Vietnam monitor 11/2009
Transcript of Vietnam monitor 11/2009
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abcGlobal Research
Economics: GDP growth picking up and bank credit
growth surging once again. But this is leading to a rapid
deterioration in the trade deficit. Policy makers need to
head for the exit, with more aggressive action likely as
inflation moves towards double-digits.Equity Strategy: The Vietnam Index was down
8% q-t-d, underperforming its Asian peers. Volume
picked up because foreign investors took profit. 12M
forward PE at 19x, more expensive than peers.
Fixed Income Strategy: We see 2yr VGB yieldsrising 70bp to 11.00% (mid) by Vietnamese Tet in
mid-February. Our bearish view is reinforced by
tightening VND liquidity, which is likely to persist given
the extended subsidised loan programme. To this, we add
an element of short-term skittishness in the FX market,
which may accelerate the increase in bond yields.FX Strategy: Depreciation pressure has intensified,
and re-allowing gold imports will not sustainably reduce
the paucity of VND demand. The longer monetary
tightening is delayed, the greater the risk that the market
becomes destabilised. Either way, expect VND
depreciation pressure to persist.
VND premium from band ceiling (% of spot)
-2%
-1%
0%
1%
2%
3%
4%
5%
6%
Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09
NDF fix less spot USD-VND
Source: HSBC, Reuters
Vietnam
Economics & Strategy
Vietnam Monitor(Issue 26)VND depreciation pressure has
intensified
12 November 2009
Richard Yetsenga*
FX Strategist
The Hongkong and Shanghai Banking Corporation Limited
+852 2996 6565 [email protected]
Virgil Esguerra
Asia Local Rates Strategist
The Hongkong and Shanghai Banking Corporation Limited
+852 2822 4665 [email protected]
Jacqueline Tse
Equity Strategist
The Hongkong and Shanghai Banking Corporation Limited
+852 2996 6602 [email protected]
Robert Prior-Wandesforde
Senior Economist
The Hongkong and Shanghai Banking Corporation Limited+65 62390840 [email protected]
View HSBC Global Research at: http://www.research.hsbc.com*Employed by a non-US affiliate of HSBC Securities (USA) Inc,and is not registered/qualified pursuant to NYSE and/or NASDregulations
Issuer of report: The Hongkong and Shanghai BankingCorporation Limited
Disclaimer & DisclosuresThis report must be read with thedisclosures and the analyst certificationsin the Disclosure appendix, and with theDisclaimer, which forms part of it
mailto:[email protected]://www.research.hsbc.com/http://www.research.hsbc.com/http://www.research.hsbc.com/mailto:[email protected] -
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USD/VND FX reserves
15,500
16,000
16,500
17,000
17,500
18,000
Jan-07
May-07
Sep-07
Jan-08
May-08
Sep-08
Jan-09
May-09
Sep-09
-2.5%
0.0%
2.5%
5.0%
7.5%
10.0%
12.5%
U SD/VN D official (lhs) Y/y change (rhs)
0
5
10
15
20
25
30
Dec-02
Jun-03
Dec-03
Jun-04
Dec-04
Jun-05
Dec-05
Jun-06
Dec-06
Jun-07
Dec-07
Jun-08
Dec-08
Jun-09
Foreign reserv es (USDbn)
Source: Bloomberg Source: CEIC
O/n call money, benchmark policy rates and 5yr bond yields Headline CPI and ex-food & energy
0
5
10
15
20
Jan-08
Apr-08
Jul-08
Oct-08
Jan-09
Apr-09
Jul-09
Oct-09
O/n call money Base rateRefinancing rate 5y r VGB
0
5
10
15
20
25
30
Jan-04
Jul-04
Jan-05
Jul-05
Jan-06
Jul-06
Jan-07
Jul-07
Jan-08
Jul-08
Jan-09
Jul-09
CPI y /y CPI ex -food & energy y /y
Source: Reuters, HSBC Source: CEIC, HSBC
HCMS Index GDP growth
0
200
400
600
800
1000
1200
1400
Jan-07
M
ay-07
Sep-07
Jan-08
M
ay-08
Sep-08
Jan-09
M
ay-09
Sep-09
-100%
-50%
0%
50%
100%
150%
200%
HCM SI (lhs) Y/y change (rhs )
0
2
4
6
8
10
M
ar-00
M
ar-01
M
ar-02
M
ar-03
M
ar-04
M
ar-05
M
ar-06
M
ar-07
M
ar-08
M
ar-09
GDP, y/ y
Source: Bloomberg Source: CEIC
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Good news
The Vietnamese economy is firmly on the mend.
Having registered its lowest GDP rise in many
years at the beginning of 2009 (3.1%), the country
has seen year-on-year growth climb to 4.5% in the
second quarter and 5.8% in Q3.
The biggest improvement has come in the
construction sector where output has turned from
negative growth in mid-2008, to double-digit
gains in the third quarter of this year. This sector
accounts for roughly 9% of total GDP and has
benefited significantly from the various
government-led infrastructure projects.
1. Manufacturing & construction: Contrasting fortunes
-2
0
2
4
6
8
10
12
1416
01 02 03 04 05 06 07 08 09
Manufac turing Construction
% Yr
GDP
Source: CEIC
Improvements have also been seen in agriculture
(17% of GDP), manufacturing (33%) and services
41%), although these have been much less
impressive. In particular, manufacturing continues
to expand at a low single-digit rate, well below
the near 9.5% average growth the sector has
enjoyed since the start of the decade.
The on-going weakness of Vietnams exports, as
shown by chart 2, is no doubt largely responsible,although we suspect the worst is now over. In our
view, Asia is entering a virtuous circle of growth
whereby policy support has helped kick-start
domestic growth, which in turn is beginning to
lead to higher import/export demand, thereby
boosting incomes and encouraging further gains
in consumption and investment.
2. Vietnams exports still suffering
-40
-20
0
20
40
60
80
01 02 03 04 05 06 07 08 09
T otal Ex-Oil
% Yr Exports of goods
Source: CEIC
Economics
GDP growth picking up and bank credit growth surging once again
But this is leading to a rapid deterioration in the trade deficit
Policy makers need to head for the exit, with more aggressive
action likely as inflation moves towards double-digits
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and badThe main worry for the country at present is the
renewed and rapid deterioration in the trade
position (chart 3) as import growth comfortably
outpaces that of exports. October saw a USD1.9bn
trade shortfall equivalent to about 23% of GDP
on an annualised basis and not too distant from
the crisis levels of early 2008.
