Vietnam freight transport report q3 2015

... Business Monitor International Ltd Page Vietnam Freight Transport Report Q3 2015 SWOT Freight Transport Vietnam Freight Transport Industry SWOT Analysis Strengths ■ Vietnam' s strong domestic growth... affect Vietnam' s freight transport sector © Business Monitor International Ltd Page 10 Vietnam Freight Transport Report Q3 2015 Political SWOT Analysis Strengths ■ The Communist Party of Vietnam. .. by road haulage companies © Business Monitor International Ltd Page Vietnam Freight Transport Report Q3 2015 Vietnam Freight Transport Industry SWOT Analysis - Continued ■ Chinese investment could

Q3 2015 www.bmiresearch.com

VIETNAM

FREIGHT TRANSPORT REPORT

INCLUDES 5-YEAR FORECASTS TO 2019

INCLUDES 5-YEAR FORECASTS TO 2019

Part of BMI’s Industry Report & Forecasts Series

Published by: BMI Research

Copy deadline: April 2015

© 2015 Business Monitor International Ltd

All rights reserved

All information contained in this publication is

copyrighted in the name of Business Monitor International Ltd, and as such no part of this

publication may be reproduced, repackaged,redistributed, resold in whole or in any part, or used

in any form or by any means graphic, electronic ormechanical, including photocopying, recording,taping, or by information storage or retrieval, or byany other means, without the express written consent

of the publisher

DISCLAIMER

BMI Industry View 7

SWOT 9

Freight Transport 9

Political 11

Economic 12

Industry Forecast 14

Trade Forecast 14

Table: Trade Overview (Vietnam 2012-2019) 16

Table: Key Trade Indicators (Vietnam 2012-2019) 17

Table: Main Import Partners 18

Table: Main Export Partners 19

Road Freight Forecast 20

Table: Road Freight (Vietnam 2012-2019) 23

Rail Freight Forecast 23

Table: Rail Freight (Vietnam 2012-2019) 25

Air Freight Forecast 25

Table: Air Freight (Vietnam 2012-2019) 28

Company Profile 29

Vietnam Airlines Cargo 29

Political Outlook 32

Domestic Politics 32

Table: Vietnam Political Overview 36

Long-Term Political Outlook 36

Oil Price Outlook 41

Global - Crude Oil, Refined Fuels And Natural Gas Prices, 10-year Forecasts 41

Table: Energy Price Forecasts, 2013-2018 41

Table: Energy Price Forecasts, 2019-2024 ( Global 2019-2024) 42

Macroeconomic Forecasts 44

Economic Analysis 44

Table: Economic Activity (Vietnam 2010-2019) 48

Demographic Forecast 49

Table: Population Headline Indicators (Vietnam 1990-2025) 50

Table: Key Population Ratios (Vietnam 1990-2025) 50

Table: Urban/Rural Population & Life Expectancy (Vietnam 1990-2025) 51

Table: Population By Age Group (Vietnam 1990-2025) 51

Table: Population By Age Group % (Vietnam 1990-2025) 52

Methodology 54

Industry Forecast Methodology 54

Sector-Specific Methodology 55

Sources 57

BMI Industry View

BMI View: We continue to believe that the Vietnamese economy is set to perform strongly in 2015, due to

continued strong foreign direct investment (FDI), healthy export growth and ongoing efforts by the

government to improve macroeconomic fundamentals In turn, the country's freight industry is set to benefit

as a result The outperformers in terms of mode will be inland waterways and road freight, due to consumer demand rising in Vietnam on the back of falling fuel prices and easier monetary policy and still-strong fiscal spending plans by the government.

Vietnam and South Korea have concluded negotiations for a bilateral free trade agreement (FTA), whichseeks to triple bilateral trade turnover to USD70bn by 2020, offering potentially significant upside risk overthe medium to long term The anticipated bounce from the FTA is an integral reason why we anticipateexport growth in Vietnam to perform strongly over our medium term forecast period, growing by anaverage 6.52% y-o-y between 2015 and 2019 In 2015, total trade real growth will come in at 6.65%, withimports outperforming exports

Vietnam is poised to post strong private consumption growth of 6.5% in 2015, which is unchanged from lastyear The country's consumers will benefit from lower oil prices, easier monetary policy and still-strongfiscal spending plans by the government, boosting the road freight mode in 2015 Moreover, Vietnam'sexchange rates have shown a reasonable amount of resilience in the first half of 2015, which will help toconserve consumers' purchasing power, again, providing a boost to road freight This will see growth forconsumer-related goods such as passenger vehicles, mass grocery and retail remain strong over the course

of 2015

In 2015, we have pencilled in y-o-y growth of 3.40% for the air freight mode in Vietnam, which is down on2014's estimated gains of 9.96% Looking further ahead to the medium term, the Vietnamese air freightsector will be buoyed by the news that two-way trade between India and Vietnam is anticipated to reachUSD20bn by 2020, according to Vietnam's Ambassador to India Ton Sinh Thanh Vietnam's growing riceexports could prove to be very popular with the Indian market, boosting air freight trade over the mediumterm as a result

