ML

PACIFIC RIM
2 February 2006
Asian Insights
Buy Vietnam - The Emerging Frontier Of ASEAN
Equity Strategy
Spencer White, CFA>>
Vietnam Is Beginning To Deliver On A Decade of Promise
Strategist, Merrill Lynch (Hong Kong) The pace of economic growth, policy reform and development in Vietnam’s
(852) 2536 3093 capital markets now demand attention. One of the last frontier markets to
spencer_white@ml.com
emerge in Asia, we see Vietnam as a ten-year buy. It now represents 3% of
our regional model portfolio.
Stephen Corry>>
Strategist, Merrill Lynch (Hong Kong) The Economy Is Vibrant, And Rapidly Growing
(852) 2536 3403
The Vietnamese economy is now one of the fastest growing in the region,
stephen_corry@ml.com
trending above 7% since 2002, under pinned by proactive government policy,
annual FDI of US$5bn and US$4bn of inward remittances.
Willie Chan>>
Strategist, Merrill Lynch (Hong Kong) Consumption Is Turning Conspicuous
(852) 2536-3960 The population of 82m is amongst the youngest in Asia, literacy rates are
willie_chan@ml.com
above 96% and consumption is growing at 20% p.a. This is an economy that
is communist in name only.
Asia Pac Financial Institutions
Embryonic Stock Market, Developing Through Privatisation
Alistair Scarff>>
Research Analyst, Merrill Lynch Market capitalization to GDP is only 4%, the government is targeting 15% -
(Hong Kong) the regional average is closer to 130%. A slew of privatizations over the next
(852) 2536 3966 twenty four months should dramatically expand this and bring Vietnam closer
alistair_scarff@ml.com to inclusion in regional benchmarks.
Bring On The Banks
The bank sector is one of the most interesting ways to play the growth of
Vietnam Inc as the consumer gains appetite for credit, infrastructure needs
are addressed and the private sector looks to fund its capital expenditure.
We liked ACB and Sacom Bank. Other meetings included Vinamilk, BT6 and
GemAdept.
>>Employed by a non-US affiliate of MLPF&S and is not registered/qualified as a research analyst under the NYSE/NASD rules.
Merrill Lynch does and seeks to do business with companies covered in its research reports. As a result, investors should be aware
that the firm may have a conflict of interest that could affect the objectivity of this report.
Investors should consider this report as only a single factor in making their investment decision.
Refer to important disclosures on page 52. Analyst Certification on page 51.

Global Securities Research & Economics Group RC#60403301 Global Fundamental Equity Research Department
Asian Insights – 2 February 2006
CONTENTS
Section Page
Insight Focus : Vietnam Investment Summary: From Bicycles to BMWs ? It’s A Buy 3-5
Capital Markets – Equity, Debt & FX 6-9
Government Policy And Politics 10 - 14
Economic Drivers – Investment & Consumption 15 - 17
The Bank Sector In-Depth 18 - 24
Company Themes & Visit Highlights 25 - 29
Risks For Vietnam 30
Trading Vital Statistics 31 – 32
Regular Sections The Big Picture - Current Equity Strategy for Asia ex-Japan 33 – 37
Asset Allocation & Thematic Model Portfolio 38 – 40
Foreign Net Buying & Selling, Market Turnover, PE & PB, EY &DY 41 – 48
Correlation Table & Pair Trade Charts 49- 50
2 Refer to important disclosures on page 52.

From Bicycles to BMWs ? It’s A Buy

Vietnam should not be dismissed as more interesting than investible. It is one
of the last frontier emerging economies in the region that will demand
investor attention over the next decade. In the last four years we have seen
rapid changes in both the economy and in government policy that are
Valuations For The VN-Index generating consistent 8% GDP growth.
2005F 2006F
PE (x) 11.6 9.7
Wealth is being created at a turbo-charged rate, and the young, newly
EPS Growth (%) 27.5 20.2 affluent population is engaging in a startling wave of (largely un-financed)
PB (x) 3.1 2.6 conspicuous consumption. Accelerating foreign direct investment, the
DY (%) 3.6 3.6 prospects of WTO-entry by 2007, opportunities to develop tourism much
RoE (%) 29.7 29.8 more significantly and a wide ranging infrastructure program are all
Source: IBES
important drivers of sustainable long term growth. The privatization
program that is underway has the potential to meaningfully expand the
breadth and depth of this market over the next five years.
Why Vietnam And Why Now

Vietnam is one of the last frontier emerging economies in the region that will
This Year Vietnam Has The Second
demand serious investor attention over the next decade. Buy equity exposure now.
Highest Growth Rate In Asia
For your fund, for yourself or for your children. Buy now and tuck the investment
(%)
9.0 away for ten years. In 2016 we can come back to discuss compound returns, the
8.0 toys that you can buy or the college that they will go to.
7.0
None of this promise is new, of course. Vietnam looked very promising ten years
6.0
ago in 1994-1995. But then the Asia Crisis came, investors pulled cash out of high
5.0
risk and peripheral markets, cash was swept out of the Vietnamese economy and
4.0
momentum was lost. Most importantly, there was no stock market at that time, and
3.0
the capital extraction process was painful for many. However, in the last five years
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there have seen rapid changes in both the economy and in government policy that
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H
2006 GDP Growth (%)
Source: Merrill Lynch, Asian Development Bank are generating consistent 7%- 8% GDP growth. More startling for us has been to
observe this pace of positive change accelerate quite dramatically in the past
twelve months.
GDP growth has exceeded 7% Wealth is being created at a turbo-charged rate, and the young, newly affluent
for each of the last four years population is engaging in a startling wave of (largely un-financed) conspicuous
consumption. In the last eight months bicycles have been swapped for BMW’s in
the streets of Hanoi and Ho Chi Minh. McDonald’s may be conspicuous by its
absence but there is no shortage of high-end electronics retail outlets, mobile
phone distributors and auto dealers challenging the spaces previously dominated
by art and lacquer ware. Accelerating foreign direct investment, the prospects of
WTO-entry by 2007, opportunities to develop tourism much more significantly
And consumption is becoming
and a wide ranging infrastructure program are all important drivers of sustainable
very conspicuous long term growth.
The disconnect has always been the nascent state of development of the capital
markets. With a total market capitalization of just over US$1.1bn, consisting of 35
listed stocks and one fund, the VN-Index remains niche, to say the least. However,
we do believe that the privatization program that is underway has the potential to
meaningfully expand the breadth and depth of this market over the next five years.
The privatization program is Opportunities for the direct accumulation of equities exist in both the OTC as well
the driving force behind the as the listed market. The increasing number of domestically-run funds offer a
expansion of the equity market more diversified play on the longer term prospects.
Refer to important disclosures on page 52. 3

Asset Classes For Expressing A View On Vietnam

Equities (Direct)
No lock up periods for equities Accounts take a couple of weeks to set up. For details see the section titled ‘Vital
Trading Statistics’. There are no lock-up periods for secondary market purchases
but volumes remain
but here is a 49% foreign ownership limit for all stocks except banks which are
challenging, for now currently 30%. Liquidity is tight, however. The largest market cap stock,
Vinamilk, currently trades US$300,000 per day.
Equities (Indirect)
A small but growing number of funds are now established, ranging from pure
venture capital to OTC and listed equities. Some include other asset classes such
as property as well. From our discussions it seems likely that several will be
offering additional capacity over the coming months. The only other choice is to
buy the listed units (where relevant). These closed end funds tend to trade at close
to a 10% premium to NAV.
Selection Of Vietnam Funds

Company Name Contact Fund Name NAV (US$mn) Listed Type
Dragon Capital www.dragoncapital.com Vietnam Enterprise Investment 185 Dublin Listed and pre-IPO equity,
Fund (VEIL) debt and property
Vietnam Growth Fund (VGF) 115 Dublin Listed and pre-IPO equity,
debt
Vietnam Dragon Fund (VGF)^ 35^ Dublin Listed and pre-IPO equity,
debt
Mekong Capital www.mekongcapital.com Mekong Enterprise Fund 19 N/A Private equity
Mekong Enterprise Fund II 40 N/A Private equity

PXP Asset Management www.pxpam.com PXP Vietnam Fund Ltd 25 Dublin Listed and pre-IPO equity
PXP Vietnam Emerging Equity 14* Dublin Listed and pre-IPO equity
Fund*
Vietnam Pioneer Partners viethung@vnpioneers.com Vietnam Pioneer Fund Raising US$50mn N/A Pre-IPO equity
Vina Capital www.vinacapital.com Vietnam Opportunities Fund 170 London Stock Exchange Listed equity, pre-IPO
(AIM) equity, debt and property
Source: Merrill Lynch Asia Pacific Equity Strategy Group, *PXP has just raised US$14m for the Vietnam Emerging Equity Fund, it has capacity for another US$36m, same listing and
closed end structure as the existing Vietnam Fund, ^second fund raising for VDF due in 2Q06
Bonds
The US$750m sovereign bond issue in October 2005 was the first issue since the
Brady bonds in the late 1990’s. These are now trading at a spread of 168bps over
Treasuries. The corporate debt market has not been developed yet and the Vietcom
Bank CB issue from November 2005 is not available to foreign investors.
Property
The equity market represents Prime residential property in Hanoi has doubled over the last couple of years and
is now close to US$200 per square foot. Ho Chi Minh City prices are comparable
competition for the previous
and foreigners can only get a 50 year lease. Whilst increased access by budget
asset of choice – Property airlines combined with domestic wealth creation usually underpins property prices
the development of the equity market creates a competing asset class. We prefer
equity exposure, although prime beach property may be worth a look.
Currency
Currency controls prevent this being a useful avenue. The Dong has depreciated
by close to 1% per annum over the last five years as the State Bank of Vietnam
has allowed the official rate to follow the unofficial rates on the street.

Summary of Key Investment Arguments For Vietnam

The Opportunity
1. Dramatically high growth economy, opening up and becoming more diverse
2. Major infrastructure requirements that are beginning to be addressed and
which should sustain the current economic trajectory
3. Accelerating privatization program that is sent to dramatically enlarge this
frontier Asian emerging market
4. A young, aspirational, highly literate workforce that is only now developing a
precocious appetite for conspicuous consumption
5. A very under developed banking system that is on the cusp of major change
6. Under stated valuations embedded in the balance sheets of many companies.
PE multiples of 8x-10x are usually paired with EPS growth of 20%-40% and
dividend yields range from 3% to 10%.
7. WTO membership may attract further capital flows together, whilst FDI
continues to be robust at more than US$4bn per year.
The Challenge
1. Even after the market capitalization doubled during our visit, trading volumes
of listed equities are extremely thin at circa US$1m a day.
2. The party congress takes place in April. The promotion of less reform minded
officials could de-rail the momentum that has been so carefully established
since 2000.
3. The property market has had a remarkable bull run, gaining some 1000% in
the last four years. This could come under pressure from the development of
the equity market.
4. The strong agricultural bias to the economy leaves it vulnerable to drought.
Furthermore, 56% of power is hydro-derived. This has crimped output and
failure to relieve this will act as a drag to Vietnam’s growth potential.
5. Levels of corruption are of a concern to some, but we view this through a
rather more pragmatic lens. It is institutionalized enough to ensure policy
momentum at the current time.

Capital Markets
One of the biggest challenges for potential investors in Vietnam’s embryonic
capital markets is capacity. Debt accounts for 96% of current value of listed
securities. Daily transaction volumes for the US$1.1bn worth of listed equities
Vietnam Market Index are still close to US$1m. However, valuations do look attractive - the average
600 PE of listed securities is 9.7x, with 20% earnings growth, a 30% RoE and a
550
dividend yield of 3.6%.
500
450
Privatization IPOs will boost market capitalization over the next twenty four
400
350
months, particularly from the bank sector. In the meantime, a number of
300 existing funds are expanding capacity, new privatization funds are being
250
200
launched and equity risk appetite of the Japanese is about to be satiated by
150 the set up of the first on-line brokerage giving access to Vietnamese equities.
100
Jul-00 Jul-01 Jul-02 Jul-03 Jul-04 Jul-05
Vietnam Index
Market Valuations
Source: Bloomberg
2006F
EPS Growth (%) PE (x) PB (x) RoE (%) DY (%)
Vietnam* 20.2 9.7 2.6 29.8 3.6
Indonesia 13.9 12.7 2.6 20.4 3.4
Malaysia 10.8 13.0 1.8 14.9 4.2
Philippines 15.0 10.8 1.4 12.9 1.8
Singapore 9.6 14.5 1.8 12.8 3.4
Thailand 3.8 9.6 2.9 19.9 4.4
Japan 9.7 18.7 2.2 11.8 1.2
China 6.8 11.6 1.9 16.8 2.8

Hong Kong 0.9 13.7 1.7 12.6 3.9
South Korea 9.4 10.2 1.5 16.0 1.6
Taiwan 11.0 12.0 2.1 17.1 4.2
Australia 10.8 14.5 2.6 18.0 3.8
India 18.5 14.7 3.3 24.2 1.8

Pakistan 10.4 11.3 3.0 27.1 5.1
Source: Merrill Lynch Asia Pacific Equity Strategy Group, *Consensus forecasts
Regional Market Turnover –
Vietnam Is Coming Off A Low Base
(US$mn)
Vietnam 1 An Embryonic, But Rapidly Growing, Equity Market
Indonesia 167
Malaysia 121 Vietnam’s equity market is one of the newest in Asia, the Ho Chi Minh Exchange
Philippines 19 began in July, 2000 with Hanoi following some five months later. Progress since
Singapore 424 then has been understandably slow but steady. However, it has been the listing of
Thailand 414 Vinamilk that has potentially marked the arrival of this embryonic equity market
upon the emerging frontier of Asia.
China 507
Hong Kong 3,659
The top dairy company in Vietnam added US$513m worth of market
South Korea 5,015 capitalization to the VN Index, taking its total value to US$1.1bn in the space of
Taiwan 3,937 the twenty minute trading session that occurs between 9.00am and 9.20 am. With
only thirty five listed companies, plus one fund, this remains one of the smallest
Australia 2,408 and least liquid markets in the region. Average trading volumes in the listed
India 963 market are close to US$1m and the regulator, the Securities Stock Commission
Pakistan 545 (SSC), estimates that retail investors account for 90% of this.
Source: Thomson Financial DataStream

However, this equity market is also likely to be one of the fastest growing as more
Vietnam’s Market Cap to GDP Ratio Is
privatizations come through and, perhaps, some of OTC-traded private sector
Targeted To Grow To 15% By 2010
companies are persuaded to go public. However, for now the majority of listed
(%)
600% companies are ex-state enterprises. The ratio of market-cap to GDP is also
500% amongst the lowest in Asia at just 4%. The official target is to raise this to as much
400%
as 15% by 2010 – even then it would still be the most under-represented in the
300%
Asia - the regional average is 127%).
200%
To help pave the way for this the government has begun to loosen its investment
100%
restrictions, as well as introduce new securities-related legislation that we will be
hearing much more about over the next six months. However, the first step has
0%
been taken with the increase in foreign ownership limits (from 30% to 49%) that
HK
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was implemented in October, 2005. The table below highlights the major stocks,
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Mkt Cap to GDP ratio (%) Average
Source: CEIC and their foreign holdings.
Top 10 Stocks By Mkt Cap

Foreign
2006F Ownership
Mkt Cap EPS Total
Symbol Company (US$mn) DY (%) growth (%) PE (x) PB (x) RoE (%) shares (m) %
VNM Vinamilk 524.4 3.0 16.8 10.5 2.9 30.6 159.0 14.9
GMD Gemadept 90.4 3.5 26.8 9.4 2.3 27.0 21.0 19.4
KDC South Kinh Do 83.2 3.0 29.5 10.3 3.3 35.5 25.0 24.1
REE REE 63.0 4.1 21.6 10.7 2.4 24.5 28.2 38.2
SAM Sacom Cable 61.7 3.4 (8.7) 7.0 2.4 34.1 23.4 34.0
NKD North Kinh Do 23.7 3.3 22.4 7.8 3.0 43.3 7.0 17.1
SSC Southern Seed 16.5 4.5 19.5 6.9 2.0 31.7 6.0 19.1
TMS Transimex 11.9 3.5 7.6 9.8 2.4 26.0 4.3 40.3
BT6 Concrete 620 11.8 4.8 55.2 5.8 1.4 26.6 5.9 44.6
DHA Hoa An Stone 10.7 4.7 (22.3) 7.6 1.8 25.5 3.8 20.4
Source: IBES, Thomson Financial DataStream
Market Volumes Healthiest In The Unlisted Segment

