a series of reports on the Vietnamese banking sector (Link). Amongst other things, the notes include a deep dive on development of bancassurance. Based on data from industry expert and our research, the life insurance penetration (premium/GDP) in Vietnam was among the lowest in the region. Of the total life insurance premium, bancassurance could still account <c10% as of 2017 vs the regional peers of 30-50%. Using Thailand as an example (see below), we believe Vietnamese banks could achieve similar penetration over the next five years.

We believe this is something the government recognises and wishes to address. According to the Vietnamese Minister of Finance, at a speech he gave in August 2017, less than 8% of the Vietnamese population is protected by life insurance policies. Life insurance revenue as a percentage of GDP was only 1% in 2016. This compares to the world average of 7.0% and 3.4% for ASEAN. The Minister reiterated that Vietnam was committed to opening up the insurance sector to foreign institutions to support rapid growth. The government roadmap talks of increasing penetration to 3-4% by 2020.

Figure 17: Life insurance premium to GDP

Source: Swiss Reinsurance

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Taiwan South Korea Singapore Thailand Malaysia Australia India China Indonesia Philippines Vietnam

% 2014 2015 2016

Government targets to raise bond market capitalisation to 38% of GDP by 2020

Requires significant growth in contractual savings

We believe there is the potential for exponential growth in bancassurance


https://neo.ubs.com/shared/d2B867FlWoqIm4L



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Figure 18: Thailand' life insurance premium via bancassurance to total premium

Figure 19: Estimated potential bancassurance premium (Life) by 2022

Source: Thai Life Assurance Association Source: UBS estimates

Tight regulatory controls particularly over mandatory insurance agent credentials, and unclear guidelines have historically been the major obstacles for growth in bancassurance. However, since 2014 the situation has started to improve after government deregulated the insurance industry (Circular No. 86).

After Circular No. 86, we started to see banks forming partnerships or Joint Ventures with life insurance companies (notably foreign). In 2017, this appeared to accelerate. Together with robust economic growth, a growing middle class and demographic change, we believe this could result in rapid growth in life insurance business.

Figure 20: Vietnamese banks tied up with insurance firms

Insurance firms Banks Type deal Signed Duration

Cardif Life VCB Joint Venture (VCB 45%, BNP Paribas Cardif 43%, Seabank 12%) 2007

Aviva CTG Joint Venture (CTG 50%, Aviva 50%) 2011

MetLife BIDV Joint Venture (MetLife 60%, BIDV 40%) 2013

Ageas Life MBB Joint Venture (MBB 61%, Ages Group 29% and Muang Thai Life Assurance (MTL 10%) 2015

Prudential VIB Excusive partner 2015 15 years

Dai-ichi Life HDB Excusive partner 2015 10 Years

Manulife TCB Excusive partner 2017 15 years

Dai-ichi Life STB Excusive partner 2017 20 years

Dai-ichi Life SHB Excusive partner 2017 15 years

AIA VPB Excusive partner 2017 15 years

Bao Viet Life Bao Viet Bank Excusive partner

Source: Company data

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Life insurance premium / GDP scenario

138

106

74

Current7

Barriers to date have largely been regulatory. In 2014, this started to change

More local banks forming partnerships or Joint Ventures with life insurance companies




23


Sector Q3


Q: Are there structural factors particular to Vietnam behind recent volatility? UBS VIEW

Six of the eight largest listed companies are SOEs; they have been at the heart of the development of Vietnamese equity market. The government plans to list many more SOEs over the next three years. We also expect existing listed companies (public and private) to come to the market for capital. There is a relative lack of liquidity, breadth and coverage all of which add to volatility. Looking ahead, in addition to IPOs there are other important catalysts e.g. a potential upgrade to emerging market status by MSCI (from frontier) and an increase in the foreign ownership limits.

EVIDENCE

Over the past five years, Vietnam has been comfortably the best performing equity market in Southeast Asia; it has risen by 90% in US$-terms compared to peers, which have risen by an average of only 6% And this is despite a 20% correction since April. We attribute the sharp moves in shares prices to a number of factors but the common denominators are government policy and the still relatively early stage of development of Vietnamese capital markets. Our base case is that Vietnam listed equities will continue to get more valuable but that limited liquidity and information should also mean the market remains volatile.

WHAT'S PRICED IN?

The strong performance of large cap stocks over the past two years has helped to significantly narrow the valuation gap between Vietnam and regional peers. However, the forward PE ratio for Vietnam remains below the average for Southeast Asia despite offering superior growth. One factor is the bifurcation in valuations, which we attribute in part to the aforesaid poor liquidity and information. Those average PE ratio for Vietnamese stocks with a market capitalisation above US$3bn is almost 21x; for those below US$1bn, it is 9x.

Over the past five years the Ho Chi Minh Index has risen by approximately 90% in US$-terms. This compares to the average gain for the other ASEAN equity markets of only 6%. Singapore is unchanged over the past five years and Malaysia has actually fallen in US$-terms.

