Roller coaster ride for VinaCapital Vietnam Opportunity

Vietnam Opportunity makes fee changes

VinaCapital Vietnam Opportunity Fund (VOF) has announced its annual results for the year ended 30 June 2019. The Chairman, Steven Bates, says that over the course of VOF’s financial year, the stock market in Vietnam had something of a roller coaster ride, rising at first and then falling in line with global markets in the fourth quarter of 2018. Since then, it has staged a decent recovery and now sits more or less where it started, despite the volatility in the meantime. In Sterling terms, VOF’s NAV per share increased by 1.8% while in US Dollars, it fell by 1.9%, both on a total return basis. The share price increased by 4.3%, reflecting a narrowing of the discount during the period (from 20.1% to 16.0%).

Investment Manager’s portfolio highlights

The investment manager’s report provides the following key portfoliohighlights for the year:

  • Accounting for the dividends paid, VOF’S NAV per share declined by 1.9% as at 30 June 2019 financial year (“FY2019”).
  • VOF paid a total of USD20.5 million in dividends (or USD0.11 per share), equivalent to a yield of 2.1% of NAV per share and 2.5% of share price as at 30 June 2019.
  • Over the previous three financial years to 30 June 2016, 2017 and 2018, VOF delivered total returns of 15.4%, 25.6% and 16.8% in USD terms, respectively.
  • VOF ended FY2019 with a total NAV of USD955.2 million or USD5.17 per share, and a total market capitalisation of USD802.1 million or a share price of USD4.34 per share, representing a discount of 16.0%.
  • VOF’s share price increased by 0.9% in US Dollar terms and by 4.6% in Sterling terms over the 12 months ending 30 June 2019.
  • During the financial year the Fund acquired 9.2 million VOF shares at a cost of USD39.6 million under its share buy-back programme. Furthermore, as part of the new fee arrangements agreed during the fiscal year 2018 whereby 25% of the performance fee that is paid to the Investment Manager is used to purchase VOF shares, the Investment Manager acquired 0.9 million VOF shares at a cost of USD3.7 million.

Investment manager’s portfolio review

  • During the financial year, VOF sold USD224 million of investments in listed and unlisted equities.
  • VOF benefited from several major exits from its capital markets portfolio, with a gross total of USD154 million sold, including stakes in Vinamilk (HOSE:VNM), FPT Corp (HOSE: FPT), Viglacera (HOSE: VGC), Hoa Phat Group (HOSE: HPG), and Vietcombank (HOSE: VCB).
  • Sales from the private equity portfolio included American Homes Vietnam, a leading ceramic manufacturer (discussed in the December 2018 interim report), and the last remaining direct real estate investment in late 2018.
  • The Company invested USD155.1 million, in two private equity investments totalling USD42.9 million, and the balance in listed and unlisted equities via private placements and privately negotiated investments.
  • Total cash available at the beginning and end of the financial year was USD34.2 million (including short-term deposits) and nearly USD32.9 million (or 3.4% of NAV), respectively.

“VOF’s decline of 1.9% on a total return basis was less than the VN Index, which was down 2.6%, in USD terms. The capital markets component of VOF’s portfolio, which lost 6.1%, represented 80% of VOF’s total NAV. As a result, the capital markets component contributed a loss of 4.8% towards VOF’s total return. The capital market component’s underperformance against the VN Index was due primarily to losses attributed to HPG (-21.2%) and Coteccons Construction (HOSE: CTD) (-30.5%) during the financial year. These two larger holdings make up 13.5% of VOF’s NAV as at 30 June 2019.

During the financial year, CTD’s share price was adversely affected by persistent rumours that a consortium led by the largest shareholder, Kusto had acquired a large stake in CTD which would allow them to veto certain shareholders’ decisions proposed by the Board of Directors which could affect the operations of the company. At the last AGM held in April 2019, Kusto voiced their disapproval of management’s recommendation to merge an affiliate company into CTD. As a result of the tensions between the management and the largest shareholder, some shareholders have decided to divest their holdings and appear to be selling indiscriminately, regardless of the valuation.

