VinaCapital Vietnam Opportunity Fund reports that, for the 12 months ended 30 June 2022, its NAV total return in US dollar terms was -8.8%. The shares fell by 12.8% in US dollar terms as the discount widened from 17.7% to 19.8%, but the dividend was increased from 11.5 cents to 16 cents per share. The VN Index fell by 14.9% in US dollar terms. The chairman notes that over the past few weeks, the discount has come under greater pressure, as have the discounts of most London-listed investment companies which invest in developing markets.
The manager’s incentive fee is capped at about 1.5% of NAV. $58.3m of unpaid fees were carried forward into this year but this accrual has fallen by $15.2m following this year’s NAV fall. $20.3m will be paid out this year and $22.8m carried forward.
The managers reiterate the relative strength of the Vietnamese economy saying that “Most economists project Vietnam’s GDP growth in 2022 to be one of the strongest in the region, with the World Bank recently raising their GDP growth forecast for Vietnam to 7.5% this year.” However, it notes that when “central banks around the world started to increase interest rates, the Vietnamese market did not avoid the collateral damage. Coupled with a campaign to clamp down on the illegal use of funds from bond issuances and stock manipulation by a few local companies, the Vietnamese stock market as measured by the VN Index declined significantly and more so than other regional markets.”
Extract from the manager’s report
[we appreciate that this is quite lengthy, but we admire the detail that VOF goes into in its reports]
Portfolio Review by Sector and Selected Companies
Looking back over the last year as Vietnam learned to live with COVID-19, we found ourselves spending more time with a few businesses that were severely affected by the movement restrictions imposed during the year.
Healthcare Sector – Thai Hoa International Hospital
All three of VOF’s hospital platforms faced severe cash flow challenges during most of 2021 as the pandemic hit and patients were reluctant to visit hospitals out of fear that they may contract COVID-19 or other illnesses. Furthermore, local governments were encouraging all private hospitals to turn their focus to treating COVID-19 patients, thus reducing capacity to treat only severe cases of other illnesses. Patient care related to COVID-19 generated very little revenue and, in some cases, drove hospital costs up significantly because extra precautions were required such as the wearing of personal protective equipment.
Towards the end of 2021 when Vietnam started to loosen movement restrictions, two of our hospital platforms, namely Thu Cuc International Hospital and Tam Tri Medical rapidly recovered, particularly their facilities in the major cities. However, provincial hospitals continued to suffer mainly because patient income and job recovery were not as pronounced as in and around the major cities. As of 30 June 2022, we are focusing on helping some of these hospitals in provincial cities improve their operational performance, particularly the Thai Hoa International Hospital in the Dong Thap province in the Mekong Delta. Thai Hoa International Hospital is currently carried at USD9.9 million in NAV and represents 0.8% of VOF’s NAV.
Construction Sector – Coteccon Construction (“CTD”)
VOF has one listed construction company in its portfolio, Coteccon Construction (HOSE: CTD) recorded at USD11.7 million in NAV or 1.0% of VOF’s NAV. This company faced significant hardship during 2021 and well into 2022. Over the last few years, there has been a major change at the Board and management levels. The new team has not been able to navigate effectively the challenges resulting from COVID-19. As the economy recovers, it finds itself struggling against higher material and labour costs. Given we are minority shareholders with few rights, we are unable to effect changes in management that we feel are necessary. It is encouraging to see that the majority shareholders do support the new management team and patiently await the fruits of their changes. Our lesson here is that we must continue to seek minority protections and veto rights, downside protections and/or performance commitments for all of our investments.
These two examples, representing about 1.8% of NAV, are some of the challenging cases in our portfolio. The investment team, working with our Business Enhancement Team, are helping these businesses in their recovery efforts and we hope over the next year to have some form of resolution.