3. Monthly trade deficit close to USD2bn in October
-3.0
-2.5
-2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
05 06 07 08 09
Trade bal ance
USDbn
Source: CEIC
Looking at the breakdown of imports, it is autos,
steel and (refined) petroleum that have seen the
biggest turnarounds over recent months. This is
interesting because it was exactly the same sectors
that witnessed the strongest import growth in the
first few months of last year - the main difference
this time being the still subdued rate of growth in
machinery imports.
Vietnam has at least gone some way to reducing
its petroleum bill via the Dung Quat oil refinery,
designed to meet 30% of the countrys domestic
fuel requirements. Operations had to be halted in
mid-August while repairs were undertaken, but it
has been up and running again since early
October. Unfortunately, however, it doesnt look
as though the refinery will prove to be the answer
to the deficit issue.
It is also noticeable that the huge flows of foreign
direct investment into the country during 2007
and 2008 have yet to turn into a structural shift up
in exports, allowing the country to run a lower
trade deficit at a given rate of economic growth.
The concern here is that the majority of the
investment found its way into asset markets,
although there is plenty of anecdotal evidence to
suggest otherwise. Our assumption is that it will
take longer to reap the export benefits of the
capital expenditure, while in the short-term
imports are being boosted as the companies get
themselves established.
To some extent, the deterioration in the trade
position is the mirror image of Vietnams growing
budget deficit, which we expect to hit 8% of GDP
this year. The private sector has also been
encouraged to borrow aggressively on the back of
the 4ppt interest rate subsidy.
As at the end of October, USD23bn (equivalent to
24% of GDP) in subsidised loans had been
extended, helping to explain why bank credit rose
33% between the end of last year and October
2009. This is above the upwardly revised 30%
official target for the year as a whole set just a
couple of months ago. The only other country in
the region, if not the world, to see such a sharp
increase in lending this year is China, although it
had the cushion of a much larger current account
surplus to begin with.
Time to exit
It seems to us that the time has come for the
Vietnam government to exit from what has been a
huge relaxation of monetary and fiscal conditions.
Indeed it is hard to think of any country that has
ever cut interest rates by 7% points and
announced a fiscal easing worth 8.5% of GDP in
the space of a few short months.
So far, the government has taken some modest
steps towards the exit, but is clearly still intent on
keeping policy conditions easy until the recoveryis assured. It announced recently, for example,
that the interest rate subsidy would be extended
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until the end of next year, albeit with a 2%
subsidy rather than the current 4%.
In our view, further policy action will be triggered
as inflation continues to move higher. So far, we
have seen a fairly modest increase in the year-on-
year rate of inflation from a low of 2% in August
to 3% in the latest data for October. But the 3
month-on-3 month seasonally annualised rate
suggests consumer price inflation is only heading
in one direction in the next few months and itsnot down (chart 4).
4. Inflation: Heading back to double digits?
-10-5
0
5
10
15
20
25
30
35
40
03 04 05 06 07 08 09
Year-on-Year 3m-on-3m annualised*
Consumer prices
%
Source: HSBC, CEIC. * Using seasonally adjusted data
Even if we assume the CPI rises in line with the
long-term seasonally adjusted month-on-month
average (of 0.7%), this would take the year-on-
year rate up to a high of 8.9% by August next
year. In practice, however, with international food
and oil commodity prices rising and domestic
demand picking up, the risks to this are very much
on the upside. We are looking the headline rate to
reach double-digits by the second quarter of next
year.
If this is right and the trade deficit remains wide,
as we expect, then policy interest rates will rise,
while fiscal policy will probably be tightened as
well. We are looking for the policy rate to end
2010 at 11%, up from 7% currently.
Given the long lag with which monetary and most
fiscal action works, such measures are unlikely to
have much dampening effect on GDP growth in
2010, which we still expect to average 6.8% (up
from roughly 5% this year). In 2011, however, we
look for growth to soften to 5.9%.
Robert Prior-Wandesforde
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Vietnam underperformed
The Vietnamese market continues to be driven by
the volatility in the global market. The Vietnam
Index once reached a recent peak of 600 in late
October (chart 1), then investors took profit.
Quarter-to-date, the Vietnam Index dropped 8%
(as of Nov 9), shedding more gains than any other
Asian indices. It underperformed even the highly
risky Pakistan Karachi Index, which declined
4.4% quarter-to-date and is the second worst
performing Asian market this quarter so far.
Foreign investors took profit
For a short while, the Vietnamese markets came
alive in October. The average daily trading
volume of the combined Ho Chi Minh and Hanoi
exchanges increased 63% to USD315m,
compared to the USD193m in August. However,
the strength seems to be levelling off already,
suggesting profit taking activities are coming to
an end (chart 2).
Foreign investors gathered pace to sell Vietnamese
stocks. During the first 5 trading days in November,
foreign investors already sold USD15m worth of
Vietnamese stocks (chart 3), setting a stark contrast
to the USD1m worth of stocks that were sold by
foreign investors in the entire month of October. The
foreign ownership percentage of the market
continues to drop to 16% from 21% in July. The
foreign investors proportion of the total turnover
lingers around the low level of 5% (chart 4). We do
not expect foreign investors to return amid the weak
macro environment.
