BMI Vietnam Freight Transport Report Q2 2014

Q2 2014www.businessmonitor.com

VIETNAMFREIGHT TRANSPORT REPORTINCLUDES 5-YEAR FORECASTS TO 2018

ISSN 1750-5364Published by:Business Monitor International

Vietnam Freight Transport ReportQ2 2014INCLUDES 5-YEAR FORECASTS TO 2018

Part of BMIs Industry Report & Forecasts Series

Published by: Business Monitor International

Copy deadline: January 2014

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CONTENTS

BMI Industry View ............................................................................................................... 7

SWOT .................................................................................................................................... 9Freight Transport ...................................................................................................................................... 9Political ................................................................................................................................................. 12Economic ............................................................................................................................................... 13Business Environment .............................................................................................................................. 14

Industry Forecast .............................................................................................................. 15Road Freight ......................................................................................................................................... 16

Table: Road Freight, 2011-2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

Inland Waterways .................................................................................................................................. 18Table: Inland Waterway Freight, 2011-2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

Rail Freight .......................................................................................................................................... 20Table: Vietnam Transport Network Length (km) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20Table: Rail Freight, 2011-2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

Air Freight ............................................................................................................................................ 21Table: Air Freight, 2011-2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

Maritime Freight ................................................................................................................................... 23Table: Maritime Freight, 2011-2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25

Trade ................................................................................................................................................... 25Table: Trade Overview, 2011-2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25Table: TOP IMPORT DESTINATIONS, 2005-2012, US$mn . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25Table: TOP EXPORT DESTINATIONS, 2005-2012, US$mn . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

Market Overview ............................................................................................................... 27

Industry Trends And Developments ................................................................................ 33Multimodal ........................................................................................................................................... 33Maritime .............................................................................................................................................. 34Air ...................................................................................................................................................... 36Road .................................................................................................................................................... 36Rail ..................................................................................................................................................... 37

Company Profile ................................................................................................................ 39Vietnam Airlines Cargo ............................................................................................................................ 39Vietnam Petroleum Transport Company (VIPCO) .......................................................................................... 42Vietnam National Shipping Lines (Vinalines) ................................................................................................ 44

Political Outlook ................................................................................................................ 48Domestic Politics ..................................................................................................................................... 48

Table: Vietnam Political Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49

Vietnam Freight Transport Report Q2 2014

Business Monitor International Page 4

Long-Term Political Outlook ..................................................................................................................... 50

Oil Price Outlook ............................................................................................................... 54Global Oil Products Price Outlook ............................................................................................................. 54

Table: 2013 Oil Product Price Forecast Record . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54

Methodology ......................................................................................................................................... 56Crude Price Forecasts ............................................................................................................................ 57

Table: BMI's Oil Price Forecasts, Average Price (US$/bbl) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57Oil Product Price Forecasts ..................................................................................................................... 57

Table: BMI's Refined Products Forecast, US$/bbl . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58Narrower US Market Crude-Product Spreads .............................................................................................. 59Weak Demand Persists ............................................................................................................................ 60Supply: Global Capacity Supports Demand ................................................................................................. 61Quarterly Prices .................................................................................................................................... 65

Table: BMI Refined Oil Products Quarterly Forecast, US$/bbl . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65Naphtha: Long-Term Growth Faces Headwinds From Gas ............................................................................ 66Gasoline And Gasoil/Diesel: Gasoline Weakness To Continue ........................................................................ 68Jet Fuel: Downward Movement Capped By Recovery .................................................................................... 74

Table: Total Air Freight And Passenger Volumes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76

Bunker Fuels: Sulphur Control To Hit Rotterdam Hardest ............................................................................. 76Risks To Outlook .................................................................................................................................... 78

Macroeconomic Forecasts ............................................................................................... 79Table: Vietnam - Economic Activity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82

Demographic Forecast ..................................................................................................... 83Demographic Outlook .............................................................................................................................. 83

Table: Vietnam's Population By Age Group, 1990-2020 ('000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84Table: Vietnam's Population By Age Group, 1990-2020 (% of total) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85Table: Vietnam's Key Population Ratios, 1990-2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86Table: Vietnam's Rural And Urban Population, 1990-2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86

Methodology ...................................................................................................................... 87Industry Forecast Methodology ................................................................................................................ 87Sector-Specific Methodology .................................................................................................................... 88Sources ................................................................................................................................................ 89



BMI Industry View

In line with BMI's view that the Vietnamese economy would accelerate forcefully into the final months of

the year (see 'Economy Picking Up Pace', October 4 2013), the latest data released by the General StatisticsOffice (GSO) showed that the economy expanded by 6.0% year-on-year (y-o-y) in Q4 2013. This translatesinto full-year growth of 5.4% for 2013, just slightly above our forecast of 5.3%. The latest GDP reading,combined with the strong set of economic data we have seen in recent weeks (accelerating foreign directinvestment inflows, remittances, and merchandise trade exports), have reaffirmed our conviction that theVietnamese economy will begin 2014 on a strong note.

In welcome news for Vietnam's freight industry, officials from firms such as Nike, Levi's and Zara attended

a public briefing in November 2013 over the status of the trade discussions between Vietnam and the

EU. One of the matters discussed was the fashion industry's push to mitigate the global 'rules of origin'. The

rules of origin can result into a significant amount of money for the goods coming from Vietnam to the EU.

According to the apparel manufacturers, the modern trade policy must not punish firms for manufacturing

goods in more than one country.

However, Europe's domestic textile industry is against the relaxation of tariffs. 'There are still very high

tariffs and significant trade barriers in place which make it hard for importers and exporters to do business,

and the free trade agreement could potentially solve this issue,' said Tim McPhie, a European Branded

Clothing Alliance spokesperson (CNBC).

In 2014, the freight picture by mode is a little mixed but is steady across the board in terms of growth.

Leading the way over the next 12 months will be the road freight sector with healthy 6.05% tonnage year-

on-year (y-o-y) growth anticipated. The maritime sector is also forecast for strong growth with the Port ofDa Nang set for slightly higher annual growth than the larger Port of Ho Chi Minh City (7.00% compared to6.06%). Slightly lower y-o-y growth is pencilled in for both the rail and air freight sectors (3.12% and3.00% respectively).

Headline Industry Data

2014 rail freight tonnage is set to increase by 3.12% to 6.73mn tonnes.

2014 air freight tonnage is forecast to rise by 3.00% to 189,210 tonnes.

Tonnage handled at the Port of Ho Chi Minh City in 2014 is forecast to grow 6.06%, whereas tonnagehandled at the Port of Da Nang is forecast to increase 7.00%.

2014 road freight tonnage is forecast to grow by 6.05% to 811.35mn tonnes.



2014 total trade is forecast to rise by 6.55%.

Key Industry Trends

Evergreen-Hanjin's Intra-Asia Tie-Up Highlights Vietnam Growth Story - The newly established intra-Asiaservice by Taiwan-based Evergreen Line and South Korea-based Hanjin Shipping, which calls at the port ofHo Chi Minh, will boost both companies' intra-Asia operations. We have long highlighted intra-Asia trade

as a region of strong growth and we note the port of Ho Chi Minh to be a specific beneficiary of the new

route - with the launch of the service offering upside risk to our forecast for the port.

Zenith Expands Vietnam Warehousing Facility - International freight services provider Zenith Global

Logistics made steps to keep up with increasing demand for humidity-controlled warehousing space in the

Asia region by expanding its warehousing facility in Ho Chi Minh City, Vietnam, according to the Journal

of Commerce, reporting in November 2013. The facility, which will house goods and cargoes destined for

the US, covers 7,500 square metres.

Finnair Cargo Adds New Freighter Service - Finnair Cargo expanded its presence in the Asian region by

adding a twice-weekly MD-11 freighter service to the Vietnamese capital, Hanoi, it was announced in

November 2013. The decision underlines Finnair's strategy of improving its Brussels cargo hub

connectivity.

Key Risks To Outlook

The transport sector forms the bulk of infrastructure investment pipeline in Vietnam across our 10-year

forecast period, expected to account for 60-65% in 2022. In part, this is because the country still suffers

from a significant deficit in transportation infrastructure and we believe the Vietnamese government will

continue to develop this sector over the medium term. As such, we expect the transport infrastructure

industry value to grow by an average of 4.5% year-on-year (y-o-y) between 2014 and 2017.

