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Summary Vietnam trades at a substantial discount compared to other countries in Asia, and has a flurry of advantages ahead of it; now is a strategic time to consider investment. Vietnam stands out as a positive outlier among the current emerging market turmoil, as it has lower FX risks and higher growth, compared to its Asian peers. The recent initiation of the TPP and Vietnam’s removal of the FOL will both serve as major economic catalysts for the country. U.S. investors should strongly consider VinaCapital’s Vietnam Opportunity Fund as an outlet to gain exposure to Vietnam’s growth. Vietnam is poised to be one of the top winners from the newly initiated TPP, yet I argue that Vietnam was already good value before this, and the country has a flurry of advantages ahead of it that will also serve as a catalyst for increased economic growth. Trading at a 30-40% discount to Asian peers such as Malaysia and Thailand, Vietnam is a superior location for value investors. Although the country’s P/E has long remained near 12, the country’s soon to be transition to an emerging market should result in higher valuation in the future. Furthermore, Vietnam’s benefit from the TPP invitation will result in the country’s GDP growth increasing to 11% by 2025 , according to Eurasia Group. This article will focus on the benefits of profiting from Vietnam’s upside by investing in the VinaCapital Vietnam Opportunity Fund ( OTCPK:VCVOF ). (click to enlarge) Source: LSE VinaCapital’s Vietnam Opportunity Fund has strongly outperformed the IT Country Specialists Asia Pacific, reflecting Vietnam’s superiority and the benefit of considering locally managed funds. The fund has had a NAV return of 33% over the past five years, compared to the VN Index gain of 7.7%. Most impressive is the fund’s extremely high discount, which has also been higher in the past. Lower FX Risk With currencies in Asia facing strong devaluations, Vietnam stands out as a positive outlier, as its currency was only devalued by 1% last month , and the VND has only had a 4.5% YTD depreciation against the USD. While much of emerging Asia is struggling with FX risks, Vietnam has been able to cope relatively well with FX risks, and I argue that the other benefits of investment in Vietnam drastically offset this risk. Inflation recently fell below 1% , a drastic improvement from the beginning of 2014, when inflation was near 5%. The VN index has had a YTD return of 5.79% , compared to the 6.06% decline of Malaysia’s KLCI index , and the 7.23% decline of the SET index . Furthermore, FDI inflow growth into Vietnam has been substantial, with a YTD increase of 30%. Mark Mobius recently announced his plan to invest $3 billion into Vietnam, which is a shockingly high amount for Vietnam. Franklin Templeton has invested a similar amount into Thailand, yet the stock market is 10 times larger in Thailand. Economic Growth and FOL Removal Economic growth will serve as a further catalyst for the country’s stock market, and is a strong complement to the country’s low valuation: Retail sales YoY growth has consistently been high ; 26.7% in July, 10.3% in August, and 5.2% in September. Consumer spending has been consistently and rapidly increasing. Annual GDP growth expanded to 6.8% during the 3rd quarter of 2015. Infrastructure spending has risen drastically, and the country’s new 5-year plan projects 300% growth in road building. The country’s decision to relax the foreign ownership limit, in certain industries, will serve as a catalyst for an increased flow of FDI, and was one of the last items on the checklist for Vietnam to move forward as an emerging market. A recent report prepared by Edmond de Rothschild made the following comment regarding the impact of the FOL removal on Vietnam’s low valuation relative to its peers in Asia: “A major effect of the implementation of the foreign ownership limitation decree will be to narrow this discount, allow a re-rating of the market, and to improve liquidity.” Investing in funds on the ground that have pre-positioned themselves is a crucial step to buy into shares of these companies early, as stock prices of these companies are bound to rise with the new relaxation of FOL and a new inflow of FDI that is ahead. The VOF fund already has a large holding of Vinamilk, a company foreigners typically pay a 20% premium to invest in. The VOF fund has been a long holder of Vinamilk, and was able to invest in this company prior to its listing. The government has recently authorized the SCIC to sell its 45.1% stake in Vinamilk . VinaCapital VOF The VinaCapital Vietnam Opportunity Fund is an excellent means for investors to access Vietnam’s future upside. The VOF is the largest and most liquid closed end fund in its peer group, and its London listing is impressively trading at an 23% discount . The fund currently trades on London’s AIM board, and is in the process of moving to main board of the London Stock Exchange ; the shares will be migrated from the Cayman Islands to Guernsey to achieve the same efficient tax structure, while being under a superior compliance and regulatory environment. The company’s EGM held on October the 27th confirmed that the process has been approved, and the migration is expected to take place in mid-November. Its U.S. OTC listing is a very feasible and liquid option for investors, as its 3-month trading volume is currently 13,849 . This fund has a unique approach of investing in listed equity, private equity deals, and investing in companies and eventually taking them to the stock market. The company has invested in key players like Vinamilk and Hoa Phat Group prior to its listing, companies that now have the dominant market share in their respective industries, and are highly sought after by foreign investors. Source: VOF August Report The fund’s diversified approach is as follows: 49% of the fund’s assets are invested in listed equity. 