Thin market volumes are currently the major obstacle to broader institutional
involvement in this equity market. The listed equity market only consists of thirty
five companies which are shown in the full table at the back of this section.
For now, there continues to be much greater volume in the pre-listed OTC market.
The OTC market is 6x-7x more
This consists of more than 2,000 mostly private companies and total daily volumes
liquid than the listed market, are estimated to be in the range of US$5m-US$6m. However, transparency in this
but pricing can be opaque unregulated area is low. Indicative prices are published in the press, and some of
the local brokers will, selectively, provide quotes. In July, 2005, the OTC market
was taken online with the launch of www.oma.com.vn which allows buyers and
sellers to negotiate without reference to Vietstock, the Vietnam Stock Market
news and information service. This service is currently only available in
Vietnamese.
Ultimately, however, the transaction price is determined by an opaque agreement
(by international standards, at least) between the specific buyers and sellers, and
this can take place anywhere, at anytime. Think of this as the Starbucks trade –
terms and conditions can be settled in local coffee shops and simply reported to
the company registrar as the pile of certificates is re-registered to the buyer. As for
brokered deals, commission rates can be extremely high – ranging from anything
between 5% and 20%.
It is only in the last twenty four months that the number of listed companies has
exceeded the number of registered brokers, with the largest including Bao Viet
Securities and Saigon Securities. The number of institutional buy side participants
is equally limited to a handful of funds, most of which have only come into

existence in the past five years, or are onshore arms of international insurance
companies. Some of the more successful of the stand alone funds include PXP and
Mekong Capital, whilst the longest track records reside with Dragon Capital and
Vinafund.
With only 40,000 retail There is no national pension fund to speak of. Domestic retail interest is growing
accounts currently set up there rapidly, however. Although the absolute number of retail accounts is still
is plenty of growth for a reasonably modest at 40,000, new accounts are expanding at a rate of 30% to 40%
per annum.
population of close to 83m
Regulatory Changes Are Happening At A Reasonable Pace
To an extent the regulations governing the equity markets are still playing catch up
with the rapid pace of development amongst the traded securities. Public
companies already have to release both quarterly results as well as monthly
revenues. Our visit to the Securities Stock Commission (SSC) highlighted that the
most important piece of legislation on the horizon is the new Securities Law which
should be in force by January, 2007. This seeks to lay out formal standards of
disclosure and governance for all public companies – whether they trade OTC or
on the formal exchanges in HCMC or Hanoi.
The new Securities Law should Further details can be found at www.ssc.gov.vn
improve corporate disclosure Company meetings quickly highlight the low levels of disclosure by the majority
and accountability of management. Much of this is historical baggage, of course. The majority of
companies did not have bank accounts for the fear that these would reveal
revenues that attracted the attention of the tax authorities. Only in the last five
years has this begun to change – in part driven the developments in the banking
system that we discuss later in this report and in part by the simplification of tax
codes and the introduction of a 10% VAT rate.
Alternative Routes To Equity Exposure

More flexible investors may look for alternative routes to gain equity exposure.
For the banking sector this has taken the form of convertible loans, thus far issued
by the likes of Maritime Bank and VP Bank. Voting share structures are also
flexible enough that control can be exerted without holding a majority stake.
IPOs To Watch Out For

Although there is a fairly constant stream of IPO’s the majority of these are very
small scale. To list the SSC only requires that companies have a paid in capital of
VND5bn and to have registered a profit for the past two years – for state owned
enterprises this requirement drops to a single year. The other major requirement is
that 20% of the shares are held by outside investors.
Private companies need two Amongst the most interesting in the next twelve months are likely to be those that
years of profits, SoEs only a add meaningful scale to the overall index. According to the largest local brokers,
single year before they can IPO Saigon Securities and Bao Viet these will include Sacom Bank (probably mid-
2006), Vietcom Bank (2H06), VNPT (the mobile operator) also in 2007, together
with PetroVietnam, Vina Re and perhaps one of the power companies.
And Here Come The Japanese

Japan’s involvement in Vietnam does not stop at FDI (for which it is the single
largest source, see Economic Section), attention is also turning to indirect
The risk appetite of Japanese investment. On-line broker service Babu.com has teamed up with one of the local
retail investors is about to be brokerage companies to provide direct equity access to the Vietnamese market for
unleashed on Vietnam as well retail investors in Japan.
It is also interesting to note that amongst the current round of capital raising being
done by the local fund management companies, Dragon Capital is, for the first
time, having a public offering for retail investors in Japan.

Not In The Benchmark Indices, Yet

Vietnam is not currently included in any of the regional benchmarks constructed
by either MSCI or FTSE. The combination of limited market capitalization as well
as free float may well delay the likelihood of this for another couple of years, at
the least. In the meantime the main determinant will be the pace of privatization
that the government manages to keep up. The supply of IPO’s such as Sacombank,
Vietcombank, Vinaphone, Vietel and the downstream oil companies will be
critical in delivering critical mass to this index.
Bond Yield Comparisons – Vietnam, Debt Is Government Related

Indonesia and the Philippines
(%)
The credit market is relatively more developed, but is still small in scale compared
10.0
to others in the region. According to HSBC Custodial Services there are more than
9.0
220 government bonds outstanding with a value of circa US$2,500m. However,
8.0 there is currently no domestic credit rating service available to facilitate the
7.0 corporate debt market.
6.0
In September 2005, Vietnam made the headlines in the credit markets with the
5.0 launch of the first sovereign bond deal since the Brady issues of the late 1990’s.
4.0
The USS$750m 10-year issue was extremely well bid, finally pricing at 256bps
May-03 Nov-03 May-04 Nov-04 May-05 Nov-05
Vietnam Bond Yield Par Indonesia Yield 14 Philippines Yield 08 over 10-year Treasuries, for a yield of 7.125% - at the time between 60bps and
Source: Merrill Lynch Asia Pacific Equity Strategy 90bps tighter than comparable issues for Indonesia and the Philippines. Since then
Group the issue has traded strongly – see the chart on the right.
The other paper in issue comes from city governments (HCMC and Hanoi) as well
as the Vietcom Bank convertible bond. Given the profound infrastructure
requirements faced by the economy it seems likely that the pace of sovereign
issuance will pick up from this modest base.

Government Policy And Politics

Government policies currently revolve around several key areas : (1) the
development of the private sector (2) attracting FDI (3) the privatization of
state-owned companies, (4) membership of WTO and (5) infrastructure
development. In combination these will both act as a driver of growth but
also provide alternative avenues of capital raising as the listed market gains
greater breadth and depth.
The Party Congress, which will set the road map for the next five year plan
(2006-2010) will take place in the first half of April, 2006. As such we would
not expect to see any particularly important new initiatives take place over
the next few months. However, with the Cabinet re-shuffle expected to elevate
more reform minded officials to key decision posts, the second half of the year
will be very interesting to watch.
Development of the SME and Medium Sized

Enterprise sector
The steadily growing foreign direct investment (FDI) sector

Cumulated disbursed Cumulated number Structure of industrial output by ownership
investment capital of foreign invested
(VND Billion) companies
100%= VND 103,375 billion VND 302,990 billion
20.0 5000
18.3
18.0 Foreign 25%
4,238 invested
15.6 36%
16.0 14.4 4000
14.0 13.1
3,490
Non-State 25%
11.5
12.0 10.8 3000 owned
2,688 25%
10.0 8.8
2,138
8.0 6.4 2000
1,749
6.0 1,438
State- 50%
3.2 1,153 owned
4.0 1000 39%
795
2.0 408
0.0 0
1995 1996 1997 1998 1999 2000 2001 2002 2003 1995 2003
Foreign direct investments have been flowing As a result, foreign-invested firms are steadily
continuously into Vietnam even after the 1997 taking away the lion share in industrial output from
Asian crisis the SOEs in the past 10 years
Source: ADB, World Bank, Vietnam Pioneer Partners
The establishment of the Enterprise Law in 2000 set the stage for the rapid growth
Over the past five years the that has occurred in the private sector over the last five years. From less than 100
number of private companies private companies at the time there are now more than 200,000 and the number
has expanded from 100 to an continues to expand. Many of these are small scale and essentially family run
estimated 200,000 businesses, in part because of the difficulty in accessing loan capital from the
banks.
However, as Alistair Scarff, our Regional Bank Research Analyst, notes this is
beginning to change, especially as foreign banks are taking stakes and starting the
process of upgrading credit assessment systems as well as credit products. The
introduction of a unified tax rate (28%) has also helped to improve both the
transparency for companies as well as tax collections for the government.

Private sector has been blossoming in both number and size ...and driving the development of the overall economy
100%= 62.908 VND 1,440,738 bio VND 193,099 bio VND 535,762 bio VND 280,884 bio 37,676,000
Foreign 0.9%
3.7% 3.9%
invested
13.8%
18.0%
21.4%
16.5%
27.0%
Non-state 47.9%
owned
79.9%
89.1%
87.8%
62.1%
55.0%
38.4%
16.2%
State-
8.5% 10.0%
owned
Number of companies Assets size at current Investment at current GDP at current prices Retail sales at current Employment
prices prices prices
Source: ADB, World Bank, Vietnam Pioneer Partners Source: ADB, World Bank, Vietnam Pioneer Partners
Privatisation Program – Needs More Scale

The Vietnamese have studied China’s development model carefully. Foreign
appetite for investment into areas such as banking is welcomed under the auspices
of providing technical assistance to the domestic entity. In many cases this
Vietnam has adapted some involves a whole scale upgrade of everything from database IT to credit risk
important lessons from China. assessment procedures, whilst at the same time driving the launch of new
FDI is actively encouraged to products. Whilst willing to sell some SoEs completely the government has a long
boost the development and list of strategic industries where it will retain a 51% controlling stake. Some of the
upgrading of domestic more obvious include areas such as electricity production, telecomm
industries. infrastructure, mineral exploration and water supply. Less obvious are high quality
cement production, large scale milk and beer production, labour export services
and agricultural equipment.
The privatization process itself begins with ‘equitization’, effectively an
incorporation process that creates shares that are all held by the State. After this
the true privatization process begins, usually with a limited public offering and an
allocation of shares to employees that is typically anything between 20%-30% of
total shares in issue. In the first instance these trade on the OTC market ahead of
the actual IPO which takes place by Dutch-style auction. To date close to 2,000
2,000 state companies have companies have been taken down this route (about a third of the total SoEs) but
been equitized, but the largest the size of these individual companies has been relatively modest. The State
are yet to come Securities Commission (SSC) calculates that these SoEs only account for 8% of
the total invested capital of all registered enterprises.
In tandem with this there have been important revisions to foreign ownership
restrictions that are reminiscent of what we have seen across markets such as
Thailand and Taiwan over the past decade. Private companies can be 100%
foreign owned but for listed companies this falls to 49% - prior to October, 2005
it was even lower at 30%.
Foreign ownership limits have The new Enterprise Law is due to come into effect from July, 2006, and this will
recently been increased to 49% require that all state owned enterprises are incorporated within four years. Our
sense is that this will set the stage for a sustained privatization stream over the
next couple of years. At the same time the government is also setting up a
Temasek-type asset holding company to accommodate all the residual holdings.
An important element of these IPO’s is the allocation of stock to management and
employees as the joint stock entity is created – which can be as much as 30% of
the total shares in issue. This provides much of the liquidity that passes through
the OTC market and provides a potential source of stock for institutional investors
to access.
WTO Ahead
WTO is serving as a major driver of administrative reform. Negotiations for WTO
membership are undergoing some renewed momentum. The U.S. team that arrived
during our visit appeared keen to get the agreements signed in the next couple of
months, making membership by the end of 2007 a fairly credible possibility.
Assuming that the other outstanding bilateral agreements are not delayed it could
actually be sooner.
WTO entry should be a reality As we have seen elsewhere around Asia in the past decade, areas such as telecoms
within eighteen months, and financial services will be amongst those to face the most intense competition
perhaps sooner as the domestic market is opened up. However, there is likely to be resistance
from areas dominated by the SME sector, such as distribution and retailing, due to
the relative lack of sophistication and scale. However, for some it will present the
opportunity to capitalize on the expansion of the global supply chain into Vietnam.
Infrastructure Development
Vietnam badly needs to upgrade its infrastructure across many of the most obvious
areas. Energy is probably the most important area that needs to be addressed.
Power needs are rising at 15% p.a. and the huge reliance on hydro (56% of total
generation capacity) leaves Vietnam vulnerable to droughts. Sixty new plants are
planned by 2020 to meet the rate of domestic demand growth. For investors with
an appetite for strategic, long term projects, the power sector in Vietnam is, from
our perspective, worth a very close look. Electricity of Vietnam (EVN) generates
95% of the countries power and faced with such huge investment requirements has
begun selling off stakes in some facilities, starting with the 25% sales of Pha Lai, a
600-megawatt thermal power plant in November, 2005.
Vietnam’s infrastructure needs Furthermore, there is no domestic refining capacity until the Dung Quat Refinery
are considerable. Energy is a comes on line at 2008 at the earliest, and even then only 60% of current needs will
key area that needs to be be met by this facility. This leaves Vietnam as a net exporter of crude oil and gas
but a net importer of fuel oil and gasoline for the foreseeable future.
addressed if growth potential is
not to be hampered Transportation is another bottleneck to growth. Ports are running at full capacity
and three large scale deepwater ports are under construction south of HCMC. Only
a year ago, cars took up one lane of the highways, now it is three. Neither HCMC
nor Hanoi suffer from the traffic congestion found in other major cities such as
Mumbai, Jakarta or Bangkok, but at the current rate of growth in car ownership
this can only be a matter of time.
Politics & The Military

As with China, the momentum seen in the economy is not being accompanied by
any discernable pace of political reform for Vietnam. To be fair, there does not
appear to be a strong push for democracy either. The broad population seems more
intent on taking advantage of the wealth opportunities that are coming as a result
of the economic reform process. As such the muted noises heard from the middle
class or overseas nationals (Viet Kieu) does not present an obvious destabilizing
factor likely to impact risk premiums. Our sense is that the Vietnamese people
No major policy changes are
want accountability before democracy.
expected ahead of the Party
Congress in April. Watch for However, the Party Congress takes place in April, setting the administrative
agenda for 2006-2010 as well as heralding a cabinet re-shuffle which will see
key position changes and an
Prime Minister Khan Van Khai replaced and several other key posts likely
acceleration in momentum in changed. Investors will be watching carefully to gauge how this will impact the
the latter half of the year reform process.
Corruption is one of the main complaints of the business community. However the
sheer scale of vested interests will make the process of reform a long and slow
one, we believe. In a recent IAB survey, one-third of officials and civil servants

were willing to take bribes, and 56% said that their superiors were involved in
corruption.
The high level of military involvement in senior government positions also
highlights the relatively modest level of international experience that investors are
The high level of involvement used to seeing amongst senior decision makers in the region. As with Pakistan, the
of the military in the economy military also occupies a large position in the economy. In the long run this runs the
is a long term negative for risk of driving down returns for the private sector because entities run by the
private sector returns military will frequently have a lower cost of capital or could be given preferential
terms on which to compete. As such it will be interesting to watch how the role of
the military evolves over the next decade. In other economies around the region it
has been tough to balance vested interests with creating a level playing field –
especially where the military has significant political influence.
Industrial Structure – A Growing Export Engine

Vietnam’s key industries are oil and gas, textiles, banks, consumer goods, telcos,
Import & Export Growth
mining/resources and tourism. Amongst the fastest growing areas has been textiles
2005 which now account for 19% of total exports. These received a major boost from
the bi-lateral trade agreements already signed with the U.S. in 2001. As a result
2004
export growth has been extremely robust over the past five years, as the bar charts
2003 highlight on the left. The key product areas behind this growth include crude oil,
seafood, textiles and footwear.
2002
The large number of SMEs operating in the Vietnamese economy lends it

2001
considerable flexibility. Most notably the ability to handle much smaller scale
0% 5% 10% 15%
Exports Growth (%)

20% 25%
Imports Growth (%)

30% 35%
orders than their Chinese competitors whilst at the same time remaining price
Source: CEIC competitive.
Major Exports By Destination

Country (US$m) 2003 2004 Oct-05 Nov-05 (%)
EU 3,783 4,915 443 488 19.9
USA 3,939 4,992 516 482 19.7
Japan 2,909 3,502 358 439 17.9
China 1,748 2,735 275 315 12.9
Australia 1,420 1,822 189 249 10.1
Singapore 1,024 1,370 209 137 5.6
Germany 855 1,066 82 104 4.3
Indonesia 467 447 45 71 2.9
UK 755 1,011 80 86 3.5
Taiwan 749 906 85 79 3.2
Total 17,649 22,766 2,282 2,450 100.0
Source: CEIC
Property – Competition From Equity Opportunities

The lack of development in the capital markets has resulted in property being the
asset of choice for domestic investors – at least until the last twelve months. Our
sense is that the growth in the equity market will continue to exert a competitive
influence and draw speculative capital away from physical assets.
According to some unofficial estimates, property prices in Hanoi have risen
The absence of capital gains on tenfold since 1998. The absence of capital gains tax on un-built property means
un-finished property has fueled that apartments can be traded 6x-7x between initial purchase and actual delivery
buying activity of the keys to the owner. However, prices are not extreme by Asian standards.
Prime residential property in central Hanoi and Ho Chi Minh City is priced at
between US$180-US$200 per sq ft, broadly equivalent to Metro Manila whilst
Bangkok is still close to double that level.

Our contacts at the Real Estate Finance Corporation (Refico) report that monthly
office rents in HCMC are currently in the region of US$3 per sq ft per month –
double what it was in 2003 but supply remains very tight and they are confident of
achieving US$4 within three years. Predictably, their activities are also expanding,
Commercial yields to now include shopping malls, where there is considerable pent up demand, as
are 12%-15% well as residential units. Commercial rental yields are still fairly healthy at
between 12% and 15%.
And yet, whilst the magnitude of these price rises are reminiscent of some of the
bubbles that have brewed elsewhere around Asia, the relative lack of leverage
But mortgages only account for amongst the population probably acts as a circuit breaker to significant downside
less than 3% of the loans in the from these elevated levels. Mortgages account for less than 3% of outstanding
banking system, and loan-value loans in the banking system. They are conservative in structure –typically seven to
ten years in duration and banks usually only lend up to 60% of the stated value.
rations are conservative
This falls far short of the bubbles seen in economies such as Thailand and Hong
Kong over the past decade.

