VietnamÆs equity markets were on a rollercoaster ride for the better part of 2007 û do you see an improvement this year?
Consider 2007. The market by and large steadily climbed until March 12 û the dips were caused by notable scares, such as in early February when there were rumours of a tightening of capital controls. The bull run ended in March when (former US federal reserve chairman) Alan Greenspan began to talk about a possible recession in the US. And the market steadily dropped until the PetroVietnam Finance Corporation (an affiliate of Vietnam Oil and Gas Group) initial public offering on April 21. The steady fall through to the summer was in part driven by some warnings. In July, for example, Merrill Lynch researchers wrote that VietnamÆs price to earnings (P/E) looked high û and the market fell. But then by August, both Citi and HSBC issued rosier reports and the market began to climb again. Of course, the US mortgage crisis hurt nearly everyone around the world and October and November were marred by another market fall.
This year is promising. Fundamental valuations are looking better now that the P/E multiples are in the low-20s on 2008 estimated earnings after the sell-off late last year. Indeed, 2008 earnings per share growth is expected to deliver another 20% or more a year, and steps that the government must take to fight inflation will likely benefit US dollar-denominated investors. We forecast a minimum of 50bp appreciation in the Vietnamese dong against the US dollar this year.
Has the market lived up to your expectations?
Indochina Capital is a fundamental investor and we are largely undeterred in our value views by wild swings in market valuations. Often we see these non-fundamental rifts as buying opportunities. This was certainly the case late in 2007 and early 2008 for select high-quality blue-chip stocks that sold off like mad, such as Vietnamese software development provider FPT.
In fact, the equity premium in the Vietnam market has eroded. The expected price-to-earnings ratio for 2007 for the VN index was 26.8 with a forward P/E for this year forecast at 22.8 according to estimates by Mekong Securities based on December 31, 2007 stockmarket closing prices. The expected earnings growth for 2008 is 20.1%. But we view that as a positive correction.
Which companies or sectors do you like?
We are big on the domestic consumer sector, which was AsiaÆs fastest growing fast-moving consumer goods market in 2007 with 20% growth. Compare that to ChinaÆs consumer goods market at 11% growth. Among the domestic consumer goods sectors which are exploding here, are food and beverage companies, and providers of personal care products. Out of VietnamÆs top 10 fastest growing brands, the leading four are domestic Vietnamese brands.
Other sectors that are growing at a robust pace are consumer-focused businesses in Vietnam and include: healthcare, education, financial services, retail apparel, household furnishings and transportation.
WhatÆs over-hyped and overdone at this point?
OTC banks and securities firms are fully priced but watch 2008 carefully for book value and earnings growth. If the sectors deliver another knockout year like 2007, we could see substantial share price movements again.
What type of time frame should investors have in mind when they look to Vietnam û a few months or years?
We are among the more patient investors in the marketplace and we tend to take a three-year view on our positions û thatÆs the period for companies to unlock value, whether it be product or market potential or unmonetised assets. It takes time in Vietnam.
If there was one investment you feel you missed, what was it and why?
We never miss great opportunities! No, seriously, we have let a few things go in 2007 that would have provided nice 30% plus annual returns because we misjudged VietnamÆs historic market rally that occurred at the end of 2006 and in the first quarter of 2007. While many of those positions moderated quite a bit by the end of 2007, we were still in dismay over the high momentum that some of these stocks showed during the bull period. The sectors included seafood, fertiliser and commodities.
What are the key risks in the future?
HereÆs my laundry list: the potential for a US recession, (domestic) inflation, a delay in state-owned enterprises equitising and a lack of a sound offering structure that might discourage investors, an inability by the corporate sector to sustain its high earnings growth, potential for massive issuance of dilutive capital instruments and, in general, potential policy risks.
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