Vietnam Enterprise Investments (VEIL) had a great 2016, its NAV rising 22.98%, outperformed the VN Index by 5.7%, despite a flurry of market-boosting new listings and the outlier performance of index heavyweights Faros (“ROS”, +791.7%, 3.3% of VN Index) and Sabeco (+51.5%, 8.5% of VN Index). This was VEIL’s best relative performance against the VN Index in the last five years and was mainly attributable to the outsized gains by its materials sector holdings (+70.1%). The transportation and food & beverage sectors were also significant contributors.
The materials sector was the top contributor (6.4%) to the VEIL’s performance in 2016, with the Fund’s holdings in sector leaders Hoa Sen Group (+155.9%) and Hoa Phat Group (+72.8%) rising on very good earnings resulting from strong sales volume growth and increased market shares. Hoa Sen Group had sales of VND17,894bn (+2.6%) and net earnings of VND1,504bn (+130.4%), while Hoa Phat Group achieved sales of VND33,283bn (+21.2%) and net earnings of VND6,606bn (+88.5%). Sales volumes grew on high market demand, which registered its fastest growth since 2007 thanks to the positive performance of the property market and exports. Profitability benefited from increased margins resulting from rising prices as a result of the imposition of import duties on Chinese steel.
The food and beverage sector was the second-biggest contributor (5.7%) to the Fund’s performance. The key representative in this sector was also the Fund’s biggest holding, Vinamilk, which raised its foreign ownership limit to 100% during the year. The State Capital Investment Corporation (“SCIC”) sold 60% of its 9% of the company that it had targeted to sell. Although the SCIC did not succeed in selling its entire stake, it was nonetheless encouraging to see the State reducing its ownership in the company. Fundamentally, Vinamilk maintained its strong business performance with net sales of VND46,794bn, (+16.8%) and net earnings of VND9,350bn (+20.3%). We are, however, concerned about its 2017 earnings growth as the gross margin will be hit by the recent significant increase in the raw material price. This is the main reason why VEIL has been reducing its position in Vinamilk and re-investing the proceeds into more compelling opportunities.
Beverage company Sabeco is a recent acquisition of the Fund in the food and beverage sector. Given its leading position in the beer industry, solid business results, and mega-weight in VN Index, Sabeco is an alternative Vinamilk in order to diversify the portfolio. The stock did well (+33.9%) after listing on the HSX on 6 December 2016, however, the underweight position in Sabeco had a negative impact the Fund’s performance.
The third-largest contributor to VEIL’s return (4.4%) was the transportation sector. VEIL’s holdings here increased by 178.6% while the VN Index’s transport components actually decreased by 0.1%. VEIL’s gain was mainly due to ACV, which rose 86.4% since it started trading on the UPCoM on 21 November 2016. Since the Fund bought ACV in December 2014 at an average price of VND13,350, the stock has gained 264%. ACV’S 2016 operating results were also strong, with an estimated net revenue of VND16,595bn (+26%) and net earnings of VND3,384bn (+56%). The company was also estimated to have served 80.9 million passengers during the year (+28%), of which 23.8 million were international passengers (+25%) and 57.1 million domestic passengers (+30%).
Still in the transport sector, in December 2016, VEIL participated in the pre-IPO and IPO of Vietjet Air, the leading low-cost-carrier and the second-largest airline in Vietnam with a 41.4% market share. The IPO was oversubscribed, attracting interest from many big institutional players such as the Government of Singapore Investment Corporation (GIC) and Morgan Stanley, as well as from retail investors. Vietjet Air was recently approved to list 300m shares on the HSX with the ticker VJC. The company also announced strong 2016 operating results, with total revenue of VND27,532bn (+39%) and profit before tax of VND2,395bn (+105%). ACV and Vietjet Air are two typical examples of undervalued IPO stocks that VEIL was able to acquire due to its local presence and expertise. The Fund will continue to pursue this strategy and hopes to achieve similar results from upcoming IPO listings.
On the negative side, the banking sector, which fell by 6.5%, dragged down VEIL’s performance by 1.3%. We attribute the poor performance of the sector to the following reasons: Firstly, as the sector is undergoing restructuring, 2016 was the year that many banks had to book very high provisions for NPLs. Secondly, the banks were facing pressure from Basel II to recapitalise. When banks apply Basel II, the CARs of the system will be lowered. Thus, the outlook for credit growth is restrained by the banks’ ability to raise capital to meet Basel II standards. In addition, the search for strategic partners by various banks in 2016 was not successful. And thirdly, expectations of a lifting of bank FOLs went unfulfilled, with FOLs for the sector remaining unchanged at 30%. Nevertheless, the Fund’s banking stocks outperformed the market by 3.5% thanks to the selection of top names in the sector, i.e. Vietcombank, ACB and Military Bank.
VEIL : Vietnam Enterprise has a great 2016