Investment Companies
For FCA purposes this is a Marketing Communication
Vietnam Closed-End Funds
12 January 2015
Research
Charles Cade
+44 (0)20 7260 1327
[email protected]
Ewan Lovett-Turner
+44 (0)20 7260 1254
[email protected]
Sam Murphy
+44 (0)20 7260 1232
[email protected]
Colette Ord
+44 (0)20 7260 1290
[email protected]
Improving Outlook and Attractive Valuations
Vietnam’s potential is widely recognised, but investors have suffered from a series
of false dawns over the past decade as credit-fuelled economic expansion has
resulted in inflation. A period of austerity since 2011 has brought stability to both
prices and the currency, but tight credit conditions have hit domestic demand,
resulting in real GDP growth slowing to just over 5% pa from 2012-2014, from 7-8%
pa from 2000-2008. However, there are now signs of increasing confidence, with
economic growth forecast to increase to 6.2% in 2015.
●
Sales
Katherine Miller
+44 (0)20 7260 1380
[email protected]
Tod Davis
+44 (0)20 7260 1381
[email protected]
Chris G00k
+44 (0)20 7260 1378
[email protected]
●
David Luck
+44 (0)20 7260 1301
[email protected]
James Glass
+44 (0)20 7260 1369
[email protected]
Website
www.numis.com/funds
●
This research was prepared
and approved by
Numis Securities Limited
The London Stock Exchange Building
10 Paternoster Square
London EC4M 7LT
+44 (0)20 7260 1000
[email protected]
www.numis.com
Registered No 02285918. Authorised and
Regulated by The Financial Conduct
Authority. A Member of the London
Stock Exchange
●
The improving outlook in Vietnam has been reflected in the performance of its stock
market, and the Vietnam Index doubled (US$ total return) from 2012 to mid-2014,
largely driven by a rerating. However, there has been a setback in recent months, with
the Index falling 10% since early September, with oil related stocks hit particularly hard.
This has resulted in a historic P/E ratio of 13.8x which we believe offers decent value
in the context of expected earnings growth of over 10% in 2015.
In our view, the best way to access Vietnam is through closed-end funds (CEFs).
There are currently nine CEFs in our universe with combined net assets of $2.8bn.
All of these were launched prior to 2008 and benefit from experienced, locally based
managers. NAV performance has generally been good, but the sector has continued to
suffer from wide discounts. In our view this presents an opportunity to enhance returns.
There have been significant improvements in corporate governance and portfolio
transparency in recent years. In addition, most funds have introduced regular share
buyback programmes, and corporate action is picking up, with both PXP Vietnam and
Vietnam Infrastructure due to open-end shortly. On the downside, management fees
are still high and trading liquidity is patchy for many of the funds, particularly for those
traded solely on an OTC basis.
Our core recommendation is VinaCapital Vietnam Opportunity (VOF) which provides
broad exposure to the domestic economy via a multi-asset approach. VOF’s exposure
to real estate development (c.20% of assets) has been a drag on performance and
sentiment in recent years, but the outlook for this asset class is improving. In future,
the emphasis will be on listed equities and private equity, as well as exploiting the
mispricing of SOE privatisations. It is the largest, most liquid fund in the peer group,
with a market cap of $563m, and is trading on an attractive discount of 25%. The
Board is now fully independent, and has implemented an active buy-back programme.
In addition, it is considering moving VOF’s listing from AIM to the main market of the
London SE in order to raise the fund's profile.
In this report we also review the prospects for other Vietnam focused CEFs. These
include VEIL ($431m market cap, 20% discount), managed by Dragon Capital, which
offers purer exposure to the listed equity market, and VinaLand ($255m, 36%), the
real estate fund which is currently focused on realising assets and returning capital to
shareholders.
For FCA purposes this marketing communication has not been prepared in accordance
with legal requirements designed to promote the independence of investment research
and is not subject to any prohibition on dealing ahead of the dissemination of such
research. Important disclosures are on pages 89 to 90 relating to Numis Securities
Limited, analyst certification, other requirements which restrict dealing ahead, relevant
investment banking relationships, potential conflicts of interest and additional
disclosures. See www.numis.com/x/regulatory.html for other disclosures.
12 January 2015
Contents
Vietnam Closed-End Funds _____________________________________________ 3
● Universe _______________________________________________________ 3
● Performance ___________________________________________________ 6
● Discount History _________________________________________________ 9
● Management Fees ______________________________________________ 11
● Corporate Action _______________________________________________ 13
Opportunities among Vietnam CEFs ______________________________________ 14
● Pros & Cons of CEFs ____________________________________________ 14
● Outlook for Investor Demand ______________________________________ 15
● Recommendations ______________________________________________ 17
Other Ways to Invest in Vietnam _________________________________________ 22
● Direct Investment _______________________________________________ 22
● Open-Ended Funds _____________________________________________ 22
● Why Not Just Use ETFs? _________________________________________ 23
Economic Background ________________________________________________ 26
● Why Vietnam? _________________________________________________ 26
● GDP Growth – Picking up Again ___________________________________ 27
● Key Challenges for the Economy ___________________________________ 30
Vietnam Stock Market _________________________________________________ 33
● Size of Vietnam’s Equity Market ___________________________________ 33
● Performance of Vietnam’s Equity Market _____________________________ 35
● Valuation _____________________________________________________ 37
● Stock Market Developments ______________________________________ 39
VinaCapital Funds ____________________________________________________ 41
● VinaCapital Vietnam Opportunity ___________________________________ 41
● VinaLand _____________________________________________________ 51
● Vietnam Infrastructure ___________________________________________ 63
Dragon Capital Funds _________________________________________________ 68
● Vietnam Enterprise Investments (VEIL) ______________________________ 68
● Vietnam Growth Fund (VGF) ______________________________________ 73
● A Comparison of VEIL and VGF ___________________________________ 75
● Vietnam Property Fund __________________________________________ 77
Other Closed End Funds _______________________________________________ 78
● DWS Vietnam _________________________________________________ 78
● PXP Vietnam __________________________________________________ 82
● Vietnam Holding ________________________________________________ 85
22
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12 January 2015
Vietnam Closed-End Funds
Universe
Most funds were launched in
2006/2007
Numerous closed-end funds (CEFs) were launched in 2006/07 as Vietnam’s equity and
property markets surged. At their peak, these funds were trading on huge premiums and
the sector had a market capitalisation of close to $6bn. However, the euphoria proved
short-lived, and discounts widened sharply in 2008 as Vietnam fell out of favour.
Figure 1: Market Cap of Vietnam Closed-End Funds
Market Cap US$m
6,000
5,000
4,000
3,000
2,000
1,000
0
2014
2013
2012
Property
2011
2010
Multi-asset
2009
2008
2007
2006
2005
Equity
Infrastructure/Resources
Source: Numis Securities Research
CEF universe now has a market
cap of $2.1bn
Several funds have been forced to wind-up or open-end, while others have implemented
regular buy-back programmes to return capital to investors in an effort to limit the
discount to NAV. Nevertheless, there is still a universe of nine closed-end funds focused
on Vietnam, with a combined market cap of $2.13bn and net assets of $2.84bn. The
funds invest across a broad range of mandates, including Equity, Private Equity, Fixed
Interest, Real Estate and Infrastructure.
Most of the funds are either listed on AIM/London SE or are listed on the Irish SE and
traded in London on an OTC basis. Transparency is much better for the AIM/London SE
listed funds, and these can be traded in the same way as any equity listed on these
exchanges. For the OTC-traded funds, trading spreads tend to be wider.
Registered No 02285918. Authorised and Regulated by The Financial Conduct Authority. A Member of the London Stock Exchange
33
12 January 2015
Figure 2: Vietnam Closed-End Funds (net assets US$m)
Figure 3: Vietnam Closed-End Fund Universe (US$m)
3,000
VietNam
PXP
Vietnam Holding, 128 Vietnam, 81
Property, 66
214
VinaCapital
Vietnam
Opps, 757
Vietnam
Infra, 214
2,500
469
172
2,000
300
Vietnam
Growth, 292
1113
1,500
815
1,000
DWS
Vietnam,
355
500
Vietnam
Enterprise
(VEIL), 544
VinaLand,
404
1,044
841
0
Market Cap
Equity
Net Assets
Multi-Asset
Real Estate
Source: Numis Securities Research
VinaCapital and Dragon Capital are
the largest managers
Infrastructure
Source: Numis Securities Research
There are now just five management groups involved in Vietnam closed-end funds, with
by far the largest being VinaCapital ($1.37bn net assets across three funds) and Dragon
Capital ($0.90bn across three funds).
Table 1: Vietnam Closed-End Funds - Summary
Listing
Domicile
Management Group
Fund Manager
Launch
Date
Equity
PXP Vietnam
London SE
Cayman Isles
PXP Vietnam AM
Kevin Snowball
Vietnam Enterprise Investments (VEIL)
Irish SE (OTC)
Cayman Isles
Dragon Capital
Dominic Scriven, Vu Huu Dien
Dec-03
Jul-95
Vietnam Growth Fund
Irish SE (OTC)
Cayman Isles
Dragon Capital
Dominic Scriven, Hoang Kien
Aug-04
VietNam Holding
AIM
Cayman Isles
Vietnam Holding AM
Christophe Ganz, Vu Quang Thinh
Jun-06
DWS Vietnam
Irish SE (OTC)
Cayman Isles
Deutsche AM (Duxton AM, PXP)
Desmond Sheehy
Dec-06
VinaCapital Vietnam Opportunity (VOF)
AIM
Cayman Isles
VinaCapital IM
Andy Ho
Sep-03
Vietnam Property
Irish SE (OTC)
Cayman Isles
Dragon Capital
Fraser Wilson
Apr-08
Vinaland
AIM
Cayman Isles
VinaCapital IM
David Blackhall
Mar-06
AIM
Cayman Isles
VinaCapital IM
Tony Hsun
Multi-Asset
Real Estate
Infrastructure
Vietnam Infrastructure
Jul-07
Source: Numis Securities Research
Mandates vary between funds
Several closed-end funds originally had broad mandates that included OTC and Private
Equity stocks, but now focus on quoted companies. These include VEIL, PXP Vietnam
and Vietnam Holding. VOF has a multi-asset mandate that includes equities, OTC/
private equity, bonds and real estate, while DWS Vietnam invests in quoted and
unquoted equites, and also has 18% of its portfolio in closed-end Vietnam funds.
