Since the introduction of market reforms that opened up the country to foreign investment in the late 1980s, Vietnam has become one of the fastest-growing economies in the world, averaging annual GDP growth rates of 7-8% throughout the nineties. Agribusiness production has nearly doubled over the past two decades, transforming Vietnam into one of the world’s largest exporters of rice and shrimp. Currently, Vietnam is in the midst of a transformation from a manual labour/agrarian-based economy towards one fuelled by skilled-labour. Agriculture production has decreased 5% to account for 20% of GDP over the last five years, while the government has begun to provide incentives for hi-tech companies — such as Intel, Canon, and Samsung — to bring skilled manufacturing jobs to Vietnam.
Established in 2000, HOSE currently lists 302 companies and has a market capitalization of USD 50.5 billion and a P/E ratio of 13.9x of as of February 2015. Originally named the Ho Chi Minh City Securities Trading Center (HoSTC) the exchange was officially inaugurated on July 20, 2000, and trading commenced on July 28, 2000. Initially, two equity issues were listed, Refrigeration Electrical Engineering Joint Stock Corporation (REE) and Saigon Cable and Telecommunication Material Joint Stock Company (SACOM). In the beginning, an overall foreign ownership limit of 20% for equities and 40% for bonds was implemented. In July 2003, in a bid to improve liquidity, the government raised the foreign ownership limit for equities to 30% and totally removed the foreign ownership limit of a particular issuer’s bonds. Foreign participants on the Stock Trading Center of Vietnam must register through a custodian licensed to hold securities on behalf of foreigners. Once registered, a securities transaction code is issued to the foreign investor that will permit securities trading. On 8 August 2007, HoSTC was renamed and upgraded to the Ho Chi Minh Stock Exchange.
Hanoi Stock Exchange (HNX), formerly the Hanoi Securities Trading Center (Hanoi STC), was launched in March 2005 and handles auctions and trading of stocks and bonds. The Hanoi STC was renamed to the Hanoi Stock Exchange in 2009. It was the second securities trading center to open in Vietnam after the Ho Chi Minh City Securities Trading Center. The HNX hosts 362 companies and has a market capitalization of USD 6.6 billion and a P/E ratio of 12.7x as of February 2015.
In line with our process of being on the ground in the countries we invest in, Ruchir Desai, Senior Investment Analyst of the AFC Asia Frontier Fund, travelled to Vietnam to meet companies on the ground.
This was my second visit to Vietnam this year with a mission to meet new companies as well as to touch base with existing companies that AFC has already invested in. Meeting companies on the ground helps to get a better picture of the inner workings of businesses and it also gives a good opportunity to get a feel for management and see if there are any factors impacting companies that could be missed from their published numbers alone. The itinerary involved meeting twenty four companies across Hanoi and Ho Chi Minh City with plant/factory visits for certain companies as well. This was the largest number of companies we have met in a single Vietnam trip compared to our previous visits.
The trip started off in Hanoi with the city presently enduring the peak summer season with temperatures ranging from 37-39 degrees Celsius during the day. Typically this is not a good time to be in the sun but coming from the sub-continent it is something that has been handled before. The meetings in Hanoi involved companies in the banking, commercial vehicle, textile, cargo handling, real estate and construction industries.
After some time in the nation’s capital I travelled to a small town in Thanh Hoa province which is about 2.5-3 hours by road from Hanoi. In Thanh Hoa I met with a cement company which the fund has invested in and it provided an opportunity to further look into its operations including checking out its limestone reserves just a few kilometres from the plant. The company in question has a well-established position in North/Central Vietnam.
One thing that I did notice from my previous visits is that the quality of roads has vastly improved. A new highway has been built from Hanoi airport to the city and even some sections of the Hanoi – Thanh Hoa trip were on newly developed highways.
Highway from Noi Bai International Airport (Hanoi) to Hanoi city
The ride to Thanh Hoa is quite picturesque with a mountain range visible for most parts of the journey. Lunch was in Ninh Binh, a small city and the capital of Ninh Binh province. This was not lunch at the usual Vietnamese restaurants one would go to in Hanoi but a local joint on the side of the road which was actually someone’s house with some of the rooms converted into seating areas (no fancy banh mi’s here but more of the local stuff). Restaurant-houses such as this are quite common and can be found in many parts of Vietnam.
Visit to cement plant and limestone quarry
Source: Asia Frontier Capital
I was keen to meet a company in the automobile sector as automobile sales in Vietnam have been increasing at a fast pace since the beginning of the year. Both passenger cars and commercial vehicle sales are up significantly over the past six months and this is a positive indicator for economic growth. I must add that part of the increase in commercial vehicle sales is due to certain regulatory changes which limit the maximum capacity a truck can load which has led to increasing truck sales. However, passenger car and commercial vehicle penetration in Vietnam is still lower than some of the ASEAN countries.
The meetings in the North went quite well and next I was off to Ho Chi Minh City (HCMC). I am starting to figure out that when flying domestic in Vietnam you can expect your flight to be delayed, usually by an hour minimum. Next time I think it would be wise to take an earlier flight so I can reach HCMC well before midnight, but no complaints here, we are after all a frontier markets fund!
The weather in HCMC was definitely a relief and the meetings involved companies in the textile, transportation, construction, infrastructure, banking, fishery, consumer staple and consumer discretionary sectors. The textile companies I met were quite positive on the benefits of the TPP (Trans Pacific Partnership) as this would lead to increased investments in the Vietnamese textile industry due to duty free access to large markets such as the U.S. and Japan. The TPP is a free trade agreement between the U.S. and eleven other countries including Vietnam and Japan with possible signing of the agreement by end of 2015. The two textile companies I met, one a garment and yarn producer and the other a polyester yarn producer will both be direct beneficiaries of the TPP agreement.
One of the most interesting meetings was with one of our current investments, which is the leading stationery manufacturer and retailer in Vietnam, in which I went to their manufacturing plant. It is one of the mid-sized companies which has a good management team that has been able to establish modern manufacturing capabilities and a well-known brand. The plant visit only increased my confidence in this company’s capabilities.
Overall, from the meetings I had in Hanoi and HCMC, I got a positive outlook from companies in the infrastructure/construction, automobile, textile industries and also certain consumer-focused companies (i.e. stationery, washing detergent and bedding products). The feedback from the companies which supply material to the real estate industry have seen a pick up in demand and the companies which are involved in constructing real estate have a healthy order book and order pipeline. Management teams appear more upbeat about their businesses and this is reflected in the macro numbers released this month which show better GDP growth and industrial production numbers compared to the previous few years. The problems related to the banking industry seem to be diminishing and there looks to be a good possibility that Vietnam will go through a structural growth trend in the coming few years which will be positive for most industries.