The Investment Case for Vietnam: Asia’s Last Tiger Emerging March 2019
BUILDING ON MACROECONOMIC SUCCESS A refocusing of monetary policy in 2011 from “growth above everything” to the pursuit of long-term economic stability heralded a new era and has created a macroeconomic landscape encompassing: • GDP growth of 7.1% in 2018: 6.7% expected in 2019 • Inflation rate has moderated from 4.7% y/y in June 2018 to 2.6% as of January 2019; in line with <4% target • Currency stability reinforced by daily setting of the reference rate • Trade balance improvements driven by FDI into higher value-added production, particularly electronics • Vietnam continues to negotiate bi-lateral and multi-party free trade agreements even as protectionism becomes more prevalent 2
THE INVESTMENT CASE MACRO • 93 million people with one of the highest literacy rates in the world (95%) • Near-perfect demographics with ~ 60% under the age of 35 • A fast developing, urbanising nation moving up the value chain • GDP growth sustainable at a minimum of 6.7% p.a. over each of the next 3 years • Inflation accelerating slightly but still below 4% annualised as of January 2019 • Trade surpluses now the norm with FDI & exports driving the economy • One of the most stable currencies in the region thanks to disciplined monetary policy MICRO • Double-digit earnings growth expected in 2019 & 2020 after 20% in 2018 • The market remains relatively cheap outside of a small number of index heavyweights • Improvements to accessibility on the agenda to promote Vietnam’s case for MSCI Emerging Market Index inclusion 3
THE RISKS MACRO • Currency depreciation beyond policy possible as a result of USD strength / CNY weakness • Emerging market contagion • Trade wars MARKET • Increase in nominal market capitalisation not currently matched by free float • IPOs (the driver of strong foreign interest in 2017 to 1Q 2018) have stalled after spectacular failures in 2018 • Market access for foreign investors narrowly focused 4
VALUATIONS: Regional & portfolio comparison 2019 Earnings 2020 Earnings 2018 PE 2019 PE 2020 PE 2017 GDP 2018 GDP 2019 GDP Growth Growth Viet Nam Index 14.9x 12.3x 10.7x 28.5% 14.4% 6.8% 7.1% 6.7% PXP VEEF 12.9x 12.4x 11.1x 4.0% 10.4% 6.8% 7.1% 6.7% PXP VSCF 9.3x 8.4x 7.6x 10.1% 10.6% 6.8% 7.1% 6.7% SE THAI 14.8x 13.6x 11.4x 19.2% 8.2% 3.9% 4.2% 3.9% FTSE Malay KLCI 19.4x 15.7x 15.2x 3.9% 2.8% 5.9% 4.7% 4.6% Jakarta Comp 19.6x 14.0x 13.6x 10.8% 3.1% 5.1% 5.2% 5.1% PSEi - Philippines 18.9x 14.9x 14.8x 13.2% 1.2% 6.7% 6.3% 6.4% 5 Source: PXP Vietnam Research, Bloomberg consensus , 21 Feb 2019
ACCESSING THE MARKET Closed end Exchange Direct Equity Open-Ended Funds Traded Funds Access Funds • Discounts of closed end funds (CEFs) varied 6-years into a bull market, with quality seemingly finally the determinant. Very few still in existence, and are subject to pricing risk • ETFs facilitate easy access and exit but cannot hold the higher quality stocks at the foreign ownership limit (with the exception of the local version) and historic performance has suffered accordingly • Direct equity access is problematic due to the cumbersome application process, foreign limits and limited stock coverage by the sell-side • Open-ended funds, such as PXP VEEF & PXP VSCF, allow focus on the underlying assets instead of creating confusion between “discount” and “value” and will continue to provide liquidity when closed end funds may not 6
