Vietnam Holding (VNH) has published its annual results for the year ended 30 June 2021 and is now approaching the 15th anniversary of both its incorporation and its listing in London, having provided what its chairman, Hiroshi Funaki, describes as one of the most robust performances in the Company’s history.
In the first half of the financial year, VNH’s NAV per share increased by 38.7% to USD 3.201, in line with a 38.8% return for the Vietnam All Share Index (VNAS) in USD terms. Then, during the second half, VNH’s NAV per share increased by a further 43.7% to a record USD 4.60 per share. For the financial year as a whole, the NAV per share increased by 99.3%, outperforming the total return of the VNAS by 7.3%, in USD terms. VNH’s outperformance of the Vietnam Index (VNI) was even higher at 27.3%. For the calendar year to 30 June 2021 it was the top-performing fund in Vietnam.
Strong returns from a concentrated portfolio
VNH maintains a high-conviction concentrated portfolio. As at 30 June 2021, VNH held 26 positions, with its top-ten positions making up 68.8% of NAV. The largest weighting, FPT Corporation (11.0% of NAV), is the country’s leading IT and telecoms services company. This soared by 130.6% as it secured significant traction in its domestic and overseas business. Hoa Phat Group (9.4% of NAV) is Vietnam’s largest steel producer in construction steel and steel pipe. This was a particularly strong performer in VNH’s portfolio for the period with a gain of 222.3%. The banks in VNH’s portfolio also performed very positively with Vietin Bank (CTG) up 150.3%, VP Bank (VPB) up 233.9%, Military Bank (MBB) up 205.7%, and Sacombank up 182.7%. Overall, 25 of VNH’s 26 positions increased in value and only one fell during the period.
Investment manager’s report
Reflecting VNH’s strong focus on ESG, the company has provided a very extensive investment manager’s report within its annual report, and we would recommend investors read this in full. However, we are including some key extracts below.
Increased Liquidity in the Market
Foreigners have been net sellers of Vietnamese equities for most of the last year with more than USD 2.0bn in net sales in the eighteen months to 30 June 2021. This has been replaced by domestic money, particularly stemming from new investors. Throughout the year an estimated one million new trading accounts have been opened, and this is currently continuing at a rate of 100,000 new accounts per month. There are now an estimated four million retail trading accounts in Vietnam, which is more than in the UK.
The significant increase in trading volumes did cause some havoc. In the second half of the financial year, the Ho Chi Minh Stock Exchange (“HOSE”) infrastructure appeared to be unable to cope with orders beyond USD 700m a day. Some administrative measures were taken, including increasing the lot size ten-fold to 100 shares and moving the trading venue for some stocks to the Hanoi Stock Exchange. FPT, our top holding, was also involved in helping to provide an interim technical solution to the HOSE, and this was finalised on 4 July 2021. Daily trading volumes on HOSE have now reached USD 1.3bn during some trading periods, which is five times the level of a year ago.
The HOSE infrastructure is due for an extensive overhaul within the next year and will be replaced by a Korean system. The new system is expected to integrate with a proposed central share depository, which will help move towards faster settlement and remove some of the problems associated with the need to pre-fund trading accounts. This bodes well for the continued growth of the stock market. In fact, to put the growth in context, the market capitalisation of all Vietnamese listed companies is now approximately USD 300bn compared to only USD 2bn when the Fund was launched in 2006.
Increased Liquidity in the Portfolio
The median market capitalisation of the Fund increased by a significant amount throughout the year – from USD 540m at 30 June 2020 to USD 1.98bn at 30 June 2021. This was due to our increased allocation in banks – which tend to be larger cap companies – and the performance of some of our previously ‘mid-cap’ holdings, which are now large-cap. The dramatic growth in top five positions such as HPG – now a USD 10bn market capitalisation company – also contributed to this surge.
The larger cap stocks, accounting for 76% of the portfolio, continued to outperform the small and mid-cap stocks for most of the year. We did see an interesting inversion in the relative valuations of smaller stocks in the second half of the year, driven in part by increased attention from domestic retail investors. To be specific, three years ago the smaller cap stocks, as measured by the VN 70 index, traded at a P/E ratio level around 30% lower than the larger cap stocks, as measured by the VN 30 index, while over this last year the ratio inverted with the VN70 stocks trading at a 30% premium to the VN 30 index in March 2021.
The portfolio liquidity is relatively high and we estimate that 94% of the portfolio could be liquidated in less than 30 days. This is a result of the combination of higher market liquidity (5x the levels of 2019, as described above) and a higher relative weighting to larger stocks. Also, as at 30 June 2021, the portfolio stock holdings were all quoted, and our previous only ‘private equity’ position in ABA was realised on 25 June 2021 for cash.
In October 2020, we decided not to exercise the conversion option we held in ABA (4% of prevailing NAV at the time of investment), and instead sought repayment of the convertible bonds originally by 27 November 2020. We were in close contact with the portfolio company and they informed us that despite their best efforts in securing refinancing options, COVID-19 travel restrictions had delayed the process and repayment would be delayed. We agreed to provide an extension initially to 31 March 2021 and then ultimately until 29 June 2021 at an enhanced interest rate and enhanced contractual return. The loan was repaid in full on 25 June 2021, earning a total return of approximately 13% IRR in Vietnamese Dong (“VND”) for a money multiple of approximately 1.24x cost.