Equity Strategy
Vietnam Index down 8% q-t-d, underperforming its Asian peers
Volume picked up because foreign investors took profit
12M forward PE at 19x, more expensive than peers
1. Vietnam stock index 2. Daily trading value on HCM and Hanoi exchanges (20DMA)
0
200
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800
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Jan-06
Apr-06
Jul-06
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Jan-07
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Oct-07
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VN Index
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USDm
HCM Hanoi
Source: HSBC, Bloomberg Source: HSBC, Bloomberg
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5. Key stock market data
HCM Hanoi Total
Market cap (USD m) 27,433 6,048 33,481No. of stocks 181 198 379Stocks with mkt cap >USD1bn 8 1 9Stocks with mkt cap >USD500m 15 3 18Stocks with mkt cap >USD200m 26 6 32Stocks that hit foreign limit 0 1 1Daily turnover (USDm, 1mth ave) 206 109 315Foreign ownership 16.4% 13.5% 15.9%
PE (2008) x 23.8 19.1ROE 22.9% 17.2% 22.8%DY 2.7% 5.0%
Source: HSBC, Bloomberg (Up to Nov 6, 09)
After the market gave back most of its gains in the
quarter, the number of stocks that hit the foreign
limit is now down to one (Asia Commercial
Bank). There are 32 companies with market caps
above USD200m. The four new additions to the
list are Vietnam Export-Import Commercial
(EIB), Binh Chanh Construction (BCI), Ho ChiMinh City Securities (HCM) and Ho Chi Minh
City Infrastructure Investment (CII) but the
market capitalization of the rubber tree plantation
operator, Phuoc Hoa Rubber (PHR), is now
trading below USD200m. (Please see table 6 on
the next page).
Valuation is rich
Since the market gave back its quarter-to-date
gain, the Ho Chi Minh exchange PE stayedsideways, trading at 23.8x historic earnings. If our
assumption of 20% EPS growth is correct, the 12-
month forward PE will reach 19.1x and 2010 PE
at 15x. This is significantly more expensive than
its peers like Thailand (12m fwd PE trading a
11.4x), China (trading at 14.7x) and Indonesia
(14.6x) and Philippines (15x).
Stay bearish
We see fewer growth catalysts in Vietnam thanother markets. The liquidity of the Vietnamese
stock market is still a concern for most foreign
investors. Therefore, we do not think Vietnam
deserves a premium over its Asian peers.
Some argue that the property sector has
rebounded as a number of real estate companies
have revised up their earning targets, but we are
sceptical. According to some data that CBRE
published, most of the real estate transactions
concentrated on the low- and mid-end projects.
Office rents for both grade A and grade B offices
fell between 6-10% over the past quarter. While
some companies might very well keep pace with
the global recovery, we think they will still be
cautious on capital expenditures. If construction
companies jumped to launching new development
projects at the first sign of recovery, we are wary
that might be a premature decision that will lead
to over-supply later on.
And according to Viet Nam News, the Ministry of
Industry and Trade told the media that many steel
3. Foreign net buying of Vietnamese equities 4. Foreign share of turnover, HCM Exchange
-100
-50
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100
150
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300
Jan-07
Jul-07
Jan-08
Jul-08
Jan-09
Jul-09
USD
m
0%
10%
20%
30%
40%
50%
07 08 09
Source: HSBC, Bloomberg (Up to Nov 6, 09) Source: HSBC, Bloomberg (Up to Nov 6, 09)
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factories lack a sufficient amount of scrap steel to
continue production at a high level while the
Ministry of Construction had scrapped four
cement projects since they did not meet the
requirements of the nations Cement Industry
Development Plan. In addition, many power plant
operators were unable to obtain financing to stay
afloat. The next positive news might potentially
be the New Year Holidays, when consumption
and export demand for foodstuff and agricultural
commodities pick up. But between now and then,
we do not anticipate much supporting news in
Vietnam that justifies investors entering the
market at a valuation premium over other more
promising markets.
Jacqueline Tse
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6. Key valuation data for the largest listed Vietnamese stocks (market cap > USD 200mn)
Code Name Industry Subgroup Exchange Mkt cap(USD m)
Ave dailyt/over
(USDm)
Foreignownership
Foreignlimit
Room forforeignbuying
(USDm)
PE Chg 3M
VCB JOINT STOCK COMMERCIAL BANK Commer Banks Non-US HCM 3,524 3.11 2% 9% 251 n/a -14%CTG VIETNAM JOINT STOCK COMMERCIAL
BANKCommer Banks Non-US HCM 2,193 1.38 0% 11% 228 n/a -24%
ACB ASIA COMMERCIAL BANK (HN) Commer Banks Non-US Hanoi 1,942 5.85 30% 30% - 10.5 -13%
VNM VIETNAM DAIRY PRODUCTS Food-Dairy Products HCM 1,721 2.59 44% 46% 32 23.1 14%
EIB VIETNAM EXPORT-IMPORTCOMMERCIAL
Commer Banks Non-US HCM 1,384 0.00 26% 30% 61 24.6 n/a
HAG HOANG ANH GIA LAI Real Estate Oper/Develop HCM 1,195 7.38 20% 49% 343 27.7 44%
BVH BAO VIET GROUP Multi-line Insurance HCM 1,171 0.76 14% 49% 415 n/a -25%
PVF PETROVIETNAM JOINT STOCKFINANCE CORPORATION
Finance-Invest Bnkr/Brkr HCM 1,092 2.14 13% 30% 183 314.0 -26%
DPM PETROVIETNAM FERTILIZER ANDCHEMICALS
Chemicals-Diversified HCM 942 1.97 21% 49% 262 11.0 -17%
VIC VINCOM JOINT STOCK COMPANY Real Estate Oper/Develop HCM 899 0.59 6% 52% 415 135.8 68%
STB SAIGON THUONG TIN COMMERCIAL Commer Banks Non-US HCM 888 10.91 30% 30% 0 18.3 -8%
HPG HOA PHAT GROUP Miscellaneous Manufactur HCM 847 5.94 32% 49% 146 14.0 -3%
