Andrew Dalyrimple, investment manager at Aubrey Capital Management, went to Vietnam recently at attend an investment conference. In a wide-ranging and detailed commentary, he outlines his expectations for one of Asia’s fastest growing economies (6.8% growth in GDP expected this year).
In the heat of the day, (a steady 31 degrees, with high humidity, even in March), Nguyen Hue, Saigon’s most prominent pedestrian thoroughfare is quiet. People relax on benches or amble economically. After dark it is transformed into a cheerful, energetic mix of food stalls, picnickers, and cavorting children. Amorous young couples monopolise the benches, and hitherto unseen fountains come to life. Vietnam is a country on the move, and definitely in an upward direction. FTSE Global Market reports.
It is not hard to see why. The population is 95 million, and is hard working, upwardly mobile, and predominantly young. Although GDP per capita is a mere US$ 2,300, it is said that around 17 million people have a “reasonable” level of disposable monthly income. There is also an entrepreneurial inclination, and 110,000 new businesses were registered last year. In 2017 the economy grew at 6.8%, which was the highest in South East Asia.
Much of this was due to services and manufacturing, and exports expanded by 21%. The recently signed Trans Pacific Partnership, albeit without America, is not only a good trade agreement, but contains a commitment to push for a better investment environment for foreigners. Indeed, Vietnam has been the recipient of huge foreign direct investment (FDI) flows in recent years, with Thailand and Japan particularly dominant. Vietnam is already an open economy, with trade accounting for 185% of GDP, and has been a manufacturing destination of choice for many multinationals, (often at the expense of Thailand), with Samsung pre-eminent. Credit growth is running at about 17%, although it must be said that some of that is restructuring of bad loans from the banking crisis that rocked the country in 2010-11, and which has at least had the effect of making lenders significantly more careful. Consumer loans remain a very small element; but expanded at 30% last year. Despite this, inflation is a mere 2.6%, with core inflation only 1.4%, according to statistics released in March.
That said, Vietnam remains a communist country, with a government that is in thrall to the Communist Party. There is a party plenum in the middle of this year which will at least provide certainty as to the leadership from 2020 onwards, and in the meantime, the government is reasonably supportive of business, and is generally fairly well regarded. Fiscally, things are not so rosy, with the government targeting a 5% annual deficit, which is usually overshot. Tax collection is ineffective, and public debt is 65% of GDP, which is the statutory ceiling. Around 80% of tax revenues go on current expenditure, mainly to improve infrastructure, and because there is so little room for government expansion, monetary policy has to remain accommodative if high economic growth is to be maintained. The government has a stated target of 6.6% GDP growth for 2018. It is also committed to ongoing privatisation of the 400 or so state-owned enterprises. Many of the best ones have already been listed, such as Airports Corporation of Vietnam, which operates 22 of the 23 airports in the country, although in most instances the government has retained majority control.
The backdrop then is overwhelmingly positive, and reflecting this, the stock market rose by 45% in 2017. There were 350 investors at the investment conference which I attended, perhaps indicating a level of enthusiasm which should engender caution from seasoned practitioners. It is also a stock market which is very heavily dominated by retail investors, who apparently account for around 80% of the average daily volume. This very unusually high level of participation is likely to lead to exaggerated volatility, especially in the event of a crisis. Even so, despite approaching many of the presentations and meetings with some scepticism, your correspondent left the country in an overwhelmingly bullish frame of mind.
The property market is strong, and in our pursuit of consumer plays in the widest sense, residential developers represent an exciting opportunity. There are 50,000 marriages a year in Ho Chi Minh City alone, and affordable private housing is therefore in high demand. In fact, 85,000 apartments were purchased in the city last year alone. Generally, a 30% down payment is made, with the rest borrowed, and very respectable flats within commuting distance of the city centre can be found for around US$100,000. This it seems is quite affordable. In particular, two medium sized developers look like very good investment prospects.
