Vietnam in the Spotlight

October 1, 2015.

Vietnam 3rd Quarter 2015 Commentary

Market Commentary

The Vietnam economy is as healthy as we have seen in the last five years. Vietnam has become hot again for foreign investors. The Vietnam Securities Depository (VSD) granted 50 trading licenses to foreign institutions in October 2015, the highest level since January 2010 when the survey began. In the first 10 months the VSD issued 253 licenses to foreign institutions versus 263 for FY2014. We are ready to take advantage of buying opportunities as they arise.

The Vietnamese government is slated to divest all of its shares in ten businesses in the next two years. Some of these companies include giants like Vinamilk, FPT Telecom, and Bao Minh Insurance. These holdings are valued at approximately US$3 billion, which the government plans to utilize to boost investment in the healthcare industry. Building quality new hospitals has become an urgent need as many Vietnamese citizens prefer to receive treatment in Singapore instead of Vietnam. The divestiture plans coincide with government willingness to open its markets in accordance with the TPP.

While we are optimistic given the encouraging macro news and introduction of market friendly regulations, we continue to remain cautious as we increase our holdings of companies with attractive value. Foreign ownership limit (FOL) expanded to 100% from the existing 49% effective September 1st, 2015. Until now, the max that foreign investors could hold of a Vietnamese publicly traded company was 49% (30% for banks). Exceptions to the 100% FOL include banks, telecom, airlines, restricted sectors and defense. Each company has the option to expand its FOL through shareholder approval. Vietnam Dairy Products JSC, otherwise known as Vinamilk, VNM, issued a statement announcing that the company would increase foreign ownership limits to the maximum allowed by government regulations. This will allow more liquidity in Vietnam’s largest company as calculated by market value and is seen by many as great news for Vietnamese markets.

On July 7th, Vietnam Secretary General Nguyen Phu Trong visited President Obama in a historic visit that seems to hint of a new greater and more fruitful relationship between the US and Vietnam. About a week prior to the historic visit, on June 25, Vietnamese government announced a series of deregulations designed to make Vietnam a more attractive investment environment. The pair discussed trade including the Trans-Pacific Partnership (TPP), climate change and cooperation on defense issues. Human rights concerns were also a topic for discussion as an element for an improved relationship.

Asian stocks dropped for a fifth straight month, the longest losing run since 2008. The MSCI Asia Pacific Index experienced its worst quarter in four years dropping 14% for the reporting period. China’s stock market was volatile throughout the reporting period, as the Shanghai Composite Index fell from its highs in mid-June to end down 19.3%. This was its biggest drop in seven years. China, whose recent economic growth has stalled, is affecting other emerging market economies dependent on China. Vietnam, however, was Asia’s best performing market. This can be seen in the below chart. The MSCI Southeast Asia Index which was down 23% for the six months ending September 30, 2015 as Vietnam’s Ho Chi Minh exchange stayed positive up .5%.

The Vietnamese stock market Price to Earnings ratio is trading at approximately 12.5x which to compare favorably to other Southeast Asian markets including the Philippines and Indonesia at 18.5x and 14.4x, respectively.

China, the world’s second-biggest economy, devalued its currency on August 11th 2015. In addition, China’s central bank attempted to curtail a drastic decline in stocks with an interest rate cut aimed at stimulating an already battered financial market. In response to the Chinese move, the State Bank of Vietnam (SBV) devalued its currency. After devaluing the Vietnamese Dong (VND) in August, the State Bank of Vietnam (SBV) repeated statements that a further devaluation would not be necessary. In an attempt to control exchange rates, a plan to cut interest rates was scrapped during the reporting period. While this placed a burden on businesses it was considered the proper strategy to eliminate a run to US dollar (USD) and keep the VND attractive to investors.

Vietnam GDP growth over the reporting period increased 6.5% over the same period last year, setting a record high figure. Agriculture also expanded 2.1% as Services also rose 8.4% which was above the previous years’ figure of 6%. Vietnam’s CPI rose .4%, while inflation levels hit a 10-year low during the reporting period. Vietnam’s economy continues to see relative strength in its growth outlook as the country improves economic agreements with many developed economies. While China was Vietnam’s largest trade partner, the U.S. has increased its growing importance with the Southeast Asian region. Vietnam exported to the US $8.2 billion worth of goods in the 1st quarter compared to $4.9 billion to China. Consumer demand increased over the reporting period as a result of the improving economy. This leads to lower unemployment and improved incomes creating opportunities for consumer lending. Also, the average value of consumer loans has increased from a few million dongs to several hundreds of million dongs in a very short period of time. Transparency in credit institutions has also improved perception of lending activities, but more still needs to be done in this area. The Vietnam government is targeting growth of 6.2% for 2015. Industrial production improved as electricity, gas and water components showed the strongest growth once again.

Even with strong GDP growth, Vietnam’s manufacturing sector contracted slightly for the first time in over two years. Declines in output and new orders were the chief components to this decline. However, firms continued to hire more workers as employment increased for the time period. Lower fuel prices helped input prices to decline, whereas the overall effects of weaker demand throughout the region was detrimental to local manufacturers.

This reporting period witnessed the finalization on October 5, 2015 of the Trans-Pacific Partnership (TPP) negotiations which brings opportunity for Vietnam’s economy. Industry experts are excited about the benefits of the largest trade pact in a generation. The TPP deal which seeks to open commerce in 40% of the world’s economy is now pending approval by lawmakers of each participating country. The countries include Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the U.S. and Vietnam. The TPP pact will create the world’s largest free-trade zone and will be most beneficial to Vietnam’s textile and garment industry. Overall, it will provide a positive stimulus for Vietnam’s economic reform and development. The pact should help improve exports, foreign investment and the push for the country to change its development model.

Strong & Weak Performers

Strong Performer
JS Bank for Foreign Trade of Vietnam (VCB) VCB’s stock price was up 20% for the reporting period and announced profits of $202 million. VCB also announced a comprehensive cooperation agreement with Vietnam Airlines (VNA) that will establish long-term effective policies that will benefit both organizations. VCB will provide VNA diversified banking and financial services and VNA will provide preferential policies to passengers, goods, luggage and parcels for VCB. VCB, a commercial bank, attracts deposits and offers consumer and corporate loans, and foreign exchange services, and sponsors credit cards.

Weak Performer
Dong Phu Rubber (DPR) experienced a slowdown in its manufacturing business which affected profits for the reporting period. The stock fell 11% on slower demand and sluggish growth. Total revenue as stated by the Board of Directors was VND296 billion with profit after tax VND96.07 billion. Total assets were VND2291.87 billion for period ending June 30th 2015. Dong Phu Rubber JSC is a diversified holding company. The company is involved in various sectors from rubber tree planting to rubber processing, agro-forestry exploitation, cattle and fowl rising, construction and property.

Louie Nguyen, CFA is the CIO of San Diego-based Soledad Investment Management. Soledad invests qualified clients’ assets in markets around the world, including Vietnam.