VietNam Holding — Consistently outperforming the market

Vietnam remains one of the best long-term secular investment growth stories, driven by structural growth in manufacturing for exports, domestic consumption and infrastructure spending. It is one of the fastest growing economies in the world, with average annual GDP growth of 5.8% pa over the last five years, compared to 5.2% on average in East Asian countries (excluding developed markets) and 2.5% global GDP growth according to World Bank data. The IMF believes that Vietnam is positioned to continue its steady growth. It forecasts 5.8% GDP growth in 2024 and assumes that inflation will remain under control at 3.4%.

Economic growth alongside significant socio-political changes – openness to foreign trade and FDI especially – have allowed Vietnam’s stock exchange to expand significantly. The Ho Chi Minh City Stock Exchange (HOSE) opened in 2000 and as at end-2022 there were 402 companies listed, with a total listing value of VND1.43qn (US$58bn) and a 2022 daily traded value of VND17.2bn (US$700m). The Vietnam Ho Chi Minh Stock Index (VN Index, VNI) delivered an average annual total return of 16% over the last five years, compared to 12% returned by MSCI Emerging Markets Index.

The manager creates a concentrated high-conviction portfolio of 20–30 stocks (26 as at end-September 2023, with the top 10 holdings representing 62% of its NAV) consisting of high-growth small and mid-caps (targeting companies with potential to double their earnings in four to five years) and best-in-class blue chips. This means that VNH’s active share compared to the Vietnam All Share Index (VNAS) stands at high 74% (three-year average). While Vietnam’s equity markets are developing fast, they are still fairly shallow in terms of liquidity compared to more developed countries.

In this environment, Dynam Capital takes a private-equity-like approach to investing despite acquiring minority stakes. This includes an active approach to investee companies, supporting them in their transformation to modern standards of management, shareholder communication, ESG and market disclosures. As a result of this approach, the manager invests with a long-term view, assuming limited market liquidity (despite VNH’s nimbleness in terms of portfolio repositioning, facilitated by the relatively small size, see below). The manager usually invests up to 2% of its portfolio into new companies, and gradually increases its stake as the company develops and the manager gains further confidence in the holding. In this context, the manager considers companies previously backed by private equity as those with a lower governance risk, as they are already post- or mid-transformation.

All of the investments are also evaluated through an ESG lens as VNH believes that companies in Vietnam can benefit from enhanced valuations by following better ESG practices, especially regarding disclosures and market communication, as Vietnam’s stock market is still establishing its best practices. VNH’s strict investment criteria regarding governance and disclosures reduce downside risks, though simultaneously limiting the investable universe. Dynam Capital estimates that there are c 60–80 stocks on HOSE at the moment that meet VNH’s ESG criteria.

VNH’s strategy has proven successful, as over the five years to end-September 2023, VNH delivered a 6.9% NAV TR pa in US dollar terms, clearly outperforming the 3.4% pa delivered by the VNAS, as well as its two LSE-listed, Vietnam-focused peers: Vietnam Enterprise Investments (VEIL) (4.3% NAV total return pa) and VinaCapital Vietnam Opportunity Fund (VOF) (5.9%). On top of its stock selection capabilities, the manager attributes part of the outperformance to VNH’s small scale (its market capitalisation currently amounts to £76m, compared to VEIL’s £1,050m, and VOF’s £709m), allowing it to reposition its portfolio relatively quickly in response to market developments despite operating in a relatively illiquid market. The manager actively trades in its portfolio within its defined investable universe, with the turnover ratio usually standing at 30–40% in any given year (50% in 2022 according to Morningstar data), and according to the investment manager, VNH can liquidate (if needed) 95% of its current portfolio within a month.

Dynam Capital recognises three main development trends in Vietnam’s economy that provide the most investment opportunities, and roughly half of VNH’s current portfolio has direct exposure to one of them (see Exhibit 2): 1) industrialisation of the economy, 2) increase in disposable income and domestic consumption from a growing middle class, and 3) increasing urbanisation.