The majority of the gains in Vietnamese equities were between April 2017 and April 2018. Since which time the market has corrected. And at the time of writing, the Index remains approximately 20% below its high year-to-date in US$-terms.


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Figure 21: ASEAN equity indices over the past five years, US$ terms

Source: Thomson Reuters Datastream, UBS

To understand the sharp movements in share prices, we believe it's important to first appreciate key distinguishing features of the Vietnam Index. Namely:

(1) The importance of SOEs and the government's equitisation programme.

(2) Significant corporate finance activity.

(3) Sensitivity to the credit cycle.

(4) The relative lack of coverage

(5) Liquidity and the lack of breadth.

(6) Bifurcation in valuations.

Key factors behind share price volatility

1) The importance of SOEs and the government's equalisation programme

There are in excess of 1,400 listed companies in Vietnam, but the majority are very small. There are only two companies with a market value in excess of US$10bn and only 27 companies above US$1bn. Of the eight largest listed Vietnamese companies, six are SOEs. The government's equitisation programme has been at the heart of developing local capital markets and it is on-going.

Distinguishing features of the Vietnamese index help to understand why the market is so volatile

6 of the 8 most valuable listed companies are the result of privatisations


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Figure 22: Large cap stocks with some public ownership

MKt cap Rank /

Mkt Cap all ListCos

Company GICS Sector Exchange (US$m) (#)

Vietnam Dairy Consumer Staples HOSE 9,759 3

Vietcombank Financials HOSE 9,650 4

PV Gas Utilities HOSE 8,460 5

Airports Corp Of Vietnam Industrials UPCoM 7,745 6

Saigon Beer Consumer Staples HOSE 6,220 7

BIDV Financials HOSE 5,047 8

Vietinbank Financials HOSE 4,338 9

Vietnam National Petroleum Energy HOSE 3,372 14

BaoViet Holdings Financials HOSE 2,782 16

Vietnam Airlines Industrials UPCoM 2,423 19

Military Bank Financials HOSE 2,197 21

FPT Corp Information Technology HOSE 1,164 26

Saigon Thuong Bank Financials HOSE 879 28

Hanoi Beer Consumer Staples HOSE 836 30

Source: Thomson Reuters Datastream. Note: Based on prices as at COB on 31 August 2018

2) Corporate finance activity

We noted earlier that the period of strongest gains for Vietnamese equities was between April 2017 and April 2018. This period coincided with a number of large IPOs and government divestments to strategic foreign investors at elevated prices.

Two of the best performing stocks since April 2017 have been two private groups, both of whom separately listed key businesses: Vingroup and Masan. Vingroup actually did this twice and its affiliates, Vinhomes and Vincom Retail, are currently the 2nd and 12th most valuable listed companies in their own right.

Figure 23: Vingroup share prices over the past two years (VND)


The period of strongest gains included a number of IPOs and government divestments to strategic foreign investors at elevated prices




26

Figure 24: Masan group of companies over the past two years (VND)


Regarding the sale of stakes to strategic foreign investors, the government sold shares in both Vietnam Dairy (the 3rd most valuable company by market capitalisation) and Saigon Beer (7th most valuable company) over the past 12 months. In both cases, at prices significantly above where the shares had previously traded. We believe this reflects their scarcity value and the desire of foreign investors to access the Vietnamese market.

Figure 25: Vinamilk and Saigon Brewery





27

Figure 26: Significant corporate actions amongst ListCos over the past 12 months

MV Rank/

Mkt Cap all ListCos

Company (US$m) (#) Comment

Vingroup 14,162 1 Separate listing of Vinhomes and Vincom Retail

Vinhomes 11,959 2 IPO

Vietnam Dairy 9,759 3 Govt sold 10% stake to strategic foreign investor

Saigon Beer 6,220 7 Govt sold a majority stake to strategic foreign investor

Masan Group 4,294 10 Separate listing of Techcombank

Techcombank 3,946 11 IPO

Vincom Retail 3,210 15 IPO

Vietnam Prosperity Bank 2,693 17 IPO

Source: Thomson Reuters Datastream. Note: Based on prices as at COB on 31 August 2018

3) Sensitivity to the credit cycle.

Whilst, by number of listed stocks, Vietnam has one of the largest equity markets in Southeast Asia, many companies barely trade. The weighting of the ones which do is skewed towards cyclicals and particularly those stocks most sensitive to the credit cycle: financials and real estate. These two sectors comprise more than half of the 100 most actively traded companies, market cap weighted. Conversely, consumer discretionary, healthcare and information technology represent only 3% between them.

Figure 27: Sector weighting amongst Vietnam's 100 most actively traded stocks

Source: Thomson Reuters Datastream, UBS. Note: Based on prices as at COB on 31 August 2018

For 2017, credit growth was 18% and property prices were rising, continuing their recovery following the local financial crisis in 2011 and 2012. Combined with a number of significant corporate actions, discussed above, banks and real estate drove much of the gains since April 2017. The stand out performer was Vingroup, which has more than trebled over this period.

