Chart 1

Some pain could come to Vietnam Inc. in 2023. As more debt-funded investments have fueled the post-COVID recovery, structural credit weaknesses of the Vietnam corporate sector are likely to crystalize. These include reliance on short-term funding, relatively narrow financing channels even for the large companies, and rising funding costs and refinancing risk. Governance and transparency considerations, which had taken a back seat as revenues and profits flew in, are also likely to make a comeback.

Such structural issues are most pronounced in the real estate and construction sectors. Its debt-funded growth bears similarities to what is happening in China and Indonesia today. Some highly leveraged property firms are facing increasingly choosy creditors and are contemplating debt extensions.

The past two years were a different story. Vietnam's corporate sector largely escaped tremors in emerging markets since the beginning of 2021. Large companies sailed through COVID somewhat more preserved than their counterparts in Indonesia, Thailand, or the Philippines. Growth had picked up in 2021.

This primer is a response to the growing number of investor queries and questions we have been receiving over the past few weeks on Vietnam.

We aim to provide insights on operating, balance sheet, liquidity, and governance trends, taking 25 of Vietnam's largest listed companies as a starting point. These companies are often among the largest, most diversified entities in their sectors. These are predominantly private, listed companies. Vietnam's largest state-owned companies remain unlisted. These include Vietnam Oil And Gas Group (PVN); mining company Vietnamese National Coal and Mineral Industries Holding (Vinacomin) and Vietnam Electricity (EVN).

About This Primer

The primer highlights the main credit characteristics and trends of 25 of Vietnam's largest corporate and infrastructure entities. These include firms' size and scope of operations; resiliency during COVID-19; financial policy decisions; growth strategies; and liquidity and funding traits. We also provide a few observations on disclosure and governance.

Table 1

Key sectors.  Real estate development and investment companies account for about one-third of the 25 large companies under review. That's a reflection of the growing prominence of this sector and its (largely debt-funded) growth over the past five years. Consumer and retailing companies comprise another third. The remaining third comprises heavier manufacturing or capital-intensive sectors such as oil and gas, utilities, steel, chemicals, and cyclical transportation.

Large Vietnamese companies are smaller than their Southeast Asian counterparts.  Revenues in 2021 at the 25 companies we reviewed were roughly half the average revenues of the 25 largest listed companies in the Philippines, Malaysia, and Indonesia, and about one-quarter of those in Thailand. About 80% of these operate only domestically.

Chart 2

Steady Macro Growth Underpinned Corporate Expansion

Real GDP in Vietnam grew 2.6% in 2020, one of the rare economies in Southeast Asia to expand during the pandemic (see chart 3). Consumption and mobility-related sectors recovered in the second half of 2022 after first being severely hit by stringent COVID restrictions in the first half . This trend continued in 2021.

That macro momentum accelerated throughout the first three quarters of 2022, which were stronger than we earlier projected despite shifts in the global and regional economic outlooks. GDP growth is likely to exceed 8% in 2022 by our estimates, helped by Vietnam's twin engines of external and domestic demand.

GDP growth will slip to 6.3% in 2023 in our base case. While this is a still respectable number compared with peers, macroeconomic headwinds are crystalizing. The global growth slowdown is likely to hit Vietnam's export recovery in the manufacturing sector. On the domestic side, concerns around the property sector and its leverage are back. These could hurt confidence in the sector at a time when financing costs are already rising. The pick-up in inflation is also likely to imprint a more hawkish stance by the State Bank of Vietnam, which would weigh further on short-term growth.

Chart 3

Revenues and profits at Vietnam's 25 large companies we reviewed largely reflected this macroeconomic backdrop. Median profits grew a compounded 17% between 2017 and 2022 (see chart 4), about 40% faster than their large counterparts in Southeast Asia over the period. Median revenues grew 3% in 2020 (vs. declines of about 5% in Malaysia, Thailand and Indonesia, and a decline of 13% in the Philippines, the most pandemic-afflicted regional economy in 2020).

Vietnamese companies have also recovered faster post-COVID. EBITDA grew nearly 40% in 2021 over 2020, a trend widespread across sectors. In Southeast Asia, only large companies in Indonesia recovered as quickly (median growth of about 35%) thanks to the commodity boom.

The recovery momentum is continuing in the year-to-date in the consumer, light manufacturing, mobility, and energy sectors. The main change is the sharp reversal in fortunes for the real estate sector, with six of the eight developers we reviewed posting falling revenues and declining quarter-on-quarter profitability.

