Vietnam. abc. *Employed by a non-us affiliate of HSBC Securities (USA) Inc, and is not registered/qualified pursuant to FINRA regulations

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1 Herald van der Linde* Head of Equity Strategy, Asia-Pacific The Hongkong and Shanghai Banking Corporation Limited Devendra Joshi* Equity Strategy The Hongkong and Shanghai Banking Corporation Limited *Employed by a non-us affiliate of HSBC Securities (USA) Inc, and is not registered/qualified pursuant to FINRA regulations 1

2 Introduction is an MSCI frontier market, as are Pakistan, Sri Lanka and Bangladesh. Frontier markets are investable but have lower market cap and liquidity than the more developed emerging markets. They are typically popular with investors seeking high, long-term returns and low correlations with other markets. Market structure Herald van der Linde* Head of Equity Strategy, Asia-Pacific The Hongkong and Shanghai Banking Corporation Limited *Employed by a non-us affiliate of HSBC Securities (USA) Inc, and is not registered/ qualified pursuant to FINRA regulations has two stock exchanges the Ho Chi Minh Stock Exchange (HOSE) and the Hanoi Stock Exchange (HNX). HOSE is mostly dedicated to equities trading, while HNX trades equities, bonds and over the counter (OTC) securities. HOSE was initially established as the Ho Chi Minh City Securities Trading Center (HoSTC) in 2. It was later upgraded and renamed in 27. Prior to 1 March 22, shares were only traded on alternate days. The equities market has come a long way in a short time. In January 26, there were only 34 companies listed on HOSE; this has increased to 33, with the market cap expanding from USD1.1bn in 26 to USD29.9bn today. The biggest 1 HOSE companies account for % of total market cap, making it a very concentrated market. Market performance (Index level) HOSE: Number of stocks and market cap (USDbn) HCM Index lev el Index members (LHS) Market cap Dec-6 Sep-7 Jun-8 Mar-9 Dec-9 Sep-1 Jun-11 Mar-12 Jan-6 Jan-7 Jan-8 Jan-1 Jan-11 In terms of sector composition, HOSE is skewed towards financials. Only c companies are financial institutions, but they constitute more than 49% of the total market cap. The consumer staples sector is a distant second (19%), followed by utilities (12%) and materials (6%). The largest company listed on HOSE is an oil & gas firm, Petro. It has a market cap weight of 1% on the VN Index (Ho Chi Minh Index). It is closely followed by Bank of Foreign Trade of and a real estate firm, Vingroup. These stocks account for nearly 29% of the total market. In, foreign investors have to consider liquidity and foreign ownership limits, so sector analysis may not be as meaningful as it is in other markets. has begun to adopt a body of ese Accounting Standards (VAS) that are based on, although not identical to, the related International Accounting Standards (IAS). 2