SSI SAI GON SECURITIES INC. Finance-Invest Bnkr/Brkr HCM 824 14.72 46% 49% 29 43.7 16%
PVD PETROVIETNAM DRILING AND WELLSERVICES
Oil-Field Services HCM 818 1.94 26% 49% 186 11.3 -3%
KBC KINHBAC CITY DEVELOPMENT Bldg-Residential/Commer Hanoi 814 5.31 13% 49% 296 49.2 103%
FPT THE FPT CORPORATION Telecommunication Equip HCM 693 2.36 38% 49% 72 13.3 1%VCG VIETNAM CONSTRUCTION AND
IMPORT EXPORTBuilding&Construct-Misc Hanoi 663 9.13 3% 49% 305 30.2 82%
ITA TAN TAO INVESTMENT INDUSTRYCORPORATION
Real Estate Oper/Develop HCM 502 3.35 29% 49% 100 27.7 10%
PPC PHA LAI THERMAL POWER JOINTSTOCK COMPANY
Electric-Generation HCM 481 1.38 20% 49% 142 -34.9 -22%
SJS SONG DA URBAN AND INDUSTRIALZONE INVESTMENT ANDDEVELOPMENT
Building&Construct-Misc HCM 419 5.30 25% 49% 103 57.3 26%
VPL VINPEARL JOINT STOCK COMPANY Resorts/Theme Parks HCM 414 0.03 18% 49% 129 182.1 -16%
DIG DIC CORP Building&Construct-Misc HCM 413 n/a 14% 49% 146 15.3 n/a
PVS PETRO OID TECHNIQUE Transport-Services Hanoi 381 1.93 12% 49% 139 10.0 -6%
SHB SAIGON HANOI COMMERCIAL BANK(HN)
Commer Banks Non-US Hanoi 324 3.78 3% 30% 86 27.6 -17%
VSH VINH SON SONG HINH HYDROPOWER Electric-Generation HCM 285 1.61 26% 49% 65 12.8 0%
KDC KINH DO CORPORATION Food-Baking HCM 284 1.78 29% 50% 59 -53.8 52%
PVX CTCP XAY LAP DAU KHI VIETNAM (HN) Building&Construct-Misc Hanoi 269 0.00 0% 49% 131 22.8 n/a
REE REFRIFERATION ELECTRONICCALENGINEERING
Appliances HCM 243 6.25 36% 49% 31 -24.8 -2%
GMD GENERAL FORWARDING ANDAGENCY Transport-Services HCM 237 5.67 24% 49% 60 -20.1 29%
BCI BINH CHANH CONSTRUCTION ANDINVESTMENT
Building&Construct-Misc HCM 205 2.36 26% 49% 48 26.4 30%
HCM HO CHI MINH CITY SECURITIESCORPORATION
Finance-Invest Bnkr/Brkr HCM 203 2.09 43% 49% 12 130.6 17%
CII HO CHI MINH CITY INFRASTRUCTUREINVESTMENT
Public Thoroughfares HCM 201 4.40 33% 49% 31 17.5 26%
Source: HSBC, Bloomberg (Up to Nov 6, 09)
6. Key valuation data for the largest listed Vietnamese stocks (market cap > USD 200m
Code Name Industry Subgroup Exchange Mkt capm)
Ave dailyt/over
(USDm)
Foreignownership
Foreignlimit
Room forforeignbuying
(USDm)
PE Chg 3M
VCB JOINT STOCK COMMERCIAL BANK Commer Banks Non-US HCM 3,524 3.11 2% 9% 251 n/a -14%CTG VIETNAM JOINT STOCK COMMERCIAL
BANKCommer Banks Non-US HCM 2,193 1.38 0% 11% 228 n/a -24%
ACB ASIA COMMERCIAL BANK (HN) Commer Banks Non-US Hanoi 1,942 5.85 30% 30% - 10.5 -13%
VNM VIETNAM DAIRY PRODUCTS Food-Dairy Products HCM 1,721 2.59 44% 46% 32 23.1 14%
EIB VIETNAM EXPORT-IMPORTCOMMERCIAL
Commer Banks Non-US HCM 1,384 0.00 26% 30% 61 24.6 n/a
HAG HOANG ANH GIA LAI Real Estate Oper/Develop HCM 1,195 7.38 20% 49% 343 27.7 44%
BVH BAO VIET GROUP Multi-line Insurance HCM 1,171 0.76 14% 49% 415 n/a -25%
PVF PETROVIETNAM JOINT STOCKFINANCE CORPORATION
Finance-Invest Bnkr/Brkr HCM 1,092 2.14 13% 30% 183 314.0 -26%
DPM PETROVIETNAM FERTILIZER ANDCHEMICALS
Chemicals-Diversified HCM 942 1.97 21% 49% 262 11.0 -17%
VIC VINCOM JOINT STOCK COMPANY Real Estate Oper/Develop HCM 899 0.59 6% 52% 415 135.8 68%
STB SAIGON THUONG TIN COMMERCIAL Commer Banks Non-US HCM 888 10.91 30% 30% 0 18.3 -8%
HPG HOA PHAT GROUP Miscellaneous Manufactur HCM 847 5.94 32% 49% 146 14.0 -3%
SSI SAI GON SECURITIES INC. Finance-Invest Bnkr/Brkr HCM 824 14.72 46% 49% 29 43.7 16%
PVD PETROVIETNAM DRILING AND WELLSERVICES
Oil-Field Services HCM 818 1.94 26% 49% 186 11.3 -3%
KBC KINHBAC CITY DEVELOPMENT Bldg-Residential/Commer Hanoi 814 5.31 13% 49% 296 49.2 103%
FPT THE FPT CORPORATION Telecommunication Equip HCM 693 2.36 38% 49% 72 13.3 1%VCG VIETNAM CONSTRUCTION AND
IMPORT EXPORTBuilding&Construct-Misc Hanoi 663 9.13 3% 49% 305 30.2 82%
ITA TAN TAO INVESTMENT INDUSTRYCORPORATION
Real Estate Oper/Develop HCM 502 3.35 29% 49% 100 27.7 10%
PPC PHA LAI THERMAL POWER JOINTSTOCK COMPANY
Electric-Generation HCM 481 1.38 20% 49% 142 -34.9 -22%
SJS SONG DA URBAN AND INDUSTRIALZONE INVESTMENT ANDDEVELOPMENT
Building&Construct-Misc HCM 419 5.30 25% 49% 103 57.3 26%
VPL VINPEARL JOINT STOCK COMPANY Resorts/Theme Parks HCM 414 0.03 18% 49% 129 182.1 -16%
DIG DIC CORP Building&Construct-Misc HCM 413 n/a 14% 49% 146 15.3 n/a
PVS PETRO OID TECHNIQUE Transport-Services Hanoi 381 1.93 12% 49% 139 10.0 -6%
SHB SAIGON HANOI COMMERCIAL BANK(HN)
Commer Banks Non-US Hanoi 324 3.78 3% 30% 86 27.6 -17%
VSH VINH SON SONG HINH HYDROPOWER Electric-Generation HCM 285 1.61 26% 49% 65 12.8 0%
KDC KINH DO CORPORATION Food-Baking HCM 284 1.78 29% 50% 59 -53.8 52%
PVX CTCP XAY LAP DAU KHI VIETNAM (HN) Building&Construct-Misc Hanoi 269 0.00 0% 49% 131 22.8 n/a
REE REFRIFERATION ELECTRONICCALENGINEERING
Appliances HCM 243 6.25 36% 49% 31 -24.8 -2%
GMD GENERAL FORWARDING ANDAGENCY Transport-Services HCM 237 5.67 24% 49% 60 -20.1 29%
BCI BINH CHANH CONSTRUCTION ANDINVESTMENT
Building&Construct-Misc HCM 205 2.36 26% 49% 48 26.4 30%
HCM HO CHI MINH CITY SECURITIESCORPORATION
Finance-Invest Bnkr/Brkr HCM 203 2.09 43% 49% 12 130.6 17%
CII HO CHI MINH CITY INFRASTRUCTUREINVESTMENT
Public Thoroughfares HCM 201 4.40 33% 49% 31 17.5 26%
Source: HSBC, Bloomberg (Up to Nov 6, 09)
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Since the start of the month,VGB yields have
risen 50-100bp to 10.30% and 10.90% (mid)for
the 2yr and 5yr VGBs, respectively, with a
steepening bias as onshore banks and the few
remaining foreign investors sold roughly
VND2.5-3.5trn in holdings during October. This
rise in quoted yields has widened the spread
between secondary market yields versus the
primary market. In its 10 November underwriting,
the State Bank of Vietnam (SBV) maintained cut-
off yields of 9.20%, 9.50% and 9.60% for the 2yr,
3yr and 5yr VGBs, respectively, resulting in
another failed sale1.