Upside risk could present itself should the Vietnamese government pay heed to calls by the Deputy Minister

of Planning and Investment Nguyen Van Trung to create a favourable investment climate to boost investor

confidence. He emphasised the need to increase investment promotions to attract more advanced technology

and environmentally friendly projects to support the industries in its industrial zones (IZs) and economiczones (EZs). Currently, the country has 289 IZs and 15 coastal EZs, which account for 35%, or more thanUS$80bn, of the country's annual import-export turnover. In addition, these zones attract around 70% of thetotal foreign investment flow into the country, and generate more than 2mn local jobs.



SWOT

Freight Transport

SWOT Analysis

Strengths Vietnam's strong domestic growth rate, coupled with its geography - it stretches for

thousands of kilometres on a north-south axis, creates a need for long-distance

freight haulage.

A recovery of activity levels at the nation's ports in 2010 is expected to continue over

the mid-term to 2018.

Vietnam's location on the South China Sea gives the country access to the main inter-

Asian shipping routes, as well as access to the developing land transport links with

ASEAN countries, allowing the country scope to develop its trade logistics.

Weaknesses The generally poor state of the road network. Despite new highway construction, only

13.5% of the network is considered to be in good condition. Just 26% of the network

has two or more lanes and only 29% is tarred.

Traditionally low investment in rail, with the potential for cost-effective bulk rail freight

being underutilised.

Decades of under-investment have left the country with a port infrastructure system

that is poor by international standards. Overcapacity is a growing problem.

Unresolved business environment issues and lack of significant improvement in

access to infrastructure financing means that we remain very conservative on the

growth potential of Vietnam's freight sector.

A slowdown affecting the US economy has a knock-on effect on Vietnam due to it

being the Asian country's largest export partner.

Vietnamese shipping company Vinashinlines has announced that 90% of its vessels,

including Diamond Way and Sea Eagle, have been sold. The firm added that a number



SWOT Analysis - Continued

of the carriers had been purchased for prices above their original valuation, Hellenic

Shipping News reported in early October 2013.

Opportunities The beginnings of local commercial vehicle production, which will help improve the

stock of lorries used by road haulage companies.

Chinese investment could bring about much-needed improvements in the rail sector.

Growing international interest in Vietnam as a growth market within the box shipping

sector.

The Vietnamese province of Dong Nai is to clear land near the proposed Long Thanh

International Airport in order to develop infrastructure facilities. Under a plan

submitted to the government, 21,000 hectares in three communes in Cam My District

and seven communes in Long Thanh are to be cleared for establishing new residential

and urban areas, industrial zones, research institutes and international service

centres.

The president of Russian Railways (RZD) has explained his belief that an investment

in the construction of a new rail line in southern Vietnam will come in at more than US

$2bn. Speaking to IA Prime, Vladimir Yakunin said that 'it is difficult to talk about it

now, because there is no project', but as it stands, an agreement of intent was signed

on March 11 2013 between RZD, Vietnamese Railways and the mineral deposit

company An Vien, also from Vietnam.

It was announced in June 2013 that the Laos government is to build a new railway

line between the country and its Asian neighbours, Vietnam and Thailand. The 220km

line will run from Laos's Western border with Thailand to the Lao Bao border gate in

Vietnam. Construction will commence in August 2013 with an expected completion

date of the second half of 2017.

The 900,000 twenty-foot equivalent units (TEUs) deepwater Lach Huyen

terminal project will entail a total investment of US$1.2bn and is likely to become

operational in 2015. The terminal, likely to ease port congestion in Haiphong, will be

able to accommodate vessels with a capacity ranging between 8,000TEUs and

9,000TEUs.




The Asian Development Bank (ADB) has announced that it will provide a US$410mn

loan for the Vietnamese government, reports KHL Group. The loan will enable the

government to develop a new arterial road between Ho Chi Minh City, the Mekong

Delta and the south of the country.

Vietnam-based Rang Dong Group has filed a petition to secure approval for

developing Phan Thiet airport, reported the Daily in August 2013, citing the

company's chairman Nguyen Van Dong.

Two berths at Vietnam's first state-built seaport, the Cai Mep-Thi Vai international

port in Ba RiaVung Tau province, are set to be leased for 30 years, according to

official sources.

Threats Vietnam risks losing out to neighbouring countries if it is unable to develop its

infrastructure to keep up with the pace of demand.

Vietnam is vulnerable to any slowdown in Chinese investment and to political risk in

the sensitive South China Sea, subject to competing sovereignty claims.

A drop in international demand for exports would negatively affect Vietnam's freight

transport sector.



Political

SWOT Analysis

Strengths The Communist Party of Vietnam remains committed to market-oriented reforms and

we do not expect major shifts in policy direction over the next five years. The one-

party system is generally conducive to short-term political stability.

Relations with the US have witnessed a marked improvement, and Washington sees

Hanoi as a potential geopolitical ally in South East Asia.

Weaknesses Corruption among government officials poses a major threat to the legitimacy of the

ruling Communist Party.

There is increasing (albeit still limited) public dissatisfaction with the leadership's tight

control over political dissent.

Opportunities The government recognises the threat corruption poses to its legitimacy, and has

acted to clamp down on graft among party officials.

Vietnam has allowed legislators to become more vocal in criticising government

policies. This is opening up opportunities for more checks and balances within the

one-party system.

Threats Macroeconomic instabilities continue to weigh on public acceptance of the one-party

system, and street demonstrations to protest economic conditions could develop into

a full-on challenge of undemocractic rule.

Although strong domestic control will ensure little change to Vietnam's political scene

in the next few years, over the longer term, the one-party-state will probably be

unsustainable.

Relations with China have deteriorated over recent years due to Beijing's more

assertive stance over disputed islands in the South China Sea and domestic criticism

of a large Chinese investment into a bauxite mining project in the central highlands,

which could potentially cause wide-scale environmental damage.



Economic

SWOT Analysis

Strengths Vietnam has been one of the fastest-growing economies in Asia in recent years, with

GDP growth averaging 7.1% annually between 2000 and 2012.

The economic boom has lifted many Vietnamese out of poverty, with the official

poverty rate in the country falling from 58% in 1993 to 20.7% in 2012.

Weaknesses Vietnam still suffers from substantial trade and fiscal deficits, leaving the economy

vulnerable to global economic uncertainties. The fiscal deficit is dominated by

substantial spending on social subsidies that could be difficult to withdraw.

The heavily-managed and weak currency reduces incentives to improve quality of

exports, and also keeps import costs high, contributing to inflationary pressures.

Opportunities WTO membership and the upcoming ASEAN AEC in 2015 should give Vietnam

greater access to both foreign markets and capital, while making Vietnamese

enterprises stronger through increased competition.

The government will in spite of the current macroeconomic woes, continue to move

forward with market reforms, including privatisation of state-owned enterprises, and

liberalising the banking sector.

Urbanisation will continue to be a long-term growth driver. The UN forecasts the

urban population rising from 29% of the population to more than 50% by the early

2040s.

Threats Inflation and deficit concerns have caused some investors to re-assess their hitherto

upbeat view of Vietnam. If the government focuses too much on stimulating growth

and fails to root out inflationary pressure, it risks prolonging macroeconomic

instability, which could lead to a potential crisis.

Prolonged macroeconomic instability could prompt the authorities to put reforms on

hold as they struggle to stabilise the economy.



Business Environment

SWOT Analysis

Strengths Vietnam has a large, skilled and low-cost workforce, which has made the country

attractive to foreign investors.

Vietnam's location - its proximity to China and South East Asia, and its good sea links

- makes it a good base for foreign companies to export to the rest of Asia, and

beyond.

Weaknesses Vietnam's infrastructure is still weak. Roads, railways and ports are inadequate to

cope with the country's economic growth and links with the outside world.

Vietnam remains one of the world's most corrupt countries. According to

Transparency International's 2012 Corruption Perceptions Index, Vietnam ranks 123

out of 176 countries.