Vietnam's rail freight industry is not set to enjoy the same level of annual tonnage growth in 2015 as lastyear, as the country put years of contracting growth behind it to post double-digit growth However, thesector is now set to see positive growth both in 2015 and over the medium term as the manufacturing andoil and gas sectors are both poised to spur on the freight mode through increased exports out of Vietnam

Indeed, Vietnamese crude oil exports increased 27% y-o-y to 867,207 metric tonnes (mt) or 205,052 barrels

per day (b/d) in December 2014, according to data from Vietnam Customs, but state-owned PetroVietnam

is likely to reduce production from four of its oil fields to cut costs, underlining why we expect slower railfreight growth in 2015

Key BMI Forecasts:

■ We forecast total road freight volumes will rise by 7.75% y-o-y over 2015 to reach 880.14mn tonnes

■ We forecast total rail freight volumes will grow by 3.40% year on year over 2015 to reach 7.42mntonnes

■ We forecast total air freight volumes will rise by 3.40% year on year over 2015 to reach 208,700 tonnes

■ We forecast total trade value to increase by 6.65% to reach USD319.27bn in 2015

■ The top trade partners will be the US, China, Japan, South Korea and Germany

Freight Transport

Vietnam Freight Transport Industry SWOT Analysis

Strengths ■ Vietnam's strong domestic growth rate, coupled with its geography - it stretches for

thousands of kilometres on a north-south axis - creates a need for long-distancefreight haulage

■ A recovery of activity levels at the nation's ports in 2010 is expected to continue overthe mid-term to 2018

■ Vietnam's location on the South China Sea gives the country access to the main Asian shipping routes, as well as access to the developing land transport links withASEAN countries, allowing the country scope to develop its trade logistics

inter-Weaknesses ■ The generally poor state of the road network Despite new highway construction, only

13.5% of the network is considered to be in good condition Just 26% of the networkhas two or more lanes and only 29% is tarred

■ Traditionally low investment in rail, with the potential for cost-effective bulk rail freightbeing underutilised

■ Decades of under-investment have left the country with a port infrastructure systemthat is poor by international standards

■ Overcapacity is a growing problem

■ Unresolved business environment issues and lack of significant improvement inaccess to infrastructure financing means that we remain very conservative on thegrowth potential of Vietnam's freight sector

■ A slowdown affecting the US economy has a knock-on effect on Vietnam due to itbeing the Asian country's largest export partner

Opportunities ■ The beginnings of local commercial vehicle production, which will help improve the

stock of lorries used by road haulage companies

Vietnam Freight Transport Industry SWOT Analysis - Continued

■ Chinese investment could bring about much-needed improvements in the rail sector

■ Growing international interest in Vietnam as a growth market within the box shippingsector

■ The World Bank stated at the start of 2014 that improved infrastructure could improvethe country's economy substantially

■ Vietnamese Transport Minister Dinh La Thang wishes to see the government helpboost inland waterway facilities and has been formulating policies likely to attractinvestments in the sector

Threats ■ Vietnam risks losing out to neighbouring countries if it is unable to develop its

infrastructure to keep up with the pace of demand

■ Vietnam is vulnerable to any slowdown in Chinese investment and to political risk inthe sensitive South China Sea, subject to competing sovereignty claims

■ A drop in international demand for exports would negatively affect Vietnam's freighttransport sector

SWOT Analysis

Strengths ■ The Communist Party of Vietnam remains committed to market-oriented reforms and

we do not expect major shifts in policy direction over the next five years The party system is generally conducive to short-term political stability

one-■ Relations with the US have witnessed a marked improvement, and Washington seesHanoi as a potential geopolitical ally in South East Asia

Weaknesses ■ Corruption among government officials poses a major threat to the legitimacy of the

ruling Communist Party

■ There is increasing (albeit still limited) public dissatisfaction with the leadership's tightcontrol over political dissent

Opportunities ■ The government recognises the threat corruption poses to its legitimacy, and has

acted to clamp down on graft among party officials

■ Vietnam has allowed legislators to become more vocal in criticising governmentpolicies This is opening up opportunities for more checks and balances within theone-party system

Threats ■ Although strong domestic control will ensure little change to Vietnam's political scene

in the next few years, over the longer term, the one-party-state will probably beunsustainable

■ Relations with China have deteriorated over recent years due to Beijing's moreassertive stance over disputed islands in the South China Sea and domestic criticism

of a large Chinese investment into a bauxite mining project in the central highlands,which could potentially cause wide-scale environmental damage