14.9% of the fund’s assets are invested in the real estate industry, and the VOF is currently emphasizing an increased shift to listed real estate equity for higher liquidity. 11.1% is invested in private equity. 10.7% of the fund’s assets are invested in hospitality projects. The fund utilizes a diverse sector approach: 20.4% of the fund’s assets are invested in the food and beverages industry, a strategic approach for Vietnam’s consumption growth story. 14.9% of the fund’s assets are invested in real estate projects, and 12.1% are invested in real estate equities. 10.2% of the fund’s assets are invested in the construction industry, which is poised for further growth due to the increasing demand for construction and building materials . 6.5% of the fund’s assets are invested in the financials services industry, which is an appropriate low level due to the issues of bad debt with banks. Exim Bank is a positive outlier in this industry, and a company fully held by foreign investors. The fund also has smaller holdings in agriculture, pharmaceuticals, and other industries. Top 10 Holdings Vinamilk : 11.5% of the fund’s assets are invested in Vinamilk, which is Vietnam’s leading dairy company, with dominant market share in Vietnam. Foreign investors typically pay a premium of up to 20% for shares of this company, yet investors can indirectly access Vinamilk shares at a substantial discount through the VOF. Source: Vietstock Sofitel Legend Metropole Hotel : 10.1% of the fund’s assets are invested in Sofitel Legend Metropole Hotel in Hanoi. Hoa Phat Group : 8.4% of the fund’s assets are invested in Hoa Phat Group, which has a 22% market share for steel production in Vietnam, and whose growth is being driven by the rapid growth of Vietnam’s real estate industry. Apart from this core business, the company also operates in real estate, furniture, and agriculture. Source: Vietstock Eximbank : 5.3% of the fund’s assets are invested in this company. The State Bank of Vietnam has set a target of reducing to bad debt in banks to 3% , and Exim Bank has responded by selling $68.2 million worth of its bad debt during the first half of this year. Source: Vietstock International Dairy Product : 5.3% of the fund’s assets are invested in this company, which is one of Vietnam’s top five dairy companies. Petrovietnam Technical Services : 3.4% of the fund’s assets are invested in this company. ROE has averaged near 20% since 2012, and the company has increased revenue and earnings since 2012. The company is a valuation gem , as its P/E is 5.3 and its P/B in 0.85. The company has historically proven its ability to cope amidst low oil prices, as both its earnings and revenue increased in 2009. Source: Vietstock PetroVietnam Drilling and Well Services : 3% of the fund’s assets are invested in this company. Like PetroVietnam Technical Services, the company’s share price has fallen drastically due to the low oil price environment, creating its extremely low valuation; its P/E is 5.74 and its P/B is 1.03. The company’s revenue did not fall in 2009, while its earnings fell slightly, indicating its ability to cope in a low oil price environment. Source: Vietstock Au Giang Pharmaceuticals : 2.9% of the fund’s assets are invested in Au Giang Pharmaceuticals, a very strategic move since Vietnam’s pharmaceutical industry is projected to have CAGR of 15.4% until 2020. Century 21 : 3.1% of the fund’s assets are invested in Century 21 , a real estate company that operates resorts, and also has operations in the tourism industry. Khang Dien House : 3.7% of the fund’s assets are invested in Khang Dien House, a real estate and development company. The diverse portfolio approach, coupled with the low valuation created from irrational sell-offs, both greatly attribute to the fund’s upside potential. The VOF is successfully prepositioned for the growth ahead of Vietnam, and it is very reasonable to conclude that the discount of both Vietnam and the VOF will not be long lived. Conclusion VinaCapital’s Vietnam Opportunity Fund is an excellent vehicle to access Vietnam’s growth, and I would further argue that Vietnam is a superior site for investment in Asia. Vietnam’s superiority has been displayed by its relatively strong performing currency this August, its low valuation, extremely high economic growth, high FDI, and the newly emerging benefits of the TPP and FOL removal. Furthermore, actively managed funds in Vietnam are certainly superior to the Market Vectors Vietnam ETF (NYSEARCA: VNM ), and there are substantial benefits associated with investment in funds that have long been on the ground in Vietnam. Investors can take advantage of Vietnam’s discount, as well as the discount of this fund, and leverage from the growth that is certainly ahead for Vietnam. Vietnam is a bright spot in emerging markets in Asia, and the selloff has created extremely low valuation. An approach to Vietnam should be a long-term hold, with the willingness to utilize bottom-cost averaging, as the market is extremely volatile. A long-term hold of Vietnam will certainly be fruitful, which is clearly displayed by the country’s discount and flurry of economic advantages that are ahead. Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks. Scalper1 News
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