Although the stresses to the local bond marketthat we have discussed in depth in previous
editions of the Vietnam Monitor such as
liquidity tightness, financial repression and credit
rationing are still of elevated concern, these
factors are being exacerbated by reignited selling
pressures in the FX market (see FX Strategy
section). Concerns over a widening current
1
Year-to-date, the SBV has sold just an est. VND7.5trn
through conventional auctions and underwritings out of a total
2009 planned deficit of VND87.3trn
account deficit combined with renewed market
speculation of imminent USD/VND band-
widening despite assurance from authorities
has spurred importers to pre-emptively buy
foreign exchange, including gold, to meet 2010
external requirements as well as meet year-end
liquidity needs.
The second major development for the bond
market is the meeting of the National Assembly
(NA), which has produced several key
policy decisions.
First, the NA has approved key 2010
targets: Socioeconomic development goals
include a growth target (6.5%), inflation (7%)
and export growth (6%). The NA also
approved a FY10 budget deficit of up to 6.2%
(VND120trn), a moderation from an official
FY09 budget deficit of 7% of GDP2. FY10
expenditures are estimated at VND582trn (of
which VND200trn is a part of a second
2
In contrast, HSBC Economics and the World Bank forecast
fiscal slippage resulting in a FY09 budget deficit of 8% and
10.3% of GDP, respectively
Fixed Income Strategy
We see 2yr VGB yields rising 70bp to 11.00% by Vietnamese
Tet in mid-February
Our bearish view is reinforced by tightening VND liquidity, which is
likely to persist given the extended subsidised loan programme
To this, we add an element of short-term skittishness in the FX
market, which may accelerate the increase in bond yields
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stimulus package) while revenues are
projected at VND463trn. While borrowing
requirements are relatively lower, the scarcity
of domestic funding sources under
tightening domestic liquidity conditions will
continue to encumber the placement of
government debt (VGBs, VDBs). The
reluctance by authorities to issue bonds closer
to market-clearing yield levels, if it persists,
would require the government to seek other
sources of funding.
Of the FY10 VND120trn budget deficit,
we expect the government to aim to
finance about 75% domestically. During
Jan-Sep 2009, according to MOF data,
the government has been able to borrow
VND41.5trn domestically, despite just an
est. VND7.5trn in observable auction and
underwriting results (see Fig. 2).
Authorities have commented on pursuing
additional onshore dollar bond issuance
(USD230m issued in Mar-2009).
However, the risk that onshore dollar
bond issuance could pressure USD/VND
higher raises the likelihood that the
government will seek offshore external
financing through multilateral channels
(VND10-11trn during FY09) or by way
of a global bond issue after a four-year
hiatus. In recent weeks, the government
has indicated an interest to issue a 10yr
USD1.0bn global bond by early 2010.
While a higher share of external
commercial borrowings is generally
supportive for the domestic bond market,
in the case of Vietnam, it is less
straightforward given higher debt
obligations (in VND terms) in the event
of volatility in the FX markets.
Subsidized lending programme is
extended: The government-directed loan
programme which was set to expire in Dec-
2009 and has provided VND420trn in new
loans since Feb-2009 has been extended
through Dec-2010. However, the government
has slashed the interest rate subsidy from
4ppts to 2ppts, with some preferred industries
allowed to borrow at the original 4ppt-rate
subsidy through Mar-2010. This gradual
reduction in the interest rate subsidy which
would cost VND7trn appears to be borne
out of dual objectives of: tempering credit
growth (which could lead to inflation
pressures) while at the same time allow the
flow of credit to avert a refinancing shock
that could interfere with economic growth and
year-end liquidity demand towards the
Christmas and Tet holidays.
The continuation of the subsidised loan
programme, however, is likely to perpetuate and
exacerbate already tight domestic liquidityconditions. This year, rapid credit expansion
(33.3% y-t-d to October versus the official target
of 30%) has outpaced deposit growth (+25.7% y-
t-d) and this has intensified competition for
deposits. This is reflected in a gradual increase in
VND deposit rates towards the 10.5% bank
lending rate cap to corporates, which has
compressed bank net interest margins (NIMs) and
eroded profitability (the SBV has said it could
intervene if deposit rates rise above 10%). Capitaladequacy rules relating to loan-deposit ratios and
charter capital have also heightened bank demand
for capital3.
3In August, the SBV has directed banks to decrease the
percentage of short-term (12mths) from 40% to 30%. Secondly,
non-joint stock commercial banks (JSCBs) must raise charter
capital to at least VND2trn by the end ofthis year while
JSCBs have until end-2010 to raise charter capital to VND3trn.