Opportunities Vietnam is increasingly attracting investment from key Asian economies, such as

Japan, South Korea and Taiwan. This offers the possibility of the transfer of high-tech

skills and know-how.

Vietnam is pressing ahead with the privatisation of state-owned enterprises and the

liberalisation of the banking sector. This should offer foreign investors new entry

points.

Threats Ongoing trade disputes with the US, and the general threat of American

protectionism, which will remain a concern.

Labour unrest remains a lingering threat. A failure by the authorities to boost skills

levels could leave Vietnam a second-rate economy for an indefinite period.



Industry Forecast

Vietnam's latest real GDP reading, which showed that the economy expanded by 6.0% year-on-year (y-o-y)in Q4 2013, confirms our belief that 2014 will prove to be a fruitful year for the Vietnamese economy. Notonly are we witnessing more evidence of a sustained pick-up in production activity and employment in themanufacturing sector, but we also expect foreign direct investment (FDI) inflows to accelerate as theeconomic recovery gathers pace over the coming quarters. We forecast real GDP growth to come in at6.0% in 2014, versus Bloomberg consensus of 5.5%.

Our assessment of the Vietnamese economy at the provincial level suggests that there are attractiveopportunities for foreign companies to invest in rapidly-developing provinces that are situated in the SouthEast region (including Ba Ria-Vung Tau, Dong Nai, and Binh Duong). We expect rising labour costs andintense competition in developed cities to push companies to look for better opportunities in theseprovinces.

GDP To Enjoy Healthy Mid Term

Vietnam Real GDP growth, % change y-o-y

2010

2011

2012

2013

f

2014

f

2015

f

2016

f

2017

f

2018

f5

5.5

6

6.5

7

7.5

e/f = BMI estimate/forecast. Source: Asian Development Bank, General Statistics Office



To keep pace with growth, Vietnam will need to invest in its logistics sector, but BMI expects a lot of this

investment to come from outside logistic and freight transport companies which will be keen to enter and

expand into this high growth market. We believe that rapid urbanisation, driven by a healthy pipeline of

government-led infrastructure projects over the next five years, will continue to spur rural-urban migrationand foreign direct investment (FDI) into developed cities such as Ho Chi Minh and Hanoi. We have alsoalready witnessed this to some extent in Vietnam's port sector, with considerable investment being made by

container shipping lines and global port operators in the development of modern box terminals at Vietnam's

ports.

This investment in the country's maritime sector has ensured that Vietnam's manufacturing growth can be

achieved with greater links between the country and its main export partner the US. Direct container

shipping links between Vietnam and the US have been in operation since 2009, which have cut both time

and cost, as previously Vietnamese shipments had to be transhipped via Singapore.

Demand from the US for Vietnam's manufactured goods looks set to continue growing, with Vietnam's

exports set to benefit from the slow but steady recovery in the US economy.

Vietnam's export outlook will also continue to be bolstered by China's growth outlook. Although we projectChina's economic growth to slow over the medium term, the country's real GDP growth outlook remains

robust.

Vietnam plays a key role in China's coal supply chain. Vietnam is China's fifth-largest coal supplier

providing the country with the thermal coal it requires for its power stations. Vietnam's role in this supply

chain looks set to continue, although BMI highlights that China is trying to decrease its power sectors'

reliance on coal. While we believe that the percentage supplied by coal fired power plants within China's

overall energy mix will slip over the medium term, it will nevertheless remain above 70%.

BMI believes that Vietnam's textile sector will also benefit from the development of China's middle class,

as the country starts to import more from abroad.

Road Freight

Road Dominates And Offers Best Links Into China

Despite its low standing in road infrastructure, with the Global Economic Forum ranking Vietnam's roads at

123 out of 142 globally, and placing it last in comparison with 13 of its Asia peers, the country's logistics



needs are primarily met by road. In 2014 and beyond, we predict that road freight volumes in Vietnam will

account for the majority of freight carried in the country.

Road Reliant

Vietnam Freight Mode Breakdown By Market Share 2013e

Source: BMI

We forecast that growth in road freight volume will continue to impress, albeit not at the double-digit rate of

growth seen in 2012 and the years preceding it. In 2013, we estimate that annual growth was just under 6%,which is set to rise to slightly over 6% in 2014 to reach 811.35mn tonnes. Over the medium term, we

forecast road freight volume growth will average 7.59% per annum reaching a projected 1.10bn tonnes bythe end of 2018.

There is, however, upside risk to this forecast as more foreign logistics companies, with considerable road

freight expertise expand in Vietnam. Both FedEx and DHL have expanded their role in Vietnam in recent

times. While some companies are breaking into Vietnam by developing their own operations in the country,

others are getting a head start by acquiring and joining up with domestic freight operators. This is the routeCEVA Logistics has taken entering into a joint venture with its long-term business partner Indo TransLogistics Group.



Road freight plays a key role not only in Vietnam's domestic logistics sector, but also in the country's export

supply chain. Road is the main form of transport linking Vietnam's factories to the country's ports and also

plays a key role in linking Vietnam with its second-largest export partner China.

Vietnam's northern border links the country's with the south of China. Road links continue to be developed

between the two and with them trucking services. Kerry Asia Road Transport (Kart), for example, offersa twice-weekly trucking link connecting Shenzhen and Hanoi.

Table: Road Freight, 2011-2018

2011 2012 2013 2014f 2015f 2016f 2017f 2018f

Road freight, '000 tonnes 654,127 722,156 765,070 811,346 878,497 949,784 1,024,494 1,102,945

- % change y-o-y 11.43 10.40 5.94 6.05 8.28 8.11 7.87 7.66

Road freight, mn tonnes/km 40,130 43,902 46,791 50,090 54,346 58,863 63,597 68,568

- % change y-o-y 10.92 9.40 6.58 7.05 8.50 8.31 8.04 7.82

e/f = BMI estimate/forecast. Source: General Statistics Office of Vietnam

Inland Waterways

Mekong Offers Trade Links With Neighbours

Vietnam's inland waterways play a considerable role in the country's freight transport sector, making it the

second-largest freight transport mode in the country. In 2013, we estimate that 180.81mn tonnes of freight

were carried by the nation's waterways, y-o-y growth of 7.31%. In 2014, annual growth will slip slightly to

a still healthy 6.67%, to reach 192.88mn tonnes, while over our forecast period, we anticipate average y-o-y

growth of 6.35%.



Mekong Offers Trade Connections

Map of the Mekong River

Source: BMI

Vietnam's inland waterways stretch for 47,130km and the country's dense network of waterways ranks its

seventh in the world in terms of length. The country's inland waterways include the Mekong River, which

enables freight connections with Vietnam's neighbours. Although we highlight that the River's full potential

has not been reached and so development in the River is an area for potential investment.



Table: Inland Waterway Freight, 2011-2018

2011 2012 2013 2014f 2015f 2016f 2017f 2018f

Inland waterway freight, '000tonnes 160,165 168,493 180,813 192,878 205,108 218,091 231,698 245,986

- % change y-o-y 11.05 5.20 7.31 6.67 6.34 6.33 6.24 6.17

Inland waterway freight, mntonnes/km 34,372 37,018 39,344 42,363 45,613 49,063 52,679 56,476

- % change y-o-y 8.50 7.70 6.28 7.67 7.67 7.56 7.37 7.21


Rail Freight

Network Lacking And No Impetus To Develop It

Despite rail's potential as an overland trade link for Vietnam with its three neighbours, the mode's role in the

country's freight transport sector remains small. In 2013, we estimate that Vietnam's rail freight volumes

accounted for a negligible percentage of the total with the country's rail network transporting just 6.53mntonnes of freight.

In 2013, we estimate that the rail freight sector in Vietnam performed poorly once more, seeing yet another

contraction in y-o-y growth. Growth decreased by 6.82%, following on from 2012's contraction of justunder 4% and 2011's larger contraction of 7.33%. However, in welcome news for the sector, we forecast

growth to come in the positive in 2014 at 3.12% y-o-y to reach 6.73mn tonnes, albeit well below the heyday

of 2007 when tonnage was over 9.00mn tonnes.

There are two key factors that we believe have held back Vietnam's rail freight development and will

continue to do so.