Financial Services Sector – Asia Commercial Bank (“ACB”)
In early March 2022, we announced an additional investment in Asia Commercial Bank (HOSE: ACB, 11.6% NAV). ACB is now the largest position in the fund and reflects our intent to increase our exposure to the financial sector, while, at the same time, gradually reducing our overweight exposure to Materials and specifically Hoa Phat Group (HOSE: HPG, 9.3% NAV).
Founded in 1993, ACB is one of Vietnam’s leading private banks, with a strong focus on consumer lending to the retail and SME segments. The bank recently reported that it attracted 800,000 new active customers in Q4 2021, increasing customer deposit growth. Furthermore, the bank is embarking on an intensive expansion into digitalization, new strategic client segments, and extending its network in cities in northern Vietnam. ACB ranks among the top 10 banks in Vietnam in terms of loans and total assets. It has superior asset quality as evidenced by having the second lowest non-performing loans ratio amongst peers, and a high reserve cover.
The bank is attractively valued: it trades on a P/E ratio of 6.1x; on a forward price-to-book ratio (P/B) of 1.4x and on estimated 2022 ROE of 27.0%. This compares favourably to the banking sector that trades on a P/E of 10.1x; a forward P/B ratio of 1.8x; and on estimated 2022 ROE of 19.8%, according to Bloomberg and VinaCapital Research.
Furthermore, we reviewed the potential impact that higher inflation and rising interest rates will have on the banking sector and conclude that our consolidation of investments into higher quality banks such as ACB stands to benefit from their being able to increase their net interest income and earnings in a rising rate environment.
Construction Materials Sector – Hoa Phat Group (“HPG”)
Materials, specifically steel companies like Hoa Phat (HOSE: HPG, 9.3% NAV), did well during 2021. HPG enjoyed a record profit after tax of USD1.5 billion in 2021, making it one of the first non-banks ever to do so. However, into 2022, its share price declined and measured over the financial year, had declined by 42.8% due to: (1) weak demand and general market decline; and (2) HPG is operating at near-full capacity. The Materials sector overall has been one of the worst performing sectors between January to June 2022, impacted by reduced selling prices and higher input costs. However, we feel that China and Vietnam will start to spend heavily on infrastructure to stimulate their economies and the average sales price for steel will climb and margins will improve. Further, as HPG is currently investing in phase 3 of its expansion strategy, new capacity and a renewed opportunity for growth will commence towards the end of 2024.
During the first half of the financial year, primarily during the July to December 2021 period, and prior to the sharp correction in the share price during the second half of the financial year, we continued to trim down our position in HPG to return approximately USD68 million in proceeds to the Company which we earmarked for investments into new opportunities such as ACB mentioned above. Nevertheless, HPG remains a top 5 holding in the portfolio, and the long-term story for HPG remains intact, with no domestic or foreign steel producer able to match HPG’s formidable competitive advantages or outsized market share.
Industrial (Aviation) Sector – Airports Corporation of Vietnam (“ACV”)
As mentioned earlier, by 2Q22, domestic passenger volumes surpassed pre-pandemic levels. As such, the recovery in the aviation sector so far in 2022 has seen Airports Corporation of Vietnam (UPCoM: ACV), one of our top 5 holdings (6.3% NAV) post a turnaround and significant improvement in performance. The share price has outperformed the VN Index over the 1H22, posting a decline of -9.2% versus -21.2% for the VN Index. 2H22 should see an increase in international passenger volumes, particularly with the reopening prospect of China, South Korea, Taiwan, and Hong Kong. International passenger volumes are important for ACV as domestic passenger fees are much lower than international passenger fees. A further catalyst for ACV is the expansion and completion of Terminal 3 in Tan Son Nhat International Airport in Ho Chi Minh City as it will help expand capacity at the country’s busiest airport. In addition, with borrowings in JPY, a further weakening of the JPY could contribute to unrealized FX gains for ACV. Our Research team expects ACV to deliver net profit growth for 2022E of USD235 million (+564% y-o-y) and 2023E of USD350 million (+48% y-o-y), returning to pre-COVID-19 levels.