Economic Drivers – Investment &

Consumption
In economic terms Vietnam has recently undergone important changes. Over
the past six years GDP growth has averaged 7.4% (second only to China) and
for neighboring Thailand this is beginning to emerge as a driver to its own
export profile. In Vietnam confidence is high at both a corporate as well as
individual level, government policy is supportive and the absence of ethnic
problems is helping tourism to boom. Poverty has been reduced to less than
20% of the population and literacy rates are above 96%. The demographic
profile is extremely positive as half of the population is under the age of 25.
The manufacturing sector is now growing at close to 11% whilst the services
sector is also picking up strongly, driven by areas such as retail and tourism.
The weakest spot in the economy has been agriculture, which grew at around
4% last year as output was constrained by drought and the adverse impact of
avian flu. However, the growth in both investment and consumption has
more than taken up the slack. From our perspective these are likely to be the
strongest drivers going forward.
Key Historic Economic Statistics For Vietnam

Vietnam’s Foreign Direct Investment
Has Been Steadily Picking Up 2000 2001 2002 2003 2004 2005
(US$mn)
900
YoY (%)
300
GDP Growth (%) 6.8 6.9 7.1 7.3 7.7 8.4
800 250
Trade Balance (US$mn) (1,154.0) (1,189.0) (3,027.0) (5,115.0) (5,520.0) (4,648)
700
200
CPI (%) 4.4 3.1 7.8 8.3
600
150 FDI (US$mn) 2,192 1,333 1,513 2,084 3,896
500
400
100
Source: CEIC
50
300
0
200
100 -50
0 -100
Jul-01 Jan-02 Jul-02 Jan-03 Jul-03
FDI (US$mn)
Jan-04 Jul-04
FDI YoY (%) (RHS)

Jan-05 Jul-05
Investment – FDI Accelerating, Domestic Too
Source: CEIC
In 2005 foreign direct investment is estimated to have reached US$5bn –
representing an eight year high (see chart on the left). In many cases we are seeing
Vietnam attract capital as a complementary production base to China as
manufacturers seek to diversify supply chains. For the many overseas
development agencies in Vietnam this also represents something of a success story
and there is active investment activity from the likes of the ADB and IFC. In
Investment to GDP (%) addition, Vietnam has yet to experience anything like the wage inflation currently
as % of GDP Fixed Capital Formation occurring in the major manufacturing regions of China, and the workforce is
50.0
45.0
expanding by 1.4m people every year.
40.0
Minimum wages are still very low. For government employees it is just US$19 per
35.0
30.0 month, foreign invested enterprises (FIEs) pay closer to US$60 per month. But
25.0 even the Prime Minister only gets US$240 per month. From our perspective, this
20.0 goes a long way to explaining both the appetite for tax evasion as well as the
15.0
10.0
wide-scale corruption that is reported.
5.0
0.0
The Japanese have been amongst the largest investors, with US$590m committed
last year and a cumulative total of US$4.5bn (close to 17% of the total). Other key
Indonesia
Taiwan
Hong Kong
Singapore
India
Sri Lanka
Korea
China
Philippines
Malaysia
Thailand
Vietnam
Pakistan
sources have been Korea, Hong Kong, Taiwan and Singapore. The recent MoA
signed with Intel, for an estimated commitment of more than US$600m, would be
Source: CEIC the single largest technology investment in the country.
In combination with domestic capex this has helped to push the overall ratio of
investment to GDP to over 35%. As the chart on the left highlights, this is the
second highest ratio that we find across the whole of non-Japan Asia.

Consumption Is Getting More Conspicuous

Consumption is clearly on the rise in Vietnam. Last year retail sales alone rose by
Retail Sales Growth YoY (%)
more than 20% YoY, supported by selective increases in minimum wages –
40%
especially those at foreign invested enterprises (FIEs). Demographics also play a
35%
powerful role – more than half of the population is under the age of 25 making this
30%
one of the youngest populations in Asia.
25%
20%
Inward remittances are another important source of income. Official sources
15%
account for annual flows of US$4bn whilst, according to our friends in the local
10%
banks, a similar amount probably passes through unofficial channels. This is easily
5%
comparable to the annual flows into either Pakistan or the Philippines. The retail
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Retail Sales Growth YoY (%)

banking sector has only really begun to develop in the past four years. Overall
Source: CEIC deposit growth has averaged between 20% and 30% since 2002 – three times the
rate of GDP growth. Although growth rates are unusually high they at least
partially underscore the pace of wealth creation, and ultimately this will set the
GDP per capital (US$) stage for an explosion in credit products for Vietnam’s wave of new consumers.
2000 2002 2004 The cars on the streets say it all. Porsche, Mercedes, Hummer, BMW and even a
Australia 25,617 27,972 30,682 Maybach have all appeared in the past twelve months. The sources of this
China 856.2 992.4 1,486 conspicuous wealth are probably a combination of the property cycle, the
Hong Kong 25,356 24,180 23,608 relaxation of investment rules, the shift in policy to encourage private enterprise
India 449 485 622 and the flow of overseas remittances.
Indonesia 736 865 1,191
Japan 37,512 31,280 36,596 Plane Spotting
Korea 10,882 11,468 14,151
Tourism is rapidly become an important source of growth in the economy. With a
Malaysia 3,876 3,880 4,646
population that is almost 95% ethnic Vietnamese (over 80% have no declared
Philippines 952 926 1,010
religion) Vietnam has none of the social conflicts that have arisen in places such
Singapore 23,040 21,210 24,740
as Indonesia, Thailand or India. Add to that almost 3,500kms of coastline, some of
Taiwan 14,457 13,130 13,451
Thailand 1,966 1,998 2,521
the best value for money accommodation in South East Asia and it is easy to
Vietnam 404 440 548 understand why tourist arrivals have now reached 2.3m a year, about twice the
absolute number for the Philippines. Furthermore, tourist spending accounts for
Source: CEIC
9% of GDP – which is 50% higher than for Thailand. The single largest group of
visitors comes from Japan, which also helps to explain the level of retail investor
interest in Vietnam.
Tourism is already a major The catalyst for an even sharper increase (in both spending and, ultimately, the
contributor to GDP (9%) and price of beach property) would likely be greater access for the region’s airlines. So
improved access to low-cost far, amongst the low cost carriers, only Tiger and Air Asia appear on the arrival
boards of the major cities. However, as Paul Dewberry, our regional airlines
carriers will only add to the
analyst notes, a partial open skies agreement between capital cities in the ASEAN
2.3m visitors that Vietnam region is due to come into effect by the end of 2008. This would likely set the
already receives stage for a sharp increase in intra-regional access that would benefit less
developed destinations such as Vietnam.

Potential Economic Stress Points

Under-Developed Power Sector
Power demand is growing at Power is a major area of concern. Demand is growing at 14%-15% p.a. and power
black outs are a regular occurrence, even in Ho Chi Minh’s business district.
almost 15% p.a., the high
Whilst there is a growing acceptance of the BOT model, decision making appears
reliance on hydro-generation is to still be slow and re-tendering of bids is a common feature of the process.
a problem Utilization rates at some of the hydro facilities fell as low as 20% in 2005 due to
constrained water supply suggesting that more stable capacity is going to be
needed if Vietnam is to (quite literally) fuel its growth.
GDP By Sector
1999 2000 2001 2002 2003 2004
GDP Growth (%) 4.8 6.8 6.9 7.1 7.3 7.7
Agriculture 1.2 1.1 0.7 0.9 0.7 0.8
Industry & construction 2.6 3.5 3.7 3.5 3.9 3.9
Services 1.0 2.2 2.5 2.7 2.7 3.0
GDP per capita ($) 372 403.6 415.4 440.1 483.1 547.7
GDP at current price ($mn) 28,567 31,336 32,686 35,085 38,973 45,188
Agriculture * 7,266 7,688 7,596 8,067 8,496 9,832
% share of GDP 25% 25% 23% 23% 22% 22%
% growth 6% -1% 6% 5% 16%
Industry & construction 9,854 11,510 12,463 13,524 15,579 18,116
% share of GDP 34% 37% 38% 39% 40% 40%
% growth 17% 8% 9% 15% 16%
Services ^ 11,447 12,138 12,626 13,494 14,898 17,241
% share of GDP 40% 39% 39% 38% 38% 38%
% growth 6% 4% 7% 10% 16%
Source: CEIC
* Total includes agriculture, forestry and fisheries ^ incl real estate, transport, hotels and tourism
Government Finances
The budget deficit is reasonably high at 4% of GDP for a reason common to many
emerging economies – poor tax collection. However, with the 10% VAT rate in
The budget deficit of 4% should
place, increased transparency being forced on companies and 82% of state owned
be stabilized by better companies (by number, anyway) now being incorporated, the levels of corporate
tax collections collection are improving.
Demographic & Other Statistics For Vietnam

1999 2000 2001 2002 2003 2004
Population (mn) 76.5 77.6 78.7 79.7 80.9 82.5
Population density (people/sq km) 231.2 234.4 237.7 241.5 243.7 249.3
Literacy rate (%) 90.0 94.0 95.0 96.0 96.0 96.0
Unemployment rate (%) 7.4 6.4 6.3 6.0 5.8 5.6
in Hanoi 10.3 8.0 7.4 7.1 6.8 6.7
in HCMC 7.0 6.5 6.0 6.7 6.6 6.5
Universities & colleges 131.0 178.0 191.0 202.0 214.0 214.0
Telephones (mn) 2.4 2.9 3.8 5.6 8.2 8.8
Telephones per 100 people 3.1 3.5 4.2 8.5 11.0
Human development index
(UNDP ranking out of 174 countries) 110.0 108.0 110.0 109.0 109.0 112.0
Source: Vietnam Economic Times

The Bank Sector

Vietnam’s credit system is only now beginning to emerge from the legacy of
policy and directed lending. Only an estimated 5% of the population use
banking services. The opportunity for the development of true retail banking
is considerable and foreign banks are beginning to position for this by taking
direct stakes. The realization of this potential will be determined by the path
of reform. Future bank IPO’s will be key to developing the embryonic equity
market, led by Vietcombank, ACB and Sacombank.
Mapping Out the Financial Landscape

State Bank of Vietnam (Central Bank)
Central bank is widely The first wave of financial sector reform and liberalization in Vietnam occurred in
considered to be not 1988-90. One of the most important developments that emerged was the creation
independent of government and of a two-tiered banking system consisting of the State Bank of Vietnam (SBV) as
the central bank and supervisory institution (tier 1) and an operating system (tier
party pressures
2). Similar to central banks in other markets, the SBV is responsible for monetary
policy and regulation of the banking system. While legislation is in place attesting
to the independence of the central bank from political influence, according to
many multi-national agencies (i.e. World Bank, IMF, etc.) the central bank has
little if any independence, with the general view being that the SBV is politically
and operationally dependent on the support from government agencies.
SOCBs dominate the banking Distribution of Vietnam Bank Sector Assets
space in Vietnam through a
network of over 1,200 branches Foreign Banks State Owned
10% Commerical
Banks
Local Joint
70%
Stock Banks
20%
Source: Various sources
Policy Lending & State-Owned Commercial Banks

The Vietnamese banking sector Similar to the situation in China, there are four large state-owned commercial
is dominated by four state- banks (SOCBs) in Vietnam – the Foreign Trade Bank of Vietnam (Vietcombank);
owned commercial banks. the Vietnam Bank for Agriculture and Rural Development (VBARD); the Industry
and Commerce Bank of Vietnam (Incombank); and the Vietnamese Bank for
These banks were principally
Investment and Development (VBID). Prior to the reforms of 1988-90, the SOCBs
policy lending banks were departments of the SBV, and thus primary vehicles of government policy
lending decisions. These institutions dominate the banking space in Vietnam
(estimate 70-75% market share of bank sector assets), with over 1,200 branches in
aggregate across the country. As the names suggest, these four banks were focused
on specific sectors and segments of the economy. Whilst these sector constraints
have been abolished and directed lending reined in, the banks remain key players
within their legacy business segments – though we believe this is also by design
given the government and the party’s desire to retain control.

The policy lending legacy of the Historically the state-owned bank sector was used as an instrument of public
SOCBs is the key reason behind policy and to promote social and political objectives as opposed to commercial
their high NPL levels objectives. While the four large SOCBs slowly began evolving from specialized
policy lending vehicles to more commercially orientated financial intermediaries
over the last 10-15 years, the legacy of policy lending has burdened them with
high levels of non-performing loans. Although official numbers suggest a system
NPL ratio in the mid-teens, it is widely believed that the level is closer to 30%,
with the vast majority of the bad loans concentrated in the SOCBs.
VBSP provides loans to poor In addition to the four main policy lenders, the Vietnam Bank for Social Policies
and low income households, (VBSP), previously know as the Vietnam Bank for the Poor, was established to
especially in rural areas. Given provide loans to poor households especially in rural areas. The rural sector is also
serviced by the People’s Credit Funds (PCFs); these were established in the early
the highly subsidized nature of
1990s by the SBV following the collapse of a raft of rural credit co-operatives.
the loans extended, it is There is approximately 1,000 PCFs now operating in Vietnam, and controlling
generally considered to be around 1-2% of total bank sector loans & deposits.
insolvent
Joint-Stock Banks – Comparative ‘New Kids’ on the Block
There are roughly 35-40 joint Another important development that accompanied the initial liberalization of the
stock banks operating financial sector was the establishment of joint-stock commercial banks (JSBs), of
in Vietnam which there are 35-40 at present. JSBs offer the full suite of banking product and
services to corporate and retail customers. The ownership structure of JSBs is
mixed ranging from purely private organizations to being jointly owned by state
owned enterprises (SOEs), private groups and individuals.
Structure of Vietnam Banking Sector

1990 1994 1999
State Owned Commercial Banks 4 4 5
Joint Stock Banks 0 36 48
Joint Venture Banks 0 3 4
Foreign Bank Branches & Rep. Offices 0 41 103
Source: World Bank
Foreign Banks & Joint Venture Banks – Hamstrung by restrictions

The bank sector ‘playing field’ The current legal and regulatory framework in Vietnam is heavily biased towards
is heavily biased in favor of the local banks and financial institutions, with significant restrictions and
local banks, with foreign banks limitations on market access, network expansion and scope of operations of
foreign banks. The most obvious of these restrictions is that foreign banks cannot
still limited to operating
establish local subsidiaries, and thus most operate through branches and
as branches rather representative offices. According to recent press reports, there are presently 27
than subsidiaries branches of foreign banks and four joint-venture banks operating in Vietnam
(there are also >75 representative offices).
The US-Vietnamese BTA and The Vietnamese authorities are understood to be working towards lifting the
the WTO are serving as positive restrictions on foreign banks operating in Vietnam in order to comply with the
catalysts for accelerating the requirements of the 2001 US-Vietnamese Bilateral Trade Agreement (BTA) and
more importantly, the requirements for entry into the WTO. One area that the
pace of reform in the
amendments to the existing legislation are being considered is to allow foreign
banking sector banks to establish subsidiaries with the same legal status of the Vietnamese banks.
However, no timeframe has been given as to when any or all of the proposed
amendments will be accepted.
Foreign ownership limits are The issue of foreign ownership of local banks is expected to be one of the most
10% for individual investors hard fought. At present, the limit on individual share ownership by foreign banks
and 30% in aggregate is 10%, with a maximum of 30% for all foreign investors. With a number of recent
high profile investments by foreign banks in the past 12mths, we would expect
this topic to remain at the forefront of discussions.

Recent Investments by Foreign banks in Local JSBs

Raft of new investments by
Date Acquirer Target Stake Size Consideration TAA*
foreign players in
Jun-05 StanChart ACB 8.56% US$22mn Yes
the past 12 months Aug-05 ANZ Sacombank 10.00% US$27mn Yes
Jan-06 HSBC Techcombank 10.00% US$17.3mn Yes
*TAA – Technical Assistance Agreement
Source: Company reports
Postal Savings Service – Mobilizing the Rural Deposit Base

The VPSC was established to One interesting aspect of the Vietnamese banking landscape is that although there
provide the means to mobilize are a number of state commercial and policy banks servicing the needs of the rural
the rural savings deposit base population (especially the low income households), these services are almost
exclusively for loans only with no savings products offered. It is in part for this
reason that the Vietnam Postal Savings Company (VPSC) was established in 1999
(under the authority of Vietnam Post and Telecom). The primary function of the
VPSC is to provide basic savings products to the aforementioned market segments.
Another key function was that it provided the means through which the government
could mobilize the rural savings deposit base for development investments.
Review of Recent Banking Reforms

After the initial round of After over a decade of financial sector reforms, the Vietnamese banking sector is
reforms in 1988-90, bank sector perceived as weak and inefficient by global standards; legislative issues are
reform slowed over the past ambiguous and regulations poorly enforced; and the bank sector still suffers from
a substantial amount of non-performing loans. However, on a more positive note,
decade. Recent developments
recent developments suggest that the reform process may be finally getting back
suggest that the reform on schedule. In this section we have taken a brief look at some key areas of reform
program may be back on track and assess the level of progress made.
Competition Remains Comparatively Subdued

The dominance of the SOCBs Compared to other banking markets around the AsiaPac region, the level of
and slow pace of reform have competition within the Vietnamese banking sector is relatively low. This situation
kept competition within the is largely attributable to the dominance of the four large SOCBs that between them
control 75-80% of total bank sector assets (2004). While the growth of the joint-
banking sector relatively benign
stock banks since the beginning of the 1990s has been rapid, their growth has been
compared to other AsiaPac constrained by the segmentation of the market – the markets for SOCBs and JSBs
banking markets are apparently separated in terms of deposits and borrowers. Another factor
contributing to the lack of competition amongst financial institutions has been the
difficultly in introducing new products and services, with the approval of new
products by the central bank (SBV) taking anywhere from 3mth to over a year
according to some bank management.
Recent investments by foreign Constraints placed on the level of access and scope of operations of foreign banks
banks in JSBs and reforms has also impeded the level of financial sector competition in our opinion.
linked to WTO and the US- However, the developments alluded to earlier on these fronts should have a
positive impact on the level of competition and bank sector innovation. The recent
Vietnamese BTA should
investments made and technical assistance agreements signed by StanChart, ANZ
boost competition and HSBC in joint-stock banks in the past 12 months should also accelerate the
level of competition in the banking sector – albeit at a comparatively modest pace.