Table: Vietnam Transport Network Length (km)

Vietnam Transport Network Length (km)

Road 206,633

Railway 2.632

Inland Waterway 47,130

Source: CIA World Factbook (accessed January 21, 2014)



The first is the quality of Vietnam's railway infrastructure. The Global Economic Formula gives Vietnam's

rail infrastructure a low ranking, placing it 71st globally out of 123 countries measured. This ranking places

it 12th out of its 13 Asian peers. A major problem for Vietnam's rail freight development is the relativeshortness of the country's rail network. Vietnam's railway lines extend for just 2,632km; this compares withthe country's 206,633km network of roads and 47,130km network of inland waterways.

The second drawback for freight rail development in Vietnam is its gauge incompatibility with China.

Vietnam's network is dominated by narrow gauge, which accounts for 80% of the total. While the country

has some standard gauge track, this system only accounts for 20% of the total.

This means that rail freight trade between Vietnam and China is slowed by gauge changes, making road

freight a more cost- and time-effective alternative; this stymies potential rail-freight projects between thetwo nations.

BMI highlights that developments in Vietnam's rail network are taking place, but these have been focused

on expanding the country's passenger network (eg, a planned high-speed railway link between Vietnam andLaos).

Table: Rail Freight, 2011-2018

2011 2012 2013 2014f 2015f 2016f 2017f 2018f

Rail freight, '000 tonnes 7,285 7,004 6,526 6,730 6,958 7,306 7,715 8,178

- % change y-o-y -7.33 -3.87 -6.82 3.12 3.40 5.00 5.60 6.00

Rail freight, mn tonnes/km 4,162 4,025 3,804 3,903 4,020 4,161 4,344 4,577

- % change y-o-y 5.08 -3.30 -5.48 2.60 3.00 3.50 4.40 5.36


Air Freight

On Growth Trajectory As Vietnam Gets Better Connected

Vietnam's air freight sector may only account for a small percentage of the country's freight transport sector;

although this is not expected to change, there is a lot of growth potential in this sector. The government has

ambitious plans to modernise and expand the country's airport infrastructure, which consists of 44 airports.



Since early 2012, Vietnam has announced that it was in the search for foreign investors to help construct

two international airports: the US$1.2bn Van Don International airport in the northern province of QuangNinh and the US$10bn Long Thanh International airport in the southern province of Dong Nai.

For 2014, we predict that the Vietnamese air freight sector will see annual growth of 3.00%, up from 2013's

2.80%, to reach 189,210 tonnes. Over the forecast period to 2018, we expect Vietnam's air freight levels to

grow on average per annum by 3.96% to reach 223,040 tonnes.

Taking Off

Vietnam's Air Freight Tonnage, '000 tonnes, 2010-2018

2010

2011

2012

2013

2014

f

2015

f

2016

f

2017

f

2018

f0

50

100

150

200

250


BMI expects the increase of air freight connections for Vietnam will come through the development of

intra-Asia air freight routes. In 2012, Air China Cargo and Malaysia's MASKargo added services to Ho Chi

Minh City. Vietnam is also becoming globally better connected by air. In 2012, Emirates added a link with

the country and Dubai, and in 2013, Finnair announced that it planned to launch new cargo routes to Hanoi.

While still at the development stage, Vietnam is seeking to play a greater role in the electronics supply

chain, a key source of demand for air freight transport options. One example has been the impact the local



production of iPhones has had on China's air freight sector. Plans are in place for Vietnam-based facilities to

produce Nokia phones, iPods, PlayStations and Sony laptops, which will all drive up air freight demand.

Vietnam's pharmaceutical sector exports much of its output, but the country also imports a lot. Vietnam's

trade in pharmaceuticals is forecast to grow in the double digits in percentage terms over the medium term.

The global pharmaceutical sector is increasingly turning to the aviation sector to meet its freight needs, with

the sector offering savings in transport time, along with environment controlled options, which are vital for

the transport of some medicines and vaccinations.

Table: Air Freight, 2011-2018

2011 2012 2013 2014f 2015f 2016f 2017f 2018f

Air freight, '000 tonnes 200.30 178.70 183.70 189.21 195.64 203.27 212.42 223.04

- % change y-o-y 5.37 -10.78 2.80 3.00 3.40 3.90 4.50 5.00

Air freight, mn tonnes/km 426.70 480.90 469.80 477.79 489.73 504.42 522.08 542.96

- % change y-o-y -0.02 12.70 -2.31 1.70 2.50 3.00 3.50 4.00


Maritime Freight

Vietnam Catching The Eye Of Shippers

Taiwan-based Evergreen Line and South Korea-based Hanjin Shipping announced a new intra-Asia serviceat the end of 2013, which should provide upside risk for the sector going forward. The new intra-Asia

service, which calls at the port of Ho Chi Minh, will boost both companies' intra-Asia operations and we

have long highlighted intra-Asia trade as a region of strong growth and we note the port of Ho Chi Minh to

be a specific beneficiary of the new route - with the launch of the service offering upside risk to our forecast

for the port.

Vietnam's ports and shipping sectors play a role in the global dry, liquid and container sector. As

highlighted earlier Vietnam plays a considerable role in China's coal supply chain, with the dry bulk

commodity being shipped out of Vietnam and into China's main coal port of Qinhuangdao. Vietnam is anoil-producing nation, but its consumption needs have come to outweigh its supply and so the country is

making use of the liquid bulk shipping sector to import oil.



Getting Better Connected

UNCTADstat Liner Connectivity Index For Asia 2004 and 2013

Source: UNCTADstat

The development of Vietnam's liner connections has been highlighted by data from UNCTAD's liner

connectivity index. In 2004, Vietnam was ranked lowest out of its 14 Asian peers in terms of container line

connectivity, but by 2013, it had jumped up the rankings to ninth place out of its 14 Asian neighbours.

Vietnam's growing role in the global container shipping sector is also in evidence in the port of Ho Chi

Minh's box throughput. In 2014, we expect container volumes to have increased by 6.06% and over the

medium term by an annual average of 6.88%.

For more information on data and analysis of Vietnam's shipping sector, please see BMI's VietnamShipping Report.



Table: Maritime Freight, 2011-2018

2011 2012 2013 2014f 2015f 2016f 2017f 2018f

Port of Ho Chi Minh City (Saigon New)throughput, tonnes '000 33,451 36,029 38,867 41,223 43,986 47,176 50,748 54,212

- % change y-o-y 7.45 7.71 7.87 6.06 6.70 7.25 7.57 6.83

Port of Da Nang throughput, tonnes '000 3,868 4,423 4,812 5,149 5,484 5,784 6,111 6,461

