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Stocks corrected to suitable values
In our second quarter Market Outlook report, we wrote: “We believe that the VN-Index may continue to rise in the short-term as P/E multiples continue to expand. But over the medium-term, we believe that it is a bit overbought and will correct back to a more reasonable valuation in the range of 560 to 580.”
That is pretty close to what happened. The VN-Index began the third quarter at 578 and rose to a peak of 640 on September 3, which equated to a trailing 12 month P/E ratio of 16.2x and a gain of 30.7 per cent over eight months. We admit that this is higher than we thought it would go. And at that time, many people were commenting that our forecast for a correction seemed unwarranted. But by the end of the quarter, the VN-Index had dropped through the psychological resistance level of 600 to close at 599. It has since dropped further, so that 580 no longer seems at all unreasonable.
The HNX-Index faired a bit better. It saw a similar run-up, from 78 on July 1 to a peak of 90 on September 17 and managed to stay close to that level through the end of the month, closing the quarter at 89.
There were only two pieces of news that seemed to drive the rise of the indices: 1) inflation numbers came in better than expected; and 2) PetroVietnam Gas (GAS), which has the largest market capitalisation of any company on the HSX, entered into a significant agreement with ExxonMobil to develop the Quang Ngai City gas field. There was no real news that fueled the correction during the third quarter, simply a change in investor sentiment.
While the VN-Index was rising to its lofty heights of 640 and we were calling for a correction, several market participants made the point that, in fact, much of the increase was due to GAS. As of September 30, GAS made up 19.4 per cent of the VN-Index market capitalisation, giving it the ability to significantly influence the overall results. It had risen by 22.8 per cent from a low of VND86,400 per share on May 19 to a high of VND124,000 per share on August 28 but then fell back below VND110,000. There was some justification for this increase as the company announced its intent to co-operate with ExxonMobil to promote a $20 billion investment plan for exploring for and transferring gas from the Quang Ngai City gas field to a power plant in Quang Ngai province. In fact, our analyst currently maintains a Buy recommendation on GAS with a target price of VND121,000.
There was a valid question though as to whether the rest of the market had really moved up so quickly or whether the gains were mostly due to GAS. We calculated that if we had excluded GAS from the VN-Index, the eight-month gain would have been 19.9 per cent (and in fact, more than 20 per cent since the dip in mid-May due to tensions with China in the East Sea). So while the moves were not quite so extreme, the gains without GAS were still quite large.
During the third quarter, and also year-to-date, the energy sector has been the best performer. This, of course, is dominated by GAS, which we discussed above. The only other sector to outperform the VN-Index year-to-date is technology, which is led by FPT Corporation (FPT). But during the third quarter this sector was relatively flat.
The consumer sector, which includes large-cap heavyweights, Masan Group (MSN) and Vinamilk (VNM), trades at the highest P/E ratio of 20.1x but recorded earnings declines. MSN had much to do with this due to its P/E ratio of more than 200x. But VNM also trades at a fairly high P/E of 17.5x as do other members of the sector. Despite the poor current quarter earnings performance, the high P/E ratios are probably justifiable due to the emergence of Vietnam’s middle class and high potential for increases in consumer spending.
The worst performing sector year-to-date has been healthcare, which is mainly comprised of pharmaceuticals companies. The largest company in this sector is DHG Pharmaceutical (DHG), which we believe has strong potential in the long run. We maintain a Buy recommendation with a target price of VND115,000.
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