The substantial operating and One area where reforms designed to improve competition are unlikely to change in
financial subsidies provided to the intermediate term is the Vietnamese rural financial sector – a key area given that
the Vietnam Bank for approximately 80% of the population live in rural areas. As is the case in a number
of emerging markets in Asia (ie China, India and Indonesia), SOCBs are the primary
Agriculture and Rural
provider of financial services to the rural market. The absence of competition to
Development (VBARD) make VBARD/VBSP (the main SOCBs operating in the rural sector) in our view is
competition in the rural sector primarily due to the very low profitability of this market as a result of the substantial
unpalatable for banks state subsidies given to these banks to cover their operating and financial costs. In
conscious of the impact light of quasi-monopoly and razor thin margins of these banks, there is little
on profitability incentive for innovation or for VBARD/VBSP to improve their performance. One
final point worth noting, it is interesting to compare the experiences of the
Agricultural Bank of China (ABC) and the VBARD/VBSP in terms of
inefficiencies, asset quality and poor profitability, with Bank Rakyat Indonesia
(BRI), as the latter is in a substantially stronger financial and operating position.
De-regulation of Interest Rates – Form Over Function

Liberalisation of interest rates Whilst the abolishment of government set interest rate ceilings (through the SBV) on
was a positive step forward – lending rates in 2002 was a key milestone for bank sector reform in Vietnam, the
now we just need to get the changes have not yet flowed through to the banks as interest rates have remained
quite inelastic and unresponsive to increased demand. We suspect the lack of
SOCBs to adopt the
movement in lending rates is due to the large SOCBs maintaining their rates at
new approach concessional levels. This situation should gradually change over time as the SOCBs
become more accountable for their financial, not social or political, performance.
Asset Quality Remains a Major Issue for the Banks

The combination of policy & Resolving legacy and current asset quality problems is one of the major challenges
direct lending by the SOCBs confronting the bank sector in Vietnam. The combination of policy and directed
and related party lending by the lending by the state owned bank sector and related-party and high-risk lending by
the JSBs has resulted in 13% of all outstanding bank loans being non-performing
JSBs could have pushed the
according to the SBV (2001) – given understatement by the banks and the
sector NPL ratio to as high as timeliness of the data, we would not be surprised if the current level was closer to
30% of total loans 30%. A significant portion of these NPLs were given to SOEs, with many of the
loans extended on an unsecured basis.
While the SOCBs have been Progress in the resolution of non-performing loans has been slow but steady
partially recapitalized, only according to some industry research papers, with the lack of reform of the SOE
Vietcombank has made progress sector regularly cited as being one of the major hurdles. While most of the SOCBs
have sufficient resources to partially address the problems following the first
towards overall restructuring
round of recapitalization (VND10.4trn/US$655mn injection over 2-3yrs starting in
2001), only Vietcombank has begun to implement a detailed restructuring
program. There have also been discussions that the large SOCBs may establish
specialized asset management companies (similar to the experience in China) to
resolve their legacy NPL problems.
As the SOCBs continue to be Whilst there appears to be modest progress being made with the bank sector’s
the major providers of bank legacy bad debt problems, the widespread adoption of a broad based credit culture
credit, we suspect new NPL where banks use market principles to assess credit risk does not appear have taken
place. Given that most of the credit expansion in recent years has come from the
inflows could remain high in
SOCBs where NPLs are already high and credit risk assessment is generally
the near term. Significant work viewed as weak, we would expect new NPL inflows to remain high for some time.
still needs to be done to upgrade On the positive side, the raft of technical assistance agreements signed between
credit risk management JSBs and foreign banks should begin to infuse better standards of credit risk
skills at the banks management among the banks.
The new requirement for all Arguably the most positive development on the asset quality front in recent years
financial institutions to adopt was the announcement by the governor of the SBV (April 2005) for all financial
international standards of loan institutions to adopt international standards of loan classification (Decision 493).
Interestingly, prior to 1999, loans were not by convention classified as non-
classification is a positive step
performing until they were more than 360 days overdue – further, this referred to
forward in our view overdue installments, rather than principal repayment.

This new requirement encompasses the classification of loans into 5 groups

(Normal, Precautionary, Sub-Standard, Doubtful and Estimated Loss) and the use
of specified reserving rates (group 1-5, 0%, 5%, 20%, 50% and 100%). Whilst no
details are available at this stage as to how the banks’ loan books look under the
new classification approach (or how rigorously the requirements are applied), we
nonetheless view this as a positive step forward.
Legal Infrastructure Is Still Developing

The legal infrastructure in Generally speaking, the legal system in Vietnam has not been able to keep up with
Vietnam is very weak by global the pace of economic development. In terms of the banking sector, legal reform is
standards. The difficulties with particularly needed with respect to clarifying legal concepts and contractual rights
such as ownership and transfer of land-use rights, collateral registration
enforcing security and
procedures, mortgage laws and title deeds. From our vantagepoint, the main issue
foreclosing on loans is a major for the bank centres on the difficulty that borrowers have in giving and lenders
impediment to the development have in enforcing pledges and security. Collection on delinquent and non-
of the residential performing loans is difficult, and in the case of the state owned enterprises (SOEs)
mortgage market largely untested. That said, given the lack of reform and restructuring within the
SOE sector, we suspect that is it unlikely that a defaulting SOE would be forced
into bankruptcy anyway.
Foreign banks have only Collective property ownership and the evolving legal infrastructure make recovery
recently being allowed to accept and realisation of security on collateralized loans difficult for both foreign and
‘land-use rights’ as collateral domestic lenders. The situation for the foreign banks is compounded by the
restriction on foreign ownership of land and limitation of ‘land use rights’. Broadly
for loans – though enforcement
similar to the situation in China, banks in Vietnam are not allowed to seize land from
of this security has defaulting farmers, making it very difficult to liquidate the collateral.
not been tested
Seeking recourse via the court While the government has recognized private lending as a legal business and
system is time consuming given banks the right to seek recourse through the courts to recover their funds, in
and costly practice, private lenders rarely go to court to settle disputes. Apart from the
perceived ‘borrower bias’ of the courts, our industry contacts suggest that the high
recovery costs (ie time, legal costs, and taxes) makes using the courts unappealing
and could potentially exacerbate losses on loans.
Under the current bank secrecy Reform of the current bank secrecy laws would also be a positive step forward for
laws, it is up to the banks as to the banking system, particularly retail banking in our view. As the existing bank
whom confidential banking secrecy laws stand, it is the credit institution and not the customer that has the
right to maintain confidentiality about a customer’s account. Thus the institution
information could be released
can give out such information about the customer if the institution chooses.
Moreover, the institution must give out such information upon request of a
‘competent state authority’. Given the lack of definition of ‘competent state
authority’, the institution could potentially pass out confidential banking
information to hundreds of state agencies at any level (UNDP 19991)
1
“UNDP. Completion of Vietnam’s legal framework for economic development”.
1999. Hanoi, Vietnam, United Nations Development Program, UNDP Discussion
Paper 2.
The Opportunity for the Banks
AsiaPac Loan Penetration (Loan to GDP, 2005E ) Bank Sector Loans & Deposits
200% VND'trn
600
180%
160% 500
140%
400
120%
100% 300
80%
200
60%
40% 100
20%
0
0% 2002 2003 2004 2005
HK TW CN MY SG TH SK VN PH IN ID
Deposits
Loans
Source: CEIC, SBV, Central Banks, Merrill Lynch estimates Source: Dragon Capital
Two comments made during our recent road trip to Vietnam encapsulate why we
believe there are interesting growth opportunities for banks in Vietnam (i)
Vietnam’s GDP growth over the past decade has been one the fastest in the region,
closely following China, and (ii) less than 5% of the Vietnamese population use
banking services. Whilst the first point is fairly self explanatory, it is the latter that
requires further explanation in our view.
Robust GDP growth and low Despite loan growth in Vietnam averaging more than 25% p.a. over the last four
usage of banking system bode years (based on data provided by Dragon Capital), credit penetration (loans to
well for future growth in GDP) in Vietnam, stood at 63% at the end of 2005. Not only is this amongst the
lowest in the AsiaPac region it is also less than half the developed market norm of
financial services in Vietnam
120-130% of GDP. Whilst already low, we believe this statistic understates the
credit growth potential in Vietnam given that the majority of bank lending has
been to questionably viable SOEs, not the more vibrant, fast growing SME sector.
Factors Contributing to the Slow Development of SME &

Consumer Banking
From our vantagepoint, the limited development of consumer and SME banking in
Vietnam over the past quarter of a century could be attributed to a combination of
demand and supply side problems. First on the demand side:
Low consumer confidence in • Lack of confidence in banking system – The widespread collapse of credit
the banking system co-operatives in the 1980s has led to considerable doubt among retail bank
customers as to the viability of the banking sector – and thus demand for
banking services. This perception has not been helped by regular cash
shortages for withdrawal at banks.
Combination of policy lending • Low income and rural households – With 80% of the population living in
and low income levels rural areas, it is not viable for profit orientated commercial banks to try and
compete against the heavily subsidized policy banks (VBARD/VBSP).
Furthermore, with roughly 50% of the population below the poverty line,
there is also likely to be limited demand for credit related banking products,
though we see significant scope for growth in savings and cash management
products.

Tax evasion is rife in Vietnam • Unwillingness to disclose personal financials – One of the implications of
the weak bank secrecy laws in Vietnam is that many consumers are unwilling
to apply for residential mortgages as they would be required to disclose their
personal financial position and all sources of income. This is particularly an
issue for consumers given the endemic tax avoidance culture in Vietnam.
On the supply side, there are three main issues:
Difficulty in recovering bad • Weak legal system – Virtually all lending in Vietnam is done on a
debts via the courts collateralized basis, primarily physical property. However, given weaknesses
in the legal infrastructure for banks seeking recourse for unpaid loans (both
technical and practical), many banks have historically shied away from
targeting the consumer and SME banking markets.
Lack of reliable financial • Poor accounting and disclosure rules – Whilst Vietnam is not alone on this
information to base issue, given the relative size of the SME market and the general lack of
credit decisions reliable financial information produced, many commercial banks have found
the risks in this sector too high to justify entering. The situation was also
hampered up until 2002 by the interest rate ceiling on lending rates, as banks
could not price for the higher risk levels.
National consumer credit • Absence of consumer credit bureau – The Credit Information Centre that was
bureau not expected to be up established to provide information on borrowers to creditors has become an
and running until the important risk management tool for the banks. At this stage, no such centralized
service exists within the consumer market. Sacombank, the IFC and a number
end of 2006
of other interested parties are currently in discussion with the SBV to establish a
national consumer credit bureau – target launch date, end of 2006.
Further Bank Reforms Key to Realizing Bank Sector Potential

Further reform is crucial to the With a population of over 80mn and supposedly less the 5% currently using
development of the consumer & banking services, the potential for consumer and SME banking in Vietnam is
SME banking markets considerable in our view. Recent investments by large foreign banks would tend to
attest to this view. However, as highlighted above, the key to realizing this
in Vietnam
potential is further reform of the banking system and legal infrastructure.

Company Themes
Given the embryonic condition of the capital markets it comes as no surprise
that levels of disclosure vary enormously between companies. Quality research
analysis is largely non-existent, accounting rules are still being written and
there are stories of multiple sets of books depending on who is asking for them.
However, there were several key themes to come out from our meetings in
Hanoi and Ho Chi Minh :
• Balance sheets are generally under-stated, especially for state companies
that are privatizing. Land assets and unlisted securities in particular are worth
paying attention to.
• Credit demand is growing very rapidly. Companies sense opportunity to
add capacity to capture demand, especially in domestic markets. The banks
are only now beginning to orientate themselves to the private sector and the
consumer. Sacom and ACB were amongst the most interesting banks - foreign
banks have taken stakes in both.
• Infrastructure needs are considerable and both public and private sector
capital is flowing to supply this. In common with larger markets such as
China and India the focus will be ports, roads, power and water. Banks will
benefit, so too will construction companies such as BT6. For a logistics play,
including port, trucking and shipping facilities, GemAdept is well worth
visiting.
• Consumption is booming as evidenced by the activity in retail sales,
property, autos and tourist services. Vinamilk is geared to wealth creation as
the population consumes more dairy products, coffee and ultimately beer.
Banks Represent Exposure To The Growth of Vietnam Inc

From our perspective banks are one of the most interesting sectors, for two
reasons :
• First, they represent an obvious play on the growth of Vietnam Inc as credit
demand develops and more sophisticated products are developed to capture
this. Loan growth is running at between 20% and 40% across the various
players. Foreign banks are also becoming increasing active, taking minority
stakes and providing wide-ranging technical assistance to upgrade risk and
other systems.
• Second, this will be the area of major privatization activity over the next
twelve months. During the second half of the year several larger scale listings
are likely in the form of Vietcombank (the largest of the State Banks), Asia
Commercial Bank (Standard Chartered has a 8.6% stake) and Sacombank
(where ANZ has recently taken a 10% stake).
Company Highlights
Vinamilk
• The largest dairy company in Vietnam, with sales of US$440mn , Vinamilk
has one of the strongest domestic brands with a broad distribution network.
• VNM produces fresh and canned milk, yoghurt, soft drinks (Vi@qua is their
leading bottled water brand). Locally sourced milk only accounts for 25% of
the company’s needs, the remainder is imported in powdered milk form (US,
Australia, NZ).

• In a move to diversify their product stream and exploit their distribution

channels, the company has just signed a JV with SABMiller to produce beer
under a new company brand. Profits are probably more than two years away,
however, and the beer market remains highly competitive.
• A typical Vietnamese balance sheet – net cash with investment holdings in
other state companies due to be privatized.
• Currently has a market cap of US$525m and trades the equivalent of
US$240,000 per day. Post the IPO the Government holding has been reduced
to 51% and the foreign shareholding is 15%.
• On consensus estimates the stock is trading on a PE of 10.5x FY06 earnings,
with earnings growth of 17%, a dividend yield of 3% and an RoE of 31%.
GemAdept
• This is a US$90m market capitalization logistics play has revenues of close to
US$80m. It is also the second largest listed company after Vinamilk.
• Core services offered include container transport, port and liner agency,
project cargo and freight forwarding. Current capacity is 450,000 TEUs –
approx 17% of the total for Vietnam.
• One of the future growth drivers will be the completion of the US$200m deep
water port at Vung Tau. 80% of the container traffic into Vietnam flows
through the south and the only deep water port is in the north.
• Three ports are under construction to accommodate the 15%-20% annual
growth in container traffic.
• Annual sales growth of above 20% is generating earnings growth of 25% this
year, according to management. The stock is trading on a PE multiple of 9x
consensus earnings, with a 3.5% dividend yield and a 27% RoE.
BT6 (Concrete 620)

• An interesting infrastructure play this company produces pre-cast cement,
girders and beams, then designs and undertakes projects that range from road
building to bridge construction.
• 45% held by foreign investors (one of the highest in the index) this US$12m
market capitalization company will see the government sell down another
20% stake over the next couple of months.
• Management reports that they have a 50% market share in the southern half of
the country and despite having built three new factories in the past year they
are unable to keep pace with demand.
• Furthermore, management believes that it can generate 20%-30% sales
growth over each of the next two year. The pace of infrastructure
development taking place would, from our perspective, support this view.
• Consensus earnings forecast for this year is 55%, putting the stock on a PE of
5.8x. The dividend yield is 4.8% and RoE 27%.

Asia Commercial Bank

Shareholding Structure Asia Commercial Joint Stock Bank (ACB) was established in 1993 and is the largest
Shareholder Stake private bank in terms of assets (VND24.4trn/US$1.6bn), loans
Management >30% (VND6.1trn/US$384mn) and deposits (VND20.0trn/US$1.3bn). ACB is widely
StanChart 8.56% viewed as a leader in the areas of SME and consumer banking. As at the end of
IFC 7.50% 2005, the bank’s physical distribution network consisted of 61 branches and
Dragon Financial .Holdings 7.00% transaction offices in developed regions (36 in HCMC, 12 in northern economic
Jardine Matheson Group. 7.00% hubs, 6 in the central provinces, 3 in the Mekong-delta and 4 in the eastern region),
Source: Dragon Capital and has 5,584 agents for card payments and 360 agents for cash remittances.
In June 2005, StanChart took an 8.56% stake in the bank for a total consideration
of US$22mn in cash– a detailed technical assistance agreement was also signed
between the banks. ACB is expected to be one of the first JSBs to list on the Ho
Chin Minh Stock Exchange.
ABC is quite a profitable bank.
It posted a net interest margin Asia Commercial Bank – Financial Snapshot
of nearly 3%, RoA >1.5% and Summary Financial Data 2002A 2003A 2004A 2005A
RoE close to 30% in 2005. With Net Profit (VND'bn) 123.0 132.1 211.7 294.1
a loan deposit ratio of only 43% EPS 1,449 1,556 2,493 3,272
EPS % Chg. 36.6% 7.4% 60.2% 31.2%
PER 35.9x 33.4x 20.9x 15.9x
DPS 1,500 1,200 1,200 1,200
Yield 2.9% 2.3% 2.3% 2.3%
Supplementary Data
Net interest margin 2.55% 2.97% 2.84% 2.97%
Other income/total income 17.0% 16.8% 18.4% 15.3%
Cost/income ratio 35.2% 37.3% 39.7% 41.8%
Total assets 9,350 10,855 15,417 24,421
Net advances to customers 2,406 2,255 3,907 6,108
Deposits from customers 8,297 8,970 12,581 19,996
Gross Loan/deposit ratio 46.0% 55.0% 48.0% 43.0%
NPLs as % of advances 0.8% 0.7% 0.7% 0.4%
Coverage of NPLs 18% 87% 33% 35%
Equity/assets ratio 5.2% 5.2% 4.6% 5.9%
Capital adequacy ratio 8.3% 8.7% 8.5% 9.4%
RoA 1.32% 1.31% 1.61% 1.48%
RoE 26.8% 25.1% 33.4% 27.4%
NB: Shares outstanding 948.32mn, Mkt. Cap US$309mn, Share price VND5.2mn
Source: ACB, Dragon Capital
Key framework for growing • Key Growth Initiatives – While ACB’s key initiatives for driving growth
and developing the through the group over the next 12mths are hardly unique – a combination of
bank’s bottom line (i.) market share gains, and (ii.) increased cross-sell of new products into its
existing client base, it is one of the few Vietnamese banks to publicly
articulate its strategic objectives.
Corporate governance and risk • Biggest changes observed over the past decade – Management cited four
management have experienced main areas where they have observed the greatest degree of change in the past
the largest changes 10yrs – corporate governance, formulation & execution of business strategies,
expanded role of risk management, and the growth and development of
financial products and instruments offered to customers.
Risk management and working • Key Near-Term Focus Issues – Improving the bank’s understanding of risk
with StanChart to enhance its management and the building robust control systems is viewed as a key
business platforms priority for the group by management. The technical assistance agreement
signed with StanChart is viewed as a central to this development.
Management is also seeking to foster a stronger corporate culture and upgrade
the skills of its staff. And lastly, the bank aims to maintain its current loan
growth and profitability momentum.