Once again, similar to the discussion first raised in last year’s annual report, if we look at the VOF portfolio through an alternative lens, one that classifies how we initially entered the investments that are currently held in the portfolio rather than how they are presented by their current asset class, this may help illustrate our private equity and privately negotiated approach to investing. As at 30 June 2019, VOF’s total NAV of USD955.2 million consisted of assets that were invested through essentially four paths[2]:

  • Private equity:46.6% (FY2018: 42.5%) of VOF’s total NAV is the carrying value of companies that VOF entered through the private equity route. Investments in this group include Hoa Phat Group (“HPG”) and Phu Nhuan Jewelry (“PNJ”) which have subsequently listed.
  • Private placement and Pre-IPO:16.9% (FY2018: 17.6%) of VOF’s total NAV is the carrying value of companies that VOF entered through a private placement with certain investment rights. Investments in this group include Coteccons Construction (“CTD”). Some of these investments have also gone on to list on Vietnamese stock exchanges.
  • Equitisation:20.7% (FY2018: 25.6%) of VOF’s total NAV is the carrying value of companies that VOF entered through the equitisationprocess. Investments in this group include Vinamilk (“VNM”) and Airports Corporation of Vietnam (“ACV”). Over the current financial year some of these investments moved to the listed equity portfolio; and
  • Shares purchased on the listed stock market:11.5% (FY2018: 10.6%) of VOF’s total NAV is the carrying value of shares acquired directly on the Ho Chi Minh Stock Exchange or the Hanoi Stock Exchange

Typically, VOF will retain listed investments where we feel that the investment gains in the coming years can surpass a minimum hurdle of 15% per annum. Depending on the risk profile, if the investment does not have the potential to expand its P/E ratio to a peer average level or deliver meaningful EPS growth to surpass the minimum hurdle, then we will look to exit the holding. At the time of writing, companies in VOF’s unlisted portfolio are expected to deliver an average EPS growth in excess of 20% over the coming year, while the weighted average P/E ratio of listed companies in the VOF portfolio is 16.0x at the end of the financial year.

In summary, we aim to invest in private, off-market opportunities that are not widely available to the general market and almost 80% of the opportunities evaluated by the investment team are into these opportunities. Over time, several of these investments may migrate to the listed portfolio through an IPO and listing process or exit through an M&A process.

In certain cases, we may accumulate additional shares of listed companies in the portfolio on the market in order to build a strategic stake that will enable us to command a premium upon an exit to a strategic buyer. Otherwise, we will typically view the listing of the privately held company as a means to exit and sell the shares.”

Investment manager’s comments on notable sector weight changes

“Our bottom-up investment approach means that the portfolio is benchmark and sector agnostic – it is not managed against an active benchmark like the VN Index. Nevertheless, it may be useful to understand the sector allocation, and changes in exposure, compared to that of last year.

Overall, the sector weightings have remained more-or-less consistent with the prior year, with no significant rotation due to structural or cyclical changes:

  • Real estate & construction:In recent years we have sold all of our direct real estate (“DRE”) holdings, with the last divestment being Green Park (Thang Loi) Estate done during FY2019. VOF has re-invested some of the proceeds from these DRE divestments back into the real estate sector through investments in public and private equity transactions of real estate related companies;
  • Construction materials:The decrease in exposure is largely due to profit taking during the year on our largest holding, Hoa Phat Group (“HPG”) as well as the stock’s price decline during the course of the financial year;
  • Food & beverage:Further to profit taking during FY2018, in FY2019 VOF continued to reduce the position in Vinamilk (“VNM”) as we believed that the milk company is fully valued. Nevertheless, the Food & beverage sector remains in our top three sector allocations as companies in this sector stand to benefit from increasing wealth creation and domestic consumption. Over the course of the financial year, VNM’s share price declined by 10.3%; and
  • Financial services:VOF invested into Ho Chi Minh Development Bank (HOSE: “HDB”) and Orient Commercial Bank (OTC: “OCB”) via private equity and pre-IPO process in 2017. In the current financial year, the weighting to the financial services sector rose from 11.2% to 12.5%.”

Listed portfolio review

“The table below sets out VOF’s top 10 listed equity holdings as at 30 June 2019. The top ten positions now account for 56% of the portfolio, down from 59% as of last year, and 82% as of two years ago:


  Investee company Sector Entry classification 2018




1. Hoa Phat Group (HPG) Construction materials Private Equity 14.6 10.9
2. Khang Dien House (KDH) Real estate & construction Private Equity 7.2 9.0
3. Airports Corporation of Vietnam (ACV) Infrastructure Equitisations 8.2 8.2
4. Phu Nhuan Jewelry (PNJ) Consumer discretionary Private Equity 5.5 6.2
5. Vinamilk (VNM) Food & beverage Equitisations 8.5 5.8
6. Eximbank (EIB) Financial services Private Placement 3.7 5.2
7. Quang Ngai Sugar (QNS) Food & beverage Private Placement 2.8 3.1
8. Vietjet Air (VJC) Industrials Private Placement 3.7 2.9
9. Coteccons (CTD) Real estate & construction Private Placement 2.5 2.6
10. Orient Commercial Bank (OCB) Financials Private Placement 2.4 2.5
Total 59.1 56.4


Table: Listed equity holdings, % of total NAV as at 30 June 2018 compared to 30 June 2019. Source: Bloomberg, VinaCapital Research

During FY2019, VOF had between 30 and 40 holdings in its listed portfolio and we would like to highlight several of the larger holdings to provide a sense of how they are performing:

Hoa Phat Group (HPG) – Listed on HOSE

Hoa Phat Group is Vietnam’s largest steel manufacturer. HPG holds the leading position in the construction steel segment, with market share at 25% which is significantly higher than the second-largest company. The company also holds the leading position in the steel pipe segment with a 30% market share.