Real Estate Sector – Hung Thinh Land (“HTL”)
The largest sector allocation in the portfolio is Real Estate at 27.1% of NAV. We have written extensively in recent months to our investors of the difficulties that the sector had to face in the light of the government’s efforts to clamp down on stock market manipulation within the small-cap real estate companies and the scrutiny concerning the use of proceeds from the raising of corporate bonds. This has had an impact on the sector’s performance over 2H22, with the sector declining 23.5% during the January to June 2022 period.
Nevertheless, we are long term investors and fundamentally believe that the sector still offers attractive investment opportunities and can deliver strong returns over the long term. As such, we continue to seek opportunities and in May 2022 the fund completed its investment in Hung Thinh Land Joint Stock Company (Pre-IPO: HTL, 2.2% NAV), one of the largest privately held property developers in Vietnam. VOF invested USD25 million to obtain an undisclosed minority stake in the property developer. Established in 2002, HTL has 20 years’ experience in the Real Estate sector, and the team at HTL has benefited from many years of experience from Hung Thinh Group Corporation developing multiple real estate projects across Vietnam. Today, HTL is developing 49 residential and hospitality real estate projects with a large land bank of approximately 2,000 hectares in various prime locations, including Ho Chi Minh City and other major provinces such as Dong Nai, Binh Duong, Vung Tau, Khanh Hoa, and Binh Dinh.
HTL has a clear plan for IPO and listing its shares on the HOSE in 2023. Post-listing, HTL is expected to become the third largest real estate developer on HOSE, following Vinhomes (HOSE: VHM) and Novaland (HOSE: NVL), and could be added into the VN30 index basket. This investment supports our strategy of having a diversified portfolio in public and private equities in the medium to long term, by seeking opportunities that are not readily available to the market.
Real Estate Sector – Khang Dien House (“KDH”)
Khang Dien House (HOSE: KDH, NAV 10.7%) remains one of the top holdings in the portfolio. KDH is one of the leading landed property developers in Vietnam, focusing on townhouses and villas. Since 2017, the company has also expanded into mid-range condominium developments. The company’s market cap is USD1.1 billion and it possesses an undervalued land bank that is one of the largest in HCMC. It has a long pipeline of developments, with their current land bank in excess of 600 hectares in HCMC representing at least 10 years of development. Among listed peers, only Vingroup and Novaland have larger land banks in Ho Chi Minh City.
KDH’s 2Q22 profit surged 25% y-o-y to USD14.5 million. Our Research team maintains their presales forecast for 2022 of USD227 million from the launch of two projects in 2H22 (one condominium project, and one landed property project). KDH benefits from strong urbanisation trends and favourable demographics amongst its buyers, coupled with a low future supply of products. Its projects are the least speculative among peers due to the high demand for condominiums and landed property within HCMC and the company’s fast payment schedule that they can demand is less attractive to speculative buyers.
Materials Sector – An Cuong Woodworking (“ACG”)
Another key portfolio company that is a major beneficiary of the recovery in the Real Estate sector is An Cuong Woodworking (UPCoM: ACG, NAV 3.9%). The company recently announced strong revenue and profit guidance for the year, with revenues of USD184 million (+29% y-o-y), and NPAT of USD24 million (+22% y-o-y), while the 1H22 revenue and NPAT increased 12% and 17% y-o-y, reaching 45.1% and 50.7% of the full year targets, respectively. Profit margins remain strong despite rallying input prices thanks to their strong selling price bargaining power and productivity improvements. Furthermore, the company moved its listing to HOSE in October 2022.
Overall, ACG attributes its performance to economies of scale, expanding market share as customer demand is recovering across most segments, while softer COVID-19 disruptions on home furnishing and construction activities in both domestic and export markets are reflected in strong 1H22 sales growth. ACG plans to grow its exports revenue by 70% in the medium term, as well as improve export profit margins which are currently lower than that of the domestic business. Furthermore, ACG continues to expand its customer base and distribution network. During the past year, it has formed various partnerships to provide its products to Novaland (a leading property developer), Central Hill (an emerging condo developer of which ACG owns 30%) and NEM Furniture (a contractor/designer firm).