Overall impression
We came away from the Our overall impression of ACB was that it was a solid, well run bank, particularly
meeting with ACB management within the context of the Vietnamese banks. Interestingly, this view was shared by
quite impressed given the many of the industry contacts we met during our ‘road trip’. Management
appeared cognizant of the major challenges and risks confronting the bank and the
context of the broader
broader banking market over the next couple of years, as well as being able to
banking market articulate a balanced strategy for taking the business forward especially in the
SME and consumer banking markets. We were particularly impressed by
management’s understanding of ‘why’ we asked certain questions as it
demonstrated a strong grasp of the issues in our opinion. We believe StanChart’s
decision to take a stake in the bank is a reflection of the quality of the franchise
and its position in key growth markets. The detailed technical assistance
agreement signed between the two banks should also accelerate ACB’s internal
reform and restructuring.
Sacombank
Shareholding Structure Saigon Thong Tin Commercial Joint Stock Bank (Sacombank) was founded in
Shareholder Stake 1991 through the consolidation of four credit institutions in Ho Chi Minh City.
Management >20% Sacombank has one of the largest physical distribution networks among the
ANZ 10.0% private banks with over 100 outlets, covering all key cities and towns across the
Dragon Financial .Holdings 8.0% country. In terms of balance sheet size, it is one of the larger private joint-stock
IFC 7.0% banks, with estimated 2005 assets (VND15.3trn/US$961mn), net loans
REE Corp. 7.0% (VND1.8trn/ US$113mn) and deposits (VND11.9trn/US$748mn). Sacombank is
Source: Dragon Capital viewed in the market as a dynamic and successful private bank, and was the first
bank in Vietnam to receive investment from the IFC.
In August 2005, ANZ took a 10% stake in the bank for a total consideration of
US$27mn – there was also a detailed technical services agreement signed between
the banks. Sacombank is expected to be one of the first JSBs to list on the Ho Chin
Minh Stock Exchange.
According to Dragon Capital
forecasts, Sacombank is Sacombank – Financial Snapshot
expected to post a substantial Summary Financial Data 2001A 2002A 2003A 2004A 2005F
rise in net profit in 2005, Net Profit (VND'bn) 26.9 53.9 90.2 151.2 217.1
principally on the back of the EPS 1,733 2,553 2,454 2,677 2,048
EPS % Chg. NA 47.3% -3.9% 9.1% -23.5%
banks significant growth in net
PER 24.2x 16.5x 17.1x 15.7x 20.5x
loans (close to 100% DPS NA 1,200 1,300 1,400 1,400
rise forecast) Yield NA 2.9% 3.1% 3.3% 3.3%
Supplementary Data
Net interest margin 3.22% 4.12% 3.56% 3.65% 3.63%
Other income/total income 25.3% 17.0% 22.3% 20.1% 21.0%
Cost/income ratio 41.6% 45.8% 49.4% 47.8% 44.1%
Total assets 3,134 4,296 7,304 10,395 15,260
Net advances to customers 392 376 538 899 1,798
Deposits from customers 2,514 3,647 5,484 8,299 11,880
Gross Loan/deposit ratio 85.0% 88.0% 74.0% 67.0% 64.0%
NPLs as % of advances 0.9% 0.6% 0.6% 1.1% 1.0%
Coverage of NPLs 175% 84% 43% 19% 20%
Equity/assets ratio 7.5% 8.2% 8.8% 9.3% 12.1%
Capital adequacy ratio 8.4% 8.3% 10.7% 11.6% 13.8%
RoA 0.86% 1.45% 1.55% 1.71% 1.69%
RoE 12.3% 18.3% 18.1% 18.8% 15.4%
NB: Shares outstanding 1,125mn, Mkt. Cap US$296mn, Share price VND42,000
Source: Sacombank, Dragon Capital

Key Takeaways:
Sacombank has been a leading • Next Leg of Growth – Liability or deposit mobilization has been the primary
deposit gathering bank in thrust of the bank over the last couple of years. The next leg of growth for the
recent years bank is expected to come through the expansion of its card and residential
mortgage product offering. Sacombank is also targeting the SME segment as
it is viewed as the primary driver and fastest growing segment of the economy
– and is the largest employer.
Strong take-up in debit cards, • Changes within the card market – Whist Vietnam is still largely a cash
but the credit card market is economy, there has been a substantial rise in the level of debit cards over the
only in its infancy past couple of years. The number of debit cards has risen from around 2,000
in 2000 to close to 2 million now. Conversely the credit card market is only in
its infancy with only 100,000-200,000 credit cards believed to be in issue.
Management indicated that there are presently high level discussions going on
with the SBV, IFC and Sacombank regarding the development of a consumer
credit bureau to complement the existing corporate credit bureau.
Interestingly, nearly 100% of credit cards are secured by deposits.
New products and government • Absence of credit culture to change – One of the most interesting
reforms should reignite the observations we made during our road-trip was the apparent absence of a
consumer credit culture consumer credit culture. Sacombank management believes that the
combination of government reforms and more innovative product offerings by
in Vietnam
the banks should reignite the latent consumer credit culture in Vietnam.
Overall Impression
ANZ’s active involvement in As our Sacombank meeting was with ANZ’s senior management appointee to the
enhancing Sacombank’s bank (previous ANZ country head for Vietnam), the tone of the meeting tended to
product offering and risk gravitate towards initial impressions of Sacombank and where ANZ believed it
could add value to the franchise. Nevertheless, we came away quite positively
management systems should
disposed towards the bank and with a greater appreciation of the difficulties and
enable it to maintain its strong challenges within the banking infrastructure in Vietnam, particularly with respect
growth momentum to the credit card market. Similar to our impression of ACB, we believe the
involvement of ANZ in enhancing Sacombank’s product offering (especially
credit cards) and risk management systems should enable the bank to maintain its
strong growth momentum and leading position among the JSBs.

Risks For Vietnam

There are several major risks that we see for investors in Vietnam. Limited
capacity is the most obvious – especially in terms of the equity market.
Government policy makers could also reverse the path of current reforms,
and if growth falls below 7% there could be social unrest given the high
numbers entering the workforce each year. Corporate governance and
transparency is improving, albeit off a very low base, which poses micro-level
risks to investors.
Capacity, Policy and Growth

Capacity constraints – for investors the most obvious risk faced is the lack of
capital market capacity to absorb investment flows. Whilst the current round of fund
raising by many of the local investment managers is encouraging, the equity market
is at risk of lagging this surge of interest. Already the Vietnamese Sovereign trades
at a tighter spread than either the Philippines or Indonesian Soverign.
Change in policy - a sustained switch in government policy that either crimped
growth or cut off the supply of new equity would destabilize the outlook. And
certainly a large proportion of overseas investors will likely remain distrustful of
the Communist Party rule. The levels of corruption being reported in recent
surveys as well as anecdotally during our visit would suggest employing a healthy
degree of emerging market cynicism. However, Party coffers are swelling as a
result of this economic growth and the absence of any social unrest suggests that a
compromise of these goals is unlikely.
Decelerating growth – Vietnam needs to grow at circa 7% p.a. to be able to
absorb the estimated 1.4m people entering the workforce every year. Power
shortages, sustained drought or economic sanctions from a major trading partner
pose the greatest risks to this largely agricultural economy. Utilisation rates at
some of the hydro plants fell as low as 20% this year as water levels dropped.
Delayed entry to WTO - the U.S. negotiators were back in Hanoi during our trip
and optimism seemed high on both sides that the remaining kinks in the bilateral
talks could be overcome. Whilst Vietnam has fought hard for this, the benefits do
not compellingly outweigh the costs, from our perspective. Our sense is that FDI
flows would not be dramatically under-mined – Vietnamese costs of production
are too cheap to ignore, especially as China continues to become a relatively more
expensive place to produce.
Corporate governance – this remains a key micro concerns. Disclosure levels are
highly variable, although the new Securities Law will help to address this. The
IFC notes that improvements are extremely slow and major shareholders are often
unwilling to give up control – arguably a parallel with investor experience in
China. Multiple sets of accounting books add to the uncertainty.
Property market pressures – the recent surge in prices in Vietnam has been
remarkable, even by Asian standards. Parts of Hanoi and HCMC are claimed to
have risen by close to 10x over the past seven years. Home ownership levels are
now very high and much of the new demand feels more speculative in nature.
However, our sense is that this while prices may see little absolute gains in the
short term the risk of a collapse is very low. Financing levels are modest so the
risks of a pronounced market collapse (as we have seen over the years in the likes
of Thailand or Hong Kong) appears to below, even if rates were to spike sharply.
Increasing supply is one of the key factors that will keep prices subdued. One
additional factor to consider is the development of the equity market. Inevitably
this will offer an alternative mechanism for expressing risk appetite.

Trading Vital Statistics

Set Up
Account set-up estimated to take two weeks. A securities trading code needs to be
gained from the Securities Trading Centre (STC) in HCMC – this is similar to the
I.D. system in Korea.
After that foreign investors may only establish one securities account with one
broking entity. No multiple accounts are allowed.
A VND account also needs to be established that can only be used for securities
transactions.
This is available to both foreign institutions and individuals.
Execution
Key exchanges – Ho Chi Minh City and Hanoi. Companies are listed on one or the
other, not both. HCMC is the most liquid. Hanoi only operates on Monday,
Wednesday and Friday.
Settlement : Equities T+3 (HCMC Exchange), T+2 (Hanoi)
T+1 for bonds
Commission rates : Listed securities up to 0.5%, unlisted 5%-20%
Delivery versus payment, 100% pre-funded (can be in USD)
There is no lock-up or minimum holding period for securities purchased.
No short selling is allowed
Daily Trading
There is no real time trading. Exchange hours are as follows :
09:00 – 09:20 Matched Orders
10:00 – 10:30 Matched Orders
10:30 – 11:00 Block Trades (crossing minimum 10,000 shares)
Daily price fluctuations limited to 5% of the close on previous trading day
Face value of equity shares is VND10,000. Confusingly dividend yields are often
quoted against this par value.
Minimum par value for bonds is VND100,000.
Investment Restrictions & Taxes

Foreign ownership restricted to 49% for all listed companies, 30% for OTC
listings. These shares have full voting rights, however.
Dividends are subject to a 20% withholding tax
Income tax of 0.1% charged for institutions against sale proceeds. Although the
5% repatriation tax has been abolished, it is still collected by the Tax Bureau. This
is under review.
IPOs
Dutch-auction, set floor price. Application broker or local trading centre. 10%
deposit required. Allocations 30 minutes post the close.

32

Vietnam Stock Valuations
Mkt Cap EPS growth (%) PE (x) PB (x) DY (%) RoE (%) Debt/ Equity Foreign Ownership
Symbol Name Price (US$mn) 2005F 2006F 2007F 2005F 2006F 2007F 2005F 2006F 2007F 2005F 2006F 2005F 2006F 2007F 2005F 2006F 2007F Total shares (m) % left
AGF Agifish 39.5 10.4 27.2 28.4 21.6 7.4 5.7 4.7 1.7 1.5 1.2 4.3 4.3 24.7 27.6 28.3 2.3 1.9 1.9 4.2 14
BBC Bibica 22.8 8 18.8 28.5 35.8 10.5 8.2 6 1.4 1.3 1.1 5.5 5.5 13.8 16.2 19.8 1 1 1.2 5.6 27.9
BBT Bach Tuyet Cotton 10.7 4.6 -160.3 565 5 58.8 8.8 8.4 1 0.9 0.9 9.1 9.1 1.6 10.6 10.4 0.7 0.9 0.8 6.8 46.1
BPC Bim Son Packaging 16.1 3.6 4.3 7.1 6.2 7.9 7.4 7 1 0.9 0.8 9.3 9.3 12.8 12.7 12.5 0.4 0.4 0.5 3.8 48.6
BT6 Concrete 620 31.8 11.8 6.1 55.2 9.7 9 5.8 5.3 1.7 1.4 1.2 4.8 4.8 19.7 26.6 25 1.9 1.9 1.8 5.9 4.4
BTC Binh Trieu Construction 8 0.6 -69.6 -126.5 9.1 -6.7 25.3 23.2 1.7 1.6 1.6 - 6.2 -23.8 6.6 6.9 4.6 4.9 5.6 1.3 40.9
CAN Halong Canning 17.5 3.8 138.8 14.1 21.4 9.2 8 6.6 1.3 1.2 1.1 5.8 7 14.5 15.1 16.7 1 0.9 1 3.5 22.1
DHA Hoa An Stone 44.1 10.7 25.1 -22.3 12 5.9 7.6 6.8 2.1 1.8 1.6 4.7 4.7 39.8 25.5 24.6 0.2 0 -0.1 3.8 28.6
DPC Danang Plastics 12.4 1.2 -0.7 -9.6 8.7 63.9 70.7 65.1 1.1 1.1 1.1 4.1 6.6 1.7 1.5 1.6 0.4 0.4 0.4 1.6 41
GIL Gilimex 33.2 9.5 -25.3 -19.5 -1.2 8.7 10.8 11 2.1 1.9 1.7 5 5 25.9 18.3 16.3 0.8 0.6 0.6 4.6 9.5
GMD Gemadept 69.5 90.4 7.6 26.8 24 11.9 9.4 7.5 2.7 2.3 2 3.5 3.5 24.9 27 28.3 0.4 0.4 0.5 21 29.6
HAP Haiphong Paper 24 4.9 2.4 7.3 9.9 6 5.6 5.1 1.1 1 0.9 6.1 7 19.8 18.9 18.6 1.1 0.7 0.7 3.3 43.7
Refer to important disclosures on page 52.
HAS Hacisco 36 3.6 19.1 18.7 16.9 6.2 5.2 4.4 1.3 1.1 1 4.7 4.7 22 22.8 23.3 2.2 1.7 1.7 1.6 33
KDC South Kinh Do 53 83.2 0.2 29.5 22 13.3 10.3 8.4 4.1 3.3 2.7 3 3 31.9 35.5 35 1.1 0.9 0.9 25 24.9
KHA Khahomex 19.8 3.9 92.8 22.7 9.5 4.5 3.6 3.3 1.4 1.1 0.9 9.4 9.4 33.6 33.7 30.5 4 3 2.7 3.1 34.2
LAF Lafooco 20 4.8 22.8 67.5 43.9 2.5 1.5 1 1 0.8 0.5 8.9 8.9 46.4 58.3 60.4 1.9 1.7 1.7 3.8 21.3
MHC Marina Hanoi 22.8 9.6 38.4 17.7 8.2 7 6 5.5 1.4 1.3 1.1 7.7 7.7 21.8 22.5 21.3 1.1 1 1.2 6.7 41.2
NHC Nhi Hiep Brick 24.7 2.1 -39.8 47.5 10.6 13.7 9.3 8.4 2.1 1.8 1.6 6.5 6.5 15.7 20.5 19.8 0 0 0 1.3 48.9
NKD North Kinh Do 54 23.7 18.9 22.4 13.5 9.6 7.8 6.9 3.9 3 2.4 3.3 3.3 38.9 43.3 38.5 0.7 0.7 0.8 7 31.9
PMS Petrolimex Mechanical 14.1 2.8 19.6 35.3 30.3 6.4 4.7 3.6 1.1 1 0.8 8.3 8.3 18.4 22 24.9 1.2 1.5 1.9 3.2 47.8
PNC Phuong Nam Cultural 18.7 3.5 25.1 16.7 30.7 9.1 7.8 6 1.3 1.7 1.4 10.8 10.8 16.1 22.9 25.9 5.1 4 3.8 3 32.5
REE REE 35.6 63 11.3 21.6 28.7 13 10.7 8.3 2.8 2.4 2.1 4.1 4.1 22.2 24.5 27 0.4 0.5 0.6 28.2 10.8
SAM Sacom Cable 42 61.7 62.7 -8.7 -9.2 6.4 7 7.7 2.3 2.4 2 3.4 3.4 40.6 34.1 29 0.7 1 0.9 23.4 15
SAV Savimex 29.5 8.1 -3.3 14 -3.2 7.7 6.7 7 1.5 1.3 1.2 5.2 5.2 20.6 20.7 17.9 1.8 1.7 1.6 4.5 18.8
SFC Saigon Fuel 27.5 2.9 37.6 24.8 12.8 6 4.8 4.3 1.5 1.3 1.1 5.3 5.3 26.7 28.2 27 0.8 0.9 1.1 1.7 46.6
SGH Saigon Hotel 18 2 24.7 31.1 33.7 10.4 7.9 5.9 1.3 1.2 1 5.6 5.6 12.8 15.4 18.6 0.1 0.2 0.5 1.8 44
SSC Southern Seed 43.8 16.5 12.9 19.5 -11.3 8.2 6.9 7.7 2.4 2 1.7 4.5 4.5 32.1 31.7 23.8 0.2 0.2 0.2 6 29.9
TMS Transimex 44 11.9 40.7 7.6 11.9 10.6 9.8 8.7 2.8 2.4 2 3.5 3.5 28.3 26 24.9 0.3 0.1 0.1 4.3 8.7
TNA Tenimex 28.1 2.3 35.1 56.1 15.9 10.8 6.9 6 2.3 1.9 1.6 5.8 5.8 21.6 29.8 28.9 0.9 0.9 0.9 1.3 46.3
TRI Tribeco 27.4 7.8 -10.1 5.9 8.6 15.7 14.8 13.7 1.9 1.8 1.6 5.4 5.4 12.6 12.3 12.4 1.3 1.3 1.5 4.5 35.4
TS4 Seapriexco 25.4 2.4 -8.6 16.6 23.2 10 8.6 7 1.5 1.4 1.2 4.6 4.6 16.2 17.1 18.9 1 0.9 1 1.5 21.1
VNM Vinamilk 52.5 524.4 37.9 16.8 13.4 12.2 10.5 9.2 3.5 2.9 2.5 3 3 31.3 30.6 29 0.4 0.4 0.3 159 34.1
VTC VTC Telecoms 32.9 3.7 -16.4 27.7 22.8 6.1 4.8 3.9 1.4 1.5 3.5 3.6 3.6 24 30.5 55.3 0.5 0.9 4 1.8 29.8
Weighted Avg 1,003.4 27.5 20.2 14.4 11.6 9.7 8.5 3.1 2.6 2.2 3.6 3.6 29.7 29.8 28.7 0.6 0.6 0.6 358.1 29.1
Source: IBES, Thomson Financial DataStream
The Big Picture - Current Equity Strategy

for Asia ex-Japan
The growth outlook for the region continues to be robust, with diverse export
Non-Japan Exporters Are Out drivers. Currencies should continue to strengthen against the USD. By mid-
Performing Their Domestic Peers – year we expect export momentum to ebb and there will be a more profound
For Now bias towards domestic-demand related sectors and stocks. The capex cycle we
1.20
expect also to revive, creating the next incremental driver to the credit cycle as
1.15
well as offering the opportunity for selective re-leveraging of balance sheets.
1.10
Amongst the major markets we see a potential inflection point looming for
Taiwan by the end of 1Q06 at a time when there is almost universally positive
1.05
sentiment towards this market. Amongst the Asian markets we continue to be
1.00
most overweight Thailand and Indonesia. We also continue to like frontier
markets such as Pakistan, where recent earnings revisions have been very
0.95
J F M A M J J A S O N D J F M A M J J A S O N D J
Asia Pac x JP Exports rel Asia Pac x JP Domestic Demand
encouraging. Vietnam is our long term play as the privatization program
Source: DATASTREAM
drives the IPO activity.
Key Assumptions For Non-Japan Asia