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Scarcity of VND funds has been reflected in the
interbank market where the O/N call money has
strayed from the official SBV benchmark rates
(5% discount rate). In November, the O/N call
money rate reached 7.5% the highest since Dec-
2008 in spite of a substantial VND40trn in
liquidity injections by the SBV through open
market operations that the interbank is
increasingly becoming reliant on.
Market outlookOur bearish view on VGBs is reinforced by
continued VND liquidity tightness, which
after the extension of the subsidised loan
programme is likely to persist. To this, we
add the element of short-term skittishness in
the FX market, which could accelerate the
increase in VGB yields in the secondary
market. In the September edition ofVietnam
Monitor, we have also pointed to incipient
inflation pressures and possible SBV rate hikesduring 1H10 (seeEconomics section).
In the near term, we do not expect the SBV to
raise primary market cut-off yields sufficiently
enough to catch-up with those in the secondary
market (since early September, cut-off yields have
risen just 30bp versus the 50-100bp rise in the
secondary market). In contrast, we see VGB
quoted yields continuing to diverge from the SBV
target yields. Due to the aforementioned risk
factors, we move forward our 2yr and 5yr
VGB yield forecast to 11.00% and 11.50%,
respectively, by the time of the Vietnamese
Tet New Year in mid-February.
Virgil Esguerra
1. VGB yield forecasts
_____________Yields (mid) _______________Current + 1mth + 3mths + 6mths + 12mths
New 2yr 10.30 10.50 11.00 11.50 12.005yr 10.90 11.20 11.50 12.00 12.00
Prior(Sep-2009)
2yr - 10.00 10.20 11.00 12.00
5yr - 10.00 10.20 10.50 11.00
Source: HSBC
2. State budget balance, financing (VNDtr)
2008 2009
(1st est.2008) (Plan 2009) 1-3Q09GDP 1,490 1,813 1,158Total revenues and grants 399 390 288Total exp. (exclude principalpayment)
439 457 324
Primary deficit (31) (53) (22)- Def icit /GDP (%) -2.1% -2.9% -1.9%
Principal payment 35 35 26
Total financing (net) 31 53 22Of which:Domestic (net) 23 43 21- Issued 51 71 41
- Of which:- Government bonds - - 8
- Onshore USD bonds(USD230m)
- - 4
- Unexplained - - 30
- Repayed 28 28 20External (net) 8 10 1- Issued 15 16 6- Repayed 7 6 5Overall deficit (grossissuance)
(66) (87) (48)
- Deficit/GDP (%) 5.0% 4.8% -4.1%
Unbalance expenditures,revenues
31 47 34
On lending 12 26 9
Source: MOF, HSBC
http://www.research.hsbc.com/midas/Res/RDV?p=pdf&key=x4q1lt882m&n=250181.PDFhttp://www.research.hsbc.com/midas/Res/RDV?p=pdf&key=x4q1lt882m&n=250181.PDFhttp://www.research.hsbc.com/midas/Res/RDV?p=pdf&key=x4q1lt882m&n=250181.PDFhttp://www.research.hsbc.com/midas/Res/RDV?p=pdf&key=x4q1lt882m&n=250181.PDFhttp://www.research.hsbc.com/midas/Res/RDV?p=pdf&key=x4q1lt882m&n=250181.PDFhttp://www.research.hsbc.com/midas/Res/RDV?p=pdf&key=x4q1lt882m&n=250181.PDF -
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Following the emergence of speculative behaviour
in the onshore gold market, the central bank this
week repealed a ban on gold imports. A shortage
of gold onshore seems to have led to an onshore
price premium, which encouraged speculative
demand for USDs, and drove the USD-VNDpremium in the NDF market out to as much as
5%. While re-allowing gold imports is likely to
stabilise FX market dynamics in the short term,
this is unlikely to completely remove depreciation
pressure from the VND.
It seems we are back in a situation not too
dissimilar to early 2008 domestic monetary
policy is too loose, and this is showing up in,
among other places, pressure on the currency to
depreciate. As argued in our economics section:
the deterioration in the trade balance has been
stark, and this is now approaching the highs
of 2008;
subsidised bank lending is 24% of GDP this
year;
the budget deficit is likely to be around 8% of
GDP this year and interest rates were cut by
7ppts; and
the inflation pulse (3m-on-3m annualised
change) has increased to more that 7%.
The deterioration in the trade deficit is of
particular concern. Domestic policy has not been
tightened at all at this point, and yet import
growth is running well ahead of export growth.
Even if policy was tightened immediately,
therefore, some further deterioration in the trade
deficit would seem almost certain. With domestic
inflation picking up, there is little surprise that the
VND is suffering from insufficient demand.
1. Vietnam trade
-60
-40
-20
0
20
40
60
80
100
01 02 03 04 05 06 07 08 09
Exports Imports
%yoy, 3m mav
Source: HSBC, Bloomberg
In short, the re-allowance of gold imports has
stabilised the VNDs depreciation premium in the
NDF market (Chart 2). The underlying
fundamentals, however, remain poor.
FX Strategy
Depreciation pressure has intensified, and re-allowing gold
imports will not sustainably reduce the paucity of VND demand
The longer monetary tightening is delayed, the greater the risk
that the market becomes destabilised
Either way, expect VND depreciation pressure to persist
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Depreciation pressure is almost certain to persist
in the near term, even if policy tightening is
delivered in the near term. The longer tightening
is delayed, however, the greater the risk that
destabilising speculation again emerges in the
currency. Either way, expect further VND
depreciation.
2. VND premium from band ceiling (% of spot)
-2%
-1%
0%
1%
2%
3%
4%5%
6%
Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09
NDF fix less spot USD-VND
Source: HSBC, Reuters
Richard Yetsenga
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Disclosure appendix
Analyst certification
Each analyst whose name appears as author of an individual chapter or individual chapters of this report certifies that the views
about the subject security(ies) or issuer(s) or any other views or forecasts expressed in the chapter(s) of which (s)he is author
accurately reflect his/her personal views and that no part of his/her compensation was, is or will be directly or indirectly related
to the specific recommendation(s) or view(s) contained therein.
Important disclosuresStock ratings and basis for financial analysis
HSBC believes that investors utilise various disciplines and investment horizons when making investment decisions, which
depend largely on individual circumstances such as the investor's existing holdings, risk tolerance and other considerations.