Industrialisation

Vietnam’s economy is export-oriented, with an exports to GDP ratio of c 90% in 2022. It is attracting increasing volumes of FDI as global companies, such as Apple, Lego, Samsung and Intel, seek to diversify their supply chains beyond China. For example, up to 60% of Samsung’s phones and 70% of Intel’s global output are now produced in Vietnam. According to the IMF, Vietnam currently attracts c US$16bn in FDI annually, compared to c US$1.5bn annually at the beginning of the 21st century. FDI is predominantly targeted at manufacturing, which now represents a bit more than 20% of Vietnam’s GDP. In this context it is also worth noting the US-Vietnam Comprehensive Strategic Partnership announced in September 2023 after the visit of US President Biden to Vietnam. The partnership is targeted predominantly at semiconductor production and supply chains, but it also covers a range of initiatives in various areas such as education, energy, finance and agriculture. The partnership should strengthen relationships between US and Vietnamese companies, and should translate to increased FDI. After the visit, several close cooperations have been announced, including Gemadept (5.0% of VNH’s NAV) partnering with SSA Marine to develop a logistics centre with a projected valuation of US$6.7bn.

VNH sees its opportunity in companies that provide B2B services for the growing industrial ecosystem and currently gets exposure to the theme predominantly through industrial parks and logistic companies. According to the manager, these companies typically have a higher quality of earnings and a higher return on equity than individual exporters. A prime example of this is Gemadept, an operator of eight ports in Vietnam as well as a vast logistics network in Vietnam and neighbouring countries, generating c US$150m in revenues annually. The company was subject to equitisation in 1993 and currently the state does not hold any share of its c US$730m market capitalisation. The manager expects that the government will revise port fees upwards, creating room for an uplift in terminal handling charges.

Urbanisation

The urbanisation rate in Vietnam stood at a low 39% in 2022 (according to the World Bank), which compares to 53% in Thailand, 58% in Indonesia and 78% in Malaysia. Urbanisation is constantly increasing as the economy industrialises, and over the last 10 years the urban population in Vietnam grew by 10 million citizens. The manager believes that Vietnam is currently at an inflection point allowing for rapid economic growth, similarly to China after 2002 when it reached a 38% urbanisation rate.

Growing urbanisation creates additional demand (and in turn investment opportunities) across a broad variety of sectors, including housing, transportation and convenience stores. VNH predominantly benefits from this trend through investments in real estate developers. Up until mid-2022, real estate made up c 20% of VNH’s portfolio, but (despite the manager’s confidence in the long-term prospects of the sector) it sold its stakes in the main housing developers in 2022, avoiding the worst of the turmoil that hit some of the companies in the sector recently. VNH’s current exposure to real estate of 9% consists predominantly of industrial parks.

Vietnam’s real estate sector suffered a liquidity crunch in late 2022, which is lingering in 2023. The trigger event came when the government issued a decree aimed at improving transparency, strengthening investor protections and improving disclosure requirements in corporate bonds issuance. Unfortunately, the decree was introduced in the wake of allegations of illegal activities (resulting in two high-profile arrests in the real estate sector). As the decree was introduced when the trust of issuers was low, corporate bond issuance basically came to a standstill, and many real estate developers found that they were unable to issue new bonds or roll over existing bonds that were maturing. The manager is confident that some of the key names in the sector will survive and thrive, and may add back some of these in the coming months.

Domestic consumption

The rapid growth of Vietnam’s economy results in increasing disposable income and a growing middle class. Vietnam’s GDP per capita has increased tenfold since the beginning of 21st century, growing at an average rate of 11% pa, and according to World Data Lab Vietnam’s middle-class population (households with per-capita spending of between US$11 and US$110 a day) reached 33 million citizens in 2020. World Data Lab expects that due to its favourable demographic structure and economic growth, Vietnam will have the seventh fastest-growing middle-class population in the world and it will reach 56 million people by 2030, implying a CAGR of 5.5%.