VinaLand is by far the largest Real Estate fund, and we have excluded Aseana
Properties from our universe, as it is primarily focused on Malaysia, with just 23% of its
portfolio invested in Vietnam.
44
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12 January 2015
Figure 4: Vietnam Closed-End Funds - Portfolio by Asset Class (%)
100
90
80
70
60
50
40
30
20
10
0
PXP Vietnam
VietNam
Holding
VEIL
Vietnam
Growth
VOF
Equity
Listed Equities
DWS Vietnam
Vietnam
Property
Multi-Asset
Private Equity/OTC
Funds
Real Estate
VinaLand
Vietnam
Infrastructure
Real Estate
Bonds
Infra
Cash/Receivables
Source: Latest company fact sheets
Discounts wider for less liquid
asset classes
Discounts of Equity-focused funds tend to be tightest, whereas Real Estate funds are
trading on wide discounts, reflecting the illiquidity of the asset class and the difficult
market conditions in recent years.
Figure 5: Discounts by Asset Class
0
-5
% Discount
-10
-15
-20
-16
-25
-26
-30
-35
-36
-40
Equity
Multi-Asset
Real Estate
Source: Numis Securities Research
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55
12 January 2015
Table 2: Vietnam Closed-End Funds - Trading Details
Bloomberg
Price
NAV
Last
Ticker
Curr
Last
Estimate
Published
% Discount(-)/
Mkt Cap
Net Assets
Premium(+)
US$m
US$m
Freq
Equity
PXP Vietnam
VNF
US$
6.50
6.738
09-Jan
D
(3.5)
78
81
VIETENI
US$
2.82
3.4
31-Dec
W
(17.2)
431
544
VIETNGF
US$
18.25
22.31
31-Dec
W
(18.2)
230
292
VNH
US$
1.69
2.059
31-Dec
W
(17.9)
102
128
DWSVIET
US$
0.52
0.73
28-Nov
M
(29.3)
251
355
VOF
US$
2.48
3.28
31-Dec
M
(25.7)
563
757
Vietnam Property
VPF
US$
0.525
0.78
30-Nov
M
(32.7)
44
66
Vinaland
VNL
US$
0.59
0.92
30-Sep
3M
(35.9)
255
404
VNI
US$
0.49
0.62
30-Nov
M
(21.0)
172
214
Vietnam Enterprise Investments
Vietnam Growth Fund
VietNam Holding
Multi-Asset
DWS Vietnam
VinaCapital Vietnam Opportunity
Real Estate
Infrastructure
Vietnam Infrastructure
Note: Estimated NAV for Equity and multi-asset funds, other funds use last published NAV
Source: Numis Securities Research, Morningstar
Portfolio Concentration
Commonality between fund
holdings
There is significant commonality among the largest Equity positions held by the CEFs,
which comes as little surprise given that just six stocks represent more than 50% of the
Vietnam Index. Most of the CEFs have a substantial weighting in Vinamilk, while other
commonly-held stocks include PV Drilling and Hoa Phat Group. In contrast, the
ownership of PV Gas is far lower than its 14% weighting in the Vietnam Index, partly
because it has a free float of just 3%. In addition, the funds are underweight
Vietcombank (8.9% of the index) and Vingroup (8.9%).
The concentration of the largest holdings has been reduced significantly over the past
year. For instance, 12 months ago Vinamilk represented 42% of the portfolio for VGF
(vs 15.6% today), 32% for VEIL (vs 14.3%), and 28% for PXP (vs 20.8%).
Table 3: Vietnam Funds – Comparison of Largest Investments
PXP Vietnam
VEIL
Vietnam Growth
Vietnam Holding
VOF
DWS Vietnam
Vinamilk
20.8 Vinamilk
14.3 Vinamilk
15.6 Hoa Phat Group
8.5
Vinamilk
9.9
Greenfeed ~
HCMC Securities
9.3
Hoa Phat Group
10.1 Masan
12.9 Hau Giang Pharma
8.1
Sofitel Metropole #
8.8
Vinamilk
7.7
Hoa Phat Group
8.5
Masan
10.0 PV Drilling
8.5
Traphaco
5.9
Hoa Phat Group
8.5
Hoa Phat Group
6.3
REE
6.8
ACB
7.9
Hoa Phat Group
8.5
Thien Long Group
5.9
Eximbank
4.3
VEIL *
5.9
PV Drilling
6.4
REE
7.3
FPT Corp
5.7
Binh Minh Plastic
5.8
PV Services
4.3
DWS Vietnam *
5.9
Sacombank
6.3
Saigon Securities
6.9
CII
5.0
Viconship
5.7
Int'l Dairy Product ~
3.8
Vietnam Growth *
5.1
FPT Corp
5.2
FPT Corp
5.9
REE
4.8
Vinamilk
5.5
Hau Giang Pharma
3.7
PV Drilling
4.2
Danang Rubber
4.8
Kinh Bac
4.0
PV Services
4.5
PV Drilling
5.3
PV Drilling
3.4
Corbyns Int'l
4.1
HAGL
4.2
Hau Giang Pharma
3.2
Vingroup
4.0
Danang Rubber
4.9
Century 21 #
3.2
FPT Corp
3.9
VN Container
2.9
PV Gas
3.2
Casumina
3.6
Phu Nhuan Jewelry
4.8
VinaLand *
2.8
PV Gas
Top 5
51.8
Top 10
Date
49.6
51.2
36.7
34.2
75.2
72.8
73.1
63.2
60.5
31-Oct
30-Nov
30-Nov
30-Nov
30-Nov
15.5
3.1
41.3
61.7
30-Nov
~ Unquoted, # Real estate, * Closed-end fund
Source: Company factsheets
Performance
Equity focused CEFs have
outperformed the Vietnam Index
Most of the CEFs focused on listed equities have delivered strong NAV returns in recent
years, ahead of the Vietnam Index. This reflects the ability of the managers to add value
through stock picking, avoiding some of the highly valued large cap stocks that are
purchased by ETFs. In addition, they are able to exploit Foreign Ownership Limits
(FOLs) by selling positions in stocks on premiums to the market price (VOF, VEIL, PXP
Vietnam and VNH have all reduced exposure to Vinamilk over the past year or two).
66
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12 January 2015
Real Estate funds have suffered
from a difficult market
The multi-asset funds have delivered strong returns in recent years, but will sometimes
lag behind in times of rising equity markets, reflecting exposure to unlisted investments.
The performance of Real Estate funds has been weak, as a result of falling property
prices and tight credit conditions.
Shareholders have also benefitted
from discount tightening
Most of the funds have benefitted from a tightening of discounts in recent years, and so
share price returns have exceeded NAV increases.
Figure 6: Vietnam Closed End Funds - Performance over Five Years (% pa)
Total Return US$ % pa
20%
15%
10%
5%
0%
-5%
Price
Vinaland
VPF
Real Estate
VN Index
Multi-Asset
Viet Infra
Equity
VOF
DWS
VNH
Viet.Gwth
VEIL
PXP
-10%
Infra
Index
NAV
Source: Numis Securities Research, Morningstar
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77
12 January 2015
Table 4: Vietnam Closed-End Fund – Share Price and NAV Performance History
2014
2013
2012
2011
2010
2009
2008
2007
2006
18.8
7.9
Vietnam Growth Fund
VietNam Holding
2005
55.1
14.3
(19.4)
(5.4)
125.4
(82.4)
26.6
143.1
-
39.1
(2.2)
(10.1)
8.7
14.9
(69.3)
11.7
205.2
19.4
(2.0)
40.9
(1.2)
(2.7)
29.3
(3.5)
(64.0)
16.6
101.6
24.0
32.2
40.1
22.3
(35.5)
52.6
24.6
(67.2)
(23.5)
-
-
Share Price Return in US$
Equity
PXP Vietnam
VEIL
Multi-Asset
DWS Vietnam
8.5
93.8
(6.7)
(7.1)
(3.6)
7.7
(68.7)
(24.5)
-
-
10.7
22.9
44.6
(32.4)
24.5
106.8
(79.1)
(8.9)
118.2
35.4
Vietnam Property
(4.5)
34.1
(18.0)
(37.5)
6.7
19.0
-
-
-
-
Vinaland
24.8
21.6
(42.3)
(32.6)
23.8
66.7
(66.0)
(3.4)
-
-
29.4
28.5
47.5
(45.9)
12.1
37.5
(64.2)
-
-
-
VOF
Real Estate
Infrastructure
Vietnam Infrastructure
NAV Return in US$
Equity
PXP Vietnam
VEIL
Vietnam Growth Fund
VietNam Holding
8.0
38.9
33.2
(21.9)
(17.2)
76.6
(70.8)
37.8
149.7
20.8
10.8
29.0
21.4
(19.7)
(11.9)
19.0
(63.0)
31.2
156.2
36.3
5.2
23.9
29.8
(19.6)
(2.8)
12.1
(61.4)
37.0
121.1
14.9
18.1
32.2
20.2
(18.1)
(7.8)
57.6
(60.3)
12.6
-
-
10.4
26.6
26.1
(19.2)
(9.8)
19.6
(54.5)
1.0
-
-
8.6
15.3
19.1
(7.6)
(0.8)
30.1
(46.7)
37.4
64.9
33.9
Multi-Asset
DWS Vietnam
VOF
Real Estate
Vietnam Property
6.0
(1.1)
1.4
(23.6)
(7.2)
9.6
-
-
-
-
Vinaland
1.1
(12.5)
(11.9)
(13.2)
(2.2)
(11.3)
17.1
33.8
-
-
9.0
12.0
4.2
(18.6)
(10.6)
1.5
(27.2)
-
-
-
10.9
25.3
24.1
(29.4)
(4.4)
51.0
(67.1)
25.1
145.1
27.3
Infrastructure
Vietnam Infrastructure
Index
Vietnam Index (total return)
Note: 2014 NAV returns estimated from last published NAV. VNH NAV return for 2013 would be 40% if dilution from warrants is excluded. Source: Numis Securities Research, Morningstar
88
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12 January 2015
Table 5: Vietnam Closed-End Funds – Share Price and NAV Performance Rankings
% pa Total Return in US$
Rank
1 yr
3 yr
5 yr
1 yr
3 yr
5 yr
18.8%
28.2%
10.0%
4
3
5
7.9%
15.9%
7.6%
7
6
7
Vietnam Growth Fund
(2.0%)
14.2%
12.1%
8
7
2
VietNam Holding
32.2%
31.3%
17.4%
1
2
1
8.5%
25.2%
11.9%
6
5
3
10.7%
25.3%
10.6%
5
4
4
Share Price Return in US$
Equity
PXP Vietnam
VEIL
Multi-Asset
DWS Vietnam
VOF
Real Estate
Vietnam Property
(4.5%)
1.6%
(6.9%)
9
8
9
Vinaland
24.8%
(4.3%)
(6.1%)
3
9
8
29.4%
34.8%
8.2%
2
1
6
Infrastructure
Vietnam Infrastructure
NAV Return in US$
Equity
PXP Vietnam
VEIL
Vietnam Growth Fund
VietNam Holding
8.0%
26.0%
5.3%
6
1
4
10.8%
20.2%
4.2%
2
4
6
5.2%
19.2%
5.7%
8
5
3
18.0%
23.3%
7.2%
1
2
1
10.4%
20.8%
5.1%
3
3
5
8.6%
14.2%
6.4%
5
6
2
Multi-Asset
DWS Vietnam
VOF
Real Estate
Vietnam Property
6.0%
2.0%
(5.5%)
7
8
8
Vinaland
1.1%
(8.0%)
(7.9%)
9
9
9
9.0%
8.3%
(1.5%)
4
7
7
10.9%
19.9%
3.1%
-
-
-
Infrastructure
Vietnam Infrastructure
Index
Vietnam Index
Note: to 31 December 2014 based on latest NAV estimates. Source: Numis Securities Research, Morningstar
Discount History
Premiums pre-Financial Crisis are
a distant memory
As often happens in frontier markets and specialist asset classes, “hot money” drove
premiums to excessive levels in 2007. However, once the Vietnam market collapsed on
the back of rising inflation and tightening credit, these capital flows shifted into reverse.