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Figure 28: Share price performance of leading banks and real estate stocks, April 2017 to current (%)


4) The relative lack of coverage

Reflective of the fact that the Vietnamese equity markets are still relatively early in terms of their development and the limited presence of international investment banks; analyst coverage is relatively thin. The average number of analysts following the 30 largest stocks is only 4, based on Thomson Reuters and even the most widely followed name is only covered by 8 analysts.

Figure 29: Number of analysts covering Vietnam's 30 largest stocks (#)


Several stocks amongst the leading group of 30 are not followed by any House, according to Thomson Reuters. This includes FLC Faros Construction; this also happens to have been one of the most volatile stocks over the past two years. We believe the lack of independent analysis and recommendations contributes to share price volatility in Vietnam.

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117 98 91

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The average number of analysts following the 30 largest stocks is only four




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Figure 30: Share price for FLC Faros Construction over the past two years (VND)


For the other ASEAN markets, the average number of analysts covering the 30 largest stocks varies from 11 (Philippines) to 22 (Thailand).

Figure 31: Average number of analysts following the 30 largest companies in each equity market across ASEAN


5) Liquidity and lack of breadth

This characteristic is perhaps not a surprise given the observation about how many analysts are following Vietnam stocks. Vietnam, whilst one of the largest equity markets in Southeast Asia in terms of number of listed companies, is however one of the smallest in terms of liquidity - both overall and in terms of individual number of stocks counters.

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The lack of liquidity and breadth serves as a deterrent for many institutional investors – particularly foreign. This means that stocks which may otherwise be attractive are not in demand and can remain undervalued. Conversely, when we see inflows of foreign capital, those stocks with the greatest liquidity can become more overvalued. Ultimately, this will act as a disincentive to new foreign capital.

Below we compare the average daily volume for the 30 largest stocks in each of the ASEAN markets again. Interesting, Vietnam is not the smallest. In fact, the average daily volume for the 30 most liquid names is now 50% higher than that of the Philippines. However, it is still less than half that of Indonesia and a fraction of that in Thailand.

Figure 32: Average daily volume for the 30 most liquid companies in each equity market across ASEAN (US$000)


Behind the headline numbers for Vietnam, there are several hundred companies which have not traded at all over the past 30 days; many of them listed on UPCoM. For these companies, unless they were actually followed by a broker we excluded them for these purposes. That still left us with more than 700 stocks between the Hanoi and Ho Chi Minh Exchanges.

Of the more than 700 stocks, none currently turnover more than US$10m per day on average. There are 16 stocks which turnover between US$3m and US$10m. and another 28 which turnover between US$1m and US$3m. There are 96 stocks which turnover between US$100,000 and US$1m.

What it means is that there are more than 600 companies listed on either of the main Exchanges (Ho Chi Minh or Hanoi) which currently trade less than US$100,000 per day. Of these, 274 trade less than US$1,000 per day.

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Figure 33: Vietnamese stocks, sorted by averaged daily turnover (US$)


6) Bifurcation in valuations

One of the predictable results of the liquidity skew is that larger stocks tend to be more expensive than the bulk of the equities where there is little or any liquidity.

The following is based on 12-month trailing data for listed Vietnamese stocks. We have sorted the companies based on current market capitalisation. We have not adjusted for quality, risk or growth prospects. Obviously, we would expect the market to value better quality companies more highly. Even so, the premium you are paying for liquidity appears to be relatively large.

Figure 34: Median valuations for listed Vietnamese stocks

PE P/BV Div Yield

Market capitalisation (x) (x) (%)

Above US$3bn 20.5 4.2 1.8%

Between US$1-3bn 14.3 2.6 1.2%

Between US$100m -1bn 12.7 1.7 3.2%

Below US$100m 9.1 0.8 5.5%


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Sector priced in

WHAT'S PRICED IN? return

The total market capitalisation for Vietnamese equities is equivalent to 79% of GDP. The government target under its Financial Sector Road Map was for 70%, but by 2020. They are almost three years ahead of schedule.

Despite impressive growth over the past three years, Vietnam still lags behind the average for emerging East Asia of 93%. The only equity market which is significantly smaller relative to the size of the economy is Indonesia (note for China, if we accounted for Chinese companies overseas it would be significantly higher than the 67% shown below).

Figure 35: Equity market capitalisation-to-GDP (%)


The forward PE multiple for Vietnam had been converging on peers over the past five years. The current multiple is approximately 1STDEV above its 10-year average, but for most of that period we believe that Vietnamese equities were deeply undervalued. The exuberance of Q118 has largely come out of most prices and the PE is back on trend.

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The ratio of market capitalisation-to-GDP for Vietnam is 79%

The current PE, whilst still 1STDEV above its post GFC average is consistent with 5-year trend




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Figure 36: Vietnam-DS market, forward PE (x)


The chart of the forward PE ratio for Vietnam relative to Asia ex Japan looks very similar. It is currently one standard deviation above the 10-year average. However, this is a significant improvement on the three standard deviations expensive in April!