- % change y-o-y 17.10 14.35 8.80 7.00 6.50 5.48 5.66 5.72

e/f = BMI estimate/forecast. Source: Port authorities

Trade

Table: Trade Overview, 2011-2018

Real 2011 2012 2013e 2014f 2015f 2016f 2017f 2018f

Imports, real growth, % y-o-y 4.10 9.09 7.90 7.50 7.50 7.30 7.20 7.00

Exports, real growth, % y-o-y 10.78 15.71 6.00 5.60 5.80 6.20 6.60 6.80

Total trade, real growth, % y-o-y 7.44 12.40 6.95 6.55 6.65 6.75 6.90 6.90

Nominal

Imports, US$bn 112.40 118.98 136.68 157.93 180.76 204.81 232.79 263.93

- % change y-o-y 24.17 5.86 14.87 15.55 14.45 13.31 13.66 13.38

Exports, US$bn 106.84 124.43 140.42 159.39 179.54 201.34 227.57 257.53

- % change y-o-y 31.49 16.46 12.85 13.51 12.64 12.14 13.03 13.16

Total trade, US$bn 219.24 243.41 277.10 317.32 360.30 406.15 460.36 521.46

- % change y-o-y 27.63 11.03 13.84 14.51 13.54 12.73 13.35 13.27

e/f = BMI estimate/forecast. Source: General Statistics Office of Vietnam, BMI

Table: TOP IMPORT DESTINATIONS, 2005-2012, US$mn

2005 2006 2007 2008 2009 2010 2011 2012

China, Mainland, US$mn 5,900 7,391 12,710 15,974 16,441 20,019 24,594 37,647

China, Mainland, US$mn, % of total 16.0 16.5 20.3 19.8 23.5 24.0 23.5 27.2

Korea, Republic Of, US$mn 3,594 3,908 5,340 7,255 6,976 9,761 13,176 17,541

Korea, Republic Of, US$mn, % oftotal 9.8 8.7 8.5 9.0 10.0 11.7 12.6 12.7



TOP IMPORT DESTINATIONS, 2005-2012, US$mn - Continued

2005 2006 2007 2008 2009 2010 2011 2012

Japan, US$mn 4,074 4,702 6,189 8,240 7,468 9,016 10,400 11,803

Japan, US$mn, % of total 11.1 10.5 9.9 10.2 10.7 10.8 10.0 8.5

Singapore, US$mn 4,482 6,274 7,614 9,378 4,248 4,101 6,391 11,421

Singapore, US$mn, % of total 12.2 14.0 12.1 11.6 6.1 4.9 6.1 8.3

Thailand, US$mn 2,374 3,034 3,744 4,906 4,514 5,602 6,384 7,310

Thailand, US$mn, % of total 6.5 6.8 6.0 6.1 6.5 6.7 6.1 5.3

TOTAL 36,761 44,891 62,765 80,714 69,949 83,365 104,510 138,166

TOTAL, top 5 countries, US$m 20,424 25,310 35,597 45,753 39,648 48,500 60,944 85,721

% from top 5 trade partners 55.6 56.4 56.7 56.7 56.7 58.2 58.3 62.0

Source: IMF. N.B. Total exports is from Direction of Trade Statistics, consequently there may be some discrepancy withdata used elsewhere in this report

Table: TOP EXPORT DESTINATIONS, 2005-2012, US$mn

2005 2006 2007 2008 2009 2010 2011 2012

United States, US$mn 5,924 7,845 10,105 11,887 11,356 14,238 16,928 19,427

United States, US$mn, % oftotal 18.3 19.7 20.8 19.0 19.9 20.4 18.2 17.0

China, Mainland, US$mn 3,228 3,243 3,646 4,850 4,909 7,309 11,125 14,755

China, Mainland, US$mn, % oftotal 9.9 8.1 7.5 7.7 8.6 10.5 12.0 12.9

Japan, US$mn 4,340 5,240 6,090 8,468 6,292 7,728 10,781 13,722

Japan, US$mn, % of total 13.4 13.2 12.5 13.5 11.0 11.1 11.6 12.0

Korea, Republic Of, US$mn 664 843 1,243 1,794 2,065 3,092 4,715 5,199

Korea, Republic Of, US$mn, %of total 2.0 2.1 2.6 2.9 3.6 4.4 5.1 4.6

Germany, US$mn 1,086 1,445 1,855 2,073 1,885 2,373 3,367 5,070

Germany, US$mn, % of total 3.3 3.6 3.8 3.3 3.3 3.4 3.6 4.4

TOTAL 32,447 39,826 48,561 62,685 57,196 69,820 92,881 113,944

TOTAL, top 5 countries, US$m 15,242 18,616 22,939 29,072 26,507 34,740 46,916 58,173

% from top 5 trade partners 47.0 46.7 47.2 46.4 46.3 49.8 50.5 51.1

Source: IMF. N.B. Total exports is from Direction of Trade Statistics, consequently there may be some discrepancy withdata used elsewhere in this report



Market Overview

Vietnam Emerges As An Investment Prospect

With the Vietnamese economy beginning to exhibit signs of a robust recovery as we head into 2014, we

believe that it could be a worthwhile effort for investors to assess the country's growth opportunities at the

provincial level, with the company's freight industry well poised to benefit. Firstly from a demographic

perspective, we note that Vietnam reached an estimated population of 90 million in November 2013,

according to a statement released by the General Office of Population and Family Planning. Although the

country's growing domestic market remains an attractive factor for foreign companies seeking to expand

their operations in the region, we note that rapidly shifting demographic trends at the provincial level could

become a major challenge for foreign investors.

That said, we see a handful of emerging provinces that are likely to witness faster population growth and

potentially attract greater FDI inflows over the coming years. We forecast population growth in provinces

such as Binh Duong and Dong Nai to average 4.5% and 2.3% annually over the next five years

(2014-2018). According to a report published in March 2013 by local consultancy firm Vietnam Report, thecountry's top 10 fastest growing enterprises are located not only in developed cities such as Hanoi and Ho

Chi Minh, but also increasingly in rapidly developing provinces including Can Tho, Hai Duong, Nghe An,

Quang Nam, Binh Thuan and Khanh Hoa. We expect this trend to continue to shift in favour of thesesmaller provinces as the Vietnamese government continues to promote foreign investment in these regions

through the establishment of special economic zones and investment in infrastructure projects.

Signs of Strong Momentum Abound

We witnessed some highly positive data in the third quarter of 2013 that indicate strong momentum for

growth over the coming months, and potentially into 2014. We highlight the rebound in manufacturing

production activity, with the HSBC Purchasing Managers' Index (PMI) recording a robust 51.5 reading inSeptember, the strongest reading since April 2011 (see 'PMI Surprises To The Upside, VNI TestingResistance', October 3 2013). More importantly, foreign direct investment (FDI) inflows into the countryhave accelerated significantly in recent months and are expected to surpass the government's full-year target

of US$13bn - usually an indication of improving business sentiment, and a precursor for an acceleration inprivate sector investment. We believe that the positive ripple effects from the factors above will serve as

strong tailwinds for 2014 growth.



Chinese and US demand remain integral factors influencing the performance of the Vietnamese freight

picture over the mid term. In terms of the former, China's real GDP grew by 7.7% in Q413, slightly aboveconsensus expectations of 7.6%. For the year as a whole the economy also grew by 7.7%, which matches

the performance seen in 2012. While a detailed breakdown of GDP by expenditure is unavailable as of yet,

we do not expect its release to reveal a great deal of economic rebalancing taking place within the Chinese

economy. The traditional drivers of real estate and infrastructure construction continue to dominate the

economy.

In terms of the US, we believe the appropriations bill recently passed by the US House of Representatives

and Senate, and which President Barack Obama is expected to sign, may mark an easing in long-running

partisan warfare over fiscal policy. Furthermore, we believe the deal will have positive ramifications for the

economy in 2014, while still allowing for fiscal consolidation over the medium term. Finally, the bipartisan

spending package sets the stage for a crisis-free resolution to the debt ceiling debate, which will come up in

the weeks ahead.

The appropriations package provides US$1.1trn for fiscal year 2014 (FY14), which runs through September30, in line with a budget deal worked out between Democrats and Republicans in late 2013 that we noted as

a meaningful first step toward de-escalating tensions over fiscal issues (see 'Deal Avoids AnotherShutdown, But Future Progress Uncertain', December 11). That legislation allowed higher spending caps inFY14 than those initially envisioned by the budget sequester that went into effect in early 2013, reducing

the drag the fiscal drag on the economy, one reason we see real GDP growth accelerating to 2.8% this year

from our estimate of 1.8% in 2013. We believe that greater clarity about the trajectory of fiscal policy thisyear will allow the US Federal Reserve to continue reducing extraordinary monetary stimulus to the

economy, eliminating its quantitative easing programme by end-2014.

Domestically, over the longer term, imports will be boosted by Vietnam's young population, as younger

populations are generally more supportive of private consumption. The country has a population of 90.7mn,

according to estimates for 2013 by BMI, 60% of which is under 35. We forecast that the population will be

94.1mn by 2017, with 57% under 35, and will rise to 97.7mn by 2022.

Road Freight Remains The Dominant Force In Tonnage Terms Road transport is the most advanced in

terms of freight sector privatisation and is by far the dominant mode for freight in Vietnam, with a market

share of around 75% of domestic cargo. Few foreign companies are present in the market and there are

many small, family owned road freight companies operating informally.



Vietnam has a national road network of 180,549km, according to the latest data provided by the CIA's

World Factbook. BMI believes the sector requires substantial investment as the quality of Vietnam's road

infrastructure was judged by the World Economic Forum (WEF) to be very poor, ranking 123rd out of 142countries surveyed in its Global Competitiveness Report 2011-2012.