Consumer Discretionary – Phu Nhuan Jewelry (“PNJ”)
Turning to one of the few Consumer Discretionary holdings in the portfolio, Phu Nhuan Jewelry (HOSE: PNJ, NAV 4.8%) released robust 2Q22 results, with net sales growing 81% y-o-y to USD345 million and net profit jumping by 64% y-o-y to USD16 million. In June alone, net profit came in at USD3.5 million, up 58% y-o-y. A strong performance was seen across key product lines in 2Q22, with the retail segment being the main driver with retail sales up 90% y-o-y, gold bar sales up 74% y-o-y, and wholesale sales rising 55% y-o-y, buoyed by strong consumer sentiment after all lockdown restrictions were removed across the country. Gross profit margins remained relatively steady in 2Q22 at 18%, a slight decrease from 19% in 2Q21 due to changes in product mix, elevated promotion activities, and higher input costs.
Following our recent company visit and meetings with the Chairwoman and the CEO, we have confidence in PNJ’s outlook for 2022 post-COVID-19, as it continues to gain retail market share with growth underpinned by: (1) a resilient high-income and affluent customer base; (2) the company’s more effective marketing activities as reflected by the improved retail gross profit margins despite aggressive promotions; and (3) PNJ’s enhanced digitalisation capabilities which look to improve operational efficiency, lower SG&A to retail sales ratio (down 1.7% to 16.3%), and better retail growth compared to wholesale growth which suggests that PNJ has gained further market share. Thirteen new gold stores opened in 1H22, of which five were opened in June alone. PNJ anticipates that it will continue to deliver strong growth in 2H22, from a low base in 2H21 due to the COVID-19 lockdowns last year.
Consumer Discretionary – Nova Consumer Group (“NCG”)
In March 2022 we completed a USD25 million investment into a rapidly growing consumer goods and agri-business company. Nova Consumer Group (OTC: NCG, NAV 2.1%) have been a leading Vietnamese company in the area of veterinary products and animal feed. The company expects to expand rapidly into consumer foods, milk, energy drinks and coffee products over the next few years. This is a pre-IPO opportunity and we expect that the company will list within the next 12 months on one of the main bourses. The terms of investment, typical of the investment terms discussed above, include a put option back to the company at a secured, minimum IRR, along with collateral coverage in excess of our investment amount.
Industrials Sector – Ngoc Nghia Industry Service Trading (“NNG”)
Turning to divestments from the portfolio during the financial year, in March 2022 we completed the successful exit from Ngoc Nghia Industry – Service – Trading (UPCoM: NNG), which at the time was a top five private equity investment in the portfolio. We sold to Indorama Ventures which is a Thailand-based Indian chemical major, through a PTO process.
VOF invested USD17.4 million for a significant minority stake in NNG in December 2019, just prior to the global health pandemic. Since our investment, we supported the Company in strengthening corporate governance, restructuring the capital structure, and enhancing the process of capital expenditures and working capital management. As a result, the net debt has been reduced significantly by around 30% compared to when we made the investment. This divestment will deliver VOF 1.5 times return over 2.5 years, equivalent to an IRR of 20%.
It should be highlighted that all these investments and divestments we discuss above were all entered through a privately negotiated process, generally when these businesses were private and over time, several will “cross-over” to the public equity portfolio where we remain investors. The table above of our top 10 holdings in the public equities portfolio also highlights how we entered into these investments. In general, between 70% to 80% of the investments held in the public equity portfolio were entered through privately negotiated routes, with very few via on-market transactions, demonstrating that we remain committed to our core strategy and strive to maintain this point of differentiation.
VOF : VinaCapital Vietnam Opportunity holds up relatively well in falling market