Chart 4

Leverage And Financial Policies Diverge

Balance sheets take different paths.  The balance sheets and credit profiles of the Vietnamese companies we reviewed have become increasingly polarized. Using annualized 2022 data, we estimate that 44% of the 25 large companies under review had leveraged capital structures. We define this as a ratio of gross debt to EBITDA of more than four times (see chart 5). About 40% had conservative capital structures, or a ratio of gross debt to EBITDA of less than two times.

The growing polarization of balance sheets had been in the making since the middle of the past decade, given rising working capital and steady capital spending and dividends. COVID-19 only accelerated this trend.

Chart 5

Funding policies have been consistent over the past five years.  The growing polarization of capital structures hide otherwise fairly consistent financial policies at individual companies (see chart 6):

• Eleven companies have maintained consistent capital structures. Steady earnings at consumer product manufacturers Vinamilk and Sabeco and PVN-related subsidiaries PVN Gas and PVN Fertilizer and Chemicals allowed them to maintain solid balance sheets despite steady capital spending or dividend payments.
• The balance sheets of nine companies deteriorated, moderately for IT-services provider FPT Corp, steel manufacturer Hoa Phat Group, retailer Mobile World, and diversified group Masan Group; the trend was most pronounced for real estate developers as their debt-funded growth has not kept up with earnings.
• Five companies strengthened their capital structure, generally through a combination of earnings growth, declining capital spending, or debt repayment.

Chart 6

There's A Lot Of Cash Out There

Similar to Malaysia, Vietnam's large, listed companies tend to hold a lot of cash.  This contrasts with the much more modest cash holdings typical for large companies in Indonesia, Thailand, or the Philippines. In Vietnam, we attribute this to relatively shallow financing channels; operating volatility for companies with a narrow asset-base; and the moderate opportunity cost of holding cash given relatively high domestic deposit rates. Companies also held ample liquidity historically to fund working capital and growth ambitions, especially in real estate.

Capital structures appear slightly less leveraged on a net basis for the 25 Vietnamese companies we reviewed (see chart 7).  Netting cash reduces the ratios of debt to EBITDA by about 1x, on average, for 11 out of 25 companies. Net leverage is substantially lower than gross leverage for downstream oil and gas company Petrolimex, Mobile World, and Hoa Phat Group given their sizable cash balances.

Chart 7

From a credit standpoint, we would generally look at capital structures on a net debt basis (rather than on a gross debt basis) when an issuer has predictable earnings of a high quality.  Predictable earnings often reduce large swings in liquidity. In the region, we generally observe those when issuers have: (1) asset, product, geographic, and customer diversity; (2) a record of above-average industry margins; (3) solid and sustainable domestic or regional market share; or (4) solid operating efficiency and working capital management. These mitigants may not be applicable to some of the largest Vietnamese companies, given their smaller size, scale, diversity or operating efficiency versus their counterparts in Southeast Asia.

Exposure to forex fluctuations is rare and company specific.  We do not see the recent depreciation of the Vietnamese dong (of about 10% over the past 12 months) as a major risk to Vietnam's largest companies or to the broader corporate sector. Most Vietnamese companies fund their operations in the domestic loan and bond markets (see below section on liquidity). Such concentrated domestic funding creates its own credit issues, especially during periods of volatile investor sentiment. But it does reduces exposure to currency volatility.

Foreign-currency funding is concentrated among a few companies that use trade finance for the purchase of U.S. dollar-denominated raw materials or feedstock, particularly the energy and power sectors. Larger conglomerates Vingroup or Masan Group, have moderate foreign currency debt but also some dollar-denominated export revenues.

Capital Allocation: Where Is The Cash Going?

Differences in growth aspirations, expansion, and shareholder distributions explain the rising credit polarization among the 25 Vietnamese companies we reviewed.

Watch the working capital.  Rapid revenue and profit growth over the past five years left its mark on corporate balance sheets of most companies we reviewed. Growth required massive investments in working capital. Trade receivables, inventories and trade payables grew nearly twice as fast as revenues and profits between 2017 and 2022 (see chart 8).

Chart 8

As a proportion of revenues, working capital requirements nearly doubled on average over the period (see chart 9). While working capital increased across sectors, growth was the most pronounced in the real estate sector. That explains the massive debt build-up over the past five years, and the sector's reliance on short-dated financing.