Figure 37: Vietnam-DS market, forward PE relative to Asia ex Japan (x)


Given Vietnam's stage of development and our expectations for continued robust economic growth, we believe the forward PE is justified. On 2019 EPS, Vietnam's PE is slightly below the average for ASEAN. The key is whether 22% EPS growth for 2019 is achievable; we do a deep dive into the drivers behind this below, when we discuss potential index targets.

Relative to Asia ex Japan, we believe Vietnam is being re-rated. We have also taken out some of the exuberance from Q118

Vietnam's PE is slightly below the average for ASEAN. The key is whether 22% EPS growth for 2019 is achievable




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Figure 38: Regional benchmark indices valuation comp table

PE EPS Growth (%) PB Dividend Yield

2018 2019 2018 2019 2018 2019 2018 2019

(x) (x) (%) (%) (x) (x) (%) (%)

JCI Index 15.5 13.8 30 13 2.3 2.1 2.3 2.5

FBMKLCI Index 17.7 16.4 Nm 8 1.8 1.7 3.1 3.3

PCOMP Index 18.2 16.1 11 13 2.1 1.9 1.6 1.8

STI Index 12.9 12.0 Nm 8 1.1 1.1 4.0 4.2

SET Index 16.0 14.5 7 10 2.0 1.8 3.1 3.3

VNINDEX Index 17.2 14.1 4 22 3.1 2.7 1.6 1.6

Average 16.2 14.5 13 12 2.1 1.9 2.6 2.8

Source: Bloomberg. Note: Based on prices as of COB on 31 August 2018

Index target

We have argued that valuations measures such as the PE ratio shouldn’t be looked at in isolation; rather, they should be viewed in the context of the prevailing interest rate environment. Multiples and interest rates are typically inversely correlated. We see this across ASEAN; we see the same effect in Vietnam.

Figure 39: Vietnam-DS market vs 10Y bond yields, inverted (%)

Source: Bloomberg

Assuming the historic relationship between bonds and equities holds, and given assumptions for market interest rates and EPS growth, we can derive index targets for the Ho Chi Minh Exchange.

For rates, in most markets we typically use 10Y bond yields, but for Vietnam this is not particularly liquid. This is sufficient to illustrate the trend in asset prices (e.g. see the chart above) but is not as helpful when we are trying to identify something slightly more precise such as an Index target. For that that reason we have used the 5Y bond yield. It is currently 4.75%. Our model assumes this rises to 5.0% by December 2018 and 5.25% by December 2019. For reference, the average over the past three years is 5.1%.

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PE multiples and market interest rates are inversely correlated

Our index target is derived from a model of the earnings yield gap, and assumptions about future growth and rates




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Figure 40: Vietnam 5-year and 10-year bond yields

Source: Bloomberg

For earnings, at first glance consensus estimates for the Ho Chi Minh Index (HOSE) for 2019 and 2020 look ambitious: 22% in 2019 and even faster the year after. For this reason we conducted our own due diligence. We calculated the weighted growth in net income for 2019 using estimates for all the listed companies followed by at least three analysts (42 companies, representing approximately to-thirds of the HOSE total market capitalization).

We arrived at a very similar number. However, analysis of the contribution was instructive; the growth is very dependent upon a single group: Vingroup. Three of the four largest contributors to growth in 2019 are: Vingroup, Vinhomes and Vincom Retail. Consensus is that earnings will grow by an average of 40% across the three companies in 2019. A surprise in earnings of the group's core property business would have a significant impact on the weighted growth for the index as a whole.

Other large contributors to growth include: Vietcombank, Hoa Phat Group, Vietinbank, Vietnam Dairy, PV gas, Airports Of Vietnam, Masan Group and Vietjet Aviation.

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Consensus growth in net income for HOSE in 2019 is 22%

More than half of this growth is from a single group: Vingroup




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Figure 41: Consensus weighted growth in net income for 2018 and 2019

Growth

Weighted Growth

Coverage FY1 FY2 Weight FY1 FY2

GICS Sector (#) (%) (%) (%) (Perc pts) (Perc pts)

Vingroup Real Estate 4 42 47 0.1347 5.66 6.33

Vinhomes Real Estate 6 0 41 0.1199 0.00 4.90

Vietcombank Financials 6 7 15 0.0909 0.67 1.38

Vincom Retail Real Estate 3 0 34 0.0309 0.00 1.06

Hoa Phat Group Materials 8 4 31 0.0325 0.14 1.01

Vietinbank Financials 4 6 24 0.0394 0.24 0.95

Vietnam Dairy Consumer Staples 7 3 9 0.0956 0.28 0.89

PV gas Utilities 4 16 11 0.0773 1.25 0.87

Airports Of Vietnam Industrials 5 36 11 0.0761 2.73 0.85

Masan Group Consumer Staples 7 43 22 0.0390 1.68 0.84

Vietjet Aviation Industrials 5 6 16 0.0336 0.20 0.54

HCMC Dev bank Financials 4 0 32 0.0141 0.00 0.45

Military Bank Financials 7 45 21 0.0204 0.92 0.42

Asia Comm Bank Financials 7 91 20 0.0164 1.49 0.33

Mobile World Consumer Discretionary 8 14 19 0.0161 0.22 0.31

FPT Corp Information Technology 5 -20 20 0.0110 -0.22 0.22

VP Bank Financials 5 15 9 0.0248 0.38 0.22


We believe the consensus estimates for 2019 and 2020 are high; hence the exercise above. However, IF these are correct then it would suggest that the Ho Chi Minh Index will re-test its highs over the next 15 months.

