Back on the radar

IFR Asia - Asian Development Bank 2016
11 min read

Vietnam is bucking the trend in South-East Asia, with an economy growing at its fastest pace in nine years. Connecting the country and its leading companies with global investors, however, remains a challenge.

Vietnam’s economy is riding high – again. After several years of middling performance, gross domestic product expanded by 6.7% in 2015, the fastest annual rate of growth since 2007. Analysts hope this is just the start of a new period of relative outperformance by the frontier market. In a February 22 report, HSBC Global Research tipped the economy to expand by 6.7% in 2016 and 6.8% in 2017, boosting per-capita income to US$2,400, a rise of 140% in a decade.

Investors are keen to tap into Asia’s fastest growing major economy after India (which expanded by 7.3% in 2015) and China (which, despite homegrown woes, grew by 6.8%). Indeed, positive data is evident wherever you look. In its February note HSBC projected inflation, which fell to zero in the final quarter of 2015, to average 2.9% in 2016, boosted by higher food costs. Final consumption growth is currently running at around 9% a year, driven by a robust real estate market and high automobile sales. New car purchases hit an all-time high of 23,775 in December 2015, up more than 35% year-on-year, according to data from the Vietnam Automobile Manufacturers Association. The domestic banking sector, once clogged with soured or failing assets, has been cleaned up: non-performing loans fell to 2% in 2015, from 17% at their peak in September 2012.

All of which is catnip to global money managers.

“Investment in a good company in Vietnam is not necessarily a good investment for a foreign investor if one is constrained by access to capital markets and liquidity. We hope to see a successful dual listing of Vietnamese companies in more established regional exchanges, such as the SGX.”

“A new institutional investor comes to talk to us about Vietnam every two weeks,” said Lien Le Hong, regional head of institutional research at Maybank.

“About half are from Asia, with the remainder split evenly between the US and the UK.”

Adrian Pop, a Hong Kong based portfolio manager at East Capital, an emerging market investment manager with €2.1bn (US$2.34bn) in assets under management, says he is “constantly increasingly exposure” to local assets.

“Vietnam came second in 2015 in terms of outperforming the benchmark in our Emerging Asia fund. The market was up 6% last year in local currency terms and 1% in dollar terms. That outperformed every market we invest in, with the exception of China’s A-share market. Things are falling into place nicely.”

The core values that have long attracted investors, including a high level of political stability and a large, ambitious, and consumption-driven populace, remain firmly entrenched.

“Vietnam has very appealing demographics from an investment perspective,” said Jonathan Bowden, a partner at law firm White & Case in Singapore. “A rapidly expanding middle class is driving domestic demand and providing a low-cost workforce, attracting the interest of potential foreign investors.”

The government has mandated five European lenders – BNP Paribas, Credit Suisse, Deutsche Bank, HSBC and Standard Chartered – to sell its story to fixed-income investors, and a US dollar sovereign bond is on the cards.

Yet this is also a market still very much in its infancy, where good and bad news often commingles.

Investors are of course attracted to a fast-growing market where valuations still lag top-line growth. Vietnam’s VN Index was priced at 1.68 times net assets at end-February 2016, close to a three-year low.

“It’s not like the market is extremely highly valued,” said East Capital’s Pop. “It’s currently trading at around 13 times forward earnings for 2016 and 11 times 2017 forward earnings.”

Private equity majors are pushing in hard, in search of underpriced assets. A consortium led by Warburg Pincus ploughed US$100m in Vincom Retail in March 2016, taking its total investment in the domestic shopping mall operator to US$300m. East Capital’s Pop sees hidden value in sectors including retail, IT and cement. White & Case’s Bowden said hot sectors were those that tapped into the country’s youthful demographics, notably healthcare, education, consumer electronics, and food and beverage.

Market access restrictions

But suppressed valuations also reflect genuine concern about the nation’s long-term prospects. Vietnam’s budget deficit remains “relatively high”, said East Capital’s Pop, having averaged 6.35% over the four years to end-2015.

Marie Owens Thomsen, chief economist at Indosuez Wealth Management, said the “most disturbing thing” about the country was its current account surplus, which fell to 1% of GDP in 2015 from 6% in 2012. Maybank’s Hong said her chief worry was a “sharp recent rise in public spending, which is growing far faster than revenues.”