Vietnam's railway transport sector has just one operator, the Vietnam Railway Corporation (VRC),established in April 2003 as a state corporation operating railway transport and related services. Vietnam's

rail network totals 2,632km. The network is of mixed-gauge, comprising 2,105km of 1.000m gauge and

527km of 1.435m gauge.

Vietnam's Ministry of Transport has decided to classify the country's airports with an aim to attract

investment in the country's aviation sector. The ministry believes that it is a difficult task to attract

investment in the sector as it requires huge investment capital and high techniques and a longer time frame

to take back the investment capital. The country recorded an increase in capacity of its domestic airports

from 6mn passengers in 2000 to 52mn in 2012.

Meanwhile, an airport development programme approved in 2009 is moving ahead as per the schedule,

according to the Civil Aviation Authorities of Vietnam. Vietnam is currently operating a state-owned airline

Vietnam Airlines as well as private airlines, namely Vietjet Air, Air Mekong and a foreign investedairline Jetstar Pacific. Additionally, the government has also granted approval to the development of 25airports.

Latest data puts the total amount of airports in Vietnam with paved runways at 37, with seven unpaved. This

total puts the country in a poor 97th place in comparison with other countries.



Road Continues To Dominate Freight Mix

Vietnam Freight Transport Mode Breakdown (% of Total 2013e)

Source: General Statistics Office of Vietnam

Vietnam's dense river and canal network provides the country with a highly developed inland waterway

system of 17,702km. This is the second largest sub-sector involved in domestic cargo transport, accounting

for 25-30% of total transport volumes.

Vietnam's seaport network comprises of many small and medium-sized entities, with inefficient

distribution. Most large ports are located on rivers, such as Hai Phong and Ho Chi Minh City, with limited

depth at the entrance. Some ports are located in big cities, thus making it difficult to connect with other

modes of transport for cargo transfer due to traffic congestion.

BMI does highlight, however, the substantial investments APM Terminal has made in Cai Mep

International Terminal (CMIT) since it opened in March 2011 as an important driver of growth. In additionto helping to construct the port, which it did through a joint venture (JV) with Saigon Port and VietnamNational Shipping Lines (Vinalines), APMT purchased two laden reach stackers, an empty reach stacker,two empty container handlers and a 25-tonne forklift - all of which were delivered by Konecranes in 2011.

Weak infrastructure is one of the main factors holding back Vietnam's shipping sector - the country ranks



111th out of 145 countries on the World Economic Forum's Global Competitiveness Report on the Qualityof Port Infrastructure. As such, APMT's commitment to improving CMIT's facilities is an important step

both for the terminal and the country's shipping sector as a whole.

The Vietnamese government also plans to deepen the Port of Ho Chi Minh City's draught, allowing larger

vessels to access the facility. BMI notes that these works are badly needed, as we are seeing a growing

trend for shipping lines to order larger container vessels.

The ongoing problems evidenced at Vinalines are indicative of a deeper malaise in the Vietnamese shipping

sector. State-owned shipbuilder Vinashin was bailed out in 2010 when its US$4.5bn debt threatened tobring down the entire Vietnamese economy. Widespread investment in the country's infrastructure is

necessary if Vietnam is to compete with regional peers.

Investment And Development Outlook The Vietnamese transport sector requires vast levels of

investment. The majority of infrastructure investment in Vietnam over the next 10 years will be in thetransport sphere, accounting for 65% by the end of 2021. Vietnam still suffers from a significant deficit in

transportation infrastructure, and we believe the Vietnamese government will continue to develop this

sector over the medium term. This is reflected in our forecast for transport infrastructure industry value,

which is expected to grow by an average of 3.5% y-o-y between 2012 and 2016.

According to our key infrastructure projects database, there are US$171bn worth of infrastructure projectsplanned or currently under way in Vietnam's transport sector. One of the most expensive of these is a US

$3.6bn plan to build the Van Phong International Entrepot. The project will begin with the construction oftwo deep water ports in Dam Mon that will be able to accommodate container ships with tonnage of 9,000

twenty-foot equivalent units (TEUs) and the capacity to handle 0.5mn TEUs a year. The project is currentlysuspended, however, due to an ongoing review of geological conditions at the site.

On November 14 2013, Vietnam's Phuong Nam Technology Science Institute and EDES were scheduled to

sign a memorandum of understanding (MoU) for the construction of the US$3.6bn railway project inVietnam. The project which will be implemented via a built, operate and transfer format, will connect HoiChi Minh City to Can Tho City. Upon signing the MoU, a joint venture will be formed by both the partiesfor executing the project as well as for conducting a feasibility study, which will be presented to thecountry's government.

The air freight sector will undoubtedly benefit from the planned construction work on a new passenger

terminal at Long Thanh international airport. Costing an estimated US$6.7bn, the work would also



incorporate a new runway, providing capacity for 100mn passengers a year. A tender for investment

consultancy work was under development as of December 2011.

The Vietnamese province of Dong Nai is to clear land near the proposed Long Thanh International Airport

in order to develop infrastructure facilities, it was announced in April 2013. Under a plan submitted to the

government, 21,000 hectares in three communes in Cam My District and seven communes in Long Thanh

are to be cleared for establishing new residential and urban areas, industrial zones, research institutes and

international service centres. The airport, which was approved in 2011 at a cost of US$6.74bn, will be thecountry's ninth international airport, serving 100mn passengers and 5mn tonnes of goods every year after

becoming operational in 2020.

Meanwhile, Shipowners in Vietnam are expected to offload more vessels form their fleets by the close of

2013, according to the Hellenic Shipping News. Firms planning to pare down their fleets include the

Vinashin Joint Stock Company and Northern Shipping. Market analysts have previously warned that theeconomic potential of the Vietnamese shipping market has been limited by an excessive focus on non-core

businesses.

In the road freight sphere, bad news was delivered at the end of October 2013, when it was announced that

the Vietnamese government has granted approval to Hanoi General Export-Import Joint Stock Company

(Geleximco) to withdraw from the build-transfer model-based Hoa Lac-Hoa Binh expressway linking Hanoiwith localities in the northwest. The company invested US$17mn in the project, with US$2mn in theconstruction and US$12.4mn in land acquisition, over three years, according to the transport ministry.

'As the investment cost rose significantly and the property market at present is nearly frozen, it is impossible

for us to reach the project deadline', Geleximco General Director Vu Van Tien said (Intellasia). Thegovernment has also approved a proposal by the country's Ministry of Transport and Ministry of Planning

and Investment to alter the project's investment model to public-private partnership to make it more feasibleand obtain official development assistance.



Industry Trends And Developments

Multimodal

Zenith Expands Vietnam Warehousing Facility

International freight services provider Zenith Global Logistics has expanded its warehousing facility in Ho

Chi Minh City, Vietnam, according to the Journal of Commerce, reporting in November 2013. The facility

was expanded as part of the company's effort to ensure that it is able to keep up with the increasing demand

for humidity-controlled warehousing space in the region. The facility, which will house goods and cargoes

destined for the US, covers 7,500 square metres.

DHL Looking To Increase Vietnamese Investment

The gaze of express shipping and logistics firm DHL is firmly on Vietnam at present with the company

expressing its desire to invest in the Asian country now that it has taken steps to integrate into the global

economy. Chief Executive Officer of DHL Express in Asia Pacific Jerry Hsu outlined his company's

commitment to Vietnam while speaking at an event marking DHL's 20th year of operations in the country,

According to Vietnam News Brief Service.

The total investment of DHL Express in Vietnam over the past six years comes to more than US$14mnfollowing the company's construction of a new depot in Danang at the end of 2012. Currently, a new depot

is being built near Tan Son Nhat Airport.

Mentfield Logistics Opens Vietnam Office

As part of its growing commitment to Vietnam, Mentfield Logistics announced in October 2013 that it had

opened new offices in the country, which brings the company's total global offices to 13, according to

Lloyd's List. Vietnamese labour costs are cheaper than those in China, meaning that Vietnam is increasingly

becoming a popular destination for globally minded firms.

