Vietnam may be the new Asian tiger

David Stevenson, 25/03/2022

Listed Vietnam Opportunities Fund (VOF) has enjoyed a continued rise in its net asset value but with a discount of over 20 percent, unfortunately the share price has not been following the same pattern. However, with a heady mix of both public and unquoted companies in its portfolio, the fund may well be set to capitalize on the country’s growing economic success.

Andy Ho, managing director and chief investment officer of VinaCapital (lead adviser on the trust) explains the fund’s holdings of commercial banks.

“We feel very strongly about the growth potential of commercial banks,” he says, in reference to the fund’s increased investment in the country’s Asia Commercial Bank. His firm was able to negotiate the larger investment due a relationship with an existing major shareholder of the bank and the reasons for doing so are compelling.

The bank’s earnings are growing between 25-35 percent per year and it is expected to record pre-tax profits of around $650 million this year. It also trades on an attractive 1.6-times price-to-book, lower than the sector average of 2-times according to figures from Bloomberg.

As we’ve seen with European fund managers that have exposure to banks, one thing that has to be considered is exposure to Russia. Fortunately, this is far less of a problem to Vietnam-based institutions.

“The potential impact of the conflict on Vietnam is minimal, as our trade activities are predominantly with China and the US,” says Mr Ho.

However, there may be less direct issues arising from the conflict on Vietnam, one of which being inflated prices of commodities such as oil. Vietnam’s inflation is running at an envious 1.8 percent currently and even with a spike in gasoline prices, this is unlikely to impact the country a great deal.

Mr Ho explains that Vietnam is still largely a rural society and not everyone has a car or a motorbike. Therefore, even with the 40 percent hike in petrol prices year-to-date this translates to less than a 1 percent increase in the country’s aforementioned low inflationary environment.

Growing sophistication of exports market

With some of the tech giants such as Intel setting up shop in the country, Vietnam’s export-based economy is growing more sophisticated quickly.

What are dubbed ‘partially completed goods’ arrive in Vietnam where their construction is completed and sent off to the end market, be it China or the US. This suggests that Vietnam has stepped up in the supply chain logistics hierarchy and while the cost of labour is cheap in the country (roughly one-third of China), it is clearly skilled.

Another big area for exports out of Vietnam is commodities such as food as the country exports more than it imports. This ranges from rice to sea food but some dub the country ‘the breadbasket of Asia’ and with an expected trade surplus it’s not difficult to see why.

Vietnam’s export market ranges from high end tech by firms such as Intel and Adobe (both have a presence there) to food as well as clothing and shoes.  Due to the demand of the country’s exports many companies have had to import quite a large number of industrial components which on a macro level might put the trade account in deficit for a short time but these investments are needed to keep the country’s flow of goods on track.

Tourism on track to pre-Covid levels

VOF holds Airports Corporations of Vietnam among its top investments and while it might appear unlikely, the country has one of the busiest airline routes in the world; Hanoi to Ho Chi Minh City which is comparable to London to Paris, New York to Boston etc.

The firm’s investment in this sector appears to be paying off as the pent-up demand for domestic travel was unleashed in the first two months of the year which saw the once government owned Airports Corporations of Vietnam enjoy a 10 percent share price surge as Vietnamese people starting rushing out of the cities to get to the beach.

However, there is some concern that as China continues with its ‘zero Covid policy’ (which Vietnam employed for some time) the country won’t enjoy the levels of international tourism that it saw pre-Covid. This is further compounded by the slump in the value of the euro which means for many Europeans it makes more sense to travel within its single currency area.

Moving forward

Having spoken to the VinaCapital team yesterday morning, ahead of the release of its interim results today (25 March), they said that those figures are backward looking and the most important thing is to look forward.

Some facts are worth considering though, Vietnam was the best performing stock market in the region last year for the second year running.

As for the discount, which today’s results illustrate is moving in (stands at around 18 percent according to the document), the company is acting to narrow it further. It will start enacting more share buy-backs for instance.

One thing that Mr Ho points out that separates VOF from other Vietnam trusts on the market, is that it pays a dividend. He says that Asian investors like to see companies pay a dividend as it shows it’s making money, ‘How many of the other [Vietnam] trusts are doing that?’.

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