Thomas McMahon
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Updated 27 Apr 2023
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Disclaimer

Disclosure – Non-Independent Marketing Communication

This is a non-independent marketing communication commissioned by Vietnam Enterprise Investments. The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research.

  • Vietnam Enterprise Investments (VEIL) has reported results for the year ending 31/12/2022. VEIL generated a NAV total return of -35.7% in US dollar terms, with the VNI benchmark down 34.1%. Vietnam was one of the worst performers during the year for global and domestic factors.
  • Internally, the market suffered due to the fallout from a crackdown on the bond market and concerns about the real estate sector, both of which affected liquidity. Globally, the fallout of spiraling inflation and interest rates saw risk aversion rise.
  • However, the Vietnamese economy grew well through the year, with GDP per capita up by 10.8%, and foreign direct investment up by 13.5%. Companies including Apple and Samsung increased their investments in Vietnam, contributing to its move up the value-add curve.
  • VEIL had an overweight allocation to residential property in the first half of the year which was detrimental when markets sold off and has been reduced. On the other hand, VEIL’s focus on the higher quality larger banks helped relative returns, as these outperformed.
  • The board bought back c. 6.8m shares during the year, boosting NAV per share by 0.78%. VEIL ended the year with its shares on a 10.7% discount to NAV. This has since widened to 16.8% at the time of writing.
  • Board chair, Gordon Lawson, said: “I am confident in the company’s ability to continue to identify the best companies with solid management, profitability and long-term business growth.”

Kepler View

2022 was something of a perfect storm for Vietnam, but in our view it has done nothing to diminish the long-term investment opportunity. Indeed, with the Vietnamese market now trading on low valuations, this could prove to be an excellent time to buy, particularly considering the wide discount available on VEIL’s shares.

Vietnam Enterprise Investments (VEIL) is managed by the largest overseas investor in Vietnam, Dragon Capital, which has been investing in the country ever since its market reforms really started taking effect in the mid-1990s – even before the local stock market launched. Dragon Capital’s experience, connections and local knowledge has helped VEIL deliver strong outperformance of the local index over the long run, with three year NAV returns of 16.1% versus 7.6%, and five year NAV returns of 11.2% versus 7.0%.

Vietnam looks set for high structural growth. Wages are still low by international standards, particularly compared to China. The government is pursuing an infrastructure spending programme, while foreign direct investment is high. Notably Vietnam is developing as an alternative site to China for multinationals to locate production. The country has maintained good relations with China and with the USA, both critical trading partners. VEIL’s portfolio is focussed on three themes: the growing middle class, robust domestic consumption and infrastructure development, which the managers believe are the key drivers for Vietnam’s future growth.

In the short-term, the managers are cautious. They note that a lot of corporate debt matures this year, so there is the potential for balance sheet issues with some companies. Vietnam is also sensitive to global trade and demand from China and the US, and there is some uncertainty around both those major economies. As a result, the managers are focussing on keeping the quality high in the portfolio, tilting towards companies with the strongest balance sheets and excellent corporate governance. However, they hope to see a more settled picture by the end of the year, with the potential for strong earnings growth in 2024.

There are risks to investing in frontier markets, as last year’s volatility showed. In our view the long-term potential in Vietnam is exciting, but investors need to take a multi-year view. VEIL is an attractive way to take up a long-term position given the deep knowledge, experience and resources of the managers, the ability to buy pre-IPO stocks and hold as they list, and the strong track record of adding alpha. Additionally, the manager has a strong commitment to ESG which sees it engage with portfolio companies, encouraging them to improve the sustainability of their business practices. VEIL also reports extensively on its carbon footprint and its climate-related goals in its annual report. Given the low penetration of ESG and sustainability in the Vietnamese market, VEIL is arguably in a strong position to drive change.

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