How is Vietnam stock market valued?

Relatively attractive market valuations

The VN-Index is currently trading at trailing P/E of 18.6x, or one standard deviation (SD) above the 10-year mean, and P/B of 2.8x. “The P/E valuation is not too high even though the VN-Index conquered the 1,350 peak on June 3, 2021 after surpassing the 1,100 resistance on December 31, 2020”, FiinGroup said.

While its forward P/E is at 17.8x on the ground of solid earnings growth of corporates (20.7%) and banks (23.8%) in 2021 regardless of stock splits or equity offerings. With the overall earnings growth projected at 20.7% in 2021, in FiinGroup’s opinion, Vietnam’s stock market looks “relatively attractive” with PEG ratio of 0.89 (PEG = 18.6/20.7 = 0.89).

The earnings yield of VN-Index is estimated at 5.4% (the inverse ratio to the P/E or 1/18.6), well above the annual interest rates for 12-month deposits but it seems to be rather low in correlation with nominal interest rates for corporate bonds (9%-12% per annum) and other fixed-income investment products (including certificates of deposits which offer interest rates of 8%-10% per annum for the similar term).

FiinGroup estimated that the overall earnings could accelerate to 33.4% in 2022. The earnings momentum is surprisingly good to the market.

There are some concerns that the market is currently in a similar context to the pre-2007 boom period before a crash in early 2008 and downtrend till 2015. “We believe that it is rational to consider these concerns on par with market demand that has been spiked by the rising inflows of speculative money local retail investors and the psychology of FOMO (fear-of- missing-out) among retail and institutional investors”, FiinGroup emphasized.

However, FiinGroup said that there woud be no remarkable downside risk. Firstly, the booming stock market in the 2006-2007 period was hyped by both domestic and foreign inflows while the market is currently at the different context with trading liquidity propelled by domestic retail investors, not foreign institutions which have been net sellers of more than VND30.7 trillion YTD. Secondly, the VN-Index was trading at extremely high valuation multiples at the end of Q1-2007 with 31.4x P/E and 8.9x P/B. At that time, the benchmark hovered around 1,130 points with the average daily trading value of VND1.2 trillion while there were 140 stocks listed on the Hochiminh Stock Exchange with a combined capitalization of VND364 trillion. The current market breadth has improved with the average daily trading value up 17 times, the size of market cap up 14 times and the number of securities trading accounts up 9 times, but valuation multiples are much lower.

In fact, the VN-Index is trading at trailing P/E of 18.6x and P/B of 2.8x, indicating that Vietnam’s stock market looks relatively attractive compared to its regional peers on P/E relatives, but staying higher on P/B relatives.

It is noteworthy that there are few regional markets having such a positive outlook for overall earnings (with respective growth rates of 20.6% and 33.4% projected for 2021 and 2022). The solid earnings prospects prompted the VN-Index to be the best performer among emerging and frontier markets, said FiinGroup.

Risks  to watch

In 2021, banks are forecast to contribute up to 43% of the overall earnings. “We believe that it is very important for investors to keep a close eye on (i) performance of the banking system in Q2-2021, (ii) regulatory amendments to the policy interest rates and credit risk provisions, (iii) possibility of maintaining high net fee and commission incomes and (iv) increase of stock splits and equity raising exercises (EPS dilutive) among listed banks if analyzing market sentiment and fundamentals” FiinGroup forecasted.

While earnings growth is projected to accelerate in 2021 and 2022, but equity offerings are creating a dilution risk, resulting in lower earnings-per-share (EPS) growth. The risk really matters since FiinGroup’s data shows that earnings-per-share (EPS) is expected to grow at a slower pace than earnings (10.1% vs. 20.7%) as a result of stock split and equity offerings.

Which sectors have upside potential?

FiinGroup defines that sectors having upside potential are ones whose earnings growth prospects have not yet fully been priced in despite recent rallies in share prices and could be spotted out by comparing trailing P/E with the historical 3-year average and forward P/E. For banks, insurers and securities companies, P/B ratio is used as a substitute metric.

Among few laggards, insurance stocks edged down 3% YTD and rose as slowly as 27.2% a year earlier despite 25% earnings growth in 2020 through the pandemic. Insurance shares are currently trading at trailing P/B of 1.5x, far below their historical 3-year average (2.2x). Expected increase in interest rates is a major driving factor for earnings growth. On balance sheets of listed insurers, a large proportion of assets are sensitive to interest rates. Up to 70%-80% of their total assets are deposits at banks. In addition, state divestments at leading insurers (BVH, BMI, MIG) could be a catalyst for insurance stocks in the coming time.

Sectors has upside potential in the time to come

As for real Estate, shares have risen 26.6% YTD. Given the strong earnings prospects, valuation multiples, in FinGroup’s view, appear attractive with 2021 forward P/E of 20.4x vs. trailing P/E of 22.2x, which are below the 3-year average of 24.8x. Real estate stocks are trading at trailing 12-month P/B of 3.2x, below the 3-year average of 5.7x.

While retail shares have risen 22.8% YTD. Retailers expect net sales and earnings to rise 16.1% and 32.2% in 2021, respectively. In fact, first-quarter net sales grew modestly at 13.3% but earnings surged 36.5% thanks to profit margin expansion. Retail stocks look attractively on positive earnings outlook though trailing P/E is well above the 3-year average.