VietNam Holding — Introducing redeemable shares

VNH’s NAV in 2023 rose by 15.8% in sterling TR terms and increased further by 10.5% since beginning of 2024 until end-February (22.4% and 10.4% in VNH’s reporting currency, the US dollar). While performance was driven by a supportive environment for Vietnamese equities (VNAS up in sterling 11.7% in 2023 and 9.2% year-to-date), we highlight that VNH’s portfolio positioning delivers outperformance against VNAS (see Exhibit 1) and its direct peers (Exhibit 2) over one-, three- and five-year periods. However, we note that the private part of VinaCapital Vietnam Opportunity Fund’s portfolio is valued periodically and tends to lag short-term public market developments.

Vietnam enjoyed a strong year in terms of macroeconomics with 5.1% GDP growth, among the highest in the region, and at the same time is expected to outperform its neighbours in 2024 according to LSEG consensus (expected growth of 5.8%). Growth was driven by returning demand for ‘made in Vietnam’ products, as well as increased consumer spending. Vietnam has seen a record-high trade surplus (US$28bn) and record level of disbursed FDI (US$23bn) in 2023. Furthermore, its government has accelerated public investments (which stood at US$26.1bn, up 27% y-o-y) and made progress on some of the flagship infrastructure projects in Vietnam, such as the international airport in Long Thanh and subway systems in Hanoi and Ho Chi Minh City. Dynam Capital anticipates a further increase in public spending in 2024 up to US$30bn.

The State Bank of Vietnam (SBV) is able to keep record-low interest rates thanks to limited inflationary pressure (3.8% in 2023), and at the same time the high trade surplus is bolstering SBV’s FX reserves, providing good headroom for potential currency market interventions if required. This translates into record-low sovereign bond yields and in turn increases demand for local equities. Individual investors, which are currently the main contributors to HOSE’s trading activity, have returned to the equity market after a relatively calm 2022 and as a result daily liquidity doubled over the course of 2023. This trend continued into 2024, with an average daily volume in February 2024 of US$758m, 23% higher than in January 2024. Together with good outlook for corporate earnings growth (Dynam Capital expects a weighted average EPS increase of 20%, below current consensus), this provides encouraging prospects for local equities, according to Dynam Capital.

Vietnam is currently recognized as a frontier market by both LSEG and the MSCI, and potential upgrades to emerging markets are widely discussed by the media. We anticipate that potential upgrades could result in a meaningful influx of new capital and investors to the market and a re-rating in the valuations on HOSE. Dynam Capital expects that LSEG's reclassification could happen as soon as H224. However, opinions on this subject vary, as for instance representatives of Vietnam’s leading broker (and one of VNH’s top holdings) SSI Securities see a possible upgrade by September 2025. According to Reuters, an upgrade at the much larger MSCI indices is less likely, due to its stricter requirements, and expected no sooner than 2025 in the most optimistic views. It is important to note that Vietnam’s government is devoted to eliminating any regulatory hurdles preventing the upgrades.

VNH’s portfolio remains highly concentrated, comprising around 24 names, with the top 10 holdings representing 65% of its NAV at end-February 2024 (see Exhibit 6). Compared to VNAS, the company is overweight telecommunications (15% versus combined VNAS exposure to IT and communication services at 3.2%) and underweight financials, even if banks and financial services make up c 40% of its portfolio value. Most of its portfolio is allocated to companies expected to benefit from three core themes: industrialisation, an increase in domestic consumption and urbanisation, as well as banks, which are expected to benefit from all three themes (see Exhibit 4).

FPT Corporation is VNH’s largest portfolio company (15% of NAV at end-February 2024) and delivered a 36% share price TR in 2023 in sterling). The company has three operating segments: software technology (with 28k engineers supporting more than 100 of the Fortune Global 500 companies), telecoms (as a leading provider of broadband, data service and pay TV in Vietnam, with nationwide telecommunication infrastructure) and education (with 140k students focusing on science, technology, engineering, and mathematics subjects). FPT recorded 20% y-o-y net profit growth in 2023. At the same time, global IT services’ revenue and profits increased by 29% and 28% y-o-y respectively, and FPT targets to quintuple the former by 2028. While the objective is ambitious, VNH underlines that outsourcing companies from India like Infosys that have opened up to global markets earlier than Vietnam reached a scale far beyond FPT’s ambitions.