SWOT Analysis

Strengths ■ Vietnam has been one of the fastest-growing economies in Asia in recent years, with

GDP growth averaging 6.6% annually between 2000 and 2013

■ The economic boom has lifted many Vietnamese out of poverty, with the officialpoverty rate in the country falling from 58% in 1993 to 17.2% in 2012

■ Vietnam has been strengthening its trade and aid ties in a bid to increase exports anddiversify its export sector

Weaknesses ■ Vietnam still suffers from fiscal deficits, leaving the economy vulnerable to global

economic uncertainties The fiscal deficit is dominated by substantial spending onsocial subsidies that could be difficult to withdraw

■ The heavily-managed and weak currency reduces incentives to improve quality ofexports, and also keeps import costs high, contributing to inflationary pressures

Opportunities ■ WTO membership and the upcoming ASEAN economic integration in 2015 should

give Vietnam greater access to both foreign markets and capital, while makingVietnamese enterprises stronger through increased foreign competition

■ The government has continued to move forward with market reforms, includingprivatisation of state-owned enterprises, addressing the high level of bad loans in thebanking sector as well as liberalising the banking sector

■ Urbanisation will continue to be a long-term growth driver The UN forecasts theurban population rising from 32% of the population in 2013 to more than 50% by theearly 2040s

Threats ■ Although inflation has subsided in 2014, complacency by the State Bank of Vietnam

on this front could result in a decline in investment

■ The potential for an escalation of political tensions with China over sovereign claims

to parts of the South China Sea could have a negative impact on the economy

SWOT Analysis - Continued

■ Market reforms could progress at a much slower pace as the government remainscautious about ceding ownership to foreign investors

Industry Forecast

Trade Forecast

BMI View: Vietnamese export growth is set to grow in 2015 as a stronger US economy and continued

inflows of foreign direct investment (FDI) to Vietnam's manufacturing sector dovetail to see export growth

of 8.3% That said, exports will likely underperform the 13.6% nominal growth pace set in 2014 owing tothe weak euro and the ongoing regional economic slowdown, which temper our freight forecasts as a result

- the air and rail freight sectors are set to see year-on-year tonnage throughput decrease in 2015 compared to

12 months previous

In terms of geographical breakdown, we believe the US market will be the key to sustaining robust exportgrowth in Vietnam over the coming quarters amid ongoing regional headwinds Indeed, the US remains thelargest destination for Vietnamese exports, receiving 19.8% of the total in the first four months of 2015.While there was a poor run of economic data from the US in the month of April, we nevertheless expect the

US economy to continue its recovery amid a healing labour market and weak global oil prices Recovering

US consumer confidence will in turn provide a boost to demand for Vietnamese goods, particularly fortextiles and garments In Q1 2015, the 'textiles and garments' category grew by 7.8% y-o-y to USD4.8bn,which is, by extension, welcome news to the air freight mode as it will be via air, as well as sea, that theseexports are transported The US accounted for 17.6% of all exports out of Vietnam in 2013 (latest availabledata), which underlines the importance of the US market to Vietnamese freight modes

While the US economy appears to be back on its feet, the regional economic slowdown in Vietnam's otherkey trading partners, particularly China, Japan and South Korea, will act as a drag on Vietnamese exportgrowth, thus resulting in export growth in 2015 dipping slightly on 2014's 5.92% y-o-y gains Indeed,China, Japan and South Korea received a combined 23.8% of the total for the first four months of 2015.Growth in exports to these major trading partners will likely be negatively impacted by ongoing generalweakness in these economies In China, ongoing economic rebalancing efforts by the Chinese governmentwill continue to slow growth in the world's second largest economy Import growth in China contracted by12.3% y-o-y in March, reflecting the economic slowdown in recent quarters Meanwhile, attempts to revivethe Japanese economy appear to have fallen short, with real household income and industrial productiongrowth remaining rather lacklustre

The ability to attract strong foreign direct investment (FDI) inflows to the manufacturing sector is anotherfactor that will keep the Vietnamese export sector vibrant The exports of manufactured goods are set togrow by 6.98% in 2015 Well-known multinational companies like Samsung (one of the largest foreign

investors in Vietnam) and Procter and Gamble are increasing their investment in the country, which will

only benefit the freight industry, in particular air freight as goods are flown out to more developed

countries In particular, Samsung (through its various subsidiaries) is running several large scale projects in

Vietnam, including the construction of a second smartphone factory worth USD3.0bn in the northernprovince of Thai Nguyen and a USD1.0bn production plant in the province of Bac Ninh to manufactureLCD screens According to the Ministry of Planning and Investment, registered capital investment from theSouth Korean giant is estimated to hit USD20.0bn by 2017 The total investment from Samsung in thecountry currently stands at around USD11.0bn

Strong Growth Ahead

Imports and Exports Value (USDbn) (2013-2019)