VNH benefits from this trend predominantly through its investments in jewellery producer and distributor Phu Nhuan Jewelry (PNJ, 4.1% of NAV at end-September 2023) and omni-channel and omni-sector retailer Mobile World Group (MWG, 2.7% of NAV at end-June 2023). While in FY23 both stocks fell in value due to unfavourable sentiment around softened consumer demand, as described below, the manager remains confident both in the trend of increasing consumer spending as well as in the companies themselves. Recently they have proven their worth during pandemic-related lockdowns, where both companies were able to meaningfully offset the decrease in traditional sales through their digital sales. VNH initially invested in PNJ in 2009 and in MWG in 2017.

VNH keeps meaningful exposure to banks and financial services (42% as at end-September 2023) as it considers the banking sector as an attractive exposure to the broad economic growth of Vietnam, with banks increasing their loan books in parallel to growing investments and customer spending. At the same time, the Vietnamese banking sector itself is presenting a secular growth trend as the country remains underbanked (less than half of its citizens have access to banking). We note that Vietnam’s banking sector is developing its digital offering from scratch rather than having to overhaul a more traditional approach.

Despite investing in minority stakes, VNH takes an active hand in supporting its portfolio companies in improving their ESG aspects. The CIO of Dynam Capital is co-founder of the Vietnam Institute of Directors (VIOD), an organisation promoting corporate governance standards and best practices. VIOD, VNH and Dynam Capital representatives regularly advise VNH’s portfolio companies on investor relations, transparent reporting as well as aligning interests of employees and shareholders. For instance, one of the ‘easy fixes’ that VNH sees in the Vietnamese stock market that could attract more international capital is improving disclosures in English.

VNH has been a signatory of the United Nations Principles for Responsible Investing (UN PRI) since 2009 and its investment policy reflects its guidelines: VNH invests only in companies that commit to reducing pollution in a measurable way, and avoids companies involved in businesses related to alcohol, tobacco, gambling or armaments, or those that violate the Vietnamese labour law. In the recent UN PRI assessment, VNH received a top score of five stars. Dynam Capital and VietNam Holdings have both affirmed the Paris Agreement and their commitment to the Task Force for Climate-Related Financial Disclosure. Dynam Capital is also a member of the Asia Investor Group on Climate Change.

Since 2016 VNH’s portfolio has also been evaluated by a third-party independent advisor (Energy and Environment Consultancy) and publishes its carbon footprint report. From 2021, the service has been extended to include a comprehensive climate-related risk assessment. In the 2022 report the advisor confirmed that VNH’s portfolio was on par with developed markets and considerably better than emerging markets in terms of alignment with the 2˚C global temperature reduction effort and its weighted average carbon intensity (greenhouse gas emission per US$m of revenue) is only marginally worse than average in the MSCI World Index (also considerably better than the MSCI Emerging Markets Index average).

Vietnam’s equity market declined by 33% in 2022 (measured by the VN Index) despite the economy showing 8.0% GDP growth. The sharp decline was caused predominantly by a collapse in valuations of real estate companies, which constitute 22% of the index (as at September 2023). As the liquidity crunch in the real estate sector was paired with market abuse allegations and high-profile arrests in the real estate industry, investors’ trust was heavily undermined. Furthermore, given the attractive bank deposit rates at that time, a significant amount of capital was allocated to deposits, decreasing the liquidity available on HOSE (see Exhibit 6). This contributed to a significant market sell-off despite the good quality of expected earnings and Vietnamese equities reaching a 10-year valuation trough of 7.7x forward earnings (based on 12-month blended forward expected earnings). Even though the market subsequently experienced improving economic prospects (recovering FDI and rebounding demand for ‘made in Vietnam’ products), local equities remain relatively cheap, with the 9.3x forward P/E being 30% below the 10-year average (Datastream Index, see Exhibit 5).

VNH’s portfolio is positioned to companies presenting strong earnings momentum with forecasted earnings growth in FY23 at 19% for the whole portfolio, compared to FY23 earnings growth of 4% for the VN Index (based on Refinitiv consensus2). At the same time their valuation is undemanding, with a 9.2x P/E ratio based on FY23 earnings, and 7.6x on FY24, compared to 11.2x and 8.5x for the VN Index, respectively (as at end-September 2023).