Furthermore, hedge funds and European high net worth investors were sellers at any
price when the credit crisis hit in late 2008. As a result, investors who bought the sector
on premiums in mid-2007 had lost most of their value by early 2009 as a result of falling
asset values and wide discounts. In recent years, discounts have narrowed as
sentiment towards Vietnam has improved, supported by share buy-backs and other
corporate action.
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99
12 January 2015
Figure 8: Discounts of Vietnam CEFs (excl. Real Estate)
350
40
300
30
% Discount(-) / Premium (+)
Performance Index
Figure 7: Performance of Vietnam CEFs (excl. Real Estate)
250
200
150
100
20
10
0
-10
-20
-30
50
-40
0
Dec-04
Dec-06
Dec-08
NAV
Dec-10
Dec-12
Dec-14
-50
-60
Dec-04
Price
Dec-06
Dec-08
Note: US$ total return. Source: Numis Securities Research
Real estate fund discounts
particularly wide
Dec-10
Dec-12
Dec-14
Source: Numis Securities Research
The boom/bust cycle has been even more extreme for the Real Estate funds, which
went from 60% premiums in 2007 to discounts of more than 70% in early 2009. In part,
this reflected infrequent valuations, which meant that NAVs lagged falls in quoted
markets, but there were also concerns over project financing and the viability of some
property developments in tougher economic conditions. Similarly, the specialist
Infrastructure and Resources funds suffered huge discounts.
Figure 9: Performance of Vietnam Real Estate CEFs
Figure 10: Discount of Vietnam Real Estate CEFs
200
80
% Discount(-) / Premium (+)
180
Performance Index
160
140
120
100
80
60
40
60
40
20
0
-20
-40
20
0
Dec-04
-60
Dec-06
Dec-08
NAV
Dec-10
Dec-12
Dec-14
Price
Source: Numis Securities Research
-80
Dec-04
Dec-06
Dec-08
Dec-10
Dec-12
Dec-14
Source: Numis Securities Research
Still an overhang from investors
We believe that the closed-end fund sector still faces a share overhang as some
investors have become disillusioned by poor trading liquidity. The difficulty is that the
structure of these funds (typically domiciled in the Cayman Isles) means that there is
often little transparency over the nature of the shareholder base. All of these funds are
foreign-owned as Vietnamese locals cannot buy offshore funds.
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Figure 11: Vietnam Closed End Funds - Discounts
% Discount(-)/Premium(+)
0
-5
-10
-15
-20
-25
-30
-35
-40
Real Estate
Vietnam Infra
Vinaland
Multi-Asset
Vietnam Property
DWS Vietnam
VOF
VEIL
Vietnam Growth
VietNam Holding
PXP Vietnam
Equity
Infra
Source: Numis Securities Research
Management Fees
Most launched with 2% plus 20%
fees
The majority of Vietnam closed-end funds were launched with base fees of 2% of net
assets plus performance fees of 20% of NAV returns, reflecting the bullish environment
pre-financial crisis when most of the capital was raised. However, these fees now
appear high, particularly for those funds focused on equity investment.
Fees remain high, especially for
DWS Vietnam
There have been some fee reductions, but fees remain high, in our view. DWS Vietnam,
in particular, has a fee structure that is out of line with the closed-end universe in
general, with a performance fee calculated on the basis of performance in its subportfolios every six months, with full catch-up and no high watermark. As an illustration,
in 2013, the fund paid a performance fee $15.33m to DeAM Asia, of which $7.66m was
paid to Duxton. A further $1.05m was paid to PXP AM in respect of the performance of
the listed equity portfolio, with the total performance fees equivalent to 6.3% of average
net assets.
VOF and VNH rebased high
watermarks on performance fees
All of the other performance fees have high watermarks, meaning that most of the
managers have not earned a fee in recent years as the NAV has yet to recover to
previous highs (e.g. VEIL). However, both VOF and Vietnam Holding agreed a rebasing
of their high watermarks in mid-2013 in return for lower base fees (although caps were
also imposed on the level of performance fees that can be paid in any year). As a result,
VOF earned a performance fee of $9.0m in the financial year to 30 June 2014 (1.17% of
average net assets), with a further $2.4m earned in excess of the cap carried forward to
following years. Vietnam Holding earned a performance fee of $0.95m (0.85%), of which
a third is donated to the VNH Foundation, the management group’s charity.
Most funds calculate the performance fee on NAV returns in excess of a hurdle
(typically 8% per annum compound), whilst others base this fee on all NAV returns
provided a trigger return has been achieved (potentially leading to much higher fee).
VOF removed the catch-up from its performance fee at the time when the high
watermark was rebased. In our view, there is a valid argument that performance fees for
many of these funds should be based on performance relative to the Vietnam Stock
Index rather than absolute returns.
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Trail commissions often paid to
private banks
One reason for the high fees of Vietnam CEFs, in our view, is that they were heavily
marketed to private banks with trail commission arrangements payable out of the
management fee. With moves towards more transparent charging structures,
particularly in the UK, we believe that any future issuance would need to be on more
competitive terms.
Figure 12: Vietnam CEFs - Ongoing Charge Ratios
9%
% Average Net Assets
8%
7%
6%
5%
4%
3%
2%
1%
Equity
Multi-Asset
Base Fee
Other Expenses
Viet Infra
Vinaland
VPF
VOF
DWS
VNH
Viet.Gwth
VEIL
PXP
0%
Real Estate
Infra
Performance Fee
Based on last published annual reports
Source: Company & Numis Securities Research
Performance fees on VEIL and
VGF are substantially under water
The Dragon Capital funds, VEIL and Vietnam Growth Fund, are so far below their high
watermarks that they will not pay any performance fees for the foreseeable future.
Although PXP Vietnam currently has no performance fee, it will shortly roll into an openended fund that pays a performance incentive.
Table 6: Vietnam Closed-End Fund - Fee Summary
Base Fee
Performance Fee
%
Based on
Period
Benchmark
Ongoing Charges
Hurdle/
High
Trigger
Watermark
excl.
incl.
%
Based on:
Cap Perf Fee Perf Fee
PXP Vietnam
2.0%
net assets
-
-
-
-
-
-
-
3.0%
3.0%
VEIL
2.0%
net assets
20%
NAV return
Annual
8% pa
compound
Hurdle
Absolute
No
2.4%
2.4%
Vietnam Growth Fund
2.0%
net assets
20%
NAV return
Annual
8% pa
compound
Hurdle
Absolute
No
2.4%
2.4%
2.0%*
net assets
15%
NAV return
Annual
5% pa
compound
Hurdle
Absolute
(reset 2013)
3%
3.2%
4.1%
DWS Vietnam
1.7%
net assets
20%
Sub-portfolio return Semi-annual
8% pa
semi-annual
Hurdle with
catch-up
No
No
2.5%
8.8%
VOF
1.5%
net assets
15%
Capital markets &
Real Estate portfolios
Annual
8% pa
compound
Hurdle
Absolute
(reset 2013)
1.5%
1.7%
2.9%
2.0%
net assets
20%
NAV return
Annual
8% pa
compound
Hurdle
Absolute
No
2.8%
2.9%
$7.5m~
fixed fee*
#
Realisations
-
-
-
-
-
2.3%
2.3%
2.0%
gross assets
20%
NAV return
Annual
8% pa
compound
Hurdle with
catch-up
Absolute
No
2.6%
2.6%
Equity
VietNam Holding
Multi-Asset
Real Estate
Vietnam Property
Vinaland
Infrastructure
Vietnam Infrastructure
* VNH base fee falls to 1.75% on assets >$100m and 1.5%>$150m. ~ VinaLand’s base fee was $8.5m in 2012/13, reducing to $7.5m in 2013/14 and $6.5m in 2014/15 # VinaLand managers are
incentivised to earn back up to $28.2m of accrued performance fees based on distributions to shareholders over the three years from Nov-2012. Vietnam Infrastructure fees to be revised following
reconstruction. PXP is due to merge with VEEF, an open-ended fund, that will have fees of 1.5% pa, plus 15% of returns over 8% pa subject to a HWM.