Vietnam - Imports, USDbn Vietnam - Exports, USDbn

2013 2014 2015f 2016f 2017f 2018f 2019f0

200 400 600

National statistics agency

Medium Term

In welcome news for the Vietnamese freight industry, Vietnam and South Korea have concluded

negotiations for a bilateral free trade agreement (FTA) during a meeting between Vietnamese Prime

Minister Nguyen Tan Dung and South Korean President Park Geun-hye on the sidelines of the Korea Commemorative Summit The FTA seeks to triple bilateral trade turnover to USD70bn by 2020 The

ASEAN-FTA covers 17 areas, including products, services and investment and intellectual property; however, itexcludes rice, a sensitive product for Korean farmers, as reported by the Korea Times The two Asiannations have held nine rounds of FTA talks since August 2012, reported Thanh Nien News If Vietnam andSouth Korea can appease farmers in the latter country, the former is set to benefit from its large rice exports.The anticipated bounce from the FTA is one of the key reasons why we see export growth in Vietnamperforming strongly over our medium term forecast period, growing by an average 6.52% y-o-y between

2015 and 2019

Long Term

Coal production will remain the overwhelming power source of choice, most notably in China and India,and with Vietnam exporting significant amounts of coal, it is well placed to benefit from growing demandover the long term Not only is coal the cheapest option, but it is relatively abundant, scalable and has afaster turnaround than other fuel sources We forecast that despite rising environmental concerns, by 2024,coal will still account for approximately 70.0% of China's energy mix, down only marginally from about73.0% currently Although coal will remain the power source of choice, we do expect policy changes toboost growth in nuclear and renewable energy sources over the next decade

With Europe being the second largest export destination for Vietnamese goods (receiving 18.8% of the totalfor the first four months of 2015), weakness in the euro will undoubtedly weigh on European demand forVietnam's exports going forward, a situation that has occurred in the first half of 2015 The euro hasdepreciated against the Vietnamese dong by about 20% since May 2014, making Vietnamese goods moreexpensive in euro terms and this is a scenario that could worsen in future, affecting demand for Vietnamesegoods and thus having a detrimental effect on the country's freight modes, in particular air freight

Table: Trade Overview (Vietnam 2012-2019)

2012 2013 2014 2015f 2016f 2017f 2018f 2019f

Imports, real growth, % y-o-y 9.09 7.90 7.50 7.50 7.30 7.20 7.00 7.00 Exports, real growth, % y-o-y 15.71 6.00 5.92 5.80 6.20 6.60 6.80 7.20 Total Trade, real growth, % y-o-y 12.40 6.95 6.71 6.65 6.75 6.90 6.90 7.10 Imports, USDbn 118.98 133.50 147.57 159.94 178.12 202.18 229.09 259.36 Import growth, % y-o-y 5.86 12.20 10.54 8.38 11.37 13.51 13.31 13.21 Exports, USDbn 124.43 137.15 149.38 159.34 175.63 198.25 224.21 254.31 Export growth, % y-o-y 16.46 10.22 8.92 6.66 10.23 12.88 13.10 13.42 Total trade, USDbn 243.41 270.65 296.96 319.27 353.75 400.43 453.30 513.67

Trade Overview (Vietnam 2012-2019) - Continued

2012 2013 2014 2015f 2016f 2017f 2018f 2019f

Total trade growth, % y-o-y 11.03 11.19 9.72 7.51 10.80 13.20 13.20 13.32

e/f = BMI estimate/forecast Source: General Statistics Office of Vietnam, BMI

Table: Key Trade Indicators (Vietnam 2012-2019)

metals, exports,

% y-o-y 21.28 11.78 9.52 7.07 10.78 13.57 13.53 14.09Ores and

metals, imports,

USDmn 4,262.93 5,364.30 5,969.23 6,500.53 7,155.36 8,278.82 9,305.92 10,684.77Ores and

metals, imports,

% y-o-y -6.13 25.84 11.28 8.90 10.07 15.70 12.41 14.82Iron and steel,

exports,

USDmn 2,203.39 2,609.31 2,874.67 3,090.60 3,494.49 3,949.34 4,553.87 5,182.44Iron and steel,

exports, %

y-o-y -1.40 18.42 10.17 7.51 13.07 13.02 15.31 13.80Iron and steel,

imports,

USDmn 8,471.23 10,158.45 11,251.96 12,212.37 12,952.95 15,295.55 16,716.99 19,470.02Iron and steel,

imports, %

y-o-y 17.23 19.92 10.76 8.54 6.06 18.09 9.29 16.47

Key Trade Indicators (Vietnam 2012-2019) - Continued

2012 2013e 2014e 2015f 2016f 2017f 2018f 2019f

Manufactured

goods, exports,

USDmn 71,085.40 77,803.42 85,108.55 91,052.85 102,058.29 114,660.13 131,471.98 148,647.29Manufactured

goods, exports,

% y-o-y 14.31 9.45 9.39 6.98 12.09 12.35 14.66 13.06Manufactured

goods, imports,

USDmn 80,785.92 89,399.19 98,858.27 107,166.05 119,292.63 135,532.23 153,510.65 173,917.43Manufactured

goods, imports,

% y-o-y 9.20 10.66 10.58 8.40 11.32 13.61 13.27 13.29Fuels, exports,

USDmn 16,530.36 17,377.78 18,781.64 19,923.99 21,088.00 24,185.26 26,537.19 30,368.73Fuels, exports,

