Export industries: Downward trending

• Overall export growth will decelerate amid weakening global demand.
• We see gross margin to shrink across the board in 2023F due to FX risks and lower average selling price to attract customers.
• Our stock pick is DGC.

Weakening demand as global economy set to subdued
Vietnam’s export turnover grew healthily 17.3% yoy in 9M22 but started slowing down in 3Q22 (-0.5% qoq; +17.2 % yoy). We expect that discretionary demand of Vietnam ‘s top exporting markets such as the U.S., E.U and even China, will soften further into 2023F which will weigh on export-related production, including: textile & garment (T&G), wood & wooden products (W&WP) and basic chemicals.

We expect that GM’s export companies will edge down in FY23F
We forecast that input material prices such as yarn, fabrics, plywood will decrease 3%-7% yoy in FY23F due to weak demand. However, with the challenge ahead, we think that T&G and W&WP comanies will have to lower the selling price (7%-10% yoy) to attract more customers. Thus, GM’s T&G and W&WP companies will edge down 0.8%-1.0% pts yoy in FY23F. While we expect GM’s basic chemical companies to remain at high level in 1H23F before slowing down in 2H23F due to weaker demand for electronics and aluminum. We forecast GM’s chemical sector to decline 1.5%-2.5% pts yoy in FY23F.

The impact of FX volatility is different among export enterprises
The VND has depreciated ~8.3% to US$ at end-Oct 22. We believe that businesses with positive net cash and low debt-to-equity ratio will benefit from high interest rates such as DGC, VIF, ACG and GIL. While most of the T&G enterprises will have to face the risk of interest rate increase due to high net debt. In additionally, we see that companies with high US$ debt ratio such as PTB, MSH, and STK are exposed to FX risks.

Our stock pick is DGC
Against sectoral headwinds, we believe export-related companies that have strong market position, solid balance sheet are able to mitigate the FX and rising cost of debt risks and quickly bounce back once the winds change. We like DGC thanks to 1) DGC had no long-term debt and a net cash/share of VND17,703/share as of 3Q22 and 2) 80% of DGC’s revenue is in US$, while only 40% of its COGS is in US$ which will support for DGC’s GM in FY23F. Investment risks include (1) longer than-expected global recession and (2) the changes exporting tariffs.

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