Vietnam’s success in leveraging its positive attributes has resulted in an internationally competitive export manufacturing base, which is perhaps the most important driver for the country.
Why? Because exports matter. A lot. No emerging country of significant size has truly ‘emerged’ without building up a successful manufacturing export base to fund its domestic growth (e.g. South Korea, Taiwan, Hong Kong, Singapore and China). Today, Vietnam’s export growth is exploding upwards as it becomes the destination of choice for firms such as Samsung and Hyundai to set up new manufacturing plants. The scale and success of Vietnam’s export juggernaut is clearly evident in the chart below. Where nearly all emerging countries have struggled to grow exports over the past decade (emerging markets exports on average having declined for the past several years), Vietnam is almost unique, with export growth surging.
Crucially, Vietnam’s export boom should continue for decades, driven by China relinquishing market share in traditional light manufacturing categories as it transitions up the manufacturing value chain and rebalances its economy. As shown in the chart overleaf, China is still in the very early stages of this process, and with total manufacturing exports of around US$2 trillion a year, compared to Vietnam’s total exports of US$169 billion, the opportunity is huge and should support strong domestic growth in Vietnam for many years.
Source: EM Advisors Group.
*Y axis = Export Index (USD, 2007-10 = 100, 3mma).
China Low-end Market Share (G3 Industrial Imports)
Source: EM Advisors Group.
Despite the promising outlook, one of the most striking and appealing aspects of Vietnam is its cheap equity market. Visit the country today and it is easy to find quality companies growing earnings in the region of 20% p.a. but trading on lowly P/E multiples of around 12x. Compare this to the rest of Asia, as per the diagram below, and Vietnam is anomalously cheap.
2017 PER/EPS Growth
Source: Bloomberg PERs. Credit Suisse forward EPS growth, Dragon Capital.
There are reasons for some of these subdued valuations. In particular, market liquidity is low, foreign ownership limits can make it difficult to purchase companies and Vietnam is not in any significant global indices. However, things are quickly changing with efforts to open up the market accelerating. This year, the country’s two stock markets are merging, derivatives trading will commence and an increasing number of State Owned Enterprises will be privatised and listed. Most importantly, there are promising signs that the foreign ownership rules will be relaxed, with limits in banks already raised and developments in motion to dramatically increase foreign ownership levels across the market. Such enhancements should speed the country’s ascent to MSCI emerging market status and be very positive for the stock market.
Military Bank is one of our largest Vietnamese holdings, and a direct beneficiary of Vietnam’s improving economic outlook. The private sector credit cycle is picking up strongly, with the bank growing loans in excess of 25% and RoEs likely to head north of 20%. With significant capital, a great deposit franchise and strong growth in consumer banking, we believe the bank is very attractively valued at a little over 1x price to book. We are also seeing a strong revival in the property market, boding well for our holding in Vingroup, the county’s dominant property developer which enjoys privileged access to state-owned land and has a rapidly expanding consumer retail business. Recently we invested in Hoa Sen and Hoa Phat, two of the country’s leading steel producers which are likely to benefit from increasing infrastructure spending but trade on just 5x price to earnings. As the market continues to open up, we are likely to see Vietnam become an ever greater portion of our Asian portfolios.
The views expressed in this article are those of Roderick Snell and should not be considered as advice or a recommendation to buy, sell or hold a particular investment. They reflect personal opinion and should not be taken as statements of fact nor should any reliance be placed on them when making investment decisions.
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