Source: Numis Securities Research, Morningstar
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Corporate Action
Corporate action is ongoing
Several closed-end funds investing in Vietnam have liquidated, open-ended or adopted
realisation strategies in recent years, and there remains pressure to return capital given
the persistence of discounts. VinaLand passed its continuation vote in 2012 by
adopting a realisation strategy for three years until the next vote in November 2015. In
addition, shareholders of two funds have recently approved reconstruction proposals:
To open-end after Jan-2015
● PXP Vietnam Fund ($81m net assets) is to merge with Vietnam Emerging Equity
Fund (VEEF), an equivalent Cayman-domiciled mutual fund run by the same
management group, PXP Vietnam AM. Following shareholder approval at an EGM
on 17 December, the shares are due to delist at the end of January 2015.
To split into two share classes
● Vietnam Infrastructure ($214m net assets) is to restructure ahead of a continuation
vote due in 2017. At an EGM on 15 December, shareholders approved proposals to
split the portfolio into two share classes, both listed on AIM, separating the fund’s
listed and private equity investments. The aim is to realise the PE assets by June
2017, while the listed assets will be transferred to a new UCITS fund, with investors
in the Listed Portfolio Shares able to switch directly into the UCITS vehicle over a 12
month period. The scheme is expected to be implemented in Q1 2015.
We believe that PXP will be better placed than Vietnam Infrastructure to retain assets
following the open-ending as the mandate is unchanged, and because there are fewer
value investors on the register.
Further details on these proposals are provided later in this report, while funds
liquidating/open-ending in recent years are summarised in the table below. Continuation
votes are often a trigger for corporate action, and forthcoming votes include Vietnam
Growth Fund (AGM 2015) and DWS Vietnam (AGM 2016).
Vietnam Funds - Corporate Action
Launch
Date
Corporate
Mandate
Manager
Listing
Action Details
SGL Vietnam
Development
Real Estate
SGL Capital IM
London SE (AIM)
Oct-07
2008 Adopted realisation strategy
(most of portfolio was uninvested)
Indochina Capital
Vietnam
Equity/OTC/PE
IndoChina Capital
London SE (main market)
Mar-07
2009 Adopted realisation strategy
JSM Indochina
Real Estate in
Vietnam/Cambodia
JSM Capital
London SE (AIM)
Jul-07
2010 Adopted realisation strategy
Vietnam Resources
Resources
Dragon Capital
Lux SE (OTC traded)
Jul-07
2010 Adopted realisation strategy
(still $3m residual value)
PCA-Vietnam Seg
Portfolio
Private Equity/OTC
Prudential AM
Irish SE (OTC traded)
Dec-06
2013 Adopted realisation strategy
Vietnam Emerging
Equity
Equity
PXP Vietnam AM
Irish SE (OTC traded)
Nov-05
2009 Open-ended following pressure to return capital
Vietnam Lotus Fund
Equity
PXP Vietnam AM
Irish SE (OTC traded)
Dec-06
2010 Open-ended and merged with Vietnam Emerging
Equity Fund
Vietnam Dragon
Equity
Dragon Capital
Irish SE (OTC traded)
Dec-05
2011 Open-ended (mainly owned by Japanese investors)
Vietnam Property
Holding
Real Estate/ Equities Saigon AM
Frankfurt SE
Nov-07
2014 Converted to open-ended fund with limited
redemptions from mid-2014
Saigon AM
Luxembourg (OTC traded)
Nov-07
2014 Converted to open-ended fund with limited
redemptions from December 2014
Jul-07
Q1 2015 Plans to open-end, with realisation strategy for
unquoteds
Realisation Strategy
Open-Ended
Vietnam Equity Holding Equity
Proposed Corporate Action
Vietnam Infrastructure
Infrastructure
VinaCapital
London SE (AIM)
PXP Vietnam
Equity
PXP Vietnam AM
London SE (main market)
Dec-03
Jan 2015 Plans to open-end and merge with Vietnam
Emerging Equity
Source: Numis Securities Research
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Opportunities among Vietnam CEFs
Pros & Cons of CEFs
Advantages
The key advantages of closed-end funds for investors seeking exposure to Vietnam
include:
● Experienced management teams: Most of the CEFs are run by locally based
management groups. The management of DWS Vietnam is based in Singapore, but
has significant experience of investing in Vietnam, and the fund’s equity portfolio is
delegated to PXP Vietnam AM based in Ho Chi Minh City (HCMC).
Far broader exposure than
available via open-ended funds
● A range of mandates: The CEFs offer exposure to unlisted, OTC and direct real
estate, as well as to the full spectrum of the listed equity market. This provides a far
more diversified exposure than available through ETFs/UCITS funds.
Ability to exploit mispricing of
SOE privatisations
● Ability to invest in less liquid stocks: The liquidity requirements of ETFs and
open-ended funds mean that they tend to focus heavily on large cap stocks. CEFs
have the ability to invest in less liquid assets, and so they have a broader available
universe, including mid/small caps and SOE equitisations.
● Exposure to restricted stocks: Companies such as Vinamilk are difficult to access
directly due to foreign ownership limits (it currently has a FOL premium of 7%). This
premium is not reflected in the NAVs of the CEFs.
Discounts are narrowing
● Valuations: In contrast to the large premiums of 2007, all of the closed-end funds
are now trading on discounts ranging from 4% for PXP Vietnam (which has
announced plans to open-end) to 36% for VinaLand. There is ongoing pressure to
narrow this value gap, and most funds, including VOF and VEIL, the two largest
vehicles, have implemented buy-back programmes.
● Corporate governance: There is now far greater independence of the Board from
the management group. For instance, VOF has recently moved to a fully
independent Board.
Drawbacks
The Vietnam CEFs continue to face a number of challenges in attracting demand from
new investors, including:
● Lack of Trading Liquidity: Small listed funds <$200m are falling off the radar of
many investors.
OTC funds have wide trading
spreads
● Lack of Transparency: OTC-traded funds tend to trade on wide spreads and there
is little visibility over pricing.
Fees are still high, especially DWS
Vietnam
● High Fees: Despite some reductions, we believe that fees in the Vietnam CEF
universe are still too high. 2% and 20% fees are no longer acceptable to many
investors in listed funds. Following the Retail Distribution Review (RDR) in the UK,
which abolished trail commissions, headline fees for clean share classes of openended equity funds are typically 0.75% pa or less. Funds with specialist mandates
would be expected to charge higher fees, but there is now far greater emphasis on
the level of fees in general. The fees of DWS Vietnam, in particular, stand out as
being from a different era, in our view.
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Cayman Isles domicile is a
drawback
● Regulation: Some investors require the management group to be authorised by a
recognised international regulatory body, such as the UK’s Financial Conduct
Authority (FCA). Being domiciled in the Cayman Islands is also a drawback for many
investors – this is a common jurisdiction for hedge funds, but not for London-traded
CEFs that are primarily domiciled in the UK or the Channel Islands.
Outlook for Investor Demand
Emerging markets CEFs have
been out of favour
There are over 100 London-listed CEFs trading at premiums, representing more than a
third of the sector by market cap. However, most of these are Equity Income funds or
Alternative Asset funds launched since 2009. Emerging markets funds, in general,
remain out of favour. The only new capital raised has been by income focused funds
(e.g. JPMorgan Emerging Markets Income, Schroder Oriental Income) or by high profile
fund managers who do not run equivalent open-ended funds, notably Fidelity China
Special Situations (launched by Anthony Bolton) and Fundsmith Emerging Equity (Terry
Smith).
Vietnam is not a core market for
most investors
Vietnam is a small Frontier market, representing just 0.1% of the world’s stock market
capitalisation. As a result, it is not a market that global investors need to own. It is
already over-represented within the London-listed CEFs, with a combined market cap of
$2.1bn equivalent to 1.1% of the overall market cap for the universe of $185bn.
Continued pressure to return
capital
In the near term, we expect the Vietnam-focused CEFs to face continued pressure to
return capital given the size of discounts and the nature of the shareholder bases. There
are still some “legacy” shareholders who would be unlikely to reinvest in ICs in future. In
addition, there are a number of value investors who are likely to sell down as discounts
tighten.
We expect interest in Vietnam to
rise
The key is therefore to attract new long term investors. Vietnam has suffered in recent
years from its boom/bust economy. However, as discussed above, the performance of
the Vietnam Index has improved since 2012, and the outlook for economic growth
appears bright. As a result, we expect interest in Vietnam to build.
Buyers of Vietnam CEFs will differ
from those in 2006-07
Investors in CEFs in future will generally not be the same buyers that chased
Vietnamese funds in 2006-2007, in our view. Many of the European family offices and
private banks were “badly burned” in the downturn. In addition, they now have a broader
range of ways to access the Vietnamese stock market, including ETFs and actively
managed UCITS funds. These are simpler structures with regular liquidity and little or no
discount risk (at times of market distress, some open-ended funds may limit
redemptions).
Is there still a role for CEFs?
Further improvements needed in
fees and corporate governance
The need to maintain a liquid portfolio means that open-ended funds will be restricted in
their exposure to small/mid-cap stocks, and we believe that long term performance
could be impacted by inflows/outflows. Moreover, some investors favour the daily
dealing/pricing of closed-end funds, rather than periodic redemptions. In our view, there
is still a role for closed-ended funds provided they tackle the issues highlighted above
(i.e. fees / corporate governance and liquidity), as well as offering:
● A differentiated mandate: by exploiting the structure to take a longer term view,
with the ability to invest in less liquid stocks, including small/mid-caps, companies
with restricted FOLs, and SOE equitisations. CEFs can also invest in less liquid
asset classes such as private equity and real estate. This gives the potential to
provide broader exposure to the Vietnamese economy, including consumer-related
businesses in sectors that are not fully represented in the stockmarket at present.
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Performance remains the key
● Superior performance: CEFs need to deliver strong risk-adjusted performance in
order to attract investors.