Trade suppliers have financed some of that growth. This helped preserve liquidity and limit reliance on short-term debt. But this is generally a temporary fix as suppliers will need to be paid at some point to continue supplying. When that happens, otherwise healthy cash balances can drop rapidly.

Chart 9

Steady investment in working capital mechanically led to a weaker conversion of accounting earnings into cash at the 25 large Vietnamese companies (see chart 10). By our estimate, about half converted 50% of less of their accounting EBITDA into cash, largely because of increasing interest expenses and rising working capital. Weaker cash conversion in 2021 may be due to the briskier pace of activity post-COVID. But year-to-date 2022 data suggest that proportion remains close to 50% as well. In 2017, it was only about one-quarter.

From a credit standpoint, a record of subpar cash conversion raises questions about the sustainability of fast-growing business models in the longer term. It can also overstate credit quality based on earnings ratios such as debt to EBITDA, or EBITDA interest coverage.

Chart 10

Capital Spending And Dividend Trends

Elevated capital spending and dividends are the main driver of cash deficits for one-third of the companies.

Capital spending.  Expanding macroeconomic activity naturally led to rising investments. Capital expenditure (capex) grew by about 18% annually between 2017 and 2020. As a proportion of earnings, capital spending has crept up to about 26% in 2021 from about 21% in 2017 (see chart 11). The sharp increase in 2020 is largely due to somewhat steadier capital spending despite a broad-based drop in earnings. More leveraged companies have tended to invest more of their earnings. On average, those have spent between 40% and 60% of their EBITDA over the past five years.

Dividends.  Dividends as a share of earnings have remained stable over the past five years, declining in 2021 given the weaker earnings in 2020. Unlike more leveraged companies that distribute limited or no dividends, shareholder remuneration tends to be the largest source of cash outflow for companies with moderate leverage.

Chart 11

Funding And Liquidity

Balance sheet structures provide, in our view, great insights on financial policies and growth ambitions for emerging market companies. But liquidity and access to funding, both shorter-term credit considerations, have proven to be early indicators of default or restructuring risk in past emerging market crises.

Large Vietnamese companies have short debt tenors…  As of Sept. 30, 2022, more than half of the total debt of the 25 companies we reviewed was due within 12 months (see chart 12). Short-term debt was more than three-quarters of total debt for nearly one-third of these companies, a proportion that has remained stable over the past five years.

We estimate the weighted average debt tenor for the 25 companies to be between one and two years, about half of the tenor of the large companies in other emerging markets in Southeast Asia.

Chart 12

…But often sizable cash  While we would generally consider short-dated debt as a credit limitation, the large Vietnamese companies we reviewed generally had one or both of the mitigants below:

• Ample liquidity: About 60% of the 25 companies held substantially more cash than needed to service maturing debt (see chart 13). Barring 2020 (and COVID), that proportion has stayed stable since 2017.

Chart 13

• More conservative balance sheets: Most of the 14 companies with high reliance on short-term debt (less than half of the mix) had conservative balance sheets (see chart 14). This is the case for consumer companies Sabeco and Vinamilk; IT-services provider FPT Corp; or companies with more volatile earnings such as Petrolimex or Vinhomes. Entities with more leverage in the real estate or cyclical transport sectors tend to have a lower share of short-term debt. But without a sizable cash balance, this still exposes the firms to refinancing risk.

Chart 14

Shallow Financing Channels Underpin Reliance On Short-Dated Debt

Vietnam's small and higher-risk banking system, and its nascent domestic bond market, limit funding options and tenors.

The banking sector.  Past periods of wide credit availability coincided with a run-up in leverage and asset quality issues. These have been followed by much slower credit growth and more selective lending standards. Between 2005 and 2010, for example, yearly credit growth exceeded 30%, or 4x-5x the real GDP growth rate. This triggered massive asset quality problems and a sharp reduction in funding for the corporate sector. In response to those risks,

Vietnamese banks have favored shorter-term lending, with high collateralization required for longer-dated borrowing. Credit growth fell to about half of that between 2014 and 2021 in the current cycle. In our base case, we assume credit growth to remain elevated at nearly 2x real GDP growth over the next few years.

