Dragon Capital is the largest private shareholder of stocks in Vietnam. I spoke with Bill Stoops, Dragon’s Chief Investment Officer for his take on the opportunities in Vietnam’s markets. The first part of this interview reviewed important events for investors in Vietnam over the past year and in the second part Mr. Stoops shared his outlook for Vietnam’s markets in the coming year. In this last part of our interview, Mr. Stoops discusses market specifics of Vietnam’s stocks and economy.
Dragon Capital’s flagship funds are Vietnam Investments Limited (VEIL) and Vietnam Growth Fund (VGF) with $477 and $265 million in assets under management respectively. The largest holding in these funds is Vinamilk.
Vinamilk will continue to be a big holding in our portfolio, but we have reduced recently… Vinamilk is about 14% of the VNI… the fact that we sold some down after holding [it] for 10 years and making a lot of money should not lead anyone to believe we don’t like it anymore… we were beginning to develop a concentration risk, so we sold about a third of our position.
Next year Vinamilk might have some margin adjustments to absorb. The price of skim milk powder is going through the roof right now, its their main raw material. That might put a bit of a break on earnings growth in 2014. But then you expect in 2015, once the margin hit has been taken, the bottom line will resume growing along with the top line, if not more.
Mr. Stoops then discussed exemplar holdings from Dragon’s portfolio.
A fertilizer manufacturer called Phu My Fertilizer is another company we like. It’s not a growth stock but a pure value play. It will have flat earnings next year but the PER is 5 or 6 times, and the yield is 10%… There are a lot of stocks that fit that description in Vietnam. Once you eliminate the top five names from the market, you eliminate 50% of market cap, and then Vietnam becomes really cheap compared to other peer markets.
One company that didn’t perform so well this year is the Masan Group. They developed a very high rating based on the view that they’re a fabulous growth play in food and beverage. Over the years, they developed an 80% markets share in soy sauce and fish sauce. They have a big market share in premium and low-end noodles.
Starting [in 2013 Masan Group began] developing new products and they ran up a lot of costs to advertise and develop them without incoming revenues yet. So, they’ve had some fairly flat quarters… [and] under-performed against the index.
We’ve had a big weighting of about 12% across funds in Masan. But [in 2014] a couple of things are going to happen: they’re going to have revenues to show against all the costs from these new products in mass market noodles, bottled water, roasted coffee [and more]… They’re also about to bring on stream a tungsten mine which will have its first full year of production in 2014. [Altogether] the company’s final net profit will be up about 150%, so I think that will restore it in the market’s view as a growth play.
We’re planning to market time our entry into banks and properties in exactly the correct way to maximize our profits. Though VEIL already has some property and banks, and stock brokers…. VGF certainly is waiting for the right moment to go into banks, property and brokers.
In the case of real estate firms, we’ve looked for signs that the property market [is recovering]. In middle income residential, I think we’ve probably already turned the corner. Apartment sales in Ho Chi Minh City are up a lot since mid-2012.
The home price to income ratio has fallen a lot [so] the right sort of property company could be a good buy now: property companies that have a huge discount to true NAV, trade on low PERs… Now is a good time to be looking at these companies.
In regard to banks, when we get some sense that the NPL problem is starting to be dealt with, we probably want to go into banks. There are some names out there that have good EPS growth, even now, PERs that are well into the single digits, price-book values that are like 1 times, and get yields as well… VEIL already has 8% in [one] bank called ACB. But, that leaves us underweight against the bank sector which is 14% of the index.
To some extent, [other countries] compete in textiles maybe. But what they don’t have is this really dynamic work force… [young people] who have good basic levels of skills in reading, writing and arithmetic [that are] abundant in supply so the wages are low. It’s like a magnet for FDI.
In Vietnam, you have law and order, political stability, work ethic, and high savings. All these socioeconomic and cultural factors combine to make Vietnam just perfect for FDI in a way you don’t get across the board in manufacturing [in other countries]… Vietnam is in a very sweet spot in terms of being competitive in low-end manufacturing.
Technology manufacturing is also ramping up in Vietnam as more skilled manufacturing is added to Vietnam’s export mix.
The most amazing thing [in Vietnam] is cellphones. From nothing in 2009, four years later they are the top exporter at $15 billion because the Koreans decided Vietnam is perfect for cellphone assembly and they piled in – Samsung & LG – billions of dollars of investment… Electronics are coming on strong too…
When I arrived in Vietnam in 2006, the export mix was very simple. It was half very-low-end manufacturers and half commodities. Vietnam has a very nice commodity sector which people tend to overlook… They produce a lot of their own oil, for example.
Now, it’s about two-thirds manufacturing and one-third commodities. Another interesting item in the manufacturing component is ever increasing amounts of chips being manufactured by Intel in Vietnam. Other [companies] will be coming in as well… The whole export sector is moving up to some extent.
Lastly, Mr. Stoops was asked about risk factors to Vietnam’s growth going forward.
Vietnam needs to pull off some kind of work out program for the banking sector to reduce NPLs. It’s not that the banking sector is going to melt down or anything like that. We estimate outstanding loans of $25 billion. To the extent that you don’t work out from that, you don’t get new loan growth. No new loan growth means lower GDP. For me the risk in Vietnam is lack of action on NPLs.
Otherwise, if they can pull that off, then I think Vietnam looks really good.