● Appropriate discount mechanisms: Investors may buy CEFs because of wide
discounts at present, but will only hold onto the investment over the long term if they
believe that the Board/manager will seek to prevent the discount from widening in
future (eg. by prioritising buy-backs over new investment if the discount is
excessive). We believe that discount control mechanisms need to be implemented
on a consistent basis. This requires careful construction to allow for portfolio liquidity
and changing market conditions.
Marketing to investors is
improving
● Improved information: Each of the funds produces a monthly factsheet providing a
summary of the portfolio and the key investments. However, the depth of information
varies, and it is sometimes difficult to access historic reports. It is hard for wealth
managers to buy/recommend funds unless they can readily monitor share price/NAV
performance, as well as changes in the investment portfolio. Regular marketing by
the management groups is also needed to gain trust from investors in a specialist
asset class.
Some have given up on the CEF
structure
Kevin Snowball, manager of PXP Vietnam, recently stated that “the single country
closed-end fund model is no longer functioning effectively as far as Vietnam is
concerned. There has been no new issuance for a number of years and wide discounts
persist.” He highlights growth in ETF assets in recent years as an illustration that there
is apathy to the closed-end structure itself, rather than towards Vietnam.
We are more positive on the
outlook
In contrast, we would not rule out the potential for Vietnamese CEFs to trade on
premiums again within the next few years. We expect more funds to open-end/wind-up,
and buy-backs look set to continue in the near term. However, we have seen wide
discounts for CEFs in other sectors recover rapidly once the asset class comes back
into favour – an example is Technology funds, which suffered a similar boom/bust in
1999/2000. Our experience suggests that it can take up to a decade before investors
will venture back into a market where they have suffered significant losses.
Figure 13: Ratings of specialist CEFs can change markedly over time
30
% (Discount) / Premium
20
10
0
-10
-20
-30
2012
2010
2008
2006
2004
2002
2000
1998
1996
Note: chart of Polar Capital Technology premium/discount to NAV
Source: Datastream
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Recommendations
VinaCapital Vietnam Opportunity Fund (VOF)
Our core recommendation among the universe is VOF, which offers:
Clearly differentiated mandate
Broad exposure to the domestic economy: VOF invests across a range of asset
classes (equities, OTC, private equity and real estate) that can provide exposure to
parts of the economy that cannot be readily accessed via listed stocks.
Long term record is impressive
Strong performance record: The multi-asset approach means that VOF’s NAV is likely
to lag behind a rally in the Vietnam Stock Index, at least in the short term. However, the
fund has a good track record over the longer term, with the NAV return of 11.8% pa
since the start of 2004 versus a total return in US$ of 11.0% for the Vietnam Index.
Furthermore, VOF’s returns are far less volatile than the benchmark.
Listed portfolio has performed well
in recent years
● The Listed Equity portfolio has consistently added value through a value-based
approach, with a focused portfolio of 20-25 quoted investments. The long term
approach has enabled the manager to build significant positions in stocks with
limited liquidity due to FOLs, and the managers took advantage of the premium
on Vinamilk in August 2014 to sell 18% of its position at 9.7% above the
prevailing market price.
Significant uplifts from PE exits
● VOF also has an impressive track record of realisations from its Private
Equity/OTC portfolio including Prime Group (ceramic tile manufacturer sold to
Siam Cement Group), Indochina Food (a sugar and ethanol producer), Halico (a
vodka producer sold to Diageo), Hoan My Medical Corporation (healthcare
provider sold to Fortis Health), and most recently, An Giang Plant Protection (a
pesticide company sold to Standard Chartered PE).
Real Estate has been a drag on
returns
● Exposure to Real Estate (currently 16.1% via development projects, 8.8% via
hotels and 2.8% via a stake in VinaLand) has been a drag on the fund’s
performance in recent years. However, there are signs that the property market
has passed its trough, and VOF’s 50% stake in the Sofitel Hanoi Metropole Hotel
is a flagship asset paying a healthy yield (it has realised its other hotel assets).
Well-resourced management team: Andy Ho (CIO) is the lead manager, supported by
a Capital Markets team of 15 portfolio managers/investment analysts. The property
portfolio (other than the Metropole Hotel) is managed alongside VinaLand’s investments
by the group’s Real Estate team of 40, headed by David Blackhall.
Commitment to share buy-backs
Attractive discount: In our view, VOF offers considerable value at its current discount
of c.25%, and there is an ongoing commitment to return capital to shareholders while
the discount remains wide: since November 2011, VOF has spent $197m repurchasing
30% of its share capital, adding 38 cents (12.9%) to the NAV.
Size and trading liquidity: VOF, listed on AIM, has the advantage of being the largest,
most liquid fund in the sector, with a market cap of c.$550m and an average daily
trading value of $1.4m over the past 12 months. The Board recently announced that it is
considering a listing on the main market of London SE, which has the potential to raise
the fund’s profile and attract buying from index trackers (which typically own a stake of
c.8%).
Corporate governance: The Board is now fully independent from the investment
manager after Don Lam, VinaCapital’s CEO, recently stepped down as a director. The
company has introduced AGMs and significantly improved the level of information
provided to shareholders in recent years.
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Private equity weighting is
expected to rise
VOF now has a clearly defined strategy to increase exposure to listed stocks (currently
51% of net assets) and OTC/Private Equity, with a reduced weighting to development
real estate projects. The weighting in Private Equity is now 6.2% following a recent
$36m private investment in a dairy company and the strategy is to increase this
weighting to 10% or more. A further 2.8% is invested in OTC- traded stocks and VOF is
seeking to exploit mispricing of SOE equitisations (prior to full listing). It has recently
invested in Vinatex, South Basic Chemical, and Cienco 4, all of which are OTC traded
but expected to gain a full listing within the next 12 months.
Potential for discount to narrow
We see scope for VOF’s discount to narrow, supported by the ongoing buy-back
programme, and we believe that a move to the main market of the London SE could
help to raise the fund’s profile with a broader audience.
Exposure to private equity and
CEFs has boosted returns
DWS Vietnam ($251m market cap, 29% discount) also has a good performance record
in recent years through a multi-asset approach. It has benefitted from a number of
profitable exits from its unquoted/OTC portfolio, including several investments common
to VOF, such as Hoan My Medical, Prime Group and An Giang Plant Protection. It has
28.7% in private investments, including Greenfeed 15.5% (an animal feed producer)
and Corbyns 4.1% (a steel manufacturer). It also has 18.5% invested in Vietnam CEFs,
and is differentiated from VOF by having no direct exposure to Real Estate (a positive
factor in recent years). However, we find it hard to recommend DWS Vietnam unless it
is on a significantly wider discount than VOF due to its fee structure: its ongoing charges
ratio including performance fees was 8.8% in the last financial year). In addition, we
believe the OTC quote is a major drawback due to the lack of trading
liquidity/transparency. Nevertheless, we believe that the current discount is attractive,
and there is a possibility that the fund could open-end in 2016 when it reaches the end
of its initial 10 year life.
Equity Funds
For investors seeking purer exposure to the Vietnam equity market, we believe that
Vietnam Enterprise Investments (VEIL), Vietnam Growth Fund (VGF), PXP Vietnam and
Vietnam Holding all have their own merits.
Portfolios of VEIL and VGF had
become highly concentrated
Dragon Capital is the longest established manager of CEFs in Vietnam, with 20 years’
of investment experience. The group has a good long term record, but its closed-end
funds, VEIL and VGF, have lagged behind the peers in recent years. A significant
weighting in an unlisted Tungsten mine hit investor sentiment towards the funds postFinancial Crisis. This led to a focus on more liquid quoted stocks, and a reduction in
exposure to Private Equity and OTC investments. However, the portfolios remained
highly concentrated. VEIL’s performance, in particular, has been impacted by significant
weightings in Asia Commercial Bank (down 16% since the start of 2012) and Masan
Group (down 13%), during a period when the Vietnam Index has risen 79%. Vinamilk
has been a highly profitable investment in recent years, rising 118% since the start of
2012, but was a laggard in 2014, falling 13%.
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Differences between the Dragon
funds are no longer as clear
During 2014, the portfolio concentration of both funds was reduced, and we believe that
they are positioned to deliver stronger performance. They are run by different portfolio
managers, but share the same research resources. In the past, VEIL was differentiated
by a high weighting in Banks and exposure to Private Equity. However, they now have
similar portfolios of around 25 quoted stocks. In our view, therefore, a merger between
the two funds would make sense. In practice, however, we believe it is more likely that
Dragon will seek to differentiate the vehicles, with VEIL prepared to invest more in less
liquid securities such as SOE equitisations. It has also broadened its mandate to allow
up to 25% of the portfolio to be invested in Cambodia and Laos, although it currently
has no exposure to these markets. The performance fees of both VEIL and VGF are
significantly underwater, and shareholders are unlikely to suffer dilution from
performance fees in the foreseeable future.
VEIL is the second largest Vietnam CEF, with a market cap of $431m, and is perhaps
the obvious choice for investors looking for exposure to listed equities despite its
unexceptional performance record in recent years. The current discount of 20% is
attractive, in our view. However, we regard the OTC trading as a significant drawback,
with wide spreads and little transparency. In addition, there is little clarity over the fund’s
discount controls, although it has periodically bought back stock when the discount
approaches 20%.
PXP Vietnam has been sub-scale
PXP Vietnam has a good track record, and shareholders have benefitted from a
narrowing of the discount in recent years. However, Kevin Snowball, the manager, has
struggled to grow the fund’s assets, and a proposed C share in early 2014 failed to gain
sufficient support. In our view, this came as little surprise given the ability to buy other
Vietnam funds on wider discounts. PXP was differentiated by being listed on the main
market of the London SE, but with net assets of $81m, we believe it has been too small
to attract the attention of many investors.
To merger with open-ended fund
in Jan 2015
PXP’s Board had been assessing the future strategy “in light of the vote on open-ending
the Fund which was due to be held at the 2015 AGM”. As a result, it put forward
proposals to merge with Vietnam Emerging Equity Fund (VEEF), a Cayman open-ended
mutual fund which shares the same management team and has a very similar portfolio.
Shareholders approved the merger at an EGM on 17 December, and the shares are
due to be suspended from trading on 30 January 2015.