HPG’s earnings in the first half of 2019 were USD 172 million, a decrease of 13% y-o-y on due to a decline in gross margin resulting from a much higher cost of a key input, iron ore, and capacity constraints. Steel revenue growth of 7% was achieved by a combination of an increase of 13% in volume and a 4% decrease in the average selling price. The main driver of long-term growth is capacity expansion, which includes a new steel sheet line (increasing annual capacity by 400,000 tons). Meanwhile, the construction of the large new Dung Quat project, an addition of four million tons of total capacity, remains on track; phase one will add two million tons of annual capacity for construction steel and is due to be operational in 2019.

The current valuation of HPG is 7.8x based on its TTM earnings which remains attractive given their solid fundamentals. At this multiple, HPG continues to trade at a discount to peers, and we feel that the stock is undervalued. As at 30 June 2019, HPG accounted for 10.9% of VOF’s total NAV.

Khang Dien House (KDH) – Listed on HOSE

 Khang Dien House is one of the best-known property developers in Ho Chi Minh City (HCMC). The company has an excellent track record in many town house and villa projects and owns one of the largest land banks for residential development in HCMC (400 ha in total land area). In recent years, KDH has experienced strong demand for its landed projects in east HCMC in areas such as Districts 2 and 9, where the infrastructure has rapidly improved.

In February 2018, KDH acquired Binh Chanh Investment and Construction (BCI), a major player in the west of HCMC, via a share swap. KDH has been actively tapping into BCI’s low-cost land bank and has begun launching major landed projects in 2018. Considering the affordability and rising demand in the mid-end market, we expect a strong absorption in KDH’s upcoming high-rise projects. Furthermore, KDH’s apartments were of higher construction and management quality with more competitive prices than its main competitors.

Management estimates 2019 net profit growth to be around 30% y-o-y, 16% higher than the company’s initial target. Profit will be largely driven by the delivery of units pre-sold in 2018 and 2019. KDH is trading at a 2019 P/E ratio of 12.3x and a price-to-book ratio of 1.7x. As at 30 June 2019, KDH accounted for 9.0% of VOF’s total NAV.

Airports Corporation of Vietnam (ACV) – Listed on UPCoM

Airports Corporation of Vietnam operates 22 airports and develops aviation infrastructure in Vietnam. For the first half of 2019, the company reported revenue of USD385 million and profit of USD159 million, representing revenue growth of 12% and profit growth of 20% year-on-year. For the full year 2019, we expect revenue growth at 14% and profit at 14% despite the slowdown in international passenger growth (4.5% in 1H2019 vs. 22% in 1H2018). However, at the recent AGM at the end of June 2019, management announced that earnings would receive a boost because ACV would be able to collect licensing fees from busy international airports such as Cam Ranh and Da Nang airports which are not 100%owned.

The stock trades at a substantial premium to other large cap stocks in Vietnam, but we think that this is justified given its monopoly position and continued growth from domestic passengers who have been attracted by lower ticket prices, greater convenience and new low-cost airlines, making air travel the optimal choice.

The listing progress to HOSE has been delayed due to issues around the ownership of airfield assets and land. ACV plans to invest in Terminal 3 at Tan Son Nhat Airport, the busiest airport in Vietnam, which will increase its capacity by 20 million passengers per year (+66%). We expect this will significantly add to earnings in three years’ time.

As at 30 June 2019, ACV’s 2019 P/E ratio is 27.2x, and EV/EBITDA of 18.4x as compared with regional peers’ valuations at P/E ratio of 30.7x, and EV/EBITDA 16.8x. We believe that ACV’s valuation versus peers is quite attractive given a lower P/E multiple but higher earnings growth rate. However, as the stock trades on UPCoM, its daily liquidity is modest (just over USD1 million per day), a number of large global funds are unable to access it. Once the stock moves to the main bourse this may act as a significant catalyst. As at 30 June 2019, ACV accounted for 8.2% of VOF’s total NAV.