Mentfield Vietnam CEO James Nguyen said: 'The opening of the new offices in Vietnam is a step that gives

a significant advantage to our clients engaged in international trade in many diverse areas. He added:

'Ranging from food products to equipment & machinery, construction materials, chemicals, high-tech and

many more, we are confident that our presence in Vietnam will lead to the strengthening and streamlining

of the processes of logistics and freight forwarding from the Far East to the rest of the world.'



Underlining the pull of Vietnam at present is the news that Cargo-Partner, the Austrian transport and

logistics company, has also chosen Vietnam to act as a base in the Asia region, with a new office opened

near Ho Chi Minh City airport.

Maritime

Evergreen-Hanjin's Intra-Asia Tie-Up Highlights Vietnam Growth Story

Taiwan-based Evergreen Line and South Korea-based Hanjin Shipping's newly launched intra-Asia service,which calls at the port of Ho Chi Minh, will boost both companies' intra-Asia operations. BMI has long

highlighted intra-Asia trade as a region of strong growth and we note the port of Ho Chi Minh to be a

specific beneficiary of the new route - with the launch of the service offering upside risk to our forecast for

the port.

Evergreen Line has partnered with Hanjin Shipping to launch the New Ho Chi Minh Service (NHCMS) thatwill see both firms receive a boost to their intra-Asia network. The NHCMS will link South Korea, China,

Vietnam, Singapore and Malaysia, and will employ four 2,500 twenty-foot equivalent units (TEUs) ships,one supplied by Evergreen and the remaining three by Hanjin. The first vessel on the once-a-week NHCMSis to set sail from Kwangyang, South Korea, on November 22.

BMI notes that Evergreen Line has steadily been expanding its intra-Asia service in 2013, with the addition

of a further two express routes: the first being a Colombo, Sri Lanka-Kochi, India, service; and the second

being an Indonesia- Malaysia service. Hanjin Shipping has been implementing a similar expansion strategy,with the addition of an Indonesia service in March 2013 and an Australasia service in July 2013.

BMI has previously identified the trend of intra-Asia trade as a strong growth area for container lines.

Growth in intra-Asia liner trade is developing from a low base and is set to continue expanding as China

rebalances its economy toward the consumer sector. The development of a consumer class in China means

that the country is increasing the number of containers it imports, rather than being primarily a box operator.

Evergreen and Hanjin's decision to include the port of Ho Chi Minh as part of its NHCMS is in line with theintra-Asia growth story seen in the region. The Vietnamese port in particular is showing strong historical

growth rates in container throughput - a trend we predict will continue over the medium term. Between

2008 and 2012 the port of Ho Chi Minh's container throughput experienced an annual average increase of

14.4% year-on-year (y-o-y). BMI forecasts this robust growth rate to continue over the medium term(2013-2018), albeit at a slightly slower pace, and forecasts container throughput at Ho Chi Minh expected to



expand by 53.1% from 2013 levels - an annual average increase of 8.9% y-o-y, to reach a throughput level

of 5.87mn TEUs in 2018.

Wan Hai Lines To Start New Direct Service

Taiwanese shipping companies Wan Hai Lines and Yang Ming Line intend to begin a new direct service

between ports of Japan, South Korea and China to the Vietnamese port of Ho Chi Minh on November 29

2013. The service will be called KCV and it will function with three vessels with an intake of 1,200 twenty-

foot equivalent units. KCV is expected to provide better service coverage between Japan, Korea, China and

Vietnam.

Vietnam Set For Belgian Link Up

Vietnam cemented its place as a strategically important growth region in December 2013 with news of a

collaboration agreement signed by the ports of Antwerp (the second largest port in Europe) and Zeebrugge,Rent-A-Port and Saigon Newport relating to the construction of a new bulk terminal in the port of Lach

Huyen in the north of the country.

Eddy Bruyninckx, CEO of Antwerp Port Authority, stated: 'Our subsidiary Port of Antwerp Internationalhas been observing this growth market closely with a view to spotting opportunities that offer added valuefor our port. Our partners can call upon a port that has developed into a leading international player with awide range of logistics, industrial and maritime activities.'

Meanwhile, further evidence of strong Flemish/Vietnamese relations were highlighted by the visit of

Flemish Minister for Mobility and Public Works Hilde Crevits to inspect the dredging work at the Soai Rap

project in November 2013.

Crevits said: 'The dredging by the DEME's dredger 'Uilenspiegel' are spectacular in Soai Rap. They are

technically advanced and offer a sustainable solution. This project also demonstrates the good cooperationwith Vietnam. Our dredgers are world class. I hope that Vietnam continues to rely on our expertise formajor projects.'



Air

Finnair Cargo Adds New Freighter Service

Finnair Cargo announced at the end of November 2013 that it has enhanced its presence in the Asian region

by adding a twice-weekly MD-11 freighter service to the Vietnamese capital, Hanoi. This decision

underlines Finnair's strategy of improving its Brussels cargo hub connectivity.

Speaking about the move, Vice-president of global sales at Finnair Cargo Mikko Turtiainen said: 'Finnair

flew seasonal passenger operations to Hanoi until the end of October and adding Hanoi to our freighter

network brings year-round continuity to the Finnair Cargo offering to and from the Vietnamese capital. I am

very confident in terms of exports and imports linked with the fast-emerging Vietnam.'

Road

Sceptical Over Dau Giay-Phan Thiet PPP Timeline

Vietnam's public-private partnership (PPP) project management board, part of the Ministry of Transport(MOT), has announced that construction work on the country's first PPP expressway project, the 98.7kmDau Giay-Phan Thiet expressway, is expected to start in Q315. However, although we reiterate that theexpressway could offer an impressive return on investment, we are not wholly convinced that the projectwill break ground as scheduled.

Following the completion of the fourth and final investor conference for the US$757mn Dau Giay-PhanThiet expressway project in September 2013, the MOT launched the qualification process for the project,with applications due on November 29 2013. The list of qualified bidders is expected to be announced on

December 30 2013.

While we continue to view the fundamentals of the project favourably, and we expect the Vietnameseeconomy to grow impressively over the coming years (see our special report, 'Vietnam: Asia's Star RisingAgain?', November 2013), we are not wholly convinced that the project will break ground as scheduled.This is due to the lack of maturity in Vietnam's business environment. The latest edition of the Doing

Business report from the World Bank ranked Vietnam 98 out of 189 countries based on its ease of doing

business, with the country faring poorly in several key areas that facilitate project development - such aselectricity access and investor protection.



We also believe that Vietnam's bureaucratic institutions lack the necessary institutional capacity to carry out

pre-construction activities (e.g. documentation, spatial planning, feasibility studies, public consultation,permit issuance, land acquisition) in a timely manner or to a level of detail desired by all of the projectstakeholders (i.e. local residents, project developers and financers). The lack of human resources to boostinstitutional capacity could take many years to be resolved and in our opinion, will continue to hamper

infrastructure development for the foreseeable future.

Such weaknesses in the business environment have already delayed PPP development amongst some of

Vietnam's regional peers, particularly Indonesia and the Philippines (see 'PPP Momentum On The Expressbut Not Without Road Blocks', September 27 2013). Both countries have enlisted the assistance of multi-lateral financial institutions such as the World Bank and the Asian Development Bank to implement their

PPP plans.

Furthermore, it remains to be seen if the selected international bidder will be able to work effectively with

the Vietnamese partner on the project. In July 2013, the Vietnamese government selected Vietnam-basedBinh Minh Import-Export Production and Trade Company (Bitexco) as the primary developer of the four-lane project, with Bitexco providing up to 60% of total equity investment and the remaining 40% comingfrom international investors. Although we believe that Bitexco's close relationship with the Vietnamese

bureaucracy could help navigate the project through Vietnam's business environment, Bitexco lacksexperience in managing an expressway concession as it has mainly developed hydropower plants for the

public sector.

We believe these issues are the main reasons for subdued interest in the project on the part of internationalinvestors. Although more than 100 participants attended the final investor conference for the Dau Giay-

Phan Thiet expressway project, the Saigon Times reported that only seven investors have submittedapplications to the MOT. While the names of the investors are unknown, the Philippines Star reported in

mid-November 2013 that Hong Kong-based investment firm First Pacific and Philippines-based Metro

Pacific Investments are planning to participate in the Dau Giay Phan Thiet project.

