Value Over Glamour In Vietnam

Apr 21 2010 | 9:57am ET

By Louie Nguyen, Soledad Investment Management -- In spite of its supporting role in the grand scheme of the global economic theatre, Vietnam closed 2009 in a surprisingly good position for growth in 2010. We believe the government initiated prudent fiscal and monetary measures to allow for a stable new year. Furthermore, as Vietnam prepares itself for the 11th National Congress in early 2011, the government is motivated to maintain a benign business environment in 2010. 

Certainly, there still remain difficulties in navigating the next phase of Vietnam's economic recovery, as its vulnerability to macro conditions in such "leading role" countries as the U.S. and China is always constant. Despite its supporting role, the country delivered tremendous stock market performance in 2009 and is still, we think, one of the best risk-adjusted, high-growth opportunities in the world. We are also seeing intriguing indicators of a value bias in the Vietnamese stock market.

The Ho Chi Minh Index ended the year up a spectacular 56%, even after a sizable pullback in the 4th quarter of as much as 26%.  The stock market soared on the back of strong corporate profit results, which is due in equal parts to robust export activities fueled by the Chinese recovery and a generous domestic stimulus program.  Fourth quarter GDP grew 6.9%, contributing to a full-year 2009 GDP growth of 5.3%.  By comparison, Vietnam's 10-year average GDP growth trend is 7.5%. 

Vietnam's industrial production in 2009 rose 7.6% from a year earlier, which is 16.5% lower than the annual target. Vietnam's exports to the U.S. in the first 11 months of 2009 were down 5.8% to $10.21 billion. Among the top export items, garments were valued at $4.51 billion, down 3.4%, and crude oil at $412 million, down 56.7%. Curiously, exports of personal computers and electronics rose 41.9% to $397 million. On a sector basis, the services sector saw the best growth in 2009 at 6.6%, while the industry and construction sector experienced 5.5% growth and the agriculture, forestry and fishery sector 1.8% growth.

Such growth usually comes with inflationary pressures. While full year inflation reached 6.5%, generally a cause for some consternation, it should be noted that it is the lowest rate for the last six years. The December trade deficit also improved, declining to US$ 1.3 billion from US$ 2.08 billion in November for an annual decline of 32%.
 
Fourth Quarter 2009 

During the fourth quarter, Vietnam's government announced that it has shifted its economic focus toward price stability, with particular focus on tightening its monetary policy and improving the balance of payments.  Steps taken included:

  • A devaluation of roughly 5.4% in the VND/USD exchange rate,  combined with a reduction in the official forex trading band over the exchange rate from ±5% to ±3;
  • A 1% base rate hike from 7% to 8% effective on 1 December 2009;
  • Mandatory sell of USD by State-Owned Enterprises and other exporters to the Central Bank.

As credit growth quickened to 34.5% through November, exceeding the full-year target of 30%, the central bank became the first in Asia to increase borrowing costs. This seems to be a necessary first step to control inflationary pressure. Also, the government announced that it is ending its first short-term stimulus program (approximately VND400 trillion, $21.64 billion), a key feature of which is a 4% subsidy of business loans to promote economic expansion. We believe a meaningful amount of the stimulus program has found its way into the capital market. We think it is highly likely that the government's termination of the stimulus program contributed to the 4Q pullback in the stock market. 

The dong, the Vietnamese currency (VND), is headed for a second annual decline, down 5.5% in 2009. While nominally a fixed currency, Vietnam's management of the dong is complicated by China's policy of a weak RMB. Since both economies are primarily export driven, Vietnam is forced to react to China's currency stance. Also, in an attempt to relieve pressure on the currency, the Prime Minister announced during the 4Q the temporary closure of the numerous domestic gold trading floors by the end of March 2010. These floors are in essence unregulated future exchanges, allowing local investors to speculate and thus put pressure on the dong. Ironically, this may have had the effect of benefiting the stock market by diverting capital flows into equities.

(All data from Bloomberg as of 12/31/2009)

As can be seen above, both the Ho Chi Minh and Ha Noi indices did exceptionally well in 2009. Strong corporate earnings, recovering macro economic factors and sustained liquidity flow into the stock markets contributed to the stellar performance of both markets. Stocks of companies in the basic materials and technology sectors did especially well. 

The Vietnam market experienced a meaningful correction in the 4Q. It was down as much as 26%, but rallied and eventually ending down 16%.  We believe this was due in large part to the ending of the subsidized business loans. Though the overwhelming number of the loans was used for productive purposes, a consequential though difficult to determine amount entered the stock markets via speculative bets.  

The Outlook for 2010

We believe the government has taken the necessary steps to support price stability which in turn should allow for a favorable business environment in 2010. Though the stock market was strong in 2009, a forward PE of 13x seems reasonable, if not cheap, for one of the fastest growing economies in the world.  Specific companies within banks and utilities sectors offer compelling valuations.

Earnings quality in 2010 is a concern as some of the key sources of earnings growth in 2009 for many listed firms have been cost savings from subsidized interest rate via the stimulus program and strong performance of marketable securities.  It is highly unlikely that these will be contributing factors in 2010. 

Even after the controlled devaluation of the currency in the 4Q, we anticipate continual currency weakening through 2010. In an environment where the VND is losing value, it seems reasonable to think that companies with costs denominated in VND and revenues in foreign currencies will do well. Likewise, companies with costs denominated in foreign currencies will have a tough time.  Given the base rate hike from 7% to 8%, companies with high debt could face strong head wind.

Finally, our research suggests a value bias in the Vietnamese market. We will provide more details of this in an upcoming study, but in short, it seems stocks that started 2009 with low PEs performed much better than the stocks that started with high PEs.  This could be a classic Value versus Glamour opportunity, intriguingly hinting of an advantage for patience value investors.

Louie Nguyen, CFA, actively invests in Vietnamese companies. He is fluent in Vietnamese and is the CIO of San Diego-based Soledad Investment Management, which specializes in non-US investments. For more information, please contact cs@seacrestim.com


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