% y-o-y 50.17 5.13 8.08 6.08 5.84 14.69 9.72 14.44Fuels, imports,

USDmn 15,190.13 16,042.55 17,763.66 19,275.28 21,413.17 24,416.26 27,667.09 31,388.04Fuels, imports,

% y-o-y 21.22 5.61 10.73 8.51 11.09 14.02 13.31 13.45

e/f = BMI estimate/forecast Source: UNCTAD, BMI

Table: Main Import Partners

2006 2007 2008 2009 2010 2011 2012 2013

China, Mainland, USDmn 7,391 12,710 15,974 16,441 20,019 24,594 28,786 53,458 China, Mainland, USDmn, % of

total 16.5 20.3 19.8 23.5 24.0 23.5 25.8 31.9 Korea, Republic Of, USDmn 3,908 5,340 7,255 6,976 9,761 13,176 15,536 23,196 Korea, Republic Of, USDmn, % of

total 8.7 8.5 9.0 10.0 11.7 12.6 13.9 13.8 Singapore, USDmn 6,274 7,614 9,378 4,248 4,101 6,391 6,690 11,978 Singapore, USDmn, % of total 14.0 12.1 11.6 6.1 4.9 6.1 6.0 7.1 Japan, USDmn 4,702 6,189 8,240 7,468 9,016 10,400 11,603 11,575 Japan, USDmn, % of total 10.5 9.9 10.2 10.7 10.8 10.0 10.4 6.9 China,P.R.:Hong Kong, USDmn 1,441 1,951 2,633 826 860 970 970 8,315 China,P.R.:Hong Kong, USDmn, %

TOTAL 44,891 62,765 80,714 69,949 83,365 104,510 111,640 167,791 TOTAL, top 5 countries, USDm 23,717 33,804 43,480 35,960 43,758 55,530 63,584 108,521

Main Import Partners - Continued

2006 2007 2008 2009 2010 2011 2012 2013

% from top 5 trade partners 52.8 53.9 53.9 51.4 52.5 53.1 57.0 64.7

Source: IMF N.B Total exports is from Direction of Trade Statistics, consequently there may be some discrepancy with data used elsewhere in this report.

Table: Main Export Partners

2006 2007 2008 2009 2010 2011 2012 2013

United States, USDmn 7,845 10,105 11,887 11,356 14,238 16,928 19,668 22,930 United States, USDmn, % of

total 19.7 20.8 19.0 19.9 20.4 18.2 17.8 17.6 China, Mainland, USDmn 3,243 3,646 4,850 4,909 7,309 11,125 12,388 15,351 China, Mainland, USDmn, % of

total 8.1 7.5 7.7 8.6 10.5 12.0 11.2 11.8 Japan, USDmn 5,240 6,090 8,468 6,292 7,728 10,781 13,060 12,917 Japan, USDmn, % of total 13.2 12.5 13.5 11.0 11.1 11.6 11.8 9.9 Korea, Republic Of, USDmn 843 1,243 1,794 2,065 3,092 4,715 5,580 6,523 Korea, Republic Of, USDmn, %

Germany, USDmn 1,445 1,855 2,073 1,885 2,373 3,367 4,095 5,683 Germany, USDmn, % of total 3.6 3.8 3.3 3.3 3.4 3.6 3.7 4.4 TOTAL 39,826 48,561 62,685 57,196 69,820 92,881 110,795 130,551 TOTAL, top 5 countries, USDm 18,616 22,939 29,072 26,507 34,740 46,916 54,792 63,403

% from top 5 trade partners 46.7 47.2 46.4 46.3 49.8 50.5 49.5 48.6

Source: IMF N.B Total exports is from Direction of Trade Statistics, consequently there may be some discrepancy with data used elsewhere in this report

Road Freight Forecast

BMI View: In terms of the domestic picture, we forecast private consumption in Vietnam, lower levels of

inflation, easier monetary policy and lower oil prices will boost consumers' purchasing power, which will prove beneficial for the road freight sector in Vietnam Therefore, y-o-y growth in terms of tonnage

transported by road is set to remain elevated, coming in at a forecast 7.75% in 2015, up on 2014's 6.77%.