Given these differences, HSBC has two principal aims in its equity research: 1) to identify long-term investment opportunities
based on particular themes or ideas that may affect the future earnings or cash flows of companies on a 12 month time horizon;
and 2) from time to time to identify short-term investment opportunities that are derived from fundamental, quantitative,
technical or event-driven techniques on a 0-3 month time horizon and which may differ from our long-term investment rating.
HSBC has assigned ratings for its long-term investment opportunities as described below.
This report addresses only the long-term investment opportunities of the companies referred to in the report. As and when
HSBC publishes a short-term trading idea the stocks to which these relate are identified on the website at
www.hsbcnet.com/research. Details of these short-term investment opportunities can be found under the Reports section of thiswebsite.
HSBC believes an investor's decision to buy or sell a stock should depend on individual circumstances such as the investor's
existing holdings and other considerations. Different securities firms use a variety of ratings terms as well as different rating
systems to describe their recommendations. Investors should carefully read the definitions of the ratings used in each research
report. In addition, because research reports contain more complete information concerning the analysts' views, investors
should carefully read the entire research report and should not infer its contents from the rating. In any case, ratings should not
be used or relied on in isolation as investment advice.
Rating definitions for long-term investment opportunities
Stock ratings
HSBC assigns ratings to its stocks in this sector on the following basis:
For each stock we set a required rate of return calculated from the risk free rate for that stock's domestic, or as appropriate,
regional market and the relevant equity risk premium established by our strategy team. The price target for a stock represents
the value the analyst expects the stock to reach over our performance horizon. The performance horizon is 12 months. For a
stock to be classified as Overweight, the implied return must exceed the required return by at least 5 percentage points over the
next 12 months (or 10 percentage points for a stock classified as Volatile*). For a stock to be classified as Underweight, the
stock must be expected to underperform its required return by at least 5 percentage points over the next 12 months (or 10
percentage points for a stock classified as Volatile*). Stocks between these bands are classified as Neutral.
Our ratings are re-calibrated against these bands at the time of any 'material change' (initiation of coverage, change of volatility
status or change in price target). Notwithstanding this, and although ratings are subject to ongoing management review,
expected returns will be permitted to move outside the bands as a result of normal share price fluctuations without necessarily
triggering a rating change.
*A stock will be classified as volatile if its historical volatility has exceeded 40%, if the stock has been listed for less than 12
months (unless it is in an industry or sector where volatility is low) or if the analyst expects significant volatility. However,
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stocks which we do not consider volatile may in fact also behave in such a way. Historical volatility is defined as the pastmonth's average of the daily 365-day moving average volatilities. In order to avoid misleadingly frequent changes in rating,
however, volatility has to move 2.5 percentage points past the 40% benchmark in either direction for a stock's status to change.
Prior to this, from 7 June 2005 HSBC applied a ratings structure which ranked the stocks according to their notional target
price vs current market price and then categorised (approximately) the top 40% as Overweight, the next 40% as Neutral and
the last 20% as Underweight. The performance horizon is 2 years. The notional target price was defined as the mid-point of the
analysts' valuation for a stock.
From 15 November 2004 to 7 June 2005, HSBC carried no ratings and concentrated on long-term thematic reports which
identified themes and trends in industries, but did not make a conclusion as to the investment action that potential investors
should take.
Prior to 15 November 2004, HSBC's ratings system was based upon a two-stage recommendation structure: a combination ofthe analysts' view on the stock relative to its sector and the sector call relative to the market, together giving a view on the
stock relative to the market. The sector call was the responsibility of the strategy team, set in co-operation with the analysts.
For other companies, HSBC showed a recommendation relative to the market. The performance horizon was 6-12 months. The
target price was the level the stock should have traded at if the market accepted the analysts' view of the stock.
Rating distribution for long-term investment opportunities
As of 12 November 2009, the distribution of all ratings published is as follows:
Overweight (Buy) 41% (18% of these provided with Investment Banking Services)
Neutral (Hold) 38% (18% of these provided with Investment Banking Services)
Underweight (Sell) 21% (15% of these provided with Investment Banking Services)
Analysts are paid in part by reference to the profitability of HSBC which includes investment banking revenues.
For disclosures in respect of any company, please see the most recently published report on that company available at
www.hsbcnet.com/research.
* HSBC Legal Entities are listed in the Disclaimer below.
Additional disclosures
1 This report is dated as at 12 November 2009.2 All market data included in this report are dated as at close 11 November 2009, unless otherwise indicated in the report.3 HSBC has procedures in place to identify and manage any potential conflicts of interest that arise in connection with its
Research business. HSBC's analysts and its other staff who are involved in the preparation and dissemination of Research
operate and have a management reporting line independent of HSBC's Investment Banking business. Chinese Wallprocedures are in place between the Investment Banking and Research businesses to ensure that any confidential and/orprice sensitive information is handled in an appropriate manner.