Our base case Index targets are 1,070 as at December 2018 and 1,360 for December 2019 (rounded up to the nearest 10 pts). The implied upside to VNINDEX based on the closing price as of August 31 is 7% in the remainder of 2018 and a total increase of 36% over the next 16 months.

We mentioned that assumptions about future growth in EPS are already elevated. The other caveat is interest rates. These are relatively close to their average of the past three years, but they are low if we take a longer-term perspective. As recently as 2011, benchmark yields were 12%.

The sensitivity of equity prices to rates is high. Since March, bond yields in Vietnam have inflected up (as they have in many frontier and emerging markets). We believe this has been a significant, contributing factor to the correction we have witnessed. In the table over the page we show the sensitivity to a one standard deviation change in rates.

Ho Chi Minh Index could re-test its highs over the next 15 months…

…However, you should also be aware that the sensitivity to changes in rates is significant




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Figure 42: UBS model for the Ho Chi Minh Index as at Dec/2018 and Dec/2019

Target earnings yield gap, based on experience over the past three years (%)

- Upside 0.9%

- Base 1.5%

- Downside 2.1%

2019E 2020E

Bond yield (%) 5.00% 5.25%

Implied fwd PE (x)

- Upside 16.9 16.3

- Base 15.4 14.8

- Downside 14.1 13.6

Growth (%) 2019E 2020E

Consensus EPS 69.6 91.8

- Growth YoY% 22% 32%

Implied VN INDEX level Dec-18 Dec-19

- Upside 1,179 1,492

- Base 1,070 1,359

- Downside 980 1,248

Upside from current Index to our Base case Dec-18 Dec-19

Current Ho Chi Minh Index 998 998

Implied upside to Base case 7% 36%

Source: Thomson Reuters Datastream, Bloomberg, UBS




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Today, UBS is initiating upon six stocks with an average upside of 35% We are initiating on four banks and two consumer stocks.

Figure 43: UBS recommendations and valuations

PE P/BV Div Yld

Price UBS PT Upside Mkt Cap ADV, 30D 2018 2019 2018 2019 2018 2019

Company (Local) (Local) (%) (US$m) (US$000) (x) (x) (x) (x) (%) (%)

Military Bank 23,700 33,500 41% 2,197 6,219 9.0 7.4 1.6 1.4 2.5% 2.5%

Mobile World 120,000 160,000 33% 1,663 2,924 12.9 11.4 5.4 4.8 1.5% 1.7%

Techcombank 26,300 42,500 62% 3,946 1,740 11.3 10.2 1.8 1.5 0.0% 0.0%

Vietcombank 62,500 64,500 3% 9,650 5,885 20.0 16.5 3.7 3.2 1.3% 1.3%

Vietnam Dairy 156,700 190,000 21% 9,760 6,880 26.8 23.6 7.9 6.9 3.2% 3.7%

VP Bank 25,900 38,000 47% 2,693 5,292 7.8 6.9 1.7 1.3 0.2% 0.0%

Average 35% 4,985 4,824 14.6 12.7 3.7 3.2 1.5% 1.5%

Source: UBS estimates

Banking

Banking is the most heavily weighted sector in Vietnam. Over the past three years, Vietnamese banks have achieved the fastest rate of growth and the greatest expansion in RoE in the region. Looking ahead, we believe the sector continues to be very attractive. This is despite lingering concerns over capital adequacy, provisioning and profitability we flagged in answer to the pivotal question at the beginning of this report.

Our positive stance is not predicated on an extrapolation of the recent past. In fact, we believe the growth model of the past 20 years is not sustainable. That model is based on rapid credit growth, predominantly to corporates. Rather, we believe the growth model of the future will be based on 1) credit growth to the household sector, which we believe to be underpenetrated; and 2) growth in fee income, primarily the sale of retail banking products such as bancassurance and mutual funds. Our views are educated by observing change in ASEAN over the past two decades.

We believe the banks we are initiating upon are amongst the best placed to benefit from this vision of the future.