On the other hand, however, the recent sell off in many emerging market currencies, combined with a regional slowdown in aggregate real GDP growth will partially offset some of the tailwinds.

Vietnam will see private consumption remain broadly the same in 2015, which is why our road freighttonnage handled forecast for the year does not differ so much from 2014 The rise in this mode will

predominantly occur due to lower fuel prices for truckers

The Vietnamese economy is currently resting on a growth-inflation sweet spot, with consumer priceinflation (CPI) coming in at just 0.9% y-o-y in March (in part owing to the slump in global oil prices) versusthe peak of 23.0% in August 2011 Price stability and positive economic growth prospects will lend support

to the Vietnamese dong, while a richer domestic consumer continues to benefit the road freight sector,hence our healthy growth forecast over the short term The confluence of these factors will restore and shore

up investor confidence, enhancing Vietnam's attractiveness as a place to invest and do business in, whichshould have a knock on effect on infrastructure, which could mean enhanced facilities for truckers and,therefore, a boost for the road freight sector

In line with our positive outlook for the Vietnamese economy, real GDP growth came in at 6.0% year (y-o-y) in Q1 2015 While the latest reading represented a slowdown from the 7.0% headline figure inthe previous quarter, the economy nevertheless remains on a very strong growth trajectory and with theVietnamese road freight sector carrying the bulk of cargo, it is in a healthy position as a result

year-on-GDP Growth To Remain High

GDP Per Capita (USD) (% change) (2013-2024)

Vietnam - GDP per capita, USD (LHS) Vietnam - GDP per capita, USD, % y-o-y (RHS)

2013 2014 2015f 2016f 2017f 2018f 2019f 2020f 2021f 2022f 2023f 2024f0

2,000 4,000

6,000

10

5 7.5 12.5

f = BMI forecast Source: General Statistics Office, Asian Development Bank, BMI

Medium Term

Over our forecast period to 2019, we expect to see y-o-y average growth to come in at a healthy 7.79%, asthe sector goes from strength to strength This is predicated on a glowing consumer picture, as well as

Vietnam's rising stature as an attractive place for investment Looking ahead, we expect the economy to

continue growing robustly, on the back of greater foreign direct investment (FDI) inflows and ongoingefforts by the government to improve the country's business conditions, which will all boost the road freightsector as demand grows and increased investment improves Vietnam's reputation as a place to do business

Vietnam for the foreseeable future Notably, Samsung (one of the leading foreign investors in Vietnam) has

plans to invest in energy, shipbuilding and other infrastructure developments in the country through itsvarious subsidiaries, with total investment reported to be around USD20.0bn It is also looking to expand itsmobile phone production capacity over the coming quarters In addition, another multinational company,

Procter and Gamble, will expand its footprint in Vietnam through setting up a USD100.0mn factory at the

Vietnam-Singapore Industrial Park in the Binh Duong province that will manufacture razors for its Gillettebrand

Over the longer term, the Vietnamese government's decision to introduce tighter regulation to clamp down

on overloaded trucks, which will now result in firms having to procure additional vehicles to transport their cargo, should promote driver safety and make the road freight sector more attractive as a direct

consequence The decision by Vietnam's Ministry of Transport (MOT) to increase control and oversight of

overloaded vehicles so as to ensure driver safety is a positive development for the commercial vehicle (CV)sector

Previously, many truck owners had registered their vehicles to carry far less weight than the actual loadtransported Subsequently, these overloaded trucks contributed to traffic accidents and caused damage toroads Since April however, the MOT has clamped down on these errant practices and initial signs showthat the policy has been successful, with the number of traffic accidents declining since then

Furthermore, the MOT's stricter regulation has made the truck market more competitive According to anofficial from the ministry, as many as 60% of container trucks owned by local firms will be ineligible to

transport containers under the new policy This has resulted in transport firms having to buy or arrange foralternative vehicles, which are suitable to carry their goods.

Table: Road Freight (Vietnam 2012-2019)

e/f = BMI estimate/forecast Source: General Statistics Office of Vietnam, BMI

Rail Freight Forecast

BMI View: Vietnam's rail freight industry in 2015 is not set to enjoy the same level of year-on-year

tonnage growth compared to 2014 as years of consecutive growth contractions were put behind the sector

to post double-digit growth; 3.40% is the 2015 forecast against 2014's 10.01% gains This impressive growth came predominantly as a result of large increases in Vietnamese crude oil exports (27% y-o-y to 867,207 metric tonnes (mt) or 205,052 barrels per day (b/d) in December 2014, according to data from Vietnam Customs) and growth in the manufacturing sector.