The growth outlook for the region remains intact. Economies such as Korea,
Capital Goods Imports Will Revive With Thailand and Indonesia should all experience accelerating growth over the course
An Upturn in Capex, Creating The Next of 2006, whilst absolute growth rates remain high in the mega economies of China
Leg To The Credit Cycle
and India. Vietnam is forecast to deliver the second highest growth in the region of
(%) (%)
60.0 40.0
50.0
close to 7.5%.
30.0
40.0
30.0 20.0 For the region the leading sources of growth continue to be China, Japan and
20.0
10.0 Europe. Furthermore, as export momentum ebbs by mid-2006 the lead will be
10.0
0.0
0.0 taken by domestic-demand related-drivers. This should be highlighted by the
-10.0 -10.0 switch in relative performance between our export and domestic demand basket.
-20.0
-30.0
-20.0 As the chart on the left highlights, exports have out performed since the second
-40.0
Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05
-30.0 half of last year. We would expect that not only will interest rates be modestly
Regional loan growth (x Aus & China) YoY (%) (RHS) Regional imports capital goods (x Aus & China) YoY (%)
higher over the course of the year (between 50bps and 75bps) but regional
Source: Merrill Lynch Asia Pac Equity Strategy Group currencies will continue to edge higher against the USD as the U.S. Fed goes on
hold from 1Q06 onwards.
The capex cycle is also expected to begin to recover this year. This should
underpin RoEs if some leverage is re-introduced, which in turn will help to drive
Asian Currencies Are Still credit growth for select banks. We explored this in some detail in 2006 Pacific
Rallying Against The USD Rim Year Ahead, dated 09 January 2006. Furthermore the healthy free cash flow,
and existing cash balances, will serve as a strong driver to M&A once again,
Ex-rate to U$ 1M (%) 3M (%)
especially within technology and telecoms.
Thailand 38.9 5.3 4.9
Indonesia 9,386.5 4.8 6.8 North Asia Most Vulnerable To Air Pocket In Short Term
South Korea 964.7 4.8 8.1
Australia 1.3 3.2 1.5 The sharp moves in regional currencies in the last three months have, however,
Taiwan 32.0 2.7 5.0 started to raise concerns about export earnings when earnings are released early in
Singapore 1.6 2.5 4.5 the second quarter. Combined with the performance of North Asian markets in
India 44.1 2.0 2.2 particular and the more cautious tone coming from our global semiconductor team,
Philippines 52.2 1.7 5.7 our sense is that markets will face a pull back before we reach the end of 1Q06.
Japan 117.1 0.8 (0.3)
The TAIEX is up 20% in USD terms since the end of October and the tax season
Malaysia 3.8 0.8 0.7
China 8.1 0.1 0.3
looms. At the upper end of the range Korean exporters have been forecasting an
Hong Kong 7.8 (0.0) (0.1)
exchange rate of KRW950:USD for the whole year and we are already about to
Pakistan 59.9 (0.3) (0.3) break that level. At the same time the KRW has also sharply out run the Yen. Over
the same period there has been a near 22% run in the KOSPI, and the latest
economic data highlighting a sharp slow down in export growth will compound
existing worries. Chinese share have also rallied very hard, with the H share index
up 32% since the end of October. Although earnings certainty appears to be

modestly higher the China stocks are likely to be as vulnerable to a short term
deterioration in risk appetite as the other North Asian markets.
Elsewhere in the region we continue to like frontier markets, notably Vietnam and
Pakistan, and we have significant over weights in two of the ASEAN markets –
Indonesia and Thailand.
Sub-Regions
North Asia
Korea suffered a sharp bout of market volatility during January but we see this as
Korean Won vs Japanese Yen having been a fairly healthy shake-out after a stunning performance over the
previous six months. From our perspective Korea continues to have decent
1150
domestic momentum, a robust credit cycle and the valuation discount to the region
1100 will, in our opinion, continue to narrow. The strength of the KRW has failed to
dent sentiment so far. As Namuh Rhee noted in his South Korea Strategy, dated 12
1050
January, 2006, a 1% change in the KRW:USD rate reduces EPS by a relatively
1000 modest 0.8%. Most of the major exporters have assumed a KRW950-980 : USD
rate for 2006 so we are already approaching the upper end of this range. Our sense
950
is that there may be heightened concerns regarding export earnings ahead of the
900 1Q06 results. This is the next trigger that we see for a correction in the KOSPI.
850
For Taiwan, the technology sector will likely carry momentum further into late
1Q04, but after that positions should be re-assessed. Foreign portfolio flows have
800
F M A M J J A S O N D J F M A M J J A S O N D J F
SOUTH KOREAN WON TO 100 JAPAN.YEN
been nothing short of spectacular since late October when the TAIEX troughed at
Source: DATASTREAM
5,600 points. Over the last three months net foreign portfolio inflows have
Source: Thomson Financial DataStream amounted to more than USD13bn, which accounts for almost two-thirds of total
inflows into emerging Asia over that period. Given the more than 20% capital gain
in USD terms from the index, we are mindful of the seasonal contraction of
liquidity that occurs as the tax season approaches in April to May. Outside of the
technology sector we see only a handful of interesting opportunities and at best the
bank sector will only be defensive in any sell off. There is very little growth on
offer from the sector in FY06.
The Hang Seng Actually Does Better When U.S. Rates Are Without Tech There Is Not Much Left To Hold In Taiwan, Banks
Rising, Not Falling Are No Growth And Defensive At Best
000'S x10-2
18 8 1.60 0.09
0.10
16 7
1.50
0.11
14 6
1.40 0.12
12 5 0.13
1.30
0.14
10 4
0.15
1.20
8 3 0.16
1.10 0.17
6 2
0.18
4 1 1.00
0.19
2 0 0.90 0.20
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 1998 1999 2000 2001 2002 2003 2004 2005 2006
Hang Seng Index Taiwan Electronics rel TWSE
US Federal Funds Target Rate (RHS) Taiwan Banks rel TWSE, inverted (RHS)
Source: DATASTREAM Source: DATASTREAM
Source: Thomson Financial DataStream Source: Thomson Financial DataStream
From our perspective Hong Kong will continue to be eclipsed by China-related

issuance and this remains a profound under weight in our asset allocation for Asia.
Over the last three months it has already severely lagged the key regional
benchmarks (the Hang Seng is up 6% versus 15% for Asia Pac). The economy
will continue to lose momentum over the course of the year and cost pressures will
continue to manifest through rental revisions. The Hang Seng Index is currently
trading in line with the regional PE multiple but has the lowest forecast earnings

H-share rel Hang Seng

x10-2
14.00
growth in the region at just over 1%. As the chart above details, the direction of
Fed Funds rates is actually more positively correlated with Hong Kong equities
13.50
than investors often assume. In the past eight years equities have made positive
13.00 returns when U.S. rates have risen and losses when they have declined. Our U.S.
12.50
Economics team believes that the Fed will begin to ease rates in the fourth quarter
of this year.
12.00
11.50
Equities in China have been so strong in the past three months that we feel that a
correction, albeit a healthy one, lies ahead. The H-share index was up 19% in
11.00
January alone, led by growth sensitive sectors such as raw materials, petrochemicals
10.50
F M A M J
H-share rel Hang Seng Index
J A S O N D J F and financials. A number of laggards in areas such as tech and telecommunication
Source: DATASTREAM equipment have also had stunning runs. For the ML China universe valuations still
Source: Thomson Financial DataStream look reasonable, with the aggregate PE sub-11x and earnings growth (ex the energy
stocks) a fairly healthy 13%. We would be inclined to be adding into any correction
that unravels. Our sense is that this is a greater risk for North Asia over the next
three months than for the rest of the region.
ASEAN
Within South East Asia we continue to be major fans of two markets – Thailand
and Indonesia. Both markets experienced a difficult 2005 but investors have been
returning in some size and performance has improved sharply with USD gains of
13% and 11% respectively in the past month alone.
The key to both is domestic demand. With the peak in the interest rate cycle
within view for both economies, Our target is still 880 on the SET and despite
recent performance it remains one of the cheapest markets in the region (9x FY06
PE). For Indonesia the domestic economy will also be in recovery mode in 2006.
We continue to like the banks and consumer discretionary stocks like Astra.
At the emerging frontier of ASEAN we have a 3%, off index, weighting in
Vietnam. The economy is growing at more than 7% a year under pinned by very
robust FDI, supportive government policy, infrastructure spending and booming
domestic confidence. Consumption is already increasing at more than 20% p.a.
and the development of the banking system will add further fuel to the growth
profile. The embryonic equity market has developed slowly over the past five
years but the pace is now accelerating with larger-scale IPO’s from SoE sector.
Malaysia and Singapore are both under weight recommendations. The former has
de-rated significantly in the past twenty-four months but better value can still be
found elsewhere. However the almost total lack of investor interest in this market
suggests that it could yet surprise. We watch and wait.
In Singapore our sense is that the attention will remain with the REITs, select
banks and regional infrastructure plays. Economic data remains very positive, as
evidenced by the recent data on both consumption and unemployment which bode
well for the real estate market this year. However, the overall index will probably
perform best against a backdrop of weaker regional markets.

Malaysia Has De-Rated Sharply But Under Performance Alone Both The Peso & The Sovereign Bond Have Rallied Hard Since
In Not Enough Of A Catalyst Mid-2005
4.1 1.30 600.0 57.0
1.25
3.9 500.0 56.0

1.20
1.15
3.7 400.0 55.0
1.10
3.5 1.05 300.0 54.0
1.00
3.3 200.0 53.0

0.95
0.90
3.1
100.0 52.0
0.85
0.0 51.0
2.9 0.80
Jan-03 Apr-03 Jul-03 Oct-03 Jan-04 Apr-04 Jul-04 Oct-04 Jan-05 Apr-05 Jul-05 Oct-05 Jan-06
Jan-04 Apr-04 Jul-04 Oct-04 Jan-05 Apr-05 Jul-05 Oct-05 Jan-06
KLCI rel MSCI Asia Pac x JP Malaysia PE rel MSCI Asia Pac x JP PE (RHS) Philip Sov Spread 08 Peso to US$ (RHS)
Source: Merrill Lynch Asia Pacific Equity Strategy Group Source: Thomson Financial DataStream
After a decent pick up in 3Q05 Philippine equity performance has been more
muted in recent months. The policy tone has been encouraging but politics will
matter more and will likely sideline investors so we maintain our market weight.
The final phase of the VAT implementation coming through as we go to publication
which bodes well for the fiscal position over the coming year. At the same time
earnings momentum is actually accelerating, from 8% in FY05 to a forecast 14% in
FY06. Going forward, however, the tone will shift to the political debate over
constitutional reform and that is likely to overshadow micro fundamentals.
Indian Subcontinent
The Indian subcontinent is proving to be a challenge for fundamental value
investors and a haven for those with an outright preference for momentum. Our
sense is that India will probably sustain its valuation premium to the region
throughout 2006. Currently the PE premium remains a relatively modest 5%.
Whilst high relative to recent history (the Sensex traded at a 50% discount to Asia
in mid-2002) many other markets have sustained much higher premiums in the
past with decidedly weaker return outlooks. The full set of relative PE and PB
charts are included in the latter part of this report.
Underpinned by one of the highest economic growth rates in Asia in FY06 (7.6%)
earnings growth is forecast to be 18% - the highest in Asia. Any post-result weakness
over the next couple of months will likely be treated as a buying opportunity.

Net Foreign Buying of India and Sensex Performance KSE100 Performance and Daily Volumes
(US$mn) (US$mn)
300.0 10000.0 1700.0 11000.0
9500.0
250.0 1500.0
9000.0
10000.0
200.0
1300.0
8500.0
150.0
8000.0 1100.0
9000.0
100.0 7500.0
900.0
50.0 7000.0
8000.0
6500.0 700.0
0.0
6000.0
500.0
-50.0
5500.0 7000.0
-100.0 300.0
5000.0
-150.0 4500.0 100.0 6000.0

Jan-04 Mar-04 Jun-04 Sep-04 Dec-04 Mar-05 Jun-05 Sep-05 Dec-05 Jan-05 Mar-05 Jun-05 Sep-05 Dec-05
India weekly average net buying & selling (US$mn) India Sensex (RHS) Pakistan - mthly avg daily turnover (US$mn) Karachi 100 (RHS)
Source: Bloomberg, Thomson Financial DataStream Source: Thomson Financial DataStream
Pakistan’s stock market continues to surprise on the upside. The KSE100 has
decisively pushed up to a new record high of 10,500 level and current indications
are that earnings will be revised up again for the banks, E&P and cement
companies. Regulatory risk also appears to have significantly receded. The
replacement of the Commissioner at the Securities and Exchange Commission of
Pakistan (SECP) suggests that the planned reform of the Badla financing system.
Privatization activity will likely carry the index higher and our overweight from
August, 2005 remains in place.
Australia
A reasonable performer last year as the AUD weakened and the domestic
economy slowed, the tone switches to the quality of earnings for 2006. Expect the
absolute level of earnings growth to still be reasonable (+11% YoY according to
the ML universe) although this will be half the growth seen in 2005 due to the loss
of earnings momentum in the energy and resource sector.
The near-term cyclical slow-down warrants a more cautious stance towards asset
allocation. However, economic growth will continue to grow above its long-term
trend, while inflation remains muted. We believe this combination will lend itself
to higher equity multiples underpinning our ASX target of 4,950 by 2H06.
Tactically (and in view of near-term caution on cyclicals), we believe it best to
build positions in higher yielding and unloved industrials and utilities into the
reporting season, including Bluescope Steel, Telstra and Coca Cola Amatil.
Longer-term we maintain a bar-bell strategy with key overweight positions in the
resources and in the banks.