A patchy national balance sheet is a genuine concern for policymakers in Hanoi. The last time the Socialist Republic of Vietnam earned an upgrade by one of the big three international rating agencies was in November 2014, in the form of a one-notch bump by Fitch from B+ to BB–. Hong said she did “not expect to see an upgrade” in 2016. “Vietnam’s economic numbers are good, but higher spending has resulted in higher public debt, and this issue will take one or two years to resolve.”

Valuations are also undermined by the government’s fitful commitment to reform. To be sure, there has been undeniable progress. Spending on essential infrastructure has soared in recent years, while the blackouts that once plagued Hanoi have been all but eliminated. Yet the Communist Party has also become worryingly addicted to issuing decrees that promise much and deliver little.

In June 2015, then Premier Nguyen Tan Dung pledged to lift or scrap entirely foreign ownership limits. Global investors cheered: current rules cap foreign ownership of state-run enterprises and banks at 49% and 30% respectively. Yet Nguyen’s words have yet to be turned into action.

“The truth that no one dares speak is that higher FOLs won’t happen,” said a Vietnam-focused, Hong Kong-based investment banker. “The Party said that to appease foreign investors. They are afraid of raising the ceiling on ownership, and of the Chinese then coming in and buying everything.”

In its latest budget, the government said it wanted to raise US$1.5bn a year by selling down stakes in state enterprises, a sum described by one local analyst as “unprecedented”. Yet divestments are often meagre affairs that leave investors disillusioned. When Airports Corporation of Vietnam launched its initial public offering in December 2015, raising D1.11trn (US$49.3m), most institutions sighed. “They sold exactly 3.47% of the capital of one of the country’s biggest state firms,” said the Hong Kong-based banker. “Really? What is the point? It’s barely into the single digits.”

Said Bill Stoops, chief investment officer at Ho Chi Minh City-based Dragon Capital: “Investors look at Vietnam and like what they see. The hurdle now is market access. Foreign funds want to put capital, but the question is where and how.”

The answer, many hope, will come in the form of a slew of sizable listings in the months ahead. Private carrier VietJet Air is hoping to raise upward of US$300m from an initial public offering in the second quarter of 2016, underwritten by BNP Paribas, Deutsche Bank, JP Morgan and VietCapital. Up to 30% of the listing is being earmarked for foreign investors. MobiFone is also planning a stock sale that could value the telecommunications firm at up to US$4bn.

“Investment in a good company in Vietnam is not necessarily a good investment for a foreign investor if one is constrained by access to capital markets and liquidity,” said Kian-Wee Seah, managing director at UOB Venture Management. “We hope to see a successful dual listing of Vietnamese companies in more established regional exchanges, such as the SGX, especially as these growth-focused companies export to the region and explore regional M&A and JV partnerships.”

Local bankers are aware of the challenges but say the government is determined to develop the country’s capital markets.

“With the new government coming in place, there is an awareness that we need to be a market-driven economy,” Ngyuen Duy Hung, chairman and CEO of Saigon Securities, said at the Credit Suisse Asian Investment Conference in Hong Kong in April.

“In 10–15 years, we won’t be able to fully develop without the development of full equity markets. There’s a lot of work to be done.”

But Vietnam’s true saving grace is likely to come in the form of trade agreements with the wider, Western world. A free trade agreement signed with the European Union in December 2015 aims to eliminate 99% of two-way tariffs over the next 10 years. Then there is the pending Trans-Pacific Partnership, which should benefit the country in two key ways. First, it will grant Vietnam’s legion of exporters, from food processors to chip makers, preferential market access to a 12-nation bloc, including the United States, Japan and Singapore. And second, it will lessen its growing dependency on China’s souring economy.

“Assuming it is ratified, Vietnam is likely to be a big winner with the TPP,” said Indosuez’s Thomsen.

“Trade with the US and Japan will rise sharply, allowing Vietnam to rejig its dependency ratios away from China and toward these mature economies. In fact, the country’s future very much depends on what happens with the TPP.”

Additional reporting by Frances Yoon

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Back on the radar