The portfolio’s size and nimbleness as per our style of investment management means that we can navigate across the spectrum of company sizes from smaller private pre-IPO type opportunities to mid-cap and larger-cap companies. Over the past 12 months, we have benefitted from a tilt towards the banking sector that underpins many of our investment themes – industrialisation, urbanisation and the domestic consumer – but we may identify other opportunities in the year ahead. For example, as the vaccination plan becomes a reality, we expect some other stocks, such as consumer and logistics companies, could see increased visibility and growth. The portfolio liquidity is also at levels that can readily support the recently announced tender for 30% of the Company’s shares. The Tender, announced on 3 August 2021 was approved on 31 August 2021, and payments of approximately USD 56.7m made to participating shareholders through our broker finnCap on 13 September 2021. We have taken advantage of the tender process to rebalance the portfolio and begin to position it for 2022.
Vietnam’s Bigger Economic Picture
Vietnam’s macro performance was also outstanding in 2020. The country was one of the few in the world to post positive GDP growth (at around 2.91%1), and it outperformed all of its ASEAN neighbours. Having successfully navigated the first waves of COVID-19, Vietnam ended 2020 on a very high note. As the chair of ASEAN, it entered into several noteworthy bilateral and multilateral trade arrangements during the last year, including free trade agreements with the European Union and the UK, as well as the regional comprehensive economic partnership (“RCEP”). Its economy expanded by 5.64% in the first half of 20211 and GDP growth for the full year of 2021 is forecast to be 3.5% – 4%, almost back on track with its standout 30-year growth record.
The Foreign Direct Investment (“FDI”) trend also continues, with more than USD 20bn disbursed in 2020 and a further USD 10bn disbursed in the six months to 30 June 2021. Much of this is for manufacturing export production playing to Vietnam’s increasing competitive advantages across several sectors, including garments, agriculture, aquaculture and increasingly more hi-tech. The government is keen to increase the value-added level of Vietnam’s manufacturing sector and has already helped cement the country as a leading hub for the manufacture of mobile phones, tablets and lap-top computers. As part of the government’s initiatives to be a modern industrialised economy, it is also showing growing support for new technologies, such as Electric Vehicles (“EV”). VinFast, a local car manufacturer, has invested USD 3.5bn in an EV assembly plant. FoxCon, a significant investor in Vietnam for the assembly of components of Apple iPhones and accessories, also has aspirations in the EV space. It is possible that Vietnam could focus on creating hubs of specialised production for these and other growth sectors to complement the areas in which it has built up both capability and scale advantages over many years.
2020 saw a record full year trade surplus of USD 20bn. Exports grew by 28.4% year-on-year (“YoY”) in the first six months of 2021, but were eclipsed by the 36.1% YoY increase in imports. This led to a USD 1.47bn trade deficit as at 30 June 2021. The full calendar year is expected to see the country back in surplus mode, even though the Delta wave of COVID-19 has disrupted the country’s manufacturing base with ongoing impacts on its supply chains. The country hopes to achieve greater levels of vaccination by September and is focusing on getting two thirds of the population jabbed by the end of 2021. The balance of payments remains strong and the country is forecast to maintain about USD 100bn in foreign reserves by the year-end.
The VND has remained relatively stable against the USD for the last couple of years, and in 2021 started to appreciate against it. Several times over the last few years Vietnam (along with several other open economies, including Singapore, Switzerland and Malaysia) have been accused of currency manipulation by the US. However, the most recent ‘charges’ against Vietnam were dropped in July 2021.
Inflation has raised its head in much of the world in part due to disruptions brought on by a combination of COVID-19, semiconductor shortages, shipping disruption in the Suez Canal and rising commodity prices. Although Vietnam’s inflation has picked up and is expected to be about 4% this year, there is no undue concern at this stage.
Impact of COVID-19 Delta Variant
Vietnam attracted worldwide attention for its commendable coordination and swift response to limit the spread of the first waves of COVID-19. It successfully curtailed transport with those countries affected, putting people in well-organised quarantine and extending the school holidays with firm and transparent plans. Authorities also were proactive and innovative in the use of traditional and social media to inform the public. As a result, the initial outbreaks of COVID-19 in 2020 were put under tight control.
In April 2021, much of Asia experienced the start of the fourth wave of COVID-19 with the virulent Delta variant spreading rapidly. This time Vietnam was unable to avoid significant levels of infections and has seen cases rise to close to 630,0001, with sadly more than 15,000 deaths to date. This is still much lower than countries of similar size in Europe but is a stark reminder of the difficulties in eradicating the threat of COVID-19 until large parts of the world are double vaccinated.
Ho Chi Minh City and Hanoi were put into periods of lockdown, and most of Vietnam’s provinces faced disruptions. This has impacted manufacturing capability and factory productivity, with a knock-on effect in the region’s supply chains. Unlike the US and the UK, where large volumes of vaccination doses were immediately procured, Vietnam initially had to rely on smaller volumes from COVAX and other direct donations from countries. Nevertheless, in the long-term, it hopes to be self-sufficient in vaccine production with manufacturing under licence and its own home-grown vaccine, which is undergoing late-stage trials. Currently, approximately 30% of the population has been vaccinated, in Ho Chi Minh City more than 90% of the adult population have received one dose, and 11% two doses. For much of the last year Vietnam has put in place strict quarantine measures on incoming travellers. Not only has this severely impacted the country’s USD 20bn tourism industry, it has also delayed, and in some cases prevented, completion of M&A investments. This was the part of the reason for the delay in the refinancing of our investment in ABA. We do expect M&A to pick up significantly when the quarantine restrictions are eventually eased, though this could be some time away.