Private investment review

In the current environment, we have found that private investments are also taking much longer to incubate and close. During FY2019 we reviewed approximately 25 investment opportunities totalling nearly USD650 million but have only focused on a little over a dozen opportunities. It is taking us much longer to move beyond the term sheet stage to closure and ultimately investment primarily because we are discovering material differences in our understanding of these businesses once due diligence activities have completed. This is indeed disappointing and has meant that we have had either to walk away from a deal because we no longer have conviction in the management team (or sponsor) or must engage in further negotiations to protect the interest of the fund through a variety of mechanisms.

Within our investment framework, if the exit horizon via an IPO is beyond one year, VOF typically seeks and receives the right to: (1) perform financial, legal, operational and environmental, social and governance due diligence; as well as (2) obtain some form of minority protections and performance commitments over the following three years, with associated financial penalties in the event that commitments are not met; and (3) participation rights on the Board of Directors and/or Management.

VOF made two private investments during FY2019, deploying USD42.9 million.

In late 2018, VOF deployed USD17.6 million into Tam Tri Medical Joint Stock Company, a second active hospital platform for VOF. Tam Tri Medical operates four profitable hospitals in south and central Vietnam with capacity of over 500 beds.

In late 2018 VOF invested USD25.3 million into a structured investment with a leading listed real estate developer to provide them capital in return for a fixed internal rate of return (“IRR”) of 17% along with several forms of security pledges. The investment also had a running annual yield of 10% and a call option to acquire shares in the company at the closing price on the investment date (subject to anti-dilution rights) exercisable at the maturity date of the bond.

These investments demonstrate the typical privately negotiated investment terms not readily available to the public and contain meaningful downside protections, profit commitments from the sponsors, and minimum IRRs.

We continue to see exciting investment opportunities arising from the domestic economy. As households enjoy the benefits of growing wealth through higher wages and capital gains from property and other investments, families are spending more on basic goods and services such as health care, education, food and beverage, banking and property.

Sectors where we are actively evaluating investments include hospitality and conference operators, food and beverage businesses, packaging businesses, construction materials, and financial services. In addition, because of the uncertainty and opportunities presented from the on-going global trade war, we are also focusing on businesses that benefit from the migration / diversion of manufacturing to Vietnam, into sectors such as construction materials and logistics. These investments cover a broad spectrum of investment types by entry method, from pure private equity investments into private companies, private placements, and pre-IPO opportunities. As always, we would like to target more private investment opportunities but note, as always, that some of the investments in the portfolio may quickly move from private to public equity as private companies seek to IPO their shares.

Private equity / privately negotiated investments

Name Industry Total Investment Cost (USDm) Actual Revenue 2018 (USDm) Projected Revenue 2019 (USDm) Revenue Growth (%)
Tam Tri Medical JSC Pharmaceuticals and Health care 17.6 17.2 23.1 34.3
International Dairy Product Food and Beverage 35.2 56.8 62.6 10.2
Thai Hoa International Hospital Pharmaceuticals and Health care 11.7 6.3 8.3 31.7
An Cuong Wood-Working Construction Materials 17.7 166.7 187.2 12.3
Orient Commercial Bank[3] Financial Services 15.9 216.9 241.7 11.4
Ricons Construction Investment[4] Real Estate and Construction 10.9 402 475.2 18.2
Saigon Pearl Group Real Estate and Construction 16.8 73.9 111.6 51.1
Total   125.8      


Name Industry Total Investment Cost (USDm) Minimum IRR (%) Maturity
Real Estate development company bond Real Estate and Construction 25.3 17% 12/2020
Food & Beverage company bond Food and Beverage 20.7 15% 09/2019
Total   46.0    

We highlight below some of the achievements from our private equity portfolio investments over the course of the financial year:

An Cuong Wood-Working Joint Stock Company (ACW)

VOF and its co-investor currently own 18.4% of ACW, with VOF’s effective holding at 11.3%.

ACW is the largest interior wood working company in Vietnam, producing wood-based panels, kitchen cabinets and equipment and other interior home furnishing components.

For the first six months of 2019, ACW delivered USD82.5 million in revenue, a 20% y-o-y growth in VND terms. The new Dat Cuoc factory came into operation 4 months earlier than expected and is contributing significantly to the 2019 revenue. During the last quarter, 2Q2019, with the transition well on track, revenue grew by 32% quarter-on-quarter.

The key target for 2019 is to ramp up operations in the new factory and improve capacity utilization, which is expected to lead to much higher gross margins. The new Dat Cuoc factory has state-of-art technology with increased use of automation and less dependency on manual labour. For example, though both existing factories have the same capacity, the newer Dat Cuoc factory only requires one quarter of the labour compared to the old factory.

