SSI says investors should focus on utility services on rising inflation

In 2011, investors should focus on stocks of companies in utility service industries, chemical industries, and listed companies that have the ability to control prices and market share, according to SSI, one of the country’s leading brokerages.



2010 was a difficult year for most businesses in Vietnam. Many companies saw fall in profit margins, partly influenced by a strong increase of input prices, higher interest loans and the devaluation of the dong. For example, the Southern Rubber JSC (CSM), witnessed its profit margin decrease from 25.3 percent in 2009 to 13.8 percent in 2010. On the other hand, higher borrowing costs made net profit of CSM plummet 46 percent.



Although many companies have managed costs to increase the sale prices, in 2011, this will be a difficult year. Inflation is the most worrisome factor directly affecting the profitability of businesses. Based on SSI’s recent interviews with listed companies, the input price increase is the biggest concern of most businesses.



Global commodity prices, particularly food, energy and raw material prices tend to rise strongly, which is regarded as a factor pushing prices of domestic goods increases.



Companies importing goods or raw materials from abroad for production (such as pharmaceutical, steel, and plastic companies) are affected seriously by price increases and the devaluation of the dong, which are forecasted to make input costs increase sharply.



Input prices for production such as electricity, coal, oil under price control policies of the government have increased or tended to increase this year. This causes pressure on wage costs to also increase.



As for Vietnam’s tight monetary policy, banks keeping high lending rates have pushed up higher interest expense of businesses. On the other hand, SSI also said that the tight monetary policy and inflation will negatively affect private consumption.



SSI believes that expectations about the consumption of companies are not too optimistic for this year. However, sales of companies will have high growth rates, with the price increase, contrary to the demand be maintained at prudent levels. Besides, profit growth will decline as margins shrink.



In meetings with companies, SSI noted the cautious attitude of business managers about business prospects in 2011, not even expected the profit growth as planned.



According to SSI, 2011 (or at least the first 6 months of 2011) will not be the appropriate time for the mobilisation of capital.

Therefore, risks of diluting the stock will not be too big in 2011.



Its statistics show that non-finance companies will see sales increase by 12 percent and net income increase by 9 percent, respectively. But for financial companies, the increase of net profit is expected to be 10 percent in 2011.



Investment Strategy



SSI recommended that the investment strategy for 2011 should focus on the sectors to benefit from inflation, beside the basic elements, that could help companies maintain operations, overcoming this difficult period and continuing to grow in coming years.



During periods of high inflation, companies in service industries will add more risks when prices are under the government control, while input prices rise, typically, pharmaceutical and agriculture.



Companies that have the ability to control or have a high share price would have certain advantages compared to other small companies, when they are able to transfer costs to consumers, but most will accept profit margins fall in 2011. Thus, large enterprises such as Vinamilk (VNM), Binh Minh Plastics (BMP), Hoa Phat Group (HPG), Phu Nhuan Jewellery (PNJ) are examples of cost advantages and effective risk defenses. In recent discussions with manufacturers of instant coffee Vinacafe (VCF), SSI found that the company may see a decline of about 7 percent in profit margins in 2011.



Companies importing materials will face risks with two burdens of high price volatility and currency devaluation including of pharmaceutical, steel, plastics companies such as Dabaco Vietnam (DBC), Pin South Battery (PAC).



Companies with high debt leverage (debt both dong and foreign currencies) will be seriously affected this year, including real estate companies more severely. While building material prices are rising, some real estate firms even lower their prices to push sales.



Conversely, some companies of consumer commodity groups would benefit from inflation and rising prices. SSI notes that the case of stocks Sugar Bourbon Tay Ninh (SBT), its gross margin percentage in 2010 was 34.5 percent, higher than 26.3 percent in 2009 due to increased sugar prices during 2010. SBT profits expected to remain high in 2011.

Tags: Vietnam companies, vietnam enterprices

Posted by VBN on Mar 16 2011. Filed under Enterprises. You can follow any responses to this entry through the RSS 2.0. You can leave a response or trackback to this entry