Ability to redeem from April
subject to a 3% fee
After the merger, former PXP Vietnam shareholders will be able to redeem their VEEF
shares at NAV minus a 3% redemption fee as of 1 April 2015 (subject to notice being
given by 10 February), with monthly redemptions thereafter (the redemption fee is
payable to the fund and reduces to 1% after 12 months). This has led to a narrowing of
the discount to 4%. We can understand the rationale for PXP Vietnam AM to
consolidate its assets from two smaller funds into one larger vehicle. Furthermore, it will
now be able to charge a performance fee (the high watermark will be set at the merger
NAV) based on 15% of returns over 8% pa, subject to a high watermark.
ESG overlay and greater weighting
in mid-caps
Vietnam Holding is differentiated from the peers by having a higher weighting in midcap stocks ($25-75m market cap) and by an ESG (environmental, social and corporate
governance) overlay. The portfolio has a bias towards a number of top-down themes,
notably Urbanisation, Domestic Consumption, and Agriculture, although exposure to the
latter has been reduced over the past year. Performance has been strong in the rising
market since early 2012, and this has led to a narrowing of the discount to 20% from
27% a year ago. The fund’s size has increased through a combination of asset
performance and the issue of short dated warrants, but it remains relatively small with a
market cap of $102m.
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Real Estate Funds
These funds should not be expected to perform in line with the Vietnamese
stockmarket. It has been a difficult few years for portfolio performance, but their share
prices rose strongly in 2014 as a result of discounts narrowing:
Realisation process is behind
schedule
VinaLand: provides exposure to a diversified portfolio of development real estate
projects in Vietnam. However, performance has suffered in recent years from high
interest rates and weak property prices, resulting in a shortage of cash to finance
developments. At an EGM in November 2012, shareholders approved the fund’s
continuation subject to a realisation strategy being adopted over a three year “capital
return period” up to the next continuation vote. The realisation process is behind original
projections, but progress is being made, with eight exits and one partial exit, mostly at or
around carrying value. However, it is notable that the fund has exited most of its
operating hotels, significantly reducing debt and potential future liabilities. There are
now 27 projects in the portfolio, down from a peak of 46 before 2009.
Fees incentivise manager to
distribute capital
VinaLand’s share price rose 24.8% in 2014, but it is still trading on a discount to NAV of
36%. We see further upside if the managers are able to deliver further realisations at
close to carrying value. The managers are incentivised to realise assets and return
capital to shareholders in order to “earn-back” a performance fee of up to $28.2m which
was accrued, but not paid, based largely on unrealised NAV gains. A provision of c.6.5
cents per share is included in the NAV, but the managers will only receive this full
amount if they return at least $141m to shareholders from realisations made by
November 2015, and this appears unlikely. Furthermore, 50% of any deferred
performance fee earned will be used to acquire VinaLand shares in the market.
Realisations are expected to pick
up in 2015
Since the EGM, $26.2m has been returned through share buy-backs, and we believe
that this will continue to be the favoured way to return relatively small amounts of capital
whilst the discount is wide. VinaLand’s manager, David Blackhall, believes that the real
estate market has passed its trough and interest is building from both domestic and
foreign investors. As a result, he predicts that the fund can realise a further $153.6m
from exits by November 2015, bringing the total cash return to shareholders to $115m
during the Capital Return Period (including distributions in 2016 in relation to exits this
year). Advanced sales discussions are currently under way in relation to four projects. In
addition, there has been growing interest in a number of the largest investments in the
portfolio, including Century 21 which is a prime location in District 2 of HCMC. Further
details on the portfolio and historic realisations are provided later in this report.
Too small and illiquid
Vietnam Property (VPF): This property fund, managed by Dragon Capital, was
launched at the top of the cycle and has taken time to invest its capital given the difficult
market conditions. With net assets of $66m, VPF has been too small to lead
developments, but it has sought to invest alongside established developers, such as
Indochina Capital Land, as well as to invest in listed real estate stocks. The fund was
originally listed on AIM, but delisted in April 2013 due to poor liquidity and a wide
discount, and is now OTC traded. This may have reduced share price volatility, but has
done nothing to improve trading liquidity, in our view.
Vietnam Infrastructure (VNI)
VNI was launched by VinaCapital in 2007 to provide exposure to a range of
infrastructure-related assets in Vietnam, including BTS telecom towers, industrial parks
and oil & gas companies. For some time, however, the fund has been struggling to find
an identity, with questions over the original mandate given the difficulty of investing
directly in infrastructure projects in Vietnam on a commercial basis given the size of
capital required and the extent of government involvement.
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Reconstruction to be implemented
in Q1 2015
VNI faced a continuation vote in 2017, and the recent strategy has been to focus on
more liquid quoted infrastructure investments. However, the Board brought forward
reconstruction proposals given that a high proportion of shareholders were seeking to
realise value. The proposals, expected to be implemented in Q1 2015, are to split the
portfolio into two share classes, both listed on AIM:
Phased transfer to open-ended
fund over 12 months
● Listed Portfolio Shares: VNI’s listed assets (c.50% of the portfolio) will invest all of
its assets in a new UCITS vehicle, with a broader mandate to invest in listed equities
in Vietnam. Holders of these shares will be able to transfer into the UCITS fund
within 12 months (which offers a twice monthly redemption). Details of the transfer
dates and costs are provided later in this report.
Seeking to realised unquoted
assets by mid-2017
● Private Equity Shares: a realisation strategy will be adopted for the private
investments (c.45% of net assets), with a target exit date of June 2017. The bulk of
the value is represented by three investments: SEATH (mobile phone towers) 27.8%
of net assets; Ba Thien Industrial Park 10.6%; and VALC (aircraft leasing) 4.5%.
VNI’s share price has risen 8.6% since the reconstruction proposals were announced,
but still trades on a discount of 20%. In our view, there is further potential upside, and
applying a 10% discount to the Listed Portfolio would leave the Private Equity shares
trading on an implied discount of 31%.
The phased exit for investors in the Listed Portfolio shares into the UCITS fund gives
VinaCapital time to reorganise the quoted portfolio in an orderly manner, and potentially
to grow the vehicle by attracting new investors. However, we believe that most existing
investors in Vietnam Infrastructure will be looking to redeem their investment over the
next 12 months. This is partly because of the difference in mandates, but also because
many of the buyers in recent years have been value investors attracted by the wide
discount to NAV.
Table 7: Vietnam CEFs - A Summary: Key Pros & Cons
Equity
MultiAsset
Real
Estate
Infra
Fund
Pros
Cons
PXP Vietnam
Good track record; open-ending removes
discount volatility
No longer potential to exploit discount; now performance
fee payable; still Cayman domiciled
Website
VEIL
Largest pure equity fund; well-resourced team;
Effectively no performance fee; Wide discount
OTC traded; lack of transparency regarding trading &
discount controls
www.dragoncapital.com
Vietnam
Growth
Well-resourced team; Effectively no performance fee;
Wide discount
OTC traded; lack of transparency regarding trading &
discount controls
www.dragoncapital.com
VietNam
Holding
Strong performance record; ESG emphasis
Several changes in lead manager; small size; rebased
HWM on performance fee
www.pxpam.com
www.vietnamholding.com
DWS Vietnam Strong record in unquoteds; attractive discount
Very high fees; OTC traded
www.dwsvietnamfund.com
VinaCapital
Vietnam
Opportunity
Broad exposure to economy; strong track record in
equities & PE; fully independent Board; attractive
discount; size & trading liquidity
NAV returns will not track Vietnam stock market; Real
Estate exposure has been a drag on returns
Vietnam
Property
Wide discount
Too small and illiquid; OTC traded
www.dragoncapital.com
VinaLand
Focused on returning capital; improving outlook for Real
Estate; wide discount
Poor historic record; discount/asset play rather than broad
Vietnam exposure; uncertain valuation for large projects &
land banks
www.vinacapital.com/vnl
Vietnam Infra
Attractive discount to access open-ended fund
Assets of open-ended fund may shrink rapidly; uncertain
realisation value for unquoteds
www.vinacapital.com/vni
www.vinacapital.com/vof
Source: Numis Securities Research
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Other Ways to Invest in Vietnam
Direct Investment
FOLs and trading liquidity are a
drawback
It is possible to invest directly in the Vietnamese equity market, though even institutional
investors may be reluctant to do so due to exchange rate controls, foreign ownership
limits, administrative requirements, poor trading liquidity and limited research coverage
outside the largest investable stocks. Institutional equity investors pay a 0.1%
withholding tax on the value of any stock sold, but dividends are tax free and there is no
capital gains or remittance tax. Direct investment in other asset classes, such as real
estate, can prove difficult in Vietnam and local knowledge/contacts are often essential.
There are no explicit capital controls in Vietnam, but the VND is not freely exchangeable
and the availability of foreign exchange is not guaranteed. The State Bank of Vietnam
fixes the US$/VND target rate on a daily basis and the inter-bank market is able to trade
within a specified band of the target rate. Foreign investors are able to purchase foreign
currency at authorised banks in order to remit overseas, provided any tax obligations
have been met. However, this may take time to achieve.
Open-Ended Funds
Potential to appeal to broader
investor base
A number of the Vietnam-based managers of closed-end funds have established openended funds in recent years. These have the potential to attract new investors who are
wary of the discount volatility of closed-ended funds. However, due to the liquidity of the
underlying market, redemptions are only available on a periodic basis, ranging from biweekly to quarterly.
Table 8: Selected Open-Ended Vietnam Funds – Key Details
Inception/
Fund
Bloomberg
Mgmt Group
Fund Type
Domicile
Size ($m)
Open-ending
Vietnam Equity
VIETNAM ID
Dragon Capital
Lumen Vietnam Fund
LUMENVN LE
CBR Investment/ Vietnam Holding AM
UCITS IV
Ireland
13
Sep-13
UCITS IV
Liechtenstein
22
Vietnam Emerging Equity
PXPVEEF KY
PXP Vietnam AM
Mar-12
Mutual Fund
Cayman
42
Vietnam Equity Holding
3MS GR
Saigon AM
Jan-10
Mutual Fund
Cayman
77
Jun-13
Source: Numis Securities Research
Number of funds increasing, but
small in size
Some of these vehicles have been formed through the open-ending of closed-end
funds, notably Vietnam Emerging Equity Fund (VEEF), managed by PXP, and Saigon
AM’s funds, Vietnam Equity Holding and Vietnam Property Holding (which only offer
limited redemptions at present). Other groups have established new UCITS funds,
notably Vietnam Equity Fund, managed by Dragon Capital, while Vietnam Holding AM
acts as investment adviser for the portfolio of IFM Lumen Vietnam, a Liechtenstein
domiciled fund. VinaCapital currently has no UCITS offering, but is planning to launch a
Luxembourg UCITS fund shortly as part of the reconstruction of Vietnam Infrastructure
(VNI). This will have initial assets of c.$100m, represented by the quoted investments
from VNI, but will offer investors the ability to redeemed their holdings on a phased
basis over 12 months.