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Disclaimer
* Legal entities as at 22 October 2008
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Multi-assetGlobalPhilip PooleGlobal Head of Emerging Markets Research+44 20 7991 5641 [email protected]
EconomicsLatin America
Jonathan HeathChief Economist, Latin America+52 55 5721 2176 [email protected] D Blazquez+54 11 4348 5759 [email protected] Dominguez+52 55 5721 2172 [email protected] Finkman+54 11 4344 8144 [email protected] G Gomes+55 11 33718183 [email protected] Loes+55 11 3371 8184 [email protected] Martin+52 55 5721 2164 [email protected] Morgenstern+54 11 4130 9229 [email protected] Hongbin
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+90 212 376 4619 [email protected] Williams+971 4 423 6925 [email protected]
CreditDilip Shahani+852 2822 4520 [email protected] Chan+852 2822 4522 [email protected] Chan+852 2822 3232 [email protected] Fedotova+44 20 7992 3707 [email protected] Mahendran+852 2822 4521 [email protected] Ellen Olson+852 2822 4524 [email protected] Zhang+852 2822 4523 [email protected] Angammana, CFA+44 20 7991 5431 [email protected]
CurrencyMarjorie Hernandez+1 212 525 4109 [email protected] Hui+852 2822 4340 [email protected] Kojodjojo+852 2996 6568 [email protected] Wardle+1 212 525 3345 [email protected] Yetsenga+852 2996 6565 [email protected]
Fixed IncomePieter Van Der Schaft+852 2822 4277 [email protected] Esguerra+852 2822 4665 [email protected] Goldberg
Head of Latin America Fixed Income Strategy+1 212 525 8729 [email protected] Kemen+1 212 525 4326 [email protected] Mrtinez-Cruz+52 55 5721 2380 [email protected] M Yellati+1 212 525 6787 [email protected]
Equity
CEEMEAEuropeWill ManuelHead of CEEMEA Company Research+44 20 7992 3602 [email protected] Lomax
Head of Equity Strategy, GEMs+44 20 7992 3712 [email protected] Baranski+44 20 7991 6782 [email protected] Drouet+44 20 7991 6827 [email protected] Fedoseev+44 20 7991 6831 [email protected] Lyssogorskaya+44 20 7992 3684 [email protected] Nijenhuis+44 20 7992 3680 [email protected] Redman+44 20 7991 6822 [email protected] AfricaUmulinga Karangwa+44 20 7992 3685 [email protected] Mballa-Ekobena+44 20 7991 6809 [email protected]
TurkeyCenk OrcanCo-Head of Turkey Equity Research+90 212 376 4614 [email protected] YurdagulCo-Head of Turkey Equity Research+90 212 376 4612 [email protected] Bayar+90 212 376 4617 [email protected] Hullu+90 212 376 4616 [email protected] Sengun+90 212 376 4615 [email protected] Shimei+972 3 710 1197 [email protected] Weisz+972 3 710 1198 [email protected] Arab Emirates
Kunal Bajaj+971 4 507 7458 [email protected] Lepper+971 4 423 6932 [email protected]
Ankur Khetawat+971 4 423 6930 [email protected] Kinsey+971 4 423 6928 [email protected]
Vikram Viswanathan+971 4 423 6931 [email protected]
EgyptAhmed Hafez Saad+202 2529 8436 [email protected] El Mehelmy+202 2529 8438 [email protected] Panicker+202 2529 8439 [email protected] Arabia
Tareq Alarifi+966 1 299 2105 [email protected]
Aybek Islamov+966 1 299 2102 [email protected]
Raj Sinha+966 1 299 2100 [email protected]
Aleksandar Stojanovski+966 1 299 2104 [email protected]
AsiaResearch ManagementChris Georgs+852 2996 6753 [email protected] van der Linde+852 2996 6575 [email protected] EstateLouisa Fok+852 2996 6629 [email protected] Kwok+852 2996 6918 [email protected] Narkar+91 22 3023 1474 [email protected] Wong+852 2996 6621 [email protected]
GEMs Research Team
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BanksTodd DunivantHead of Banks, Asia-Pacific+852 2996 6599 [email protected] Agarwal+91 22 2268 1235 [email protected]
Sarah Hung+886 2 8725 6026 [email protected] Park+82 2 3706 8755 [email protected] Pun+852 2822 4396 [email protected] Wu+852 2996 6585 [email protected] Ho+852 2996 6593 [email protected] Lam+852 2822 4398 [email protected] Russell+852 2822 `4321 [email protected] Agrawal+91 22 2268 1243 [email protected]
Transport / ConglomeratesMark Webb+852 2996 6574 [email protected] Gupta+91 22 2268 1079 [email protected] Jain+852 2996 6717 [email protected] Lin+852 2996 6570 [email protected] Shahrim+852 2996 6976 [email protected] ResourcesDaniel Kang+852 2996 6669 [email protected] Chan+852 2996 6619 [email protected] Chiu+852 2822 4297 [email protected] Hong Xing Li
+852 2996 6941 [email protected] Mak+852 2822 4551 [email protected] Tsoi+852 2996 6620 [email protected] StrategyVivek Misra+91 80 3001 3699 [email protected] Sun+852 2822 4298 [email protected] Tse+852 2996 6602 [email protected]
Consumer & RetailJessie Guo+852 2996 6572 [email protected] Panthaki+91 22 2268 1240 [email protected] Yang+852 2822 4342 [email protected]
TMTTucker Grinnan+852 2822 4686 [email protected] C Pelayo+852 2822 4391 [email protected] Aggarwal+91 22 2268 1246 [email protected] Anderason+886 813 5203 3826 [email protected] Park+852 2822 6591 [email protected] Sharma+91 22 2268 1239 [email protected] Shing+852 2996 6751 [email protected] Su+8862 8725 6025 [email protected] Wang+8862 8725 6024 [email protected]
Wanli Wang+8862 8725 6020 [email protected] Yao+852 2822 4397 [email protected]
Small & Mid-capSuman Guliani+91 80 3001 3747 [email protected] Somani+91 22 2268 1245 [email protected] America
Patrick BoucherHead of Research, Americas+1 212 525 7632 [email protected] GartnerHead of Equity Research, Brazil+55 11 3371 8181 [email protected] Carlos MateosHead of Equity Research, Mexico+52 55 5721 3607 [email protected] Brands & RetailManisha A Chaudhry+1 212 525 3035 [email protected] J Chevez+1 212 525 5350 [email protected] Herrera+1 212 525 5126 [email protected] Maia+55 11 33718192 [email protected] Torres
+1 212 525 6972 [email protected] Watson+1 212 525 4905 [email protected] Galliano+1 212 525 5253 [email protected] Santiago+1 212 525 5418 [email protected] & LogisticsVanessa Ferraz+55 11 3371 8190 [email protected] Freiberger+55 11 3371 8197 [email protected] Salomon-KaramConstruction & Engineering/Infrastructure, Mexico+52 55 5721 2173 [email protected] Resources and EnergyJordi Dominguez
+1 212 525 3460 [email protected] Flores+1 212 525 3053 [email protected] Marquez+1 212 525 7669 [email protected] Pereira+55 11 3371 8203 [email protected] Redman+44 20 7991 6822 [email protected], Media & TechnologyRichard Dineen+1 212 525 6707 [email protected] E Gonzalez+52 55 5721 2580 [email protected]
Equity StrategyGarry EvansGlobal Head of Equity Strategy+852 2996 6916 [email protected] LomaxHead of Equity Strategy, GEMs+44 20 7992 3712 [email protected] AguilieraStrategist+52 55 5721 2379 [email protected]
GEMs Research Team (continued)
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