Sunday, 23 November 2014
Last updated 1 day ago
Jul 23 2010 | 10:55am ET
By Louie Nguyen, Soledad Investment Management -- Savvy global investors are becoming increasingly familiar with the investment case for Vietnam. At the risk of over simplifying, the elevator pitch is that the population is young with a high literacy rate, the can-do energy is abundant and labor cost is economical. In short, this is China ten years ago. This enormous capacity for growth, however, is threatened by poor infrastructure and inefficiencies.
This commentary is the human face to the Vietnam investment thesis. What follows is a series of observations of this analyst's most recent trip to Vietnam. It encompasses meetings with management teams, sell-side analysts, real estate experts and private equity players. The report is additionally informed by conversations with such people as drivers, chefs, and television producers. The observations also include sights seen from taxis and on foot, from large avenues of the financial district to small alleyways of District Three. While not rigorous from an economist's standpoint, it is instrumental to Soledad's value approach by providing anecdotes to complement hard data points.
Macro Data's Blind Spot
While other parts of the world currently appear to be at a standstill, this does not seem to be the case for Vietnam. From the buzzing of motorcycles around Ho Chi Minh City's many roundabouts to the excited conversations at cafes, the atmosphere can be described as positive, full of possibility, and infectious. This is perhaps, in part, a function of half the population being under the age of 35. Although it is difficult for macro data to pick up this positive attitude, some would argue it's essential for success.
The men and women of the investment field are impressive. Their command of English is high-arguably better than what this analyst observed during his years in Tokyo-and they also have a deep understanding of the companies they cover. It seems Vietnam has benefited from the global financial meltdown via a brain injection. Many out-of-work investment professionals in hubs from New York to London, particularly those who can speak some Vietnamese, suddenly find themselves sought after. This has resulted in the introduction of the latest international best practices.
The quality of the local professional staff is maybe a direct result of education being highly valued. This analyst wandered into a book store looking for Vietnamese language children's books. In the middle of a conversation with the sales clerk, a mother standing nearby interrupted to offer suggestions. She shared that her four-year old loves the bilingual English/Vietnamese children's books, particularly the ones that come with pronunciation guides. "You have to start them early," she said.
Bling and Blackouts
Premium smartphones are ubiquitous. The storefront of powerhouses such as Marc Jacobs, Louis Vuitton, and Chloe gleam along main streets with Vietnamese brand boutiques situated close by. One particular street is dedicated to Japanese restaurants, catering to expats. While the roads are still dominated by motorcycles, a number of premium vehicles can be seen now and then. These are not your father's 1999 Mercedes C-class; but rather, the latest model Bentley, Porsche, Rolls Royce and the like. Bear in mind that such imports in Vietnam cost a multiple of what they would in the U.S.
The modernization of life in Vietnam has also made its way to plain everyday living, far from the eyes of potential investors. In District Three, a middle-class residential area, a grocery store sits on the ground floor of a 10-storied residential high-rise. The store, about the size of a typical U.S. neighborhood pharmacy, had everything a person may need on a daily basis in clean and organized aisles. Clothing, pots and pans, electronics, dairy products, vegetables, and even ready-to-eat meals under hot lamps, can be purchased for about $1. There is a butcher section with fresh meat and fish, devoid of the smell typically associated with lack of proper sanitation. At the front of the store next to three ATM machines, five cashiers scanned barcodes for customers. In perhaps a departure from old norms, there was no haggling and no bargaining.
Despite the obvious progress, it doesn't take much time in Vietnam to recognize that infrastructure is still a problem. While at a meeting in one of the most modern buildings in HCMC, an enormous bang startled everyone when the electricity went out. Moments later, the generator kicked in, the lights flickered on and everyone continued about their business. "Happens about three times a day," a managing director shrugged.
While many of the mains roads in HCMC are new and well-built, a great number of the roads leading into the city are not. A trip to Vung Tau - an 80-km trip (approx. 48 miles) from HCMC - took close to three hours one-way. The two-lane road is highly vulnerable to myriad traffic disturbances, from accidents to inoperable vehicles. The roads are still very much third-world quality, yet the 18-wheelers using them are hauling heavy first-world appliances.