It is important to note the continued structural undersupply of the local housing market, with the ministry of construction estimating that Vietnam needs to build a further 300k social housing units for low-income earners in urban areas to meet the demand, estimated at US$9.6bn in investment. We believe this underpins the good prospects for Vietnam’s real estate sector, once the current liquidity issues are sorted out. We note that housing development has seen some revival in recent months, with major projects being resumed. While the liquidity crunch is not over yet, with VND65.9tn bonds maturing in H223 and VND124tn in 2024, the government is introducing incentives to provide much-needed breathing space for issuers. These include allowing companies to use other assets to make bond payments if approved by debtholders, as well as extension of debt maturities.

In mid-March, the State Bank of Vietnam (SBV) surprised markets by reducing its discount rate from 4.5% to 3.5% and cutting the open market operations (OMO) rate from 6.0% to 5.5%. This was the first rate cut in two years, which the SBV justified on the basis that the currency is stable and that inflation is ‘well-managed’; the most recent reading of Vietnam’s inflation (June 2023) stood at 2.0%, compared to SBV’s target of 4.5%. Vietnam’s central bank has signalled the likelihood of further rate reductions over time to ‘give additional breathing room to the property and capital markets’, especially given expectations of looser US Federal Reserve policy following the recent developments in US regional banks, which resulted in a further 50bp OMO rate cut in May 2023 and a 50bp discount rate cut in June 2023. On top of that, the SBV recently announced higher credit growth limits for commercial banks, easing banks’ appetite for deposit growth. In turn, deposit rates at Vietnamese banks have seen a reduction of 200–300bp since the beginning of the year to the current 6.5–8.0% on 12-month deposits. The Vietnam Association of Realtors highlights that a large number of deposits matured in Q323, so with lower deposit rates, some of the money could enter the equity and property markets.

As the risks have reduced significantly and deposit rates have decreased, investors are returning to stock markets. The average daily liquidity reached its trough level in Q123 and is gradually rebuilding, with Q223 being up 40% q-o-q and Q323 up 60% q-o-q. This may translate to increasing valuations.

Over the year to end-September 2023, VNH significantly increased its exposure to financial services by investing in the securities broker SSI Services (eighth largest portfolio position, representing 4.4% of NAV). VNH expects the company to benefit from increasing trading volumes on HOSE with the return of retail investors, especially considering the State Securities Commission’s efforts to implement a new trading system in Vietnam by end-2023. VNH also increased its allocation to banks with significant investments into Vietcombank (5.5% of NAV) and Asia Commercial Bank (4.5%). The exposure to banks allows VNH to position itself to the revival of economic activity in Vietnam, without favouring any of the trends, as described previously in the note.

Another significant investment was PV Technical Services, which is well-positioned for an increase in green energy generation, as Vietnam has announced its 2050 zero emission target. The company provides offshore technical services with its fleet of 18 vessels. It is currently focusing on increasing its presence in offshore wind power generation. It provides construction, operation and maintenance services to several nearshore and offshore wind farms in Vietnam. Recently it signed a memorandum of understanding with Orsted to collaborate on offshore wind projects in Vietnam, and secured two overseas contracts with a total value of US$320m.

PV Technical Services is part of the state-owned PetroVietnam – the country's largest oil producer and second-largest power producer – and its fleet provides offshore construction and maintenance services for the oil and gas industry, which remains its core business. PV Technical Services itself is also majority-owned by the government – the free float stands at 48.5% with foreign ownership standing at 20.8% as at June 2023.

Over the 12 months to end-September 2023, VNH’s NAV per share increased by 4.2% in sterling terms, which compares to a 9% loss for the VN Index. VNH consistently delivers returns above the broad Vietnamese equity market, although it is naturally following Vietnamese equities, and represents a macro play on Vietnam’s economy for investors.

UK-based investors have access to three funds focused solely on opportunities in Vietnam listed on the London Stock Exchange, varying in size and investment approach: VNH, VEIL, and VOF. VNH is the smallest fund among them, which allows it to rotate its portfolio more efficiently and as a result outperform its peers (see Exhibit 11).