Rail

EDES Signs MoU For US$3.6bn Railway project

On November 14 2013, Vietnam's Phuong Nam Technology Science Institute and EDES were scheduled to

sign a memorandum of understanding (MoU) for the construction of the US$3.6bn railway project inVietnam. The project which will be implemented via a built, operate and transfer format, will connect Hoi



Chi Minh City to Can Tho City. Upon signing the MoU, a joint venture will be formed by both the partiesfor executing the project as well as for conducting a feasibility study, which will be presented to thecountry's government.



Company Profile Vietnam Airlines Cargo

SWOT Analysis

Strengths Vietnam Airlines Cargo is the main air cargo provider in Vietnam.

The recent green light given to the purchase of Jetstar Pacific will only strengthen the

company's domestic position.

Weaknesses Unlike its peers, Vietnam Airlines Cargo does not have a freighter fleet and is reliant

on using the bellyholds of its parent company's planes.

Opportunities The air carrier is well placed to benefit from Vietnam's growing role in the trade

sector. The country has flooded money into the development of the country's port

sector, but BMI believes aviation also stands to benefit.

Vietnam Airlines is to reportedly run flights between the UK and Vietnam, which could

result in cargo being transported in the bellyholds of aircraft in the future.

At the end of 2012, Vietnam Airlines announced that it was to introduce a new air

route linking the Vietnamese capital with Jakarta, in a bid to 'boost tourism and

economic links between Vietnam and Indonesia', according to Bloomberg Business

Week. The flights will depart on Tuesdays, Wednesdays, Fridays and Sundays,

leaving Ho Chi Minh City at 10am local time, and arriving in Jakarta at 1pm local time.

Jakarta is now connected to six ASEAN countries in total.

Vietnam Airlines has increased the frequency of its flights to Gatwick Airport, London,

it was announced in April 2013, potentially opening the door for further link ups

between the two countries.

In order to ease congestion at Ho Chi Minh City's Tan Son Nhat International Airport,

Vietnam, officials at a meeting in Hanoi in July 2013 called for a new airport to be built

in the country. Thanh Nien News reported the chairman of the board, Airports

Corporation of Vietnam, Nguyen Nguyen Hung as stating: 'We should have started

construction by now, in order to have the first phase completed by 2020.'




There is further room for co-operation between Vietnam and the US in the coming

years, it was declared at the US-Viet Nam Aviation Co-operation Working Group held

in Ho Chi Minh City in September 2013.

Threats While the sector has recovered well, the outlook for global air freight remains volatile,

especially with oil prices at their current high levels.

Company Overview Vietnam Airlines Cargo's parent Vietnam Airlines began operations in 1956 serving the

domestic market. In 1993, it was established as Vietnam's national carrier.

The cargo carrier's operations are concentrated in Asia, catering for the domestic

market. The airline operates its cargo business by transporting goods in the bellyholds

of its passenger planes.

Strategy Operating out of hubs in Hanoi and Ho Chi Minh City, Vietnam Airlines Cargo has

developed a network of both domestic and international routes. Within Vietnam the

carrier lands at 18 domestic airports. It is heavily focused on Asia, with three freight

flights to neighbouring Thailand and routes servicing China, Hong Kong, Japan, South

Korea, Taiwan, Philippines, Malaysia and Indonesia. The air freight carrier is therefore

able to cater for all five of Vietnam's top five import partners (China, Japan, Korea,

Thailand and Singapore).

Vietnam Airlines Cargo's expansion into China offers a launch pad for further services to

other Chinese airports. It has also developed routes to Australia, with freight

connections to Melbourne and Sydney.

Allied to Vietnam Airlines Cargo's cargo links to three destinations in Europe (Paris,

Frankfurt and Moscow), parent company Vietnam Airlines began operating a direct air

route to the UK in the last months of 2011. The service flies to Gatwick Airport, with

cargo space available in the bellyholds of planes going to and from London.

Etihad Airways announced at the start of the October 2013 that it had launched its first

commercial passenger service between Abu Dhabi and Ho Chi Minh City. Vietnam

Airlines is its codeshare partner and its VN code will be placed on the Abu Dhabi-Ho Chi

Minh City sector.

Taking advantage of the fast-growing market, Etihad Airways President and CEO James

Hogan explained that: 'The United Arab Emirates is Vietnam's seventh largest trading

partner and its largest in the Gulf region. In 2012, exports from Vietnam to the UAE

exceeded US$2 billion for the first time - up 82 percent on 2011 - and forecast to

exceed US$4 billion in 2013. The 13.1-tonne belly-hold capacity of our Airbus A330-200



aircraft, which equates to more than 9,500 tonnes per year, gives us sufficient capacity

to boost the volume and value of trade between the UAE and Vietnam and to other

markets in the GCC, Europe and North America.'

Latest Activity Vietnam Airlines Links Up With Nordisk

Vietnam Airlines began to take delivery of some 900 Nordisk light weight air cargo

containers, it was announced at the beginning of January 2014, reported Cargo

Trends.With the containers weighing less than conventional boxes due to being

fashioned from AKE aluminium as opposed to normal aluminium, the costs associated

with handling them will reduce due to lower fuel consumption and reduced carbon

emissions.

BY Sim, Nordisk's Vice President of Sales, Asia and Pacific, explained: 'Nordisk offers

the widest range of ULDs in the industry, and we are pleased to provide Vietnam

Airlines with products, services and solutions that lower their total cost of ULD

ownership while ensuring safe and reliable cargo handling for their customers.'

Sim added: 'Vietnam Airlines already has approximately 2,000 Nordisk containers

operating in its fleet, and our dedicated after-sales support team in Asia is committed to

support Vietnam Airlines and ensure that their new Nordisk units enter operation

according to schedule.'



Vietnam Petroleum Transport Company (VIPCO)

SWOT Analysis

Strengths Around 60% of VIPCO's fleet is employed by Petrolimex.

The company boasts a relatively young fleet.

It has diversified away from operating in a single sector, with a real estate arm.

Weaknesses VIPCO only operates in one shipping sector.

Opportunities The company plans to expand its fleet, although no further information is currently

forthcoming.

Petrolimex made a company announcement at the end of July 2013 to state that it

had signed a memorandum of understanding (moU) with Japan International

Cooperation Agency (JICA) and Tamada Industries, Inc. (Tamada) relating to

'cooperation in the trial project of double-shell tank against harmful matters'.

Threats Vietnam's reliance on imported refined products is decreasing as the country brings

online more refining capacity, which could negatively affect VIPCO. In the longer term,

Vietnam's refining capacity could allow the state to export.

Company Overview The Vietnam Petroleum Transport Joint Stock Company (VIPCO) offers maritime

transport for petroleum products. The company has a diversified portfolio, including

units that support its product tanker fleet - such as its port operations and freight

forwarding services. It is also engaged in real estate.

Strategy VIPCO has developed a fleet of six product tankers with a total capacity of 176,111

deadweight tonnes (DWT). The fleet is relatively young with an average age of 16 years.

VIPCO has a fleet expansion strategy in place and is prepared to invest either in

newbuilds or purchasing tankers under the age of 10 years. The company plans to

boost its fleet to 200,000DWT.

The majority of VIPCO's tanker fleet (60%) is employed to meet the transport needs of

the Vietnam National Petroleum Corporation (Petrolimex). The remaining 40% is charted

to other consignees.



Via its connection with Petrolimex, the company is able to cater for Vietnam's oil sector.

While Vietnam has estimated oil reserves of 4.6bn barrels, it imports refined products.

The company's shipping unit is complemented by its petrochemical terminal's sector.

The board of directors of Petrolimex announced the establishment of a new wholly-

owned subsidiary, PG Tanker, in 2013, with Nguyen Anh Dung made chief executive

officer. Headquartered in Hanoi, the subsidiary will be charged with transporting oil

products, marine services and the repair and building of tankers.

Financial Data 2013

Deputy General Director Tran Ngoc Nam explained at the end of December 2013 that

profits were low at Petrolimex, owing to the Vietnamese government's efforts to curb

inflation and stabilise the economy th

BMI Vietnam Freight Transport Report Q2 2014

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Transcript of BMI Vietnam Freight Transport Report Q2 2014