From a production perspective, the strong showing in the first quarter was rather broad-based In theindustry category, which accounted for 30.3% of nominal GDP in Q115, the manufacturing sector grew by

a robust 9.5% y-o-y, while construction growth came in at 4.4% y-o-y We expect the manufacturing sector

to remain a key driver of growth over the coming quarters The still relatively low labour costs in thecountry despite the recent wage hike, the generous tax incentives the government has to offer, as well as theready supply of a young and dynamic workforce will greatly entice foreign manufacturing firms to invest

and set up their production plants in Vietnam, continuing to boost demand for rail freight services in thecountry.

Vietnam exported 9.29mn mt of crude, up 10.5% y-o-y from January to December 2014 While the exportvolume for December was 23.5% higher than November, the export value was 4.7% lower at USD414mncompared with November 2013 Greater demand for crude has a positive knock-on effect on Vietnam's railfreight sector, which is why we anticipate positive growth to remain in this freight mode both in 2015 andover the medium term also

Tempering our forecast, however, is the news that state-owned PetroVietnam is likely to reduce production

from four of its oil fields to cut costs, as expenses have exceeded prices.This scenario has resulted in BMI

deciding that double-digit growth seen in 2014 is unlikely to take place again in 2015

Rail Freight Finally Back On Track

Rail Freight Tonnage (2006-2019)

Vietnam - Rail freight tonnes ('000) Vietnam - Rail freight tonnes, % y-o-y

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015f 2016f 2017f 2018f 2019f0

2,500 5,000 7,500 10,000

-10 -5 0 5 10 15

National Statistics Agency

Medium Term

The expansion of Japan's K Line into Vietnam's logistics sector in 2014 could offer upside risks to the rail

freight sector going forward The move is part of the company's wider strategy to reduce its exposure to the container shipping sector by increasing its exposure to more profitable sectors, including logistics Should other firms follow suit, the rail freight mode could benefit and the mode is already set to perform steadily over our forecast period, averaging y-o-y growth of 3.60% to 2019.

Long Term

Discoveries and foreign investments are encouraging signs for both Vietnam's gas production and

consumption growth prospects and, by extension, provide welcome news for rail freight as it is the modemost concerned with heavy industry transportation This is reflected in our optimistic growth forecast forVietnamese gas production and consumption Nonetheless, gas prices and regional security pose risk tofurther growth

Table: Rail Freight (Vietnam 2012-2019)

2012 2013 2014 2015f 2016f 2017f 2018f 2019f

Rail freight tonnes ('000) 7,003.50 6,525.90 7,178.90 7,422.98 7,697.63 7,974.75 8,273.80 8,575.79 Rail freight tonnes, % y-o-y -3.87 -6.82 10.01 3.40 3.70 3.60 3.75 3.65 Rail freight tonnes-km (mn ton

km) 4,024.60 3,804.10 4,297.20 4,426.12 4,567.75 4,723.06 4,893.09 5,066.79Rail freight tonnes-km, % y-o-y -3.30 -5.48 12.96 3.00 3.20 3.40 3.60 3.55

e/f = BMI estimate/forecast Source: General Statistics Office of Vietnam, BMI

Air Freight Forecast

BMI View: We believe that the Vietnamese air freight sector will grow by 3.40% in 2015, while over our

forecast period to 2019 we anticipate annual gains to remain at a similar level, at 3.60% per annum.

Short Term

Vietnam's pharmaceutical industry, meanwhile, is currently facing challenges to compete with Indian drugfirms, according to state management agencies With domestic firms preferring to import materials for drug

production, rather than spending money on research, the air freight sector by extension is poised to benefitfrom what could be a lucrative revenue stream A free trade agreement signed with the ASEAN, of whichVietnam is a member, has also led to this rise in imports of Indian medicines There were 4,269 registeredIndian drugs in 2014, accounting for 26% of the total registered items in Vietnam, which is welcome newsfor Vietnam's air freight operations.

Calm Skies For Mid Term Growth

Air Freight Tonnage (2006-2019)

Vietnam - Air Freight Tonnes (000) (LHS) Vietnam - Air freight tonnes % y-o-y (RHS)

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015f 2016f 2017f 2018f 2019f0

100 200 300

-20 0 20 40

e/f = BMI estimate/forecast Source: General Statistics Office of Vietnam, BMI

Medium Term

Significant private sector interest in Vietnam's airport sector bodes well for the government's efforts to raisefunds for additional projects and also provides potentially significant upside risk to our air freight forecastsover the medium and longer term Nonetheless, we maintain our moderate forecast as we expect issues such

as permit approvals, environmental clearances and land acquisition to result in project delays, hinderinggrowth Consequently, we currently forecast y-o-y air freight tonnage throughput growth of an average3.60% between 2015 and 2019

Private sector interest in Vietnam's airports indicates that the government's plan to privatise the sector is

gaining traction French airport operator Aeroports de Paris (ADP) has expressed interest in being a

strategic stakeholder of Airports Corporation of Vietnam (ACV) through a 25-30% ownership, according tothe Vietnam Investment Review In addition, ADP is also looking to work with Credit Suisse, Vietnam'sTransport Ministry and ACV to raise USD2-3bn for the construction of the Long Thanh InternationalAirport in southern Vietnam

