This year has been an exciting year for Vietnam investors. The stock market performance continued to be strong, the startup space blossomed, and the FTA talks remained promising. In the midst of such lucrative prospects, we snatched an interview with Soledad Investment Management’s Louie Nguyen, CFA to gain his perspective on Vietnamese assets moving forward. Louie has been managing Vietnam Strategy portfolios for about a decade as Chief Investment Officer at Soledad. We discussed general economic trends, industries with good prospects, and ripple effects from Brexit.
How is the general economic engine?
Weather conditions may have affected agricultural output in the first half, but consumption and investment remained strong. The service sector should sail smoothly in the second half, as enterprises accelerate consumption and domestic demand remains robust. Consumer confidence reached 109, which is the highest level since Q2’15. Capital flows are also giving excellent signs. Registered FDI grew 105.4% YoY to USD 11.3 billion. If the TPP and EU FTA are implemented successfully, that momentum can continue. But one thing to watch is definitely government stimulus, as increasing credit growth will no longer yield the same results.
In which industries do you see the most opportunity?
The consumer sector will do well. Urban volume has increased relative to mid-year 2015 in dairy, beverages, and packaged foods. Unsurprisingly, minimarket and convenience stores grew 51%. A recent study by Nielsen also mentioned that 69% of Vietnamese consumers believe local companies are most attuned to customers’ needs, relative to 60% in South East Asia (SEA). Therefore, we may see a strong surge in local brands. One compelling play on that trend is VinaMilk (VNM), which controls over 50% of Vietnam’s dairy market. It is trading at 19.3x FY16 earnings relative to regional peers valued at 24x, and grew EPS 25% relative to Q1’15.
The power sector could also be interesting. I see power demand growth of 12% to surpass supply growth of 10% in the coming years. Please note that Vietnam’s electricity consumption per capita is still only a fifth of SEA’s average. The country’s new power plan is expected to triple capacity by 2030. To ride this trend, consider Nhon Trach 2 (NT2), which is the newest thermal plant in South Vietnam. A 10-year contract and the industry’s highest efficiency ratio make this an ideal play.
And the general stance on the VNI?
The first half gains in the index were in line with long-term trends. However, recent gains have placed valuations a little high and we may see a convergence to fair-value in the second half. One thing to note is that ASEAN markets as a whole have been edging higher, and the trend may sweep up the VNI. A bullish factor to keep in mind is that the VNI still trades at a PE of 13.7x. By comparison, Indonesia and the Philippines trade at 26.7x and 23xPE despite having lower ROE and ROA. But if the VNI does hit 700 without a surge in fundamentals, we may be touching overvaluation.