Another notable growth driver was Viettel Construction (1.7% of NAV at end-December 2023), which recorded a 71% total return in 2023. The company is the construction arm of the state-owned telecommunication company Viettel, which holds a 66% stake in the company. It is recognised within construction and materials in VNH’s sector split. In December 2023, the Ministry of Information and Telecommunications announced that 2G bandwidth would be discontinued in Vietnam in September 2024, which should translate into high demand for 4G tower construction services across the country, supporting Viettel Construction.

The revival in exports and manufacturing was beneficial for stocks forming the ecosystem around Vietnam’s manufacturing base. VNH’s third largest holding, Gemadept (6.3% of NAV at end-February), which is a port operator, recorded a 48% share price increase in sterling over 2023, with its record profits supported by the sale of one of its older ports. In 2024, the company plans to divest its non-core rubber plantation. The industrial parks developer IDICO gained 52% over the year (in sterling), as its core projects continue to attract FDI.

In 2023, VNH portfolio was expanded to include FPT Digital Retail, which is a subsidiary of VNH’s largest and long-lasting holding FPT (47% ownership) and represents 4.8% of VNH’s NAV at end-February 2024. FPT Digital Retail’s share price increased by 66% in 2023, predominantly due to the rapid expansion of its new pharmacy business. In 2023 the company opened 560 pharmacies, taking its total store count to 1,497 (whereas its traditional digital goods retailing segment was affected by deteriorating consumer sentiment).

VNH retains meaningful exposure to banks and financial services as it considers the banking sector an attractive play on the broad economic growth of Vietnam, with banks increasing their loan books in parallel to growing investments and customer spending. In the second part of 2023, VNH’s exposure to banks underperformed the VNAS Index (VNH recorded a 3.6% loss on exposure to banks in total), offsetting part of its H123 gains, but overall contributed positively to FY23 results. The manager continues to see good prospects for several Vietnamese banks (four of its top 10 holdings are banks) and increased its weighting to financials from 35% at December 2023 to 40% at February 2024.

VNH integrates ESG in its investment process, as well as in the day-to-day management of its portfolio. In 2023, it received the highest score (five stars) from the United Nations’ Principles for Responsible Investing, and a third-party evaluator confirmed that its portfolio had a c 40% lower carbon footprint than VNAS on average over the last three years. Despite being a minority holder in its portfolio companies, the manager is involved in improving ESG criteria across its holdings (and broader Vietnam corporate environment) through a variety of initiatives. The CIO of Dynam Capital is co-founder of the Vietnam Institute of Directors (VIOD) and representatives of VNH, VIOD and Dynam Capital regularly advise VNH’s portfolio companies on investor relations. In 2023, VNH sponsored and supported the inaugural ESG investor conference in Vietnam and will be supporting this year’s edition in May 2024.

In March 2024, VNH appointed Connie Hoang Mi Vu as an independent non-executive director, following the retirement of Sean Hurst and Damien Pierron at the December AGM. Ms Vu will expand VNH’s ESG expertise with her vast experience in the field. She is a partner at Raise Partners, a consultancy that advises clients on ESG strategy and partnerships. She has over 20 years of experience in ESG and international development and is one of Vietnam's leading experts on human trafficking, modern slavery and labour migration. Ms Vu is a board member of the Belgium Luxembourg Chamber of Commerce Vietnam and has been based in Vietnam since 2006.

While VNH focuses on ESG’s value-unlocking capabilities, we note that close cooperation and insight into companies’ corporate culture also provides VNH with risk mitigation tools. This is especially important in Vietnam, an economy with still emerging governing structures. VNH’s capabilities were highlighted in 2022 amid the real estate crisis (as described in our earlier note). The manager highlights that the recent resignation of President Vo Van Thuong is unlikely to affect the real economy and business, despite media turmoil around the topic.