Background: Pneumococcal pneumonia is a leading cause of childhood mortality. Pneumococcal conjugate vaccines (PCVs) have been shown to reduce hypoxic pneumonia in children. However, there are no studies from Asia examining the effectiveness of PCVs on hypoxic pneumonia. We describe a novel approach to determine the effectiveness of the 13-valent PCV (PCV13) against hypoxia in children admitted with pneumonia in the Lao People's Democratic Republic. Methods: A prospective hospital-based, test-negative observational study of children aged up to 59 months admitted with pneumonia to a single tertiary hospital in Vientiane was undertaken over 54 months. Pneumonia was defined using the 2013 WHO definition. Hypoxia was defined as oxygen saturation <90% in room air or requiring oxygen supplementation during hospitalisation. Test-negative cases and controls were children with hypoxic and non-hypoxic pneumonia, respectively. PCV13 status was determined by written record. Vaccine effectiveness was calculated using logistic regression. Propensity score and multiple imputation analyses were used to handle confounding and missing data. Findings: There were 826 children admitted with pneumonia, 285 had hypoxic pneumonia and 377 were PCV13-vaccinated. The unadjusted, propensity-score adjusted and multiple-imputation adjusted estimates of vaccine effectiveness against hypoxic pneumonia were 23% (95% confidence interval: -9, 46%; p=0•14); 37% (6, 57%; p=0•02) and 35% (7, 55%; p=0•02) respectively. Interpretation: PCV13 is effective against hypoxic pneumonia in Asia, and should be prioritised for inclusion in national immunisation programs. This single hospital-based, test-negative approach can be used to assess vaccine effectiveness in other similar settings. Funding: Funded by the Bill & Melinda Gates Foundation.