Current Asset Allocation
Asia Pacific ex-Japan Country Asset Allocation & Valuations

2006F
Country ML Weight (%) Asset Allocation Recent Changes EPS Growth (%) PE (x) PB (x) RoE (%) DY (%)
South Korea 20.0 OW = 9.4 10.2 1.5 16.0 1.6
Taiwan 16.0 OW = 11.0 12.0 2.1 17.1 4.2
Hong Kong 4.0 UW - 0.9 13.7 1.7 12.6 3.9
China 6.0 UW = 6.8 11.6 1.9 16.8 2.8
Singapore 3.5 UW = 9.6 14.5 1.8 12.8 3.4
Malaysia 1.0 UW = 10.8 13.0 1.8 14.9 4.2
Thailand 5.0 OW = 3.8 9.6 2.9 19.9 4.4
Indonesia 4.5 OW = 13.9 12.7 2.6 20.4 3.4
Philippines 0.5 MW = 15.0 10.8 1.4 12.9 1.8
Vietnam 3.0 OW + 20.2 9.7 2.6 29.8 3.6
Australasia 28.5 UW - 10.8 14.5 2.6 18.0 3.8
India 5.0 MW = 18.5 14.7 3.3 24.2 1.8
Pakistan 3.0 OW = 7.6 10.5 2.8 27.3 5.8
Total 100.0
Source: Merrill Lynch Asia Pacific Equity Strategy Group estimates
• Indonesia has turned the corner. The market is • Pakistan OW. Capital inflows continue to be
leading the economy but both inflationary and rate strong, recent company results healthy, especially
pressures are easing. It is a domestic story for FY06, from the banks and E&P sector. Expect more
add to banks and consumer discretionary names. OW M&A and privatizations ahead. Prefer to India at
• Economic momentum in Thailand is improving current levels.
which should feed through to better earnings. OW. • Hong Kong still faces headwinds from
Re-gearing of balance sheets could boost returns, currencies and rates. More downside likely in
valuations remain amongst most compelling. property sector whilst forward earnings growth is
• Korea has further upside potential over the next 12 most anemic in the region for 2006. UW.
months as the domestic economy picks up, credit growth • Malaysia remains UW. Market has de-rated but is
accelerates and fund flows provide liquidity. OW still expensive relative to the region and the
growth on offer.
Asia Pacific ex-Japan Sector Asset Allocation & Valuations

2006F
Sector ML Weight (%) Asset Allocation Last Change EPS Growth (%) PE (x) PB (x) RoE (%) DY (%)
Banks 19.0 MW + 9.0 12.1 2.0 16.4 4.4
Non-Banks 16.5 OW = -0.8 15.2 1.8 11.8 3.3
Materials 13.5 OW = 16.7 8.0 2.1 26.4 3.9
Industrials 12.0 OW + -4.0 14.6 1.5 11.4 3.5
Consumer Discretionary 7.0 MW = 18.5 14.8 2.3 15.6 2.2
IT – Semis 9.5 OW = 40.9 11.8 2.2 18.3 1.5
IT - Non-Semis 6.0 MW = 37.7 17.7 3.3 18.7 1.7
Telecom 3.0 UW = 4.6 12.9 2.1 16.3 4.2
Consumer Staples & Health Care 6.0 MW - 16.8 20.8 3.5 16.7 2.9
Utilities 2.5 UW = 10.0 12.4 1.5 11.5 3.3
Energy 5.0 MW - 0.9 10.0 2.2 22.7 3.8
Total 100.0
Source: Merrill Lynch Asia Pacific Equity Strategy Group estimates
• Recently raised the Banks allocation to reflect our • Industrial OW. Strongest preference is for the
preference for domestic cyclical names. Consumer regional infrastructure plays. We have turned positive
Staples finances this after strong relative performance on the airlines post our downgrade to WTI oil price.
so moved down to MW. Energy is cut to MW.

Thematic Model Portfolio
Mkt Cap 2006E
Country Company Ticker Rating Price (US$mn) PE (x) EPS Growth (%) PB (x) DY (%) RoE (%) Comments
Australia Brambles BRMBF B-1-7 9.9 7,299 23.9 16.7 3.5 2.5 65.3 Re-rating potential from concentration on CHEP and Recall
Australia Coles Myer CMYRF B-1-7 10.5 9,856 16.2 26.3 3.2 3.9 19.8 Re-rating story. Management looking to sell cyclical retail portfolio - South African retailers
and DJS in acquisition mode.
Australia St. George Bank STGKF B-2-7 30.3 12,110 15.4 9.2 3.7 4.9 23.6 Favoured bank exposure thanks to its superior franchise and core deposit gathering. Likely to
generate superior net interest income growth due to gaining market share in SME lending.
Australia BHP Billiton BHPLF B-1-7 25.8 69,957 13.0 43.1 4.8 1.5 37.7 News flow remains positive - commodity prices have further to run. BHP also controls around
40% to 50% of global uranium supply (Asia needs to diversify its power generation capacity)
Australia CSL CMXHF B-1-7 43.5 5,948 24.0 21.0 4.0 1.2 14.9 Upside EPS risk from new Vivaglobin pricing premium, strong fundamentals in IVIG as well
as the Herpes vaccine. DCF valuation of A$49.51.
Australia Westfield Group WEFIF A-2-7 17.7 23,389 17.4 6.4 1.6 6.4 9.1 Interest rate sensitive that has returned to good value.
Australia ASX YASXF B-1-7 34.9 2,699 27.6 17.0 11.3 3.2 2.8 Continuing strong operational performance. Merger with SFE a positive.
PRC Chalco ALMMF C-1-7 7.2 10,185 8.8 20.4 2.1 3.4 23.3 Chalco has the monopoly position in PRC, a market naturally short of Chalco's major
products, aluminium and alumina. Increased confidence in our forecasts given ASP strength.
PRC Sinopec SNPMF B-1-8 4.7 53,412 8.8 17.4 1.6 2.4 18.5 Refined oil price caps have held share price and returns back hindering capacity expansion
and ultimately the secure supply of refined oil products to the market.
Hong KongWheelock & Co WHLKF B-1-7 14.1 3,680 11.4 -39.7 0.7 1.3 6.5 Wheelock Props offers an interesting restructuring wildcard. In the meantime positive
fundamentals of HK office and retail rental market should support high cash flows to
dividends.
Hong KongHysan Development HYSNF B-1-7 19.7 2,675 7.8 -14.3 0.9 2.4 11.4 Decentralisation of office and retail tenants theme within HK. Hysan benefits through its
Causeway Bay investment portfolio. PBV of 0.8x.
Hong KongCitic Int’l Financial CIIEF B-1-7 3.1 1,288 10.1 -11.3 1.1 5.4 10.5 Stock has under performed the local index, remains overlooked, restructuring benefits not
priced and dividend yield comfortably in excess of market.
India IDBI XDBIF C-1-7 90.2 1,479 12.6 68.0 1.0 1.7 8.2 Inexpensive government bank - markets has yet to value change in loan mix, recovery in
SASF NPLs and new low cost deposit base.
India Bharat Heavy BHRVF C-1-7 1,797.5 9,971 30.2 50.8 6.1 0.6 20.3 Top Indian engineering play seeing strong order growth for power equipment across the region.
Electricals Tie up with Alstom very positive for larger projects. High barriers to entry too.
India Associated Cement ADCLF C-1-7 573.0 2,396 17.4 38.2 4.5 2.0 25.5 Most leveraged to rising cement prices in India.
Companies
Indonesia Bank Rakyat BKRKF C-1-7 3,400.0 4,376 9.4 14.6 2.5 5.3 27.1 One of our top picks in the APR banking sector - trading on undemanding valuation multiples.
Indonesia
Indonesia Mitra Adiperkasa PMDKF C-1-7 1,100.0 195 10.8 25.3 1.4 1.7 13.4 Attractive small cap consumer discretionary stock with high barriers to entry and unique
business model. Manages portfolio of international brands such as Starbucks.
Korea Kumho KWWCF C-1-7 69,400.0 434 8.6 115.0 2.1 1.2 24.6 Tightness in Kumho's main product LCD TV CCFL is likely to persist throughout 2006 -

demand is stronger than expected while supply is restricted to a few proven players such as
Kumho.
Korea Samsung F&M SZVZF C-1-7 127,000.0 6,333 16.4 24.6 2.2 1.4 13.4 Rising interest rates will lift SF&M's investment yield. Deregulation in the sector will help
sustain growth.
Korea Samsung Heavy SMSHF C-1-7 15,500.0 3,722 9.4 401.3 1.4 2.1 15.2 Lucrative deepwater drillers injects new life into the Korean shipbuilding cycle. Recent EPS
Industries upgrades with 72% upside to our PO
Korea SK Corp SKCXF C-1-7 59,500.0 7,923 5.9 11.2 0.9 3.1 15.4 Acquisition of Inchon refinery is EPS accretive while also affords SK Corp a majority share of
market now. Share overhangs form Sovereign and Wellington are behind us now.
Korea Samsung SSNLF C-1-7 740,000.0 112,385 12.3 33.8 2.7 0.7 21.8 DRAM and NAND regaining their growth trajectories while NAND bit costs are declining
Electronics boosting margins. SEC to post sequential earnings growth through to 4Q06.
39
40

Model Portfolio
Mkt Cap 2006E
Country Company Ticker Rating Price (US$mn) PE (x) EPS Growth (%) PB (x) DY (%) RoE (%) Comments
Malaysia Air Asia AIABF C-1-9 1.7 1,062 22.3 44.3 3.6 0.0 14.8 Structural growth in discount airlines.
Pakistan ICI Pakistan ICPKF B-1-7 144.2 334 10.0 16.7 1.8 4.9 18.2 CSF cycle to remain in deficit through to 2008. Investors have failed to appreciate
company restructuring given steep valuation discount to market PE.
Singapore Singapore Air SPAAF B-1-8 14.2 10,678 14.4 7.4 1.3 2.8 9.1 Operationally strong currently given seasonal high in PAX loads while cargo loads v
strong as well. Too cheap with positive EPS revisions ahead of it as jet keep falls
Singapore Ascendas REIT ACDSF B-1-7 2.2 1,716 19.7 27.0 1.6 5.4 7.8 Higher gearing ceiling and earnings accretive acquisitions will continue to re-rate A-
REIT.
Taiwan Sunplus SNPLF C-1-8 37.7 1,116 12.4 18.5 1.9 5.1 15.6 We believe the restructuring story / spin off of the LCD business. Growth momentum is
forecast to accelerate into 2H06.
Taiwan EVA Air EVABF C-2-8 13.5 1,577 22.2 151.8 1.0 2.4 4.6 50% of revenues stem from tech exports which are inflecting. Seasonal rally ahead of
Chinese New Year and direct air links.
Taiwan Powerchip PWSMF C-1-9 20.6 3,591 13.3 31.0 1.2 0.0 11.1 Korean capacity constraints have allowed Powerchip to gain market share in low-end
DRAM. Growth trajectory in DRAM recently upgraded.
Taiwan TSMC TSMWF C-1-7 63.5 49,092 12.6 34.2 3.0 3.1 23.7 Valuation hit historic low but resumption in growth momentum in 2H05 due to gateway
processors and gigabit Ethernet chips.
Taiwan Coretronic CCOCF C-1-7 50.9 829 9.7 7.8 2.0 2.1 20.5 Good momentum in LCD backlight businesses. Is well diversified in sales mix, and
valuation remains compelling relative to forecast earnings growth.
Thailand Asia Property XPPKF C-1-7 4.0 231 7.6 32.5 1.8 5.4 24.0 Residential supply is forecast to contract in 2006 while demand is stabilising and
beginning to rise. Interest rates are close to their peak. Valuations are undemanding
Thailand Bangkok Bank BKKLF C-1-7 114.0 5,590 10.9 -5.9 1.6 3.6 15.3 Top bank exposure in Thailand due to improving NIM and improving asset quality (post
TPI debt work-out).
Source: Merrill Lynch Asia Pacific Equity Strategy Group, Thomson Financial DataStream
Foreign Net Buying & Selling
Korea Taiwan
US$bn (US$mn)
0.5 1500.0 1000.0 7500.0
0.4
1400.0 800.0
0.3 7000.0
1300.0 600.0
0.2
1200.0 400.0
0.1 6500.0
0.0 1100.0 200.0
-0.1 6000.0
1000.0 0.0
-0.2
900.0 -200.0
-0.3 5500.0
800.0 -400.0
-0.4
-0.5 700.0 -600.0 5000.0

Jan-04 Mar-04 May-04 Jul-04 Sep-04 Nov-04 Jan-05 Mar-05 May-05 Jul-05 Sep-05 Nov-05 Jan-06 Jan-04 Apr-04 Jun-04 Sep-04 Dec-04 Mar-05 Jun-05 Sep-05 Dec-05
Korea net buying & selling weekly avg (US$ bn) KOSPI (RHS) net buying & selling weekly avg in Taiwan (US$mn) TAIEX (RHS)
Source: Bloomberg, Thomson Financial DataStream Source: Bloomberg, Thomson Financial DataStream
Thailand Indonesia
US$mn (US$mn)
300.0 800.0 500.0 1250.0
250.0
- 1150.0
750.0
200.0
(500.0) 1050.0
150.0
700.0
100.0
(1,000.0) 950.0
50.0
650.0
(1,500.0) 850.0
0.0
-50.0 (2,000.0) 750.0

600.0
-100.0
(2,500.0) 650.0
-150.0 550.0 Jan-04 Mar-04 May-04 Aug-04 Oct-04 Jan-05 Mar-05 Jun-05
Jan-04 Feb-04 Apr-04 Jun-04 Jul-04 Sep-04 Nov-04 Jan-05 Feb-05 Apr-05 Jun-05 Aug-05 Sep-05 Nov-05 Jan-06
net buying & selling weekly rolling (US$mn) JCI (RHS)
Thailand weekly average net buying & selling (US$mn) Bangkok SET (RHS)
India Philippines
(US$mn) (US$mn)
300.0 10000.0 40.0 2300.0
250.0 9500.0
2200.0
9000.0 30.0
200.0 2100.0
8500.0
150.0 2000.0
8000.0 20.0
1900.0
100.0 7500.0
10.0 1800.0
50.0 7000.0
6500.0 1700.0
0.0
0.0
6000.0 1600.0
-50.0
5500.0 1500.0
-10.0
-100.0 5000.0 1400.0
-150.0 4500.0
-20.0 1300.0
Jan- Mar- Apr- Jun- Aug- Oct- Dec- Feb- Apr- Jun- Aug- Oct- Dec- Jan- Jan-04 Mar-04 Jun-04 Sep-04 Dec-04 Mar-05 Jun-05 Sep-05 Dec-05
04 04 04 04 04 04 04 05 05 05 05 05 05 06
India weekly average net buying & selling (US$mn) India Sensex (RHS) Philippines net buying/selling weekly average (US$mn) PSE Index (RHS)

Foreign Net Buying & Selling as of Jan 26, 06

Foreign Net Buying & Selling (US$mn) Abs. Performance (%)
1wk 1mth 3mth 6mth 1wk 1mth 3mth 6mth
India (21) 733 3,612 3,896 2.5 6.6 21.5 28.2
Indonesia 52 242 862 1,356 (0.3) 5.9 15.5 4.1
Korea 1,885 1,640 1,104 (2,153) (0.6) (1.1) 14.7 24.0
Philippines 3 23 70 156 0.4 0.3 9.5 8.1
Taiwan (663) 5,422 13,409 12,459 0.3 (0.0) 14.6 2.6
Thailand 292 1,788 2,306 1,913 2.2 8.5 11.1 15.9
MSCI Far East F x JP 1.2 5.3 18.7 13.4
Source: Bloomberg
Asian Markets Turnover
Asia Pacific x JP Market Turnover

(US$bn)
15.0 350.0
14.0 330.0
13.0
310.0
12.0
290.0
11.0
270.0
10.0
250.0
9.0
230.0
8.0
7.0 210.0
6.0 190.0
Sep-03 Nov-03 Feb-04 May-04 Aug-04 Oct-04 Jan-05 Apr-05 Jul-05 Sep-05 Dec-05
Asia Pac x Jp - mthly avg daily turnover (US$bn) MSCI AC Asia Pac x JP (RHS)
Asian Markets Turnover as of Jan 26, 06

% of Mkt Share
Country Mthly Avg Turnover (US$mn) 1mth 3mth 6mth
Hong Kong 3,659 18.4 18.8 20.1
South Korea 5,015 27.1 23.3 20.6
Taiwan 3,938 18.8 17.3 19.2
Indonesia 168 0.9 1.3 1.4
Malaysia 121 1.1 1.1 1.1
Philippines 19 0.2 0.1 0.2
Singapore 424 2.6 3.0 3.2
Thailand 414 1.4 1.9 2.0
Australia 2,408 21.4 22.7 22.4
India 463 3.3 3.1 3.1
Pakistan 545 4.2 4.2 3.4
Source: Merrill Lynch Asia Pacific Equity Strategy Group

North Asia, Australia & India Turnover
China – H-Share Index Korea

(US$bn) (US$bn)
0.7 6000.0 5.5 1550.0
0.6 5.0 1450.0
5000.0 4.5 1350.0

0.5
4.0 1250.0
0.4 3.5 1150.0

4000.0
0.3 3.0 1050.0
2.5 950.0
0.2
3000.0
2.0 850.0
0.1
1.5 750.0
0.0 2000.0 1.0 650.0

Jan-03 Mar-03 Jun-03 Sep-03 Dec-03 Mar-04 Jun-04 Sep-04 Dec-04 Mar-05 Jun-05 Sep-05 Jan-04 Mar-04 Jun-04 Sep-04 Dec-04 Feb-05 May-05 Aug-05 Nov-05 Jan-06
H shares - mthly avg daily turnover (US$bn) H-Index (RHS) Korea - mthly avg daily turnover (US$bn) KOSPI (RHS)
Hong Kong Taiwan

(US$bn) (US$bn)
4.2 16500.0
5.0 7000.0
4.5 6800.0
3.7 15500.0
6600.0
4.0
3.2 14500.0
6400.0
3.5
6200.0
2.7 13500.0 3.0
6000.0
2.5
2.2 12500.0 5800.0
2.0
5600.0
1.7 11500.0
1.5 5400.0
1.2 10500.0 1.0 5200.0

Sep-03 Nov-03 Feb-04 May-04 Aug-04 Oct-04 Jan-05 Apr-05 Jul-05 Sep-05 Dec-05 May-04 Jul-04 Oct-04 Jan-05 Apr-05 Jun-05 Sep-05 Dec-05
HK - mthly avg daily turnover (US$bn) Hang Seng (RHS) Taiwan - mthly avg daily turnover (US$bn) TWSE (RHS)
Australia India
(US$bn) (US$bn)
3.5 5150.0 1.1 11000.0
4950.0 1.0
10000.0
3.0 4750.0 0.9
4550.0 0.8 9000.0
2.5 4350.0 0.7

8000.0
4150.0 0.6
2.0 3950.0 7000.0

0.5
3750.0 0.4 6000.0

1.5 3550.0 0.3
5000.0
3350.0
0.2
1.0 3150.0
0.1 4000.0
Australia - mthly avg daily turnover (US$bn) ASX (RHS) India trading value (US$bn) India Sensex (RHS)

South East Asia Markets Turnover
Indonesia Philippines
(US$mn) (US$mn)
470.0 1300.0 35.0 2300.0
420.0 1200.0
30.0 2100.0
370.0
1100.0
320.0 25.0 1900.0

