Results analysis: Vietnam Enterprise Investments

• Vietnam Enterprise Investments (VEIL) has published results for the half year period ending 30/06/2023. The trust saw NAV total returns of 10.3% over the period, compared to equivalent returns of 12.2% in the VN Index, both in US dollar terms. Long-term performance remains strong, with NAV total returns of 48.0% over three years, compared to 40.1% in the benchmark.
• Sectors that experienced a tough 2022, such as materials, real estate, and manufacturing, have experienced a strong bounce back in 2023. VEIL’s top contributors to performance were steel conglomerate HPG and financial services firm Asia Commercial Bank.
• Despite strong performance, VEIL’s discount widened from 10.7% at the start of the year, to 14.0% at the end of June. This has widened further to 19.1% at the time of writing. The board bought back c. 1.9m shares in H1, adding 0.2% to NAV, and continues to actively manage the trust’s discount.
• A slowdown in global demand and local consumption dampened GDP growth in Vietnam, which stood at 3.7%. However, the country has been in a much stronger position than developed markets, with inflation running comparatively low at 3.3% during the first half of the year. This allowed the State Bank of Vietnam (SBV) to initiate four rate cuts, totalling 150bps. The SBV has also given regulatory approval for local banks to expand their credit facilities.
• Large global companies continue to shift manufacturing to Vietnam, with FDI hitting $10bn in the first half of 2023. Notably, VEIL holding KBC – an operator of industrial parks – saw its share price surge, in part because Foxconn, which produces over 70% of iPhones globally, signed a $62.5m leasing agreement with the company.
• Chairman Gordon Lawson said: “I have faith in the Company’s ability to identify the best businesses for long-term success, profitability and solid management, thanks to the highly experienced investment manager and the nation’s largest and most knowledgeable in-house research team.”

Kepler view

Vietnam Enterprise Investments (VEIL) is one of the only investment trusts that provides dedicated exposure to Vietnam. The trust is managed by Dragon Capital, which has been investing in Vietnam for close to three decades and prior to the country’s stock market being launched. The trust’s extensive, on-the-ground team has delivered annualised returns to shareholders in excess of 12% over more than two decades of investing in the country’s equity market.

We noted earlier this year that 2022 was something of a ‘perfect storm’ for Vietnam. A stronger dollar, rising inflation, and higher rates all put pressure on the large weightings that VEIL has to financials, materials, and real estate. However, we also said that the drawdowns the market experienced last year had pushed valuations to attractive levels, something that was compounded by the fact that VEIL’s discount had widened substantially.

That dynamic has played out to an extent. Lower inflation, looser monetary policy and other moves by the Vietnamese government to stimulate the economy have all proven supportive to share prices, which goes some way in explaining why we have seen a bounce back in performance this year.

The macro picture looks positive as well, with Vietnam continuing to benefit from large conglomerates shifting manufacturing to the country. A Samsung report from earlier this year, which indicated that revenues derived from its Vietnamese operations exceeded $70bn in 2022, shows the meaningful size of these operations. And this trend only seems to be accelerating. More than 50 large US firms have visited Vietnam this year, as have over 200 Korean companies. This also benefitted the portfolio during the first half of the year, with tech manufacturer Foxconn taking out a $62.5m lease on an industrial park operated by VEIL holding KBC.

The fact that GDP growth of 3.7% in H1 of this year was seen as subdued, is an indication of how impressive growth in Vietnam has been over the past two decades. Moreover, Dragon Capital’s Top-80, a group of companies that the asset manager tracks, are projected to deliver average earnings growth of 24.4% in 2024. We would note that this is an indicator of growth in the wider economy as well, given these companies are much more domestically focused than their listed peers in developed markets tend to be.

Despite these positives, VEIL continues to trade at a wide discount of close to 20% as at 13/09/2023. Valuations in the underlying portfolio also remain at comparatively low levels. For example, the companies in Dragon’s Top-80 are trading at 8.1x forward earnings, despite the high levels of projected earnings growth.

As a result, and with the usual proviso that nothing is guaranteed and capital is at risk in this volatile market even if things look positive – we may be at a juncture that ultimately proves to be an attractive entry point for investors. Assuming earnings growth comes through and the Vietnamese authorities continue their supportive economic policies, share prices may ultimately follow, with VEIL investors enjoying the potential for additional returns if this results in the discount tightening.

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