Vietnam Enterprise Investments 20 October 2022

Vietnam is a fast-developing market which arguably offers some of the most exciting investment opportunities in Asia. The country falls outside the mainstream emerging market indices, which means it is unlikely to feature in most EM or Asian funds and therefore most investors will have little exposure. However, it is benefitting from some well-entrenched secular growth themes which look set to continue for many years: as the economy opens up, foreign direct investment has rocketed, exports have boomed and a middle class has emerged with all that that means for demand for consumer goods and services.

Against this backdrop, Vietnam Enterprise Investments (VEIL) could offer an interesting opportunity. VEIL is the largest and longest established investment company that focusses on Vietnam, having launched in 1995, although it wasn’t listed on the London Stock Exchange until 2016. The management team therefore have knowledge and experience second-to-none, spanning the whole period of Vietnam’s liberalisation – and Dragon Capital is the largest foreign investor in the country. VEIL can also invest in unlisted pre-IPO companies, as Vietnam’s biggest investment fund it is often able to negotiate favourable terms on both IPOs and structured deals, allowing it to benefit from the rapidly growing and developing investment opportunity set.

The strategy focuses on identifying companies benefitting from key secular drivers such as urbanization, consumption growth and the shift of exports up the value chain. Vietnam has a highly educated workforce and cheap labour costs, which means it is increasingly winning market share from high end manufacturing from established players such as China. These favourable tailwinds are supported by a government which is committed to funding the transformation of Vietnam from an agrarian to an industrial economy, putting the country in a position which observers in the region are quick to compare to Thailand or Malaysia two decades ago, before their transformation to regional industrial powerhouses.

With the market looking cheap after a sell-off this year, VEIL also trades on a significant discount of 14.8%, making it an interesting option for those with an eye on the long-term potential it could deliver.

Vietnam looks exciting on a multi-year view. The country is at a relatively early stage of economic development compared to some Asian peers, which means there is an obvious runway of growth ahead for companies which can tap into rocketing domestic demand for investment and consumer goods. With a highly educated workforce and strong support from the government, which is spending big on the infrastructure required to encourage foreign companies to choose it as a base for manufacturing, the case for Vietnam as a destination for FDI is also strong – as evidenced by the recent creation of major industrial hubs by Apple and Samsung.

We think VEIL is a highly attractive vehicle for access to this market. The management team’s deep knowledge and experience put them in a great position to identify the winning companies. The ability to buy pre-IPO companies adds to the opportunity set – and is something open-ended funds can’t do as easily. Meanwhile, at the present moment the trust trades on a double-digit discount to NAV, offering considerable downside protection and the potential for extra returns should the discount narrow.

Vietnam has sold off and VEIL’s discount has widened as risk aversion has risen during 2022, while two local scandals have played out (see Performance). The country is not immune to the global slowdown, with export growth falling this year and the central banks having to raise rates to defend the currency. However, in May of this year S&P upgraded Vietnam to one notch below investment grade, citing solid GDP growth and continued FDI inflows as two of the main reasons. Moody’s (who upgraded Vietnam’s outlook in September) forecast GDP will hit 8.5% this year, boosting corporate profits. The country is also embarking on an infrastructure spending spree which should boost the economy and counteract any global cyclical slowdown, while its self-sufficiency in food means domestic inflation is likely to remain lower than many peers.