Military Bank (MBB.HM; BUY, price target VND33,500). MBB's successful transformation from predominantly a corporate lender into a retail/SME bank has led to major improvement in its NIM and fee income in the recent years. And we believe is ongoing. We forecast MBB's reported RoE to improve from 13% in 2017 to 19% in 2018 and that it can be sustained at approximately 20% for the foreseeable future. We also believe the bank can meet the minimum capital requirement Basel II without raising capital. However, this would limit its ability to grow. As a result, we do expect it to raise capital; something management has indicated it may try to do in 2019. Beyond capital, our biggest concern would be government intervention; MBB is one of the leading state-owned commercial banks (SOCBs). (Link)

The fastest rate of growth and the greatest expansion in RoE in the region

Our positive stance is not predicated on an extrapolation of the past. Instead, it is growth in household credit and fee income


https://neo.ubs.com/shared/d2XAitSD2c



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Techcombank (TCB.HM; BUY, price target VND42,500). We believe TCB is well positioned to benefit from strong growth in retail banking. The bank is already the most profitable in Vietnam, with a RoA of approximately 2.6%. Although TCB is a relatively small bank with total assets less than 3% of the total banking system, it is a leader in retail banking, particularly mortgage lending and credit cards. Moreover, it has a large market share in the affluent segment, which provides a strong foundation for cross-selling. The bank is also well balanced on corporate and SME lending via its 'ecosystem approach'. The bank's strategy has enabled it to grow fee income significantly faster than peers; something we expect to continue. Our biggest concern, ironically given our opening comments about the industry, is the lack of leverage. This will depress RoE, which we forecast to decline from 28% in 2017 to 21% in 2018 and 16% in 2019. However, we think this could be the bottom. (Link)

Vietcombank (VCB.HM; NEUTRAL, price target VND64,500). We believe VCB has great potential to enhance its ROE given its competitive advantages. VCB has the lowest funding costs amongst peers, the best asset quality and the best retail franchise according to UBS Evidence Lab. VCB's fee income is conspicuously low given its strong franchise; it is only 9% of total revenues and 0.3% of total assets, much below banks in most developing markets of more than 1%. We expect its ROE (adjusted for expenses below-the-line) to improve significantly, from 15% in 2017 to 21% in 2022. Our primary concern is valuations; at more than 3x P/BV, VCB appears to be fairly valued. On PBV/ROE, VCB is valued at a premium to other leading banks in the region e.g. BCA, HDFC but for much lower RoA. (Link)

VP Bank (VPB.HM; BUY, price target VND38,000). VPB arguably offers the purest play on growth in consumer credit, given its leading position in unsecured lending. Household debt penetration in Vietnam is low by regional standards and this still provides ample room for growth. The challenge is to manage the quality of growth (specifically to limit NPLs) and for this reason we do expect growth to slow compared to recent years. However, with its banking business delivering solid growth and NIM expansion, we believe VPB can still deliver compounded growth in net interest income of 23% over the next five years. How significant is the risk from higher credit costs? We estimate its NPLs coverage, fully adjusted was only 39% as at December 2017. When we calculated our price target we discounted the book value to fully close the provisioning gap. This still generated a price target significantly in excess of the current market price. (Link)

Consumer

Mobile World (MWG.HM; BUY, price target VND160,000). We believe the market is under-valuing the potential growth for Mobile World (MWG). We appreciate why: MWG's earnings have historically been driven by the sale of mobile phones, but with smart phone penetration already at 84% the rate of growth will naturally decelerate. However, MWG also has a significant consumer electronics business (we forecast its sales for consumer electronics to comfortably exceed those of phones in 2018); and a growing grocery business. We believe both these businesses offer significant additional room to grow. Sales of consumer electronics on a per capita basis, and of modern trade in general, are low relative to peers. Work by UBS Evidence lab also suggests that MWG's online platforms are amongst the most visited by Vietnamese consumers. (Link)


https://neo.ubs.com/shared/d2pGDnPugl9

https://neo.ubs.com/shared/d2OFwLjzycc9efs

https://neo.ubs.com/shared/d2siSHihP8

https://neo.ubs.com/shared/d2hGgya5BaDi/



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Vietnam Dairy (VNM.HM; BUY, price target VND190,000). Vietnam Dairy (Vinamilk) has a dominant market share and has been able to steadily grow this over the past three years. Euromonitor estimates that Vinamilk's market share is currently: 82% for sales of condensed milk, 68% for yogurt and 56% for UHT milk. A survey by UBS Evidence Lab came to a similar conclusion; of people we surveyed more than 90% of respondents said they regularly bought Vinamilk's brand of UHT and more than 70% replied it was the brand they most often purchased. Vinamilk has also been able to successfully translate this market share into value for shareholders; Vinamilk's return on invested capital post tax for 2018 was 70%. The share price has been weak in Q218, not helped by disappointing Q118 revenue growth. However, we attribute this to slowdown in total FMCG sales (a view supported by Nielsen). Our key call is that this is temporary. Finally, we believe downside in the share price is limited by the desire by two foreign strategic investors to increase their stakes; they have purchased shares directly from the government and in the market. (Link).

Comparing UBS's views against consensus

We compared UBS ratings and price targets against consensus. But not just on an individual company basis; we looked at how the six stocks fitted into the full distribution of analysts' prevailing views on Vietnam's largest listed equities.

Thomson Reuters Datastream attributes a score to each analyst's rating, with 1 being a strong buy and 5 being a strong sell. We included any stock which was followed by at least two brokers; this still only left us with a universe of 24 names.