THE ROAD TO MSCI EMERGING MARKET STATUS Vietnam is determined to achieve re-classification from MSCI Frontier to MSCI Emerging Market status. Whilst market size & liquidity measures are probably sufficient, the country has further to go before achieving its goal. Remaining requirements: • Significantly improved access through real relaxation of foreign ownership restrictions • Simultaneous bi-lingual publication of all corporate announcements Time-frame: • Annual market classification review in June each year (earliest June 2019) • MSCI decision is announced one year later (earliest June 2020) • Reclassification to EM from Frontier effective one year later (earliest June 2021) Potential Impact: • Approx. US$1.6 trillion follows MSCI EMI; a 0.1% weighting might attract US$ 1.6 billion of inflows (> 10 days current turnover & >2 times 2017 inflows); latest estimate would suggest a 0.7% weighting for Vietnam 7
THE VIEW FROM PHAN XI PANG Core elements are in place for a retest of index highs by the end of 2019: • Supportive macroeconomic environment • Political stability • Reform-minded government • Decent earnings growth • Increased market visibility and a surge in (particularly foreign) interest Further gains should precede re- designation as “MSCI Emerging” assuming: • Increased free-float through public primary & secondary offerings • Improved access through encouraging relaxation of foreign ownership restrictions after rationalisation of conflicting legislation via a new Securities Law (draft released in October 2018) Although disappointed by its omission in 2017 and 2018, possibly due to a lack of sustained progress in free- float expansion and the glacial progress of improvement in foreign access, we see few other realistic alternatives for re-designation, and Vietnam is focused on success. 8
APPENDIX A: Macro data 30 Vietnam CPI – y/y 24,000 VND/USD Since 2011 Devaluation 25 23,500 23,000 20 22,500 CPI y/y % 22,000 15 21,500 21,000 10 20,500 5 20,000 19,500 19,000 Jan 06 Dec 06 Nov 07 Oct 08 Sep 09 Aug 10 Jul 11 Jun 12 May 13 Apr 14 Mar 15 Feb 16 Jan 17 Dec 17 Nov 18 Jan 11 Jul 11 Jan 12 Jul 12 Jan 13 Jul 13 Jan 14 Jul 14 Jan 15 Jul 15 Jan 16 Jul 16 Jan 17 Jul 17 Jan 18 Jul 18 Source Bloomberg Vietnam GDP Growth % Balance of Trade (USD bn) 8 9 6 8 6.7% 6.21% 6.81% 7.1% 4 7 2 0 6 -2 5 -4 4 -6 -8 3 -10 2 -12 1 -14 -16 0 -18 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 E 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Source: World Bank and PXP Estimates 9
APPENDIX B: The life-cycle to date of the VN Index 1400 Vinamilk ilk mkt. mkt. cap ap. surpasses $1 su $10b 0bn 1200 Tot otal 35 35 Stoc ocks PXP XP VSC SCF Tot otal 5 5 Stoc ocks 1000 launched December Tot otal 17 176 6 Stoc ocks Fou oundin ing of f PXP 2015 2015 800 Vie ietn tnam Asset t Man anagement 600 PXP XP Vietnam HCMC: 372 HC 372 Stoc ocks Fun und Lau Launch Han Hanoi: i: 374 374 UPCOM: 799 UP 799 400 Tot otal Mkt. kt. Cap ap. $17 176bn PXP XP VEE EEF 200 launched November Nov 2005 2005 0 Jul 00 Jul 01 Jul 02 Jul 03 Jul 04 Jul 05 Jul 06 Jul 07 Jul 08 Jul 09 Jul 10 Jul 11 Jul 12 Jul 13 Jul 14 Jul 15 Jul 16 Jul 17 Jul 18 Ho Ho Chi hi Minh City ty Vinamilk ilk (VNM) lists Stoc ock k Ex Exchange Jan an 06 06, Mkt. kt. Cap ap. ope pens (2 2 stoc ocks, $5 $500 00m (50 50% of f 10 $3 $35m Mkt. kt. Cap ap.) tot total l mar market) 10
Contacts Kevin Snowball Steve Mantle Chief Executive Officer & Head of Marketing Chief Investment Officer Email: SMantle@pxpvietnam.com Email: KHSnowball@pxpvietnam.com Chi Nguyen Lawrence Brader Co-Portfolio Manager PXP VSCF Co-Portfolio Manager PXP VSCF Email: ChiNguyen@pxpvietnam.com Email: LBrader@pxpvietnam.com www.pxpvietnam.com
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