Table 9: Open-Ended Funds: Fees and Terms
Initial
Redemption
Management
Charge
Charge
Fee
Fee
Subscriptions
Redemptions
Vietnam Equity
Up to 5%
0%
2%
None
Every 2 weeks
Every 2 weeks
Lumen Vietnam Fund
T+max 5
Fund
Performance
Up to 3%
0%
2%
10%
T+3
Vietnam Emerging Equity
None
3% (1% after 12m)
2%
20% (>8%pa)*
2 days' notice
Monthly
Vietnam Equity Holding
None
3%
2%
20% (>8%pa)
Monthly
Up to 10% of fund qtly
with 60 days' notice
* From 1 January 2015, Vietnam Emerging Equity is to reduce base fee to 1.5% and performance fee to 15% (>8% pa hurdle). Note: all the performance fees include high watermark provisions
Source: Company & Numis Securities Research
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There are also a number of other open-ended vehicles with a range of domiciles,
including Amundi Vietnam Opportunities (Cayman), Eastspring Inv Vietnam Equity
(Luxembourg), IPConcept Vietnam Emerging Market (Luxembourg), JPMorgan Vietnam
Opportunities (Hong Kong), KBC Horizon Access Vietnam (Belgium), Lion Global
Vietnam (Singapore) and Prevoir Renaissance Vietnam (France). The mandates of
these vehicles vary (e.g. the Prevoir fund investing just 57% of its assets directly in
Vietnam).
Potential source of growth
In time, we believe that UCITS vehicles are likely to become the primary source of
capital for funds investing in listed Equities within Vietnam. This reflects the discounts of
the existing vehicles which limits their potential for growth, as well as the reluctance of
some investors to buy closed-end funds having suffered significant discount volatility in
the past.
Domestic Funds
Within Vietnam, there is also a small, but growing domestic mutual fund industry. At
present, there are 16 funds, mostly with balanced mandates including equity and debt,
including one local ETF. VinaCapital and Dragon Capital have both established
domestic funds. These funds can invest in local stocks and are open to foreign
investors, although they tend to be relatively small funds and often have high fees.
Why Not Just Use ETFs?
Two Vietnam ETFs have combined
assets of $855m
There are two exchange-traded funds that seek to offer international investors exposure
to Vietnam by tracking the market. These have grown significantly in recent years, and
now have assets of $855m combined.
Figure 14: Growth in Size of Vietnam ETFs
1,200
Assets (US$m)
1,000
800
600
400
200
0
May-07
May-08
May-09
May-10
db x-tracker
May-11
May-12
May-13
May-14
Van Eck ETF
Source: Bloomberg
Unable to replicate the Vietnam
Index
The difficulty is that trading liquidity and foreign ownership limits mean that it is not
possible to track the performance of the Vietnam Index. Instead these ETFs follow
indices that have been designed to facilitate tracking. As a result, they have no
exposure to some of the largest stocks in the market (e.g. PV Gas and Vinamilk). This
has impacted on their performance, and the ETFs have failed to match the performance
of the Vietnam Index in recent years (or that of the CEFs).
In addition, the ETFs tend to have concentrated portfolios, and due to their size relative
to the market, significant inflows/outflows can have a material impact on underlying
share prices.
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12 January 2015
db x-tracker FTSE Vietnam ETF
Follows FTSE Vietnam Index
The db x-trackers FTSE Vietnam ETF is a UCITS IV compliant fund listed on multiple
stock exchanges across Europe. It is traded in London in both Sterling (ticker: XFVT LN)
and US$ (XVTD LN). The ETF was launched in early 2008 and seeks to track the
performance of the FTSE Vietnam Index, a tradeable subset of the FTSE Vietnam All
Share comprising stocks that have sufficient foreign ownership availability.
Bias towards Financials
The ETF, provided by Deutsche Bank, currently has assets of $401m and includes 21
stocks. There is a bias towards Financials, which represent 48% of the FTSE Vietnam
Index versus a weighting of 34% within the HOSE. A full list of constituents can be
found on www.dbxtrackers.co.uk, but the largest investments at 28 November 2014
were Masan Group 16.8%; Vincom 12.9%; Hoa Phat 11.8%; PV Drilling 10.4%; and
HAGL 7.5%. The current bid/offer spread is 1% and the fund has a total expense ratio of
0.85% (excluding OTC Swap Transaction Costs).
Performance significantly behind
Vietnam Index
Since launch in January 2008, the db x-tracker has closely followed the FTSE Vietnam
Index (-70% versus -74% total return in US$), though it has underperformed the
Vietnam Index (-39%). It lagged significantly behind in the rally since the start of 2012
with a total return in US$ of just 47% versus 73% for the Vietnam Index.
Index of Total Return (US$)
120
110
100
90
80
70
60
DB-X ETF
FTSE Vietnam
Source: Bloomberg
Vietnam Index
Van Eck ETF
Aug-14
Feb-14
Aug-13
Feb-13
Aug-12
Feb-12
Aug-11
Feb-11
Aug-10
Feb-10
Aug-09
Aug-14
Feb-14
Aug-13
Feb-13
Aug-12
Feb-12
Aug-11
Feb-11
Aug-10
Feb-10
Aug-09
Feb-09
Feb-08
50
Vietnam Index
24
24
Figure 16: Market Vectors Vietnam ETF Performance
130
100
90
80
70
60
50
40
30
20
10
0
Aug-08
Index of Total Return (US$)
Figure 15: DB-X Vietnam ETF Performance vs Vietnam Index
Market Vectors Index
Source: Bloomberg
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Market Vectors Vietnam ETF
26% invested in stocks listed
outside Vietnam
This is a US traded ETF (ticker: VNM US) that seeks to replicate the performance of the
Market Vectors Vietnam Index, part of the Van Eck Market Vectors range. 74% of the
index is invested in locally-listed companies, with the remainder in overseas stocks that
generate at least 50% of their revenues from Vietnam or have a significant and growing
position in Vietnam. The index is rebalanced on a quarterly basis and currently includes
30 stocks. By sector, the fund is invested 37.6% in Financials, 16.1% Energy, 13.3%
Consumer Staples, 11.7% Industrials, and 10.6% Consumer Discretionary. A full list of
constituents can be found on the website www.vaneck.com/vnm
As at 31 December 2014, the largest investments were Masan Group 8.0%; Vincom
7.8%; Vietcombank 7.5%; and Sacombank 6.5%. Overseas holdings include Parkson
Holdings (Malaysia, retail) 4.8%; Hansae (Korea, clothing) 4.7%; Gamuda (Malaysia,
construction) 4.5%; and Charoen Pokphand Foods (Thailand) 4.4%, as well as stakes in
two London-listed Oil & Gas E&P stocks, Soco International (5.3%) and Premier Oil
(4.3%). It also has held a position in VinaCapital Vietnam Opportunity Fund.
Launched in August 2009
The ETF was launched in August 2009 and currently has assets of $478m, down from a
peak of $640m in September 2014. It has a total expense ratio of 0.76%. Initially, the
fund performed closely in-line with the Vietnam Index, but it has underperformed in
rising markets over the past three years, with a total return of 43% versus 73%.
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12 January 2015
Economic Background
Why Vietnam?
Vietnam was isolated from global markets until the mid-1990s, but is now one of the
most promising countries in the world due to:
Growing workforce
● Positive demographics: A young, growing workforce; it is the world's 13th largest
country by population, with over 90m people mostly between the ages of 25-35 (the
growth in the labour force is expected to outpace population growth over the next
decade).
Low labour costs
● Competitive labour costs: Good literacy and an entrepreneurial culture are
combined with low wages versus North Asia (manufacturing wages are $120 per
month versus $320 in China).
● Rising domestic consumption: An emerging middle class is driving growth in
demand for consumer goods and services.
● A strategic location: Being based near to China and Japan makes Vietnam ideally
suited as an export hub for a wide range of manufactured products. Vietnam is
currently a leading exporter of textiles and the second largest exporter of footwear,
but it is moving up the value chain, and is now a significant player in electronics,
notably the assembly of computer chips and mobile phones.
Range of exports is growing
● Significant natural resources: including agriculture, timber and oil. Vietnam is the
second largest exporter of rice and coffee, and third largest for rubber.
● Political/religious stability: Bureaucracy remains a problem, but the communist
government is committed to opening up the economy to foreign investment. The
current leadership is in place until the next Party Congress in early 2016.
Figure 17: GDP per Capita (US$) - Emerging Asia
Figure 18: Vietnam - Population & GDP per Capita Growth
2000
12,000
100
1800
8,000
6,000
4,000
2,000
90
1600
1400
80
1200
1000
70
800
60
600
400
Population (m)
GDP per Capita (US$)
10,000
50
200
Myanmar
Bangladesh
Cambodia
Pakistan
India
Vietnam
Philippines
Sri Lanka
Indonesia
Thailand
China
2012
2008
2004
GDP per Capita (LHS)
2000
1996
1992
1988
26
26
40
1984
Source: IMF
0
1980
Malaysia
0
Population (RHS)
Source: IMF
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GDP Growth – Picking up Again
Boom-bust cycle in recent years
For a number of years, GDP grew at 7-8% pa, but in 2008 Vietnam was hit by a double
crisis. First, it was forced to raise interest rates sharply to choke off a surge in inflation,
and this was followed by the global credit crisis which hit exports and foreign
investment. Subsequently, there was a strong recovery in 2009/2010, but this was
fuelled by credit growth of more than 30% pa, leading to a resurgence in inflation. In
early 2011, the Vietnam Dong devalued by 7.2% against the US$ and interest rates
rose sharply, hitting real estate markets and leading to a sharp rise in non-performing
loans (NPLs).