Elsewhere, Vietnam Airlines has recently announced that it wants to buy the domestic passenger terminal

at Hanoi's Noi Bai International Airport from the ACV, pitting itself against VietJet Air, which also wants

to purchase Terminal 1 at Noi Bai T&T Group, a Hanoi-based conglomerate had also requested in March

2015 that the Transport Ministry approve its investment into the Phu Quoc Airport - currently fully owned

by AVC With the country expected to see significant growth in air passenger traffic over the coming years(expanding by 25% between 2015 and 2019 to 10.4mn based on our forecast), the government has

ambitious plans to develop airport infrastructure, and the partial privatisation of ACV's assets will help tounlock funds to support airport construction The knock on-effect of this will be better facilities for airfreighters, as well as increased foreign interest in the sector as Vietnam begins to better compete regionally.Besides the Long Thanh airport project which ADP is interested in and is estimated to cost USD15.8bn,there are also plans to build an additional terminal at Cam Ranh International Airport The Cam Ranhproject is expected to cost VND1.0tn (USD47mn), with the new terminal expected to operate in 2018.Meanwhile, construction of new terminals at the Cat Bi International Airport and Phu Cat Airport alsocommenced in January 2015

Beyond funding, the entrance of private players in the operations of Vietnam's airports will help improveefficiency in the sector AVC currently operates all civil airports in Vietnam, and we believe a lack ofprivate sector participation has resulted in several airports operating below capacity and becoming

significant fiscal drags As such, private investment would also allow various projects to operate in morecompetitive, revenue driven environment which will see standards and capacity utilisation improve

Existing hurdles to project execution such as permit approvals, environmental clearances and land

acquisition could result in delays of airport projects A case in point is the possible expansion of the TanSon Nhat Airport, which is expected to reach passenger capacity by 2017 While the Long Thanh

International Airport has been planned with the intention of alleviating traffic at Tan Son Nhat, it is

expected to enter its first phase of operations only in 2023 This could be delayed further; according to the

Ho Chi Minh City government, plans to expand Tan Son Nhat are 'impossible' due to issues with siteclearances, which involves relocation of residences and a significant compensation for land acquisition

Table: Air Freight (Vietnam 2012-2019)

2012 2013 2014 2015f 2016f 2017f 2018f 2019f

Air Freight Tonnes (000) 178.70 183.70 202.00 208.87 217.01 224.61 232.81 241.07 Air freight tonnes % y-o-y -10.78 2.80 9.96 3.40 3.90 3.50 3.65 3.55 Air freight tonnes-km (mn ton km) 480.90 469.80 530.40 544.99 561.34 577.05 594.08 611.90 Air freight tonnes-km % y-o-y 12.70 -2.31 12.90 2.75 3.00 2.80 2.95 3.00

e/f = BMI estimate/forecast Source: General Statistics Office of Vietnam, BMI

Company Profile

Vietnam Airlines Cargo

SWOT Analysis

Strengths ■ Vietnam Airlines Cargo is the main air cargo provider in Vietnam

■ The recent green light given to the purchase of Jetstar Pacific will only strengthen thecompany's domestic position

Weaknesses ■ Unlike its peers, Vietnam Airlines Cargo does not have a freighter fleet and is reliant

on using the bellyholds of its parent company's planes

Opportunities ■ The air carrier is well placed to benefit from Vietnam's growing role in the trade

sector The country has flooded money into the development of the country's portsector, but BMI believes aviation also stands to benefit

■ Vietnam Airlines is to reportedly run flights between the UK and Vietnam, which couldresult in cargo being transported in the bellyholds of aircrafts in the future

■ At the end of 2012, Vietnam Airlines announced that it was to introduce a new airroute linking the Vietnamese capital with Jakarta, in a bid to 'boost tourism andeconomic links between Vietnam and Indonesia', according to Bloomberg BusinessWeek Jakarta is now connected to six ASEAN countries in total

■ Vietnam Airlines has increased the frequency of its flights to Gatwick Airport, London,

it was announced in April 2013, potentially opening the door for further link upsbetween the two countries

■ In order to ease congestion at Ho Chi Minh City's Tan Son Nhat International Airport,Vietnam, officials at a meeting in Hanoi in July 2013 called for a new airport to be built

in the country Thanh Nien News reported the chairman of the board, AirportsCorporation of Vietnam, Nguyen Nguyen Hung as stating: 'We should have startedconstruction by now, in order to have the first phase completed by 2020.'

■ There is further room for co-operation between Vietnam and the US in the comingyears, it was declared at the US-Viet Nam Aviation Co-operation Working Group held

in Ho Chi Minh City in September 2013