VNH was the best performing Vietnam-focused fund over the periods of one, three and five years, while its 10-year performance was behind VOF and broadly in line with VEIL. When comparing the performances of these three funds, we need to highlight that VOF has a meaningful part of the portfolio (21% as at end-September 2023) allocated to private investments, which are less volatile than public equities.

Compared to the broader peer group of country specialist funds focused on Asian markets, VNH was the third best-performing fund across all the periods, being behind two funds focused on the Indian market, which has been particularly strong in recent years (see Exhibit 11). VNH’s stellar performance underlines the manager’s stock picking expertise, which is supported by the portfolio’s flexibility provided by its small size. At the same time, its small scale contributes to higher ongoing charges as a percentage of NAV (although we note that the above-mentioned NAV outperformance is after fees), and limits its potential pool of shareholders, as some institutional investors may find it difficult to invest in VNH due to liquidity constraints. VNH does not pay dividends but distributes its profits to shareholders through buybacks (see below).

VNH has not paid any dividends since its inception, but regularly distributes income to investors through NAV-accretive share buybacks. In FY23, US$5m of shares were repurchased from the market (1.7% of opening market capitalisation), which compares to US$60m (of which US$57m was repurchased through tender offer) in FY22. This compares to the current market capitalisation of VNH of c US$93m. Over the last five years, VNH distributed (through share buybacks and tender offers) US$126m back to investors – US$25m pa on average (see Exhibit 12) – which roughly represents 25% of its average market capitalisation over this period. Since September 2017, when the current board was appointed, the company has bought c 15m shares from the market (excluding tender offers, 53% of currently outstanding shares) at an average discount of 15.4%, translating into a 3.4pp NAV accretion.

Distribution in the form of share buybacks has its advantages for VNH and shareholders: it allows VNH to remain nimble in size; it allows investors to effectively reinvest distributions at no cost if they choose not to participate in buybacks; and it provides VNH with an additional tool to limit the discount. On the other hand, we need to note that significant buybacks limit share liquidity, which at least partially offsets their positive impact on limiting the discount to NAV.

We understand that the company monitors shareholders’ interest in dividends and does not rule out dividend distributions in the future. The portfolio generates recurring dividend income (US$2.5m; or 2% of opening NAV in FY23), stemming predominantly from the blue-chip investments, which could support future dividend distributions, and currently covers roughly half of VNH’s operating expenses.

Over the last five years, VNH’s shares have traded in a broad 10–25% corridor of discount to its last reported NAV. As at 30 October 2023, the discount to NAV stands at 13.4% – slightly below its five-year average of 16.6%.

The board is authorised to repurchase up to 15% of the outstanding shares each year, renewed at the AGM, and the regular share buybacks from the open market limit the volatility of the discount. On top of that, both VNH and its investment manager engage in marketing and investor relations activities to improve liquidity in the shares and widen the shareholder base. VNH believes that retail investors and wealth management platforms are natural buyers of VNH shares as a focused, yet niche investment company.

As at 30 October 2023, the company’s share capital consisted of 27.3m ordinary shares, all of which are outstanding as VNH regularly cancels repurchased shares. The shares have been listed on the Premium Segment of LSE’s Main Market (ticker: VNH) and on the International Stock Exchange (VNMH-VNH) since 2019; previously VNH traded on AIM. The company is domiciled in Guernsey, Channel Islands. The board and representatives of the investment manager directly own 0.8% of outstanding shares, aligning their interests with shareholders. Additionally, the chairman of VNH’s board is also a director at Discover Investment Company, which owns 5.0% of VNH’s outstanding shares as at 2 November 2023.The fund is subject to a five-yearly continuation vote, with the next vote to take place at the next AGM expected to be held before end-2023.

The VNH board consists of five independent non-executive directors, four of whom were appointed in September 2017, when the company underwent significant corporate governance changes, including the appointment of a new board, in response to shareholder concerns. For detailed biographies please see our 2019 initiation note.