Any stock with a MEAN recommendation below 2 is good; six stocks met this threshold: FPT Corp (1.40); Techcombank (1.40); Vietinbank (1.50); Mobile World (1.75); Hoa Phat Group (1.75); and Military Bank (1.86). Today, UBS is initiating on three of them; all with BUY ratings.

The biggest divergence between UBS and consensus concerns Vinamilk (3.29). Today, UBS is initiating with a BUY; for consensus it is the second most unpopular stock.

Figure 44: Consensus MEAN recommendations (1-5)

Note: stocks are ranked 1-5, with 1 being a strong buy and 5 being a strong sell. Source: Thomson Reuters, Starmine

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The favourite stocks with consensus are: FPT, Techcombank, Vietinbank, Mobile World, Hoa Phat Group and Military Bank


https://neo.ubs.com/shared/d2nkjqRRECb



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Two of the banks under UBS coverage have the greatest upside according to consensus (Techcombank and VP Bank). In all, there are eight names with upside of more than 30% based on the latest consensus. They include two more of UBS most preferred stocks (Military Bank and Mobile World). The four additional (uncovered) stocks are: FPT Corp, Vinhomes, Airports of Vietnam and Vincom Retail.

Figure 45: Upside/downside to consensus price targets (%)

Source: Thomson Reuters, Starmine. Based on prices as of COB on 31 August 2018

Beyond broker forecasts, Starmine also provides an independent assessment of companies' earnings quality, credit risk, value and momentum. The stocks are ranked 1-100 percentile amongst other listed stocks across Asia against the following criteria:

Price Momentum

Analyst Revisions

Relative Valuation

Earnings Quality

Credit risk

To Starmine's rankings we simply added a column averaging the companies' scores across the featured categories. The results were similar in most respect to consensus ratings, with banks, FPT, Mobile World faring well.

-30%

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The results were similar in most respect to consensus ratings, with banks, FPT, Mobile World faring well




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Figure 46: Starmine's rating vs Asia (ranked 1-100 percentile)

Hardwired

Price

Momentum

Region Rank

Analyst Revisions

Model

Region Rank

Price / Intrinsic Value

Region Rank

Relative Valuation

Region Rank

Earnings Quality

Region Rank

(FY0)

Credit Combined

Region Rank Average

Military Bank 96 94 87 71 80 32 77

FPT Corp 61 89 68 84 94 60 76

Asia Comm Bank 98 100 89 54 49 38 71

VP Bank 95 97 87 85 43 13 70

Hoa Phat Group 86 50 92 66 23 84 67

Vietjet Aviation 83 73 35 41 99 50 64

PV Gas 82 70 30 39 98 48 61

Mobile World 29 80 59 39 94 38 57

Saigon Thuong Bank 81 64 67 82 21 8 54

Techcombank - 52 50 80 - 31 53

Vietnam Dairy 67 8 26 29 100 86 53

Saigon Beer 5 96 12 15 100 88 53

Vinhomes - 87 - 25 - 45 52

BIDV 93 97 26 40 37 8 50

Vietcombank 96 84 26 25 42 27 50

Airports of Vietnam 79 39 11 12 79 73 49

HCMC Dev. Bank - 75 48 58 - 14 49

Vietinbank 95 11 61 67 42 13 48

BaoViet Holdings 85 59 4 6 79 52 48

Masan Group 88 59 23 23 19 21 39

Vietnam Petroleum 74 57 27 27 19 26 38

No Va Land 89 40 14 21 40 17 37

Vingroup 95 23 5 10 40 21 32

Vincom Retail - 21 20 20 24 36 24

Source: Thomson Reuters, Starmine

Valuation Method and Risk Statement

Equity investing involves many uncertainties, not the risk of least economic and policy surprises. Given Vietnam's stage of development, we believe government policy is particularly important. Our base case assumes further progress on reform and privatisation. If this does not occur it would likely cap growth in the medium term. Economic growth is often volatile, and Vietnam has experienced more than one boom-bust cycles in recent years. These cycles have a significant impact upon earnings, and in turn asset prices. Asset prices are also a function of interest rates, which in turn reflect expectations for inflation. Interest rates in Vietnam are low by standards of the past 10 years, and they have been rising recently in response to an uptick in inflation. If this trend were to continue it could have a detrimental impact upon asset prices. Finally, the exchange rate is not freely floating. In recent years, the government has allowed the currency to depreciate gradually against the US dollar. However, previous periods of weak growth have witnessed much sharper depreciations. This again represents a risk for foreign investors.




43

Required Disclosures

This report has been prepared by UBS Securities (Thailand) Ltd., an affiliate of UBS AG. UBS AG, its subsidiaries, branches and affiliates are referred to herein as UBS.