Compared to several years ago, however, the improvement in road quality has been dramatic. One positive aspect of this improvement is that it is much easier for workers to come in from the rural areas. On the flip side, the already overcrowded HCMC hospitals are pushed to their limit due to the easier access. To further aggravate the situation are Cambodian medical tourists taking advantage of the superior health care in Vietnam.
On the previously mentioned trip to Vung Tau, we passed numerous toll stations, each with several booths. At the first booth, the attendant collected cash and issued a ticket. Several yards later, at a second booth, an attendant collected the ticket. This serves, as we are told, to make sure the first attendant does not pocket the cash. Multiply this delay by a few thousand cars per day and the cumulative delay can be significant. Extend this across the spectrum of society and the economic deadweight of inefficiencies becomes consequential.
Obstacles to Growth
Many Vietnamese businesses are vulnerable to the accusations of being involved in too many industries, not too dissimilar to the Japanese keiretsu or the Korean chaebols. However, successful Vietnamese companies with focus do exist. When asked why they do not diversify, management at VinaMilk and Ho Chi Minh Infrastructure, companies with a singular dominant line of business, both expressed dismay as to why they should.
At the other extreme is Masan, a holding company with involvement in many businesses combining world-class talent with a large war chest. TPG and the IFC are among its investors. Masan's first tranche of investment companies has done well, though its latest acquisition of a mine has raised questions of execution. Full disclosure: Soledad is an investor in all three above mentioned companies.
Factors currently hobbling the business prospects of many Vietnamese firms include Chinese competition and the traditional family business structure. Vietnamese manufacturers struggle to make a profit with cheap Chinese imports so readily available. A local businessman lamented that he can buy a Chinese-made radio that includes two batteries for $1 when two batteries alone cost $0.40. Also, Chinese motorcycles can be bought for $200 when a low-end Vietnamese motorcycle would normally run $400. As for the second issue, a number of family-owned businesses have reached the limit of their growth based on family talent. To grow they must bring in trustworthy, well-trained professional managers. As we are told by a number of local business people, good managers are very hard to find. Oftentimes managers will leave to launch a rival business once they have gathered enough know how and industry contacts.
The number of high-rise construction projects, particularly in the financial district, is astounding. Each center promises a more upscale shopping experience than its neighboring development. The Vincom Center expects to be the first green building, featuring the same energy efficient glass used by state of the art buildings worldwide. At 68 stories, the Bitexco Financial Tower will be the tallest building in the city with its steel and glass design. Of note is its lotus petal form, linking the skyscraper to its Vietnamese heritage.
In nearby districts, the landscape is covered with residential high-rises at various stages of completion. The city is plastered with advertisements to buy. While the local investment community seems generally bullish on the investment case for residential homes, it is difficult to understand the source of demand. The often-stated case is that the growing population of young, affluent professionals will move out of their family home in pursuit of their own residence. This may be an expensive case of the fallacy of misapplication of cultural norms. Historically Americans moved out at the earliest opportunity and this may be the case for Vietnam in the long-term. However, this analyst does not see cultural norms changing fast enough to justify the short-term increase in supply. The investment opportunity will be more compelling when the real estate correction happens.
On a company visit, this analyst stood befuddled before a bank of elevator doors. Elevators opened, closed and ascended, seemingly of their own accord. Inside the elevators there was not a single floor button to push, as would be expected. After missing several elevators the "light bulb" came on. Visitors had to select their desired floor from a panel of buttons located in front of the elevators. An LCD monitor would indicate which elevator to ride, based on an algorithm that determined the most efficient elevator to use, given the current volume and direction of traffic. In many ways, this is the modern Vietnam. There is little doubt of its ascent, short of some disastrous policy mistakes. The quality of the people and adoption of technology have fundamentally altered the trajectory of growth relative to the traditional development model.
We ought not to miss the next elevator.
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 firstname.lastname@example.org
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