Domestic capital markets.  Vietnam's domestic capital markets are attempting to serve as a sustainable alternative to domestic bank funding. Data from the Vietnam Bond Market Association (VMBA) and the ADB Bond Online database suggest domestic capital markets have deepened. Outstanding local currency bonds represent about 40% of GDP, compared with 22% in 2017 (see chart 15).

Yet, issuers are concentrated: besides government and government-linked entities, real estate or banking/finance companies accounted for nearly two-thirds of corporate issuances in 2020 and 2021, and about 80% for issuances between January and October 2022. Except for government bonds, tenors are also short (two-thirds of the issuances were of a one to three-year tenor in 2021).

Chart 15

Vietnam top 25: funding diversity is moderate on average.  We grouped the 25 companies according to their funding diversity and debt composition, as disclosed in the notes of their latest financial statements (Chart 16). Funding channels are more concentrated for about half of these entities, with either a reliance on a few single-bank lenders (Khang Dien, DIC, Kinh Bac) or concentrated exposure to domestic capital markets. We would regard these concentrations as credit negatives for companies with either limited cash buffers or more leveraged balance sheets. It exposes them to swings in creditor sentiment and rollover risk.

Funding diversity for the other half is generally greater with a wider pool of bank lenders (domestic or international) and domestic capital market access. Only a few companies have diversified their funding either in international capital markets, with a greater pool of foreign bank lenders, or with more recurring recourse to equity funding. The conglomerates Vingroup or Masan Group have done such funding diversification, for example.

Chart 16

The funding profiles of the large companies in Malaysia, Indonesia, Thailand, and the Philippines are typically more diverse than those in Vietnam.  Access to a diverse base of domestic and foreign lenders is greater, domestic capital markets are deeper (except in Indonesia), and between a quarter and half of these large companies have had some international capital market activity over the past 10 years (except in the Philippines). Similar trends pan out for state-owned enterprises (SOEs). For over a decade, large SOEs in Indonesia, Malaysia, or Thailand have tapped foreign-currency bond markets. In Vietnam, the large SOE or subsidiaries of SOEs still largely rely on domestic funding.

In our view, there is a real opportunity for Vietnamese companies with established business models and adequate governance, or the less leveraged SOE, to widen their funding sources beyond domestic borders. Many large Indonesian, Malaysian, and Thai companies have done so successfully, and international investors are keen to diversify, especially in these times of selective lending.

Governance And Transparency

Transparency and governance topics are likely to stay highly relevant to the Vietnam corporate sector because of its fast growth, complex ownership, varying disclosure standards and sometimes changing strategic focus.

In the private sector.  Judging by the volume of information available in financial statements, disclosure standards in Vietnam's listed sector have improved over the past decade. The disclosures give greater details on firms' off-balance sheet contingencies, operating leases, guarantees, and related parties. It also appears to be increasingly timely, at least for the larger listed companies.

Still, Vietnamese companies share characteristics typical in emerging markets, such as concentrated ownership, key-man risk or dealings with unlisted sister companies. This is especially apparent in the real estate and construction sectors. As a growing number of privately held companies access the domestic bond market, information quality and timeliness become key credit considerations. According to data from VBMA, a majority of domestic bonds in the real estate sector were issued by unlisted companies.

In the state-owned sector.  The three largest SOEs remain unlisted: energy company PVN, mining company Vinacomin, and power producer EVN. This means they either provide no public financial disclosure, or the information is only in Vietnamese and they don't have the same timeliness requirements than listed companies. The government has listed some subsidiaries of large SOEs (such as PVN Gas, PVN Fertilizer and Chemicals, and EVN Genco3) to raise capital for investment. However, the related disclosures provide only a small glimpse of their parents' operations and financial policies.

Disclosure, Complexity And Related-Party Transactions Vary Significantly

We categorized the 25 companies according to (1) their size, corporate complexity and level of disclosure of large balance sheet items; and (2) the nature, frequency and materiality of related party transactions (see chart 17). Those aspects vary by company, though we can identify a few trends (see table 2).

Chart 17

Table 2

The domestic banking and bond markets are likely to stay sensitive to governance-driven event risk or the default of a large domestic borrower over the next few years.  Transparency and disclosure from both the corporate and the banking sector can at times be limited. The problem can be compounded by aggressive underwriting standards and single-name lending concentration. These factors can be more conducive of event risk that could potentially trigger sector-wide funding shortages. That's the case for real estate companies. More sectors are at risk.

Digital designer: Evy Cheung

Editor: Jasper Moiseiwitsch

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