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Vietnamese Brokerage Sector Initiation — We’ve only just begun

13/02/2019 - 08:40

We initiate coverage on the Vietnam brokers. Despite our cautious short-term strategy call, we think that the long-term outlook for Vietnam’s capital markets is highly attractive. Individuals account for c.75% of turnover, but demographic trends suggest that the retail punter story is just getting started. We also expect increased flows from foreign institutional investors in the medium term. Our view on the sector is not complicated: similar to elsewhere, we view Vietnamese brokerage stocks as proxies on this positive market outlook. Our top picks are HCM and VND.

Brokers offer exposure to Vietnam’s long-term capital markets development. We are confident in the outlook for Vietnam’s financial markets in the years ahead and see the brokerage stocks as an attractive way for investors to gain exposure to this long-term story. Thematic drivers include increased participation by both retail and institutional investors, ongoing (albeit at an uncertain pace) privatization / equitization, and a nascent but growing derivatives market.

Brokers are market proxies. Long-term fundamentals aside, the stocks typically trade in line with market activity, which is similar to brokers and exchanges that we have covered elsewhere. Long term correlations of broker stocks to VNIndex are north of 90% and to ADT are c. 80%. This should inform trading decisions.

Solid profitability, cheap valuations, no FOL hassles, limited coverage. Sector ROEs are c. 14-23% with limited leverage, but PERs are in the single digits despite a solid growth outlook for margin finance, derivatives, investment banking, wealth management, and even (despite fee compression) pure brokerage. Foreign ownership limit hassles are refreshingly nonexistent in these names. Despite what we see as a highly positive growth story, sell-side coverage of the sector is sparse.

Risks. We have penciled in 14% CAGR for equities ADT and 19% CAGR for margin finance in 2018P-2021E (both c. half the 2016A-2018P CAGR levels). Obviously, weak markets would impact forecasts, valuations, and stock prices. Prop trading is also a swing factor for earnings. Market liberalization is an upside risk on balance, but deregulation is not a one-way street – it can also mean competition and fee compression.

Top picks: HCM and VND. In our view, HCM (Yuanta rating: Buy) is optimally positioned for growth in institutional investor participation in the years ahead. VND’s (Buy) superior online trading platform should allow for greater operational leverage on as retail investor activity grows. SSI’s (Hold) relatively low ROE justifies a valuation discount. By contrast, VCI (Buy) has the highest ROE in the sector but faces difficult operational comps in 2019, which we think may constrain its share price performance.

Please see the link for the full report: Vietnam brokerage sector initiation

Analyst: Matthew Smith, CFA   matthew.smith@yuanta.com.vn