For information on the ways in which UBS manages conflicts and maintains independence of its research product; historical performance information; and certain additional disclosures concerning UBS research recommendations, please visit www.ubs.com/disclosures. The figures contained in performance charts refer to the past; past performance is not a reliable indicator of future results. Additional information will be made available upon request. UBS Securities Co. Limited is licensed to conduct securities investment consultancy businesses by the China Securities Regulatory Commission. UBS acts or may act as principal in the debt securities (or in related derivatives) that may be the subject of this report. This recommendation was finalized on: 04 September 2018 09:26 AM GMT. UBS has designated certain Research department members as Derivatives Research Analysts where those department members publish research principally on the analysis of the price or market for a derivative, and provide information reasonably sufficient upon which to base a decision to enter into a derivatives transaction. Where Derivatives Research Analysts co-author research reports with Equity Research Analysts or Economists, the Derivatives Research Analyst is responsible for the derivatives investment views, forecasts, and/or recommendations.

Analyst Certification:Each research analyst primarily responsible for the content of this research report, in whole or in part, certifies that with respect to each security or issuer that the analyst covered in this report: (1) all of the views expressed accurately reflect his or her personal views about those securities or issuers and were prepared in an independent manner, including with respect to UBS, and (2) no part of his or her compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by that research analyst in the research report.

UBS Investment Research: Global Equity Rating Definitions

12-Month Rating Definition Coverage1 IB Services2

Buy FSR is > 6% above the MRA. 48% 25%

Neutral FSR is between -6% and 6% of the MRA. 37% 21%

Sell FSR is > 6% below the MRA. 15% 13%

Short-Term Rating Definition Coverage3 IB Services4

Buy Stock price expected to rise within three months from the time the rating was assigned because of a specific catalyst or event. <1% <1%

Sell Stock price expected to fall within three months from the time the rating was assigned because of a specific catalyst or event. <1% <1%

Source: UBS. Rating allocations are as of 30 June 2018. 1:Percentage of companies under coverage globally within the 12-month rating category. 2:Percentage of companies within the 12-month rating category for which investment banking (IB) services were provided within the past 12 months. 3:Percentage of companies under coverage globally within the Short-Term rating category. 4:Percentage of companies within the Short-Term rating category for which investment banking (IB) services were provided within the past 12 months.

KEY DEFINITIONS:Forecast Stock Return (FSR) is defined as expected percentage price appreciation plus gross dividend yield over the next 12 months. In some cases, this yield may be based on accrued dividends. Market Return Assumption (MRA) is defined as the one-year local market interest rate plus 5% (a proxy for, and not a forecast of, the equity risk premium). Under Review (UR) Stocks may be flagged as UR by the analyst, indicating that the stock's price target and/or rating are subject to possible change in the near term, usually in response to an event that may affect the investment case or valuation. Short-Term Ratings reflect the expected near-term (up to three months) performance of the stock and do not reflect any change in the fundamental view or investment case. Equity Price Targets have an investment horizon of 12 months.


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EXCEPTIONS AND SPECIAL CASES:UK and European Investment Fund ratings and definitions are: Buy: Positive on factors such as structure, management, performance record, discount; Neutral: Neutral on factors such as structure, management, performance record, discount; Sell: Negative on factors such as structure, management, performance record, discount. Core Banding Exceptions (CBE): Exceptions to the standard +/-6% bands may be granted by the Investment Review Committee (IRC). Factors considered by the IRC include the stock's volatility and the credit spread of the respective company's debt. As a result, stocks deemed to be very high or low risk may be subject to higher or lower bands as they relate to the rating. When such exceptions apply, they will be identified in the Company Disclosures table in the relevant research piece.

Research analysts contributing to this report who are employed by any non-US affiliate of UBS Securities LLC are not registered/qualified as research analysts with FINRA. Such analysts may not be associated persons of UBS Securities LLC and therefore are not subject to the FINRA restrictions on communications with a subject company, public appearances, and trading securities held by a research analyst account. The name of each affiliate and analyst employed by that affiliate contributing to this report, if any, follows.

UBS Securities (Thailand) Ltd.: Ian Gisbourne.

Company Disclosures

Company Name Reuters 12-month rating Short-term rating Price Price date

Military Commercial Joint Stock Bank MBB.HM Buy N/A D23,700.00 31 Aug 2018

Mobile World Investment MWG.HM Buy N/A D120,000.00 31 Aug 2018

Techcombank TCB.HM Buy N/A D26,300.00 31 Aug 2018

Vietcombank VCB.HM Neutral N/A D62,500.00 31 Aug 2018

Vietnam Dairy Products4 VNM.HM Buy N/A D156,700.00 31 Aug 2018

Vietnam Prosperity Bank VPB.HM Buy N/A D25,900.00 31 Aug 2018

Source: UBS. All prices as of local market close. Ratings in this table are the most current published ratings prior to this report. They may be more recent than the stock pricing date 4. Within the past 12 months, UBS AG, its affiliates or subsidiaries has received compensation for investment banking

services from this company/entity or one of its affiliates.

Unless otherwise indicated, please refer to the Valuation and Risk sections within the body of this report. For a complete set of disclosure statements associated with the companies discussed in this report, including information on valuation and risk, please contact UBS Securities LLC, 1285 Avenue of Americas, New York, NY 10019, USA, Attention: Investment Research.




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