Vietnam Taps Foreign Military Aid in Dispute with China

HO CHI MINH CITY (TheStreet) -- Vietnam has had it with China. The Southeast Asian country has felt pushed around by its massive northern neighbor for centuries. Vietnam fought it off in 1979. Then in May China parked an oil rig in disputed waters off the Vietnamese coast.

China has the world's third most powerful military with 2.285 million active personnel, while Vietnam places 23 with just 412,000 people ready for war on a list by the NGO Global Fire Power. It will need help resisting China in case simmering tension between the two Communist governments ever boils over.

That would mean an opportunity for defense companies, and their stocks, in Japan and the United States.

Vietnam is now fine-tuning its already aggressive agnostic diplomacy (it eagerly makes friends with just about anyone) to look for military aid and aid shows early signs of coming through.

No one expects Vietnam to fight a war with China despite rumors in May. Both sides have too much at stake economically and pursuit of money dominates discussion in the Vietnamese financial center Ho Chi Minh City. But multinational defense contractors will win if Hanoi buys weapons systems just as a deterrent.

"They need the help if they want to build up militarily," says Ralf Matthaes, a 20-year Vietnam expatriate and owner of the business consultancy In-Focus. "I don't see there being a land war or anything like that, but you're going to have squabbles in the sea."

China's nemesis Japan activated a 2011 defense cooperation agreement with Vietnam in July to offer six used vessels and maritime security equipment worth $4.87 million. Japan has battled China diplomatically over disputed tracts of the East China Sea since 2012 when it nationalized a group of islets claimed by Beijing.

"Japan is definitely beefing up the Philippines and Vietnam precisely because all three have maritime disputes with China," says Carl Thayer, Vietnam expert and emeritus professor with the University of New South Wales in Australia. "Japan is very likely to offer increased assistance in the future."

If that happens, that means a boon to the business of Japanese defense contractors Mitsubishi Heavy Industries (MHVYF) and Kawasaki Heavy Industries (KWHIY) as their government relaxes a historic ban on arms sales abroad.

The United States, China's chief global military rival, is considering the Vietnamese president's request in July for a lifting of a ban on selling lethal weapons. Washington has kept the ban since the end of the Vietnam war in 1975 but indicated this year it had moved into a new phase of supporting Vietnam over China.

A U.S. official indicated last month that Vietnam had shown enough human rights progress to be considered for the ban's end and Secretary of State John Kerry pledged more vessels for Vietnam as he visited the country in December.

Cancellation of the ban could open a new overseas market for top U.S. defense contractors Boeing (BA) , Lockheed Martin (LMT) and Raytheon (RTN) .

Russia is selling Vietnam six diesel-electric submarines as part of a $2 billion package arranged in 2009. Some subs are here now and the last one is due by 2016.

China won't say much about Vietnam's possible new sources of weaponry but will worry privately as a hostile Asian neighbor flexes muscle with the help of other countries with a history of tough relations.

"China undoubtedly won't be thrilled by Japan's naval vessel assistance to Vietnam," says Murray Hiebert, a senior fellow at the U.S. think tank Center for Strategic and International Studies.

"Beijing increasingly feels it is being encircled by the Obama Administration's rebalance to Asia, which includes improving ties with most of the Southeast Asian countries on China's southern flank," he says. "Japan's effort to improve military ties with Vietnam will probably prompt China to fear that Japan is now joining an anti-China front."

At the time of publication, the author held no positions in any of the stocks mentioned, although positions may change at any time.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

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"We rate LOCKHEED MARTIN CORP (LMT) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its solid stock price performance, good cash flow from operations, growth in earnings per share, increase in net income and notable return on equity. We feel these strengths outweigh the fact that the company has had generally high debt management risk by most measures that we evaluated."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

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  • Net operating cash flow has significantly increased by 56.82% to $977.00 million when compared to the same quarter last year. In addition, LOCKHEED MARTIN CORP has also vastly surpassed the industry average cash flow growth rate of -19.74%.
  • LOCKHEED MARTIN CORP's earnings per share improvement from the most recent quarter was slightly positive. The company has demonstrated a pattern of positive earnings per share growth over the past two years. We feel that this trend should continue. During the past fiscal year, LOCKHEED MARTIN CORP increased its bottom line by earning $9.04 versus $8.34 in the prior year. This year, the market expects an improvement in earnings ($11.25 versus $9.04).
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