Manager View: Why Investing In Vietnam Makes Sense

Mar 2 2012 | 6:22am ET

By Louie Nguyen, Soledad Investment Management -- Since our article “Good Time to Have Dry Powder in Vietnam,” there have been some noteworthy investments in that country.

Richard Chandler’s Orchid Fund invested $50 million in a large Vietnamese conglomerate.  Mount Kellett Capital Management LP, a U.S. private equity group started by a couple of former Goldman traders, spent $100 million for a stake in a Vietnamese firm with a large tungsten mine. KKR invested $159 million in the largest private equity transaction to date in the country.  Macquarie, the Australian investment bank, entered the Vietnam market in a deal with one of Vietnam’s well-respected brokerage firms. 

So what are these investment firms seeing in Vietnam, even in light of the ominous economic concerns currently hanging over the country?  Concerns of high inflations and double-digit interest rates dominated both public and private sector dialogs.  Anecdotally, this correspondent sensed the proverbial blood is starting to run in the streets  after returning from an investment conference in Ho Chi Minh.  The economic challenges facing Vietnam is apparent to anyone with a cursory knowledge of the country.  The alarm bells are varied and numerous – so why did this collection of smart money decided to pull the trigger?

From a macro perspective, they could be investing on the assumption of a global recovery, as it is reasonable to think Vietnam will benefit when the U.S. and global economy recovers. They could also be investing based on the assumption that global growth will be in the emerging markets and Vietnam’s current population structure can pay significant dividends in the future. 

Vietnam’s population has just entered a 30-year period with promising economic growth. This particularly interesting demographic phenomenon in Vietnam is known as the “golden population” structure, which is defined as when there are two workers per one dependent.  While there are other important contributing factors, generally speaking, there tends to be meaningful economic growth when a country goes through such a phase.  The primary reason for this is because the relatively low number of dependents represents less drag on the economic growth generated by the workers.  This was seen not too long ago in Singapore, China and Korea, to name a few of the Asian countries. It is estimated that Vietnam’s golden population structure will run from 2010 to 2040. 

On the investment front, there are indications that the market is hitting bottom.  While there has been talk of distressed businesses for sale, there has been little evidence of this in the market, until now.  It has been our position for some time now that there is massive over-capacity in the local real estate market and if one waits, some fantastic opportunities will appear.  It seems we are now seeing fractures appearing in the real estate space and the fractures are spreading fast and deep.  Large teams of real estate investors and operators from Singapore and Hong Kong are often seen on the ground prowling for deals.  The recently completed Bitexco Tower, the tallest building in the country, is rumored to be up for sale due to lack of tenants.  In addition, two mid-level residential projects in Ho Chi Minh with a combined 500 units recently slashed prices 25%-30%.  While this may sound prosaic, we view it as the canary.  In a financial system where banks have great flexibility to report non-performing loans and saving face is tantamount, cutting real estate price is not an every day event.

Comparative Valuation vs. SE Asia Peers

Country

Consensus     FY12 PE

PB

Dividend    Yield

FY 12F GDP Growth

FY12 PEG

FY12F CPI

Malaysia

14.8x

2.3x

5.4%

4.9%

3.0

2.7%

India

13.5x

2.5x

5.3%

7.5%

1.8

7.1%

Philippine

13.1x

2.4x

3.5%

4.7%

2.8

4.5%

Indonesia

12.8x

2.8x

2.9%

6.2%

2.1

5.4%

Singapore

12.7x

1.3x

1.8%

3.6%

3.5

3.0%

Taiwan

12.5x

1.6x

3.0%

4.1%

3.0

1.3%

Thailand

12.3x

1.9x

3.7%

4.4%

2.8

3.5%

China

10.6x

1.8x

3.9%

8.5%

1.2

3.5%

Hong Kong

10.2x

1.4x

2.6%

4.0%

2.6

4.5%

Korea

9.0x

1.2x

3.9%

3.8%

2.4

3.2%

Vietnam

7.5x

1.0x

5.5%

5.5%

1.4

11.0%

Sources: Bloomberg, Consensus Economics

Vietnam stock market valuations are cheap on both an absolute and historical basis.  It also compares well versus regional peers.  In additional to real estate investments, we also see several near term opportunities as certain businesses will find it difficult to raise new capital in 2012 due to changes in the Vietnamese credit market.  We also believe the nascent Vietnamese convertible bond market could present some compelling investments.  Lastly, in the last six months there has been a series of mergers and acquisition deals announced, one of which was unsolicited.  That is unheard of until now. 

To invest in Vietnam, investors have several options.  Historically, most investors have invested in Vietnam via exchange-traded funds (ETFs) and closed-end funds.  As with everything, there are pros and cons to these vehicles.  The large discount to the net asset value (NAV) of the closed-end funds make them seem attractive, though it is unclear when the discount will go away.  In addition, the NAVs may need to be adjusted given the valuation policies of the private equity and real estate investments.  That said, even after a generous haircut to NAV, some of these funds may still offer compelling returns.

Investors now have the ability to sidestep some of the structural concerns of ETFs and closed-end funds.  A number of SEC-registered US investment firms provide separately managed account services focused on the Vietnamese public equity market.  These firms manage client assets in Vietnam as well as walk investors through the on-ground setup process.  Separately managed accounts allow investors a high degree of liquidity and transparency.  With the arrival of foreign brokerage firms like Macquarie and Kim Eng, combined with some recent meaningful regulatory changes, standards of client servicing and custodial support of separately managed accounts are beginning to rise towards international level.  Execution and settlement are efficient and smooth while research and commentaries are becoming progressively better.  In addition, foreign and certain local custodians are offering efficient back-office solutions.

We believe the conditions are there to warrant more than a cursory look at Vietnam. Whether on the back of a global recovery, the move of smart money, advantageous demographic profile, and/or cheap valuations, its time to line up targets in the cross-hair.

Louie Nguyen, CFA is the sub-advisor of the Christopher Weil & Company Global Dividend Fund (CWGDX) and CIO of San Diego-based Soledad Investment Management. Soledad invests qualified clients’ assets in markets around the world, including Vietnam. 


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