An Cuong Wood-Working Joint Stock Company (ACW) (continued)

As at June 2019, Sumitomo Forestry owns 20% of ACW with the latest acquisition of 10% occurring in early 2019 at a total post investment equity valuation of USD417 million. Sumitomo Forestry is the leading furniture manufacturer in Japan and has a joint venture in Vietnam producing material board for wood-based panel products.

International Dairy Products (IDP)

In November 2014, VOF, along with an investment partner, acquired 70% of a distressed dairy company called Bavi (named after the province in which the fresh milk is sourced). Over the next 18 months up to the middle of 2016, we renamed the company International Dairy Products (“IDP”) and embarked on the first phase of a restructuring process. Our focus was on addressing the company’s capital structure, fixed assets, and portfolio of products.

The investment team continues to make progress with this restructuring and over the course of this past financial year, we finally began to witness positive signs from these efforts. During the first half of 2018, the company generated revenue growth of 12% while competitors declined compared to the same period last year. Various cost savings were applied that returned IDP to profitability in 2018. During 1H2019, IDP delivered approximately USD33.6 million in net revenue (10.6% y-o-y increase) and USD2.4 million in net income. The company also delivered over USD4.0 million in EBITDA over the past six months, surpassing the whole 2019 annual budget by 10%.

The improvement to EBITDA stems from: (1) sales improvement on both domestic and exporting markets thanks to a revised and effective trade strategy and attractive consumer promotion programs; (2) a new marketing strategy, switching from traditional to digital channels; (3) switching materials to save cost but still maintaining a high level of quality; (4) major cuts in G&A expenses via re-organisation; and (5) the merger of a small factory into a mega factory to save on operational costs.

Thai Hoa International Hospital Joint Stock Company (THH)

VOF currently owns 81.1% of THH, with the remaining stake owned by THH’s CEO and management team. THH is the largest private group of general hospitals in the Mekong Delta region with over 400 beds. THH, located 150 km away from HCMC, has emerged as a high-quality brand within the local market and has strong support from the local government. The hospital’s CEO is a surgeon and obstetrician with over 20 years of experience at Tu Du Hospital, the largest obstetrics hospital in Vietnam, located in Saigon. In 2019, Thai Hoa expects to post USD8 million in revenue, a year-on-year increase of 33%.

THH owns and operates a hospital in Dong Thap with a designed capacity of over 200 beds and over 200 professionals including 25 experienced doctors, medical advisors, and highly skilled nurses. A second hospital with over 200 beds is near completion in Hong Ngu City about 50 km from the existing hospital. Awaiting final approval, the hospital will open in 4Q 2019 and is expected to accommodate 70,000 to 80,000 outpatient visits in the first year of operation, equivalent to 200 to 220 outpatient visits per day. The new hospital enjoys favourable investment conditions from the government, including subsidised interest on both government and commercial loans, low land acquisition costs, and long-term tax exemptions.

Market risks

Market valuations today have returned to historical norms, trading in-line with the regional peer averages and are reasonable compared to forecast growth rates. Nevertheless, we do see some risks that require monitoring. The question revolves around whether the current market can sustain its onwards trajectory, whether the weight of inflows from foreign investors will retreat in times of market shock, and whether there are sufficient domestic actors to sustain a deep and broad market. We believe that today’s market conditions are different from in the past and so are the associated risks. The top three areas of concern for the Vietnamese market today that bear repeating are:

  • External volatility:In 2018 and into early 2019 we witnessed how the US market and global currency volatility can have a negative impact on Vietnam’s stock markets. External shocks and volatility could force some foreign investors to retreat, putting pressure on Vietnamese markets as well as on the Vietnamese Dong;
  • Margin lending:Market analysts estimate that this currently stands at approximately USD1.4 billion, or 1.40% of the total market capitalisation of Vietnam’s main bourses. The level of margin lending remains high relative to historic levels and any sudden volatility on the downside could trigger a downward spiral effect driven by the forced liquidation of margin positions; and
  • Inflation and interest rates:Although this risk is on the lower side as global rates have reached historic lows, it is one that we are nevertheless acutely aware of and monitoring. A more detailed discussion of these risks is presented in our chief economist’s update that follows.

We also believe that the Vietnamese stock market today is more reasonably valued than at its height in 2006 where the average P/E ratio was at times over 30x; today the market trades at 16.5x (and less if we remove certain anomalies in the index constituents). The size and depth of today’s market is significantly larger with over 700 listed companies. Furthermore liquidity, which is driven by both foreign and domestic investors, is significantly higher and thus lessens various market risks relative to 2006.

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