Vietnam Brokers: Down, but not out

Vietnam brokers — Down, but not out

Tactically tough timing for the Vietnam brokers. As outlined in our February brokerage sector initiation, we retain our structural Overweight call on the Vietnam brokers. However, the stocks’ extremely high correlations with volatile market index levels and ADT suggest that they are not a one-way bet. We reckon that the brokers’ valuations will remain under pressure in 2Q19, but we still think the market will pick up in the second half of the year.

Themes and catalysts

• Stocks are very highly correlated with market levels and ADT.
• Market is under pressure; but we expect a 1H19 rebound.
• Brokerage margins remain under pressure in 1Q19….
• …but margin lending is highly profitable and has been rising.

1Q19 earnings were a mixed bag. HCM only managed to post 13% of our full-year reported profit forecast, while SSI did slightly better at 15% of our 2019E target. VCI achieved 29% of our forecast for 2019E, but this was largely due to trading book disposal gains. By contrast, VND was an operational standout, delivering 29% of our full-year forecast on solid net brokerage, margin, and income from HTM assets.

Brokerage commissions down… We estimate our universe’s gross commission rate fell to 20bps (-2bp QoQ and YoY) in 1Q19, while net commissions fell to 6bps (-3bp QoQ / -7bp YoY). Gross brokerage income falling by 31% QoQ / 59% YoY vs a decline of 25% QoQ / 54% YoY in attributable stock transactions.

But not much further left to fall. February’s demise of the 15bp floor gave rise to concerns (and for some investors, hopes) that brokerage fees would fall substantially. Our view has been that fixed and variable brokerage costs would limit the downside, as net commissions (now 6bp) approach zero.

Margin lending is a far more critical driver of retail brokerage profitability, and margin loans hit a record high of VND48.5 trn (+14% QoQ / +13% QoQ) in 1Q19.

Tactical outlook: Wait for it. The brokers’ share price correlation to the VNIndex are north of 90%. As outlined in our Apr 4 strategy note “Time for a breather in 2Q19”, we think the market doldrums will persist until well into 3Q19, and we would trade the brokers accordingly. For long-term investors, we prefer HCM given its strong positioning for growth in institutional investor participation in the years ahead. VND’s superior online trading platform should allow for greater operational leverage as retail investor activity grows. We are relatively cautious on SSI and VCI, which may face constrained share price performance.