3 Turnover on both ese bourses is quite low. The 2-day moving average of the combined daily trading value (as of 1 June 212) of HOSE and HSX is USD61.9m, with HOSE accounting for USD38.8m. HOSE sector composition in terms of market cap Liquidity is low Materials, 6% Industrials, 6% Utilities, 12% Others, 7% Financials, 49% USDm HCM Hanoi Consumer staples, 19% Jan-6 Oct-6 Jul-7 Apr-8 Oct-9 Jul-1 Apr-11 Earnings and valuation The VN Index is trading at a trailing PE of 11.1x (based on reported EPS in the last four quarters). This is a c18% discount to the MSCI Asia ex Japan s trailing PE of 13.x. Based on the history available (since 26), we see that on average the VN Index has been trading almost at par with the Asia ex Japan average trailing PE. However, a detailed look at the time series reveals that was trading at a premium between February 26 and March 28. Since then, has traded at a average discount of 27%. If we compare the current trailing PE to the long-term average trailing PE of 17.4x, it trades at a 36% discount. Making a similar comparison with the post-28 trailing PE reveals a 8% discount. This suggests the market is currently trading at a discount to the region as well as to its own history. A similar picture emerges when looking at PB ratios. is trading at a trailing PB of 1.6x, which is 6% lower than the Asia ex Japan average of 1.7x. The current trailing PB of 1.6x represents a 18% discount to the post-28 average trailing PB of 1.9x and 49% to the long- term average of 3.1x. Trading at a discount to the regional trailing PE : PB ratio relative to Asia x HCM Trailing PE MSCI AEJ Trailing PE 3.x HCM Trailing PB MSCI AEJ Trailing PB 4x 3.x 3x 2.x 2x 2.x 1x 1.x x 1.x M ar-6 Nov-6 Jul-7 M ar-8 Nov-8 Jul-9 M ar-1 Nov-1 M ar-12 M ar-8 Aug-8 Jun-9 Nov-9 Apr-1 Sep-1 Feb-11 Dec-11 May-12 Source: MSCI, Bloomberg, Thomson Reuters Datastream, HSBC Source: Bloomberg, Thomson Reuters Datastream, HSBC The trend in the trailing 12-month dividend yield since 26 suggests that yields have been rising since early 21. The chart below shows that the dividend yield has doubled to 4.% since late 28. 3

4 A new investment law came into effect in 26. As part of s efforts to meet the criteria for accession to the WTO, the National Assembly attempted to unify principles relating to investment in by foreign and domestic investors. However, it appears that a common legal framework has not yet been achieved in all areas. Rising dividend yields Jan-6 Jul-6 Jan-7 Jul-7 Jan-8 Jul-8 Jul-9 Jan-1 Jul-1 Jan-11 Dividend yield (%) Economic basics The economy was originally based on agriculture, mainly rice, coffee, tea, and rubber. Growth has increased rapidly since the country was reunited in 1976, with the government implementing structural reforms to modernise the economy and create more competitive export-driven industries such as textiles. Trinh Nguyen Economist The Hongkong and Shanghai Banking Corporation Limited trinhdnguyen@hsbc.com.hk joined the WTO in January 27, providing access to the global market. The global financial crisis hurt growth, with GDP growing less than the 7% annual average achieved during the last decade. Export growth resumed in 21, driving up GDP, but the government has struggled to control one of the region s highest inflation rates, but this recently dipped to single figures for the first time in two years. Although the global recession hurt the economy, has shown an impressive ability to make progress in the face of adversity. With favourable demographics, geographical proximity to China and a strong entrepreneurial culture, the economy has robust fundamentals. But without reforms to eliminate longstanding structural bottlenecks such as inefficient state-owned enterprises (SOEs), public investment, and the banking sector the country could be stuck on a below trend growth trajectory over the medium term. Economic policy primer s economy remains dominated by SOEs which still produce about 4% of GDP. Agriculture s share of economic output has continued to shrink from about 2% in 2 to about 2% in 21, while industry s share increased from 36% to 41% in the same period. When inflation reached 23% in February 211, shifted its focus away from economic growth to stabilising its economy by tightening fiscal and monetary policies. While this curbed demand for goods, especially food, economic growth suffered. On the export front, the formula of low-wage, low-cost 4

5 manufacturing no longer works as it once did as countries such as Cambodia and Bangladesh now undercut. Slowing growth has focused attention on reform. A law will be passed to require SOEs to disclose their earnings and it is hoped that much-anticipated changes to the banking sector will make the financial system more transparent. Political structure is a one-party state that has 8 provinces and five municipalities. The Politburo is responsible for government policy, while the Secretariat is in charge of overseeing day-to-day policy. The National Assembly has members, who are elected for a five-year term. Key regulatory bodies The State Bank of is the central bank. It is responsible for promoting monetary stability and the supervision of financial institutions. The Ho Chi Minh City Stock Exchange (HOSE) is the largest stock market. The benchmark index is the VN-Index.