1000.0
270.0
900.0 20.0 1700.0
220.0
800.0
170.0 15.0 1500.0
700.0
120.0
10.0 1300.0
70.0 600.0
20.0 500.0 5.0 1100.0

Sep-03 Nov-03 Feb-04 May-04 Aug-04 Oct-04 Jan-05 Apr-05 Jul-05 Sep-05 Dec-05 Sep-03 Nov-03 Feb-04 May-04 Aug-04 Oct-04 Jan-05 Apr-05 Jul-05 Sep-05 Dec-05
Indonesia - mthly avg daily turnover (US$mn) Jakarta Composite (RHS) Philippines - mthly avg daily turnover (US$mn) PSE Composite (RHS)
Malaysia Singapore
(US$mn) (US$bn)
275.0 1000.0 0.60 2500.0
255.0 0.55 2400.0

960.0
235.0 2300.0
0.50
215.0 920.0 2200.0

0.45
195.0 2100.0
880.0 0.40
175.0 2000.0
0.35
840.0
155.0 1900.0
0.30
135.0 1800.0
800.0
0.25
115.0 1700.0
760.0
0.20 1600.0
95.0
75.0 720.0 0.15 1500.0

Sep-03 Nov-03 Feb-04 May-04 Aug-04 Oct-04 Jan-05 Apr-05 Jul-05 Sep-05 Dec-05 Sep-03 Nov-03 Feb-04 May-04 Aug-04 Oct-04 Jan-05 Apr-05 Jul-05 Sep-05 Dec-05
Malaysia - mthly avg daily turnover (US$mn) KLCI (RHS) Singapore - mthly avg daily turnover (US$bn) STI (RHS)
Thailand Pakistan
(US$mn) (US$mn)
700.0 850 1700.0 11000.0
800 1500.0
600.0
10000.0
1300.0
750
500.0
1100.0
700 9000.0
400.0 900.0
650
8000.0
700.0
300.0
600
500.0
200.0 7000.0
550
300.0
100.0 500
100.0 6000.0
Jan-05 Mar-05 Jun-05 Sep-05 Dec-05
Thailand - mthly avg daily turnover (US$mn) Bangkok SET (RHS)
Pakistan - mthly avg daily turnover (US$mn) Karachi 100 (RHS)

North Asia, Australia & India PE & PB relative to Asia Pac x JP
China Korea
(x)
(x)
1.2
1.2
1.1 1.1
1.0
1.0
0.9
0.8 0.9
0.7
0.8
0.6
0.7
0.5
0.4 0.6
0.3
0.5
0.2 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06
Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06
Korea PB rel MSCI Asia Pac f ex Jp PB Korea PE rel MSCI Asia Pac f ex Jp PE
China PB rel MSCI Asia Pac f ex Jp PB China forward PE rel MSCI Asia Pac f ex Jp forward PE
Source: Merrill Lynch Asia Pacific Equity Strategy Group Source: Merrill Lynch Asia Pacific Equity Strategy Group
Hong Kong Taiwan

(x) (x)
3.0
1.6
1.4 2.5
1.2
2.0
1.0
1.5
0.8
1.0
0.6
0.5
0.4 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06
Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Taiwan PB rel MSCI Asia Pac f ex Jp PB Taiwan PE rel MSCI Asia Pac f ex Jp PE
HK PB rel MSCI Asia Pac f ex Jp PB HK PE rel MSCI Asia Pac f ex Jp PE
Australia India
(x) (x) (x)
2.5 3.0 1.7
2.3
1.5
2.1 2.5
1.9
1.3
1.7 2.0
1.5 1.1
1.3 1.5
0.9
1.1
0.9 1.0
0.7
0.7
0.5 0.5 0.5

Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06
Australia PB rel MSCI Asia Pac f ex Jp PB Australia PE rel MSCI Asia Pac f ex Jp PE India PB rel MSCI Asia Pac f ex Jp PB India PE rel MSCI Asia Pac f ex Jp PE (RHS)

South East Asia PE & PB Relative Asia Pacific x JP
Indonesia Philippines
(x) (x) (x)
2.0 1.0 2.5
0.9 2.3
1.8
2.1
0.8
1.6
1.9
0.7
1.4 1.7
0.6
1.5
1.2
0.5 1.3
1.0 1.1
0.4
0.9
0.8 0.3
0.7
0.6 0.2
0.5
Indonesia PB rel MSCI Asia Pac f ex Jp PB Indonesia PE rel MSCI Asia Pac f ex Jp PE (RHS)
Philippines PB rel MSCI Asia Pac f ex Jp PB Philippines PE rel MSCI Asia Pac f ex Jp PE
Malaysia Singapore
(x) (x)
1.4 2.0
1.3
1.8
1.2
1.6
1.1
1.4
1.0
0.9 1.2
0.8 1.0
0.7
0.8
0.6
0.6
0.5
0.4
0.4
Singapore PB rel MSCI Asia Pac f ex Jp PB Singapore PE rel MSCI Asia Pac f ex Jp PE
Malaysia PB rel MSCI Asia Pac f ex Jp PB Malaysia PE rel MSCI Asia Pac f ex Jp PE
Thailand
(x)
2.5
2.0
1.5
1.0
0.5
0.0
Thailand PB rel MSCI Asia Pac f ex Jp PB Thailand PE rel MSCI Asia Pac f ex Jp PE

Earnings Yield & Dividend Yield Gap
HK Taiwan
(%) (%) (%) (%)
8.0 4.0 10.0 4.0
8.0
6.0 2.0 2.0
6.0
0.0
4.0 0.0 4.0
2.0 -2.0
2.0 -2.0
0.0 -4.0
0.0 -4.0 -2.0
-6.0
-4.0
-2.0 -6.0
-8.0
-6.0
-4.0 -8.0
-8.0 -10.0
Jan-98 Mar-99 May-00 Jul-01 Sep-02 Nov-03 Jan-05 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06
HK Earning Yield Gap HK DY Gap (RHS)
Taiwan Earning Yield Gap Taiwan Dividend Yield Gap (RHS)
Australia Korea
(%) (%) (%) (%)
4.0 0.0 12.0 4.0
-0.5 2.0
3.0 9.0
-1.0
0.0
2.0 -1.5 6.0
-2.0 -2.0
1.0 3.0
-2.5 -4.0
0.0 -3.0 0.0
-6.0
-3.5
-1.0 -3.0
-4.0 -8.0
-2.0 -4.5 -6.0 -10.0

Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Apr-99 Apr-00 Apr-01 Apr-02 Apr-03 Apr-04 Apr-05
Australia Earning Yield Gap Australia Dividend Yield Gap (RHS)
Korea Earning Yield Gap Korea DY Gap (RHS)
India Indonesia
(%) (%) (%) (%)
8.0 0.0 0.0 0.0
6.0
-2.0 -10.0
-10.0
4.0
-4.0 -20.0
2.0 -20.0
0.0 -6.0 -30.0

-30.0
-2.0 -8.0 -40.0
-4.0 -40.0
-10.0 -50.0
-6.0
-50.0
-12.0 -60.0
-8.0
-10.0 -14.0 -60.0 -70.0

Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-98 Mar-99 May-00 Jul-01 Sep-02 Nov-03 Jan-05
Indonesia Earning Yield Gap Indonesia DY Gap (RHS)

India Earning Yield Gap India Div Yield Gap (RHS)

Earnings Yield & Dividend Yield Gap
Malaysia Singapore
(%) (%) (%) (%)
5.0 4.0 10.0 3.0
3.0
4.0
2.0
8.0 2.0
3.0 1.0
6.0 1.0
0.0
2.0
-1.0 4.0 0.0
1.0
-2.0
-3.0 2.0 -1.0
0.0
-4.0
-1.0 0.0 -2.0
-5.0
-2.0 -6.0 -2.0 -3.0
Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06
Malaysia Earning Yield Gap Malaysia DY Gap (RHS)
Singapore Earning Yield Gap Singapore DY Gap (RHS)
Philippines Thailand
(%) (%) (%) (%)
6.0 0.0
15.0 2.0
4.0 -2.0
0.0
2.0
-4.0 10.0
-6.0 -2.0
0.0
-8.0 5.0
-2.0 -4.0
-10.0
-4.0 0.0
-12.0 -6.0
-6.0
-14.0
-5.0
-8.0
-8.0 -16.0
-10.0 -18.0 -10.0 -10.0

Jul-98 Jul-99 Jul-00 Jul-01 Jul-02 Jul-03 Jul-04 Jul-05 Mar-99 Mar-00 Mar-01 Mar-02 Mar-03 Mar-04 Mar-05
Philippines Earning Yield Gap Philippines DY Gap (RHS)
Thailand Earning Yield Gap Thailand DY Gap (RHS)

Country Correlation Table – Correlation since Jan 1, 2002 (weekly return)

Aust China HK India Indon Korea Mal Pak Philip Sing Taiwan Thailand US-DJ US-Nasdaq US-S&P500 Japan
Australia 1.00 0.36 0.51 0.33 0.30 0.51 0.32 0.10 0.26 0.46 0.42 0.32 0.48 0.50 0.51 0.51
China 0.36 1.00 0.65 0.52 0.35 0.45 0.31 0.10 0.15 0.47 0.44 0.52 0.29 0.30 0.30 0.32
HK 0.51 0.65 1.00 0.46 0.32 0.59 0.40 0.04 0.18 0.63 0.58 0.38 0.46 0.52 0.48 0.55
India 0.33 0.52 0.46 1.00 0.32 0.45 0.23 0.13 0.18 0.43 0.37 0.34 0.27 0.32 0.28 0.36
Indonesia 0.30 0.35 0.32 0.32 1.00 0.41 0.39 0.13 0.30 0.39 0.35 0.39 0.14 0.20 0.15 0.33
Korea 0.51 0.45 0.59 0.45 0.41 1.00 0.35 0.10 0.23 0.58 0.60 0.40 0.43 0.45 0.45 0.60
Malaysia 0.32 0.31 0.40 0.23 0.39 0.35 1.00 0.08 0.26 0.46 0.42 0.37 0.22 0.24 0.21 0.32
Pakistan 0.10 0.10 0.04 0.13 0.13 0.10 0.08 1.00 0.06 0.17 0.16 0.10 0.03 0.00 0.01 0.08
Philippines 0.26 0.15 0.18 0.18 0.30 0.23 0.26 0.06 1.00 0.31 0.21 0.32 0.09 0.13 0.10 0.22
Singapore 0.46 0.47 0.63 0.43 0.39 0.58 0.46 0.17 0.31 1.00 0.57 0.46 0.41 0.45 0.41 0.53
Taiwan 0.42 0.44 0.58 0.37 0.35 0.60 0.42 0.16 0.21 0.57 1.00 0.42 0.41 0.51 0.44 0.52
Thailand 0.32 0.52 0.38 0.34 0.39 0.40 0.37 0.10 0.32 0.46 0.42 1.00 0.23 0.25 0.22 0.32
US – DJ 0.48 0.29 0.46 0.27 0.14 0.43 0.22 0.03 0.09 0.41 0.41 0.23 1.00 0.83 0.97 0.34
US - Nasdaq 0.50 0.30 0.52 0.32 0.20 0.45 0.24 0.00 0.13 0.45 0.51 0.25 0.83 1.00 0.89 0.40
US - S&P500 0.51 0.30 0.48 0.28 0.15 0.45 0.21 0.01 0.10 0.41 0.44 0.22 0.97 0.89 1.00 0.35
Japan 0.51 0.32 0.55 0.36 0.33 0.60 0.32 0.08 0.22 0.53 0.52 0.32 0.34 0.40 0.35 1.00
Source: Thomson Financial DataStream, Merrill Lynch Asia Pacific Equity Strategy Group

HK’s Performance Relative to Singapore Korea’s Performance Relative to Taiwan

9.00 0.22
0.20
8.50
0.18
8.00
0.16
7.50
0.14
7.00
0.12
6.50
0.10
6.00 0.08
5.50 0.06
2000 2001 2002 2003 2004 2005 2006 2000 2001 2002 2003 2004 2005 2006
HK Hang Seng rel Singapore STI KORCOMP/TAIWGHT
HIGH 0.21 27/1/06,LOW 0.08 26/5/00,LAST 0.21 27/1/06

Source: DATASTREAM
Source: DATASTREAM
China’s Performance Relative to India IT’s Performance Relative to Utilities

3.50
1.00
0.90
3.00
0.80
0.70
2.50
0.60
0.50 2.00
0.40
1.50
0.30
0.20
2000 2001 2002 2003 2004 2005 2006
HK H-Shares rel India SENSEX
1.00
2000 2001 2002 2003 2004 2005 2006
MSCI Asia Pac x JP IT rel MSCI Asia Pac x JP Utilities
Source: DATASTREAM
Source: DATASTREAM
Recent Strategy Research

For background here are some of our most recently published views on equity
strategy for Asia.
Recently published strategy views :

Asian Model Portfolio – Four Themes, Thirty Two Stocks 10 January, 06
Pac Rim Year Ahead 09 January , 06
Market Momentum and Inflection Points 20 Dec ember, 05
Taiwan – More Promise, More Delivery 06 December, 05

Analyst Certification
I, Spencer White, Alistair Scarff, Stephen Corry & Willie Chan, hereby certify
that the views expressed in this research report accurately reflect my personal
views about the subject securities and issuers. I also certify that no part of my
compensation was, is, or will be, directly or indirectly, related to the specific
recommendations or view expressed in this research report.
Note to Readers
Due to the nature of strategic analysis, the issuers or securities recommended or
discussed in this report are not continuously followed. Accordingly, investors
must regard this report as providing stand-alone analysis and should not expect
continuing analysis or additional reports relating to such issuers and/or securities.
Merrill Lynch makes no representation or warranties whatsoever as to the data and
information provided in any referenced website and shall have no liability or
responsibility arising out of or in connection with any referenced website.

Important Disclosures
Investment Rating Distribution: Global Group (as of 31 December 2005)
Coverage Universe Count Percent Inv. Banking Relationships* Count Percent
Buy 1119 40.44% Buy 376 33.60%
Neutral 1429 51.64% Neutral 401 28.06%
Sell 219 7.91% Sell 44 20.09%
* Companies in respect of which MLPF&S or an affiliate has received compensation for investment banking services within the past 12 months.
FUNDAMENTAL EQUITY OPINION KEY: Opinions include a Volatility Risk Rating, an Investment Rating and an Income Rating. VOLATILITY RISK RATINGS,
indicators of potential price fluctuation, are: A - Low, B - Medium, and C - High. INVESTMENT RATINGS, indicators of expected total return (price appreciation
plus yield) within the 12-month period from the date of the initial rating, are: 1 - Buy (10% or more for Low and Medium Volatility Risk Securities - 20% or more for
High Volatility Risk securities); 2 - Neutral (0-10% for Low and Medium Volatility Risk securities - 0-20% for High Volatility Risk securities); 3 - Sell (negative
return); and 6 - No Rating. INCOME RATINGS, indicators of potential cash dividends, are: 7 - same/higher (dividend considered to be secure); 8 - same/lower
(dividend not considered to be secure); and 9 - pays no cash dividend.
The analyst(s) responsible for covering the securities in this report receive compensation based upon, among other factors, the overall profitability of Merrill
Lynch, including profits derived from investment banking revenues.
Other Important Disclosures

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PACIFIC RIM

Refer to important disclosures on page 52. Analyst Certification on page 51.

Capital Markets – Equity, Debt & FX 6-9

Government Policy And Politics 10 - 14

Economic Drivers – Investment & Consumption 15 - 17

The Bank Sector In-Depth 18 - 24

Company Themes & Visit Highlights 25 - 29

Risks For Vietnam 30

Trading Vital Statistics 31 – 32

Asset Allocation & Thematic Model Portfolio 38 – 40

Correlation Table & Pair Trade Charts 49- 50

2 Refer to important disclosures on page 52.

From Bicycles to BMWs ? It’s A Buy

Why Vietnam And Why Now

2006 GDP Growth (%)

Refer to important disclosures on page 52. 3

Asset Classes For Expressing A View On Vietnam

Selection Of Vietnam Funds

Mekong Enterprise Fund II 40 N/A Private equity

4 Refer to important disclosures on page 52.

Summary of Key Investment Arguments For Vietnam

Refer to important disclosures on page 52. 5

Japan 9.7 18.7 2.2 11.8 1.2

China 6.8 11.6 1.9 16.8 2.8

Australia 10.8 14.5 2.6 18.0 3.8

India 18.5 14.7 3.3 24.2 1.8

6 Refer to important disclosures on page 52.

Mkt Cap to GDP ratio (%) Average

Source: CEIC and their foreign holdings.

Top 10 Stocks By Mkt Cap

Market Volumes Healthiest In The Unlisted Segment

Refer to important disclosures on page 52. 7

Alternative Routes To Equity Exposure

IPOs To Watch Out For

And Here Come The Japanese

8 Refer to important disclosures on page 52.

Not In The Benchmark Indices, Yet

Bond Yield Comparisons – Vietnam, Debt Is Government Related

Refer to important disclosures on page 52. 9

Government Policy And Politics

Development of the SME and Medium Sized

The steadily growing foreign direct investment (FDI) sector

Source: ADB, World Bank, Vietnam Pioneer Partners

10 Refer to important disclosures on page 52.

Privatisation Program – Needs More Scale

Politics & The Military

12 Refer to important disclosures on page 52.

Industrial Structure – A Growing Export Engine

The large number of SMEs operating in the Vietnamese economy lends it

Exports Growth (%)

Imports Growth (%)

Major Exports By Destination

Property – Competition From Equity Opportunities

Refer to important disclosures on page 52. 13

14 Refer to important disclosures on page 52.

Economic Drivers – Investment &

Key Historic Economic Statistics For Vietnam

FDI YoY (%) (RHS)

Refer to important disclosures on page 52. 15

Consumption Is Getting More Conspicuous

Retail Sales Growth YoY (%)

16 Refer to important disclosures on page 52.

Potential Economic Stress Points