Tourist arrivals grew by almost 30% in 2017, reaching almost 27 million, which led to a 10% expansion in the hotel and restaurant sector. But the growth in domestic tourism (+53% in 2017), dwarfs foreign arrivals. Vietjet, the country’s equivalent of Ryanair, has 219 aeroplanes on order from Airbus and Boeing, in addition to the 51 which it already operates, and achieved a load factor of 88% last year. Domestically, they now offer a faster and more convenient mode of transport at a price comparable to the much less satisfactory rail and bus options. With 38 domestic and 44 international routes, Vietjet expects to carry 25 million passengers this year.
As is always the case, greater economic confidence results in accelerating consumption. Phu Nhuan Jewellery employs 5,000 people and operates 283 stores throughout the country. It saw same store sales growth of 21% last year, leading to a 61% expansion in net profit. While the company does sell gold and silver, the growth in jewellery sales is far greater, as people look to enjoy ownership, a trend that we have also seen in India, driven by the greater confidence of the younger generation. The retail sector looks likely to enjoy a tailwind for many years to come, as 65% of Vietnamese people still live in the countryside.
Urbanisation provides a massive boost to consumption, not that much is needed, since 7,800 motorcycles, and almost 300 cars are sold every day in Vietnam. Indeed, swarms of small motorcycles, on an almost unimaginable scale, constitute my most prominent memories of Ho Chi Minh City. The lack of obvious accidents on the streets is entirely miraculous.
Concerns among the population already centre on the environment, infrastructure, and food quality, and intriguingly, Mobile World which has emerged as the country’s dominant retailer of mobile telephones, and electronic and household appliances, (think Dixons Carphone Warehouse or Best Buy), is launching a major drive into the organised grocery market. Wet markets still dominate the food sector in Vietnam, and Mobile World which has already established 300 stores, is targeting this area in particular, with fresh food comprising around 40% of the offering. They expect to have 1000 stores by the end of the year, investing $30m-$50m in the process, and believe that the country is capable of supporting at least 4,000 stores in total. Pharmacies are another intriguing area, where, as is always the case in developing markets. The sector is extremely fragmented. The very low level of spending per head of population on medicines and cosmetics in Vietnam, is only exceeded by Indonesia. FPT Retail looks likely to take the lead in the inevitable consolidation, aiming to grow its current small store base by at least 20 outlets per year, to reach 400 over the next four years. The company is scheduled to list in April.
Although smartphones remain extremely expensive, mobile telephone penetration has reached 84% in Vietnam, and technological products are amongst the top priorities in consumer surveys. That said, the lack of an effective payment and distribution system means that there is, as yet, no obvious pure e-commerce play available for investment. Online sales are growing fast but remain very much as part of an “omni-channel” offering, with goods usually delivered from the nearest store, and invariably, paid for with cash. If this changes, it may well be due to the efforts of Tiki.com. Backed by JD.com amongst others, they aim to offer authentic, quality products, with top flight service. Online retail sales constitute a mere 3% of retail sales at present, but all the ingredients exist for this to expand rapidly, and, while controlling the entire supply chain, Tiki.com expects to dramatically increase the scale and range of its product offering by the end of 2018. The company remains privately owned.
The entire market capitalisation of Vietnam is around $140bn (about one fifth the size of Amazon.com). Following its strong rise last year, the market trades on a forward multiple of about nineteen with earnings expected to grow at 20%. Not especially unreasonable, in our view. However, access to the stock market, as a foreign investor, remains difficult.
Aubrey Capital Management has foreign investor status, but many stocks have a foreign ownership limit, and almost all of the most attractive prospects have already reached their limit. A premium will almost inevitably have to be paid, and even then, an order can only be completed when another foreigner sells. Because there is no foreign board on which such stock can be legitimately priced, any resultant holding has to be priced as local stock, resulting in an immediate “loss”. However, any future sale of this stock would be to a foreign investor, resulting in this “loss” being reversed as the premium price would prevail.
Deterring as this may be, it seems likely to be a short-term issue, since the underlying attractiveness of many of the corporates which interest us, should result in their share prices appreciating substantially in the medium term, and indeed, it seems to us that this short-term pain should prove to be a small price to pay for handsome long-term rewards. Over the next six months or so, we expect to establish several holdings in the market which might constitute 6%-8% of the Global Emerging Markets Strategy.