Economy recovering from a period
of austerity
A period of austerity followed, with tight lending conditions and high interest rates. This
stabilised the currency, but impacted on domestic demand and real GDP growth slowed
from 6.8% in 2010 to 5.9% in 2011 and 5.3% in 2012. However, growth stabilised in
2013 and has been strengthening throughout 2014, with Dragon Capital recently
revising its full year target to 5.8%, following growth of 6.2% in Q3. The group believes
that the pillars are now in place for a sustained period of stronger growth of closer to 7%
pa, in contrast to the previous credit fuelled growth phases. In recent years, economic
growth has relied on rising exports, fuelled by foreign direct investment. However, there
are now signs of improving liquidity in the banking system, and domestic sentiment is
starting to pick up, as reflected by inflation adjusted retail sales growth of 6.5% in the
first 11 months of 2014.
Figure 19: Vietnam Economic Growth
Figure 20: Real GDP Growth % pa (2000-2013)
10
9
9
8
7
7
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
Hong Kong
Source: Bloomberg
Korea
0
Thailand
0
Pakistan
1
Philippines
1
Malaysia
2
Singapore
2
Indonesia
3
Sri Lanka
4
3
Vietnam
5
4
India
6
5
China
6
2001
Real GDP Growth YoY
8
Source: IMF
Falling Inflation and Stable Currency
Inflation at record lows
Inflation has fallen to historic lows of under 3% year-on-year from more than 20% in
2011, and high real interest rates are starting to fall, with a lending rate of 9-11%, down
from a peak of over 20% in late 2011. As a result, loan growth is picking up, albeit from
a low level. The balance of trade has improved markedly in the past two years, and the
government’s foreign currency reserves have risen to $40bn. Reflecting this, the
Vietnam Dong has been stable against the US$ since the devaluation in February 2011
(with a target depreciation of 1-2% pa).
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12 January 2015
Figure 21: Vietnam - Currency has Stabilised
Figure 22: Vietnam - Inflation Falling (%)
22,000
30
21,000
25
20,000
Inflation YoY
VND per US$
19,000
18,000
17,000
16,000
20
15
10
15,000
14,000
5
13,000
0
2006 2007 2008 2009 2010 2011 2012 2013 2014
Jan-14
Jan-13
Jan-12
Jan-11
Jan-10
Jan-09
Jan-08
Jan-07
Jan-06
Jan-05
12,000
Source: Bloomberg
Source: Bloomberg
Trade Surplus
Trade surplus since 2012 driven by
FDI
Vietnam’s balance of trade returned to a surplus in 2012, for the first time after 19 years
of trade deficit, and there was a surplus of $2.06bn in the first 11 months of 2014. The
US is the biggest export market, representing 19% of the total, followed by the EU
(18%), the ASEAN region (13%), China (10%) and Japan (10%). The largest source of
imports is China (29%), followed by the ASEAN region (16%) and Korea (14%). FDI
accounts for 57% of imports, but is wholly responsible for the trade surplus, with net
exports of $15.5bn in the first 11 months of 2014. There is the potential for Vietnam to
sign significant Free Trade Agreements over the next year or so: one with the EU, and
the other with a broad range of countries including the US, Japan, Australia and
Singapore under the Trans-Pacific Partnership.
Figure 23: Vietnam - Exports & Imports (US$bn)
Figure 24: Vietnam - Trade Balance (US$bn)
5
140
120
0
100
80
-5
60
-10
40
20
-15
Exports
Imports
Source: Vietnam GSO
28
28
-20
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
11M 14
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
11M 14
0
Source: Vietnam GSO
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Strong Foreign Direct Investment
FDI disbursement reached $11.2bn in the first 11 months of 2014, up 6.2% year-onyear. The biggest investors are South Korea, followed by Hong Kong, Japan and
Singapore. More than 70% of the FDI relates to manufacturing, and several leading
electronics companies have invested significant capital, including Intel, Canon,
Foxconn, Olympus and Brother. Samsung has total registered investment capital of
$8.0bn for the manufacture of mobile phones and electronic devices, and in June it
announced plans to set up a US$1bn production facility in HCMC, as well as shifting
some of its manufacturing facilities from China to Vietnam.
80
1800
70
1600
60
1400
1200
50
1000
40
800
30
600
20
400
10
200
0
Number of Projects
FDI US$bn
Figure 25: Vietnam - Foreign Direct Investment
Approved (LHS)
Disbursed (LHS)
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
0
No of projects (RHS)
Source: Vietnam GSO
Credit Growth and Domestic Debt
Credit growth picking up again
After a decade of credit growth averaging 33% pa, Vietnam suffered a sudden drop in
credit growth to 14% in 2011 and then 8.9% in 2012. The household sector, which
accounts for 22% of outstanding loans, is not highly leveraged reflecting the immature
market for credit cards and mortgages. However, the tightening credit conditions hit
corporates, and led to a slump in real estate prices and activity. Credit growth was just
3.5% in H1 2014, but had risen to 10.2% by late November. This is still lagging behind
the government’s target of 12-14% pa. However, Dragon Capital expects credit growth
to reach 14-16% in 2015 and then accelerate to 18-19% by 2016. It believes that credit
growth of around 1.5-1.6x nominal GDP growth, equivalent to 17-19% is required to
maintain healthy growth across the whole economy.
Government has sought to boost
domestic demand
Vietnam’s government has taken a number of steps to stimulate the domestic economy,
notably:
● Establishment of the Vietnam Asset Management Company (VAMC) to acquire
NPLs from the commercial banks (discussed in more detail below).
● A $1.4bn package to boost credit for the housing sector.
● A reduction in the corporate tax rate to 22% from 25% at the start of 2014, with a
further cut to 20% scheduled for 2016.
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Modest external debt
The country is running a fiscal deficit of c.5% of GDP, reflecting low tax revenues.
However, this is not a major concern to most commentators given that strong FDI is
expected to continue. Vietnam has external debt of $68bn, equivalent to around 36% of
GDP, but much of this is related to ODA, and the country was not impacted by capital
outflows that hit several emerging markets in 2012 when the US started to wind down its
QE programme.
Improved Credit Rating
Recent upgrades from Moody’s
and Fitch
For several years, foreign investors have had concerns over the health of Vietnam’s
banking sector, and confidence was hit in 2010 when state-owned Vietnam Shipbuilding
Industry Group (Vinashin) defaulted on a $600m internationally syndicated loan.
However, the country’s growing macro-economic stability is being recognised by the
strong performance of government bonds: the yield on 5-year government bonds has
dropped from 8.3% at the end of 2013 to 4.8%. In addition, the leading credit rating
agencies have been positive on the country’s outlook. In July 2014, Moody’s upgraded
Vietnam’s sovereign credit rating to B1 from B2, its first upgrade for the country since
2005. Fitch recently raised its rating for Vietnam to BB-, three levels below investment
grade, while S&P already has a BB- rating.
US$ bond issue in strong demand
In early November, the Vietnamese government took advantage of these credit
upgrades by selling US dollar bonds abroad for the first time in almost five years. It
priced $1bn of 10-year securities to yield 4.8%, equivalent to 2.39% over similarmaturity US Treasuries. The offer was heavily oversubscribed (9x), and the whole issue
was allocated to existing holders of VN USD bonds 2016 maturity and VN USD bonds
2020 maturity that were given the option to switch into the new issue.
Table 10: Vietnam - Summary of Key Economic Statistics
Unit
2009
2010
2011
2012
2013
2014 F
2015 F
US$bn
100.8
114.0
133.5
155.8
172.1
188.4
210.3
Real GDP Growth
%
5.3
6.8
5.9
5.3
5.3
5.8
6.2
CPI
%
6.5
11.8
18.1
6.8
6.0
3.2
4.5
Lending Rate
%
10.0
13.1
17.0
14.1
13.6
9.7
8.6
Trade Balance
US$bn
(11.8)
(12.6)
(9.8)
0.8
0.0
1.3
3.1
FDI Disbursement
US$bn
10.0
11.0
11.0
10.5
11.5
12.5
13.0
FX Reserves
US$bn
16.5
12.4
13.5
25.6
32.1
40.5
50.5
External Debt
US$bn
34.7
40.4
49.6
58.4
63.2
68.5
75.5
External Debt
% GDP
34.4
35.4
37.2
37.5
36.7
36.4
35.9
VND/US$
18,500
20,700
21,200
20,850
21,115
21,350
21,700
GDP
Exchange Rate
Source: Dragon Capital as at 30 Sep 2014
Key Challenges for the Economy
Key structural negatives for Vietnam are infrastructure bottlenecks, the state of the
Banking sector, as well as corruption and the inefficiency of State Owned Enterprises
(SOEs). These have hampered productivity gains and contributed to a boom/bust
economic cycle. However, there are some signs of improvement:
Infrastructure
Significant infrastructure
investment is required
As with any emerging market, a huge amount of infrastructure expenditure is required in
order for Vietnam to maintain its rapid economic growth. Most people currently ride
motorbikes and a shift to cars will necessitate major improvements in the road network.
In addition, further developments are required in terms of rail, ports, electricity supplies
and industrial parks. Many of these activities are controlled by SOEs, though the
government has encouraged private companies to invest in infrastructure, often in cooperation with state-owned undertakings.
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Progress is being made
In recent years, the government has made a more concerted effort to invest in
infrastructure projects, often with foreign/ODA backing. For instance, the Phú Mỹ Bridge
(2009) and Thu Thiem Tunnel have been built in HCMC, while a metro is scheduled to
open in 2017/18 with the first line linking District 2 to the CBD, funded primarily from
$0.9bn from the Japanese Bank for International Cooperation. A new airport is also
being considered in HCMC, although the cost is estimated at $18.7bn.
Non-Performing Loans
Official figures on NPLs are
understated
For several years, there has been concern over the health of the banking sector,
exacerbated by weak real estate prices and a lack of accurate data on NPLs.
Commercial banks claimed to have had 4.2% NPLs at July 2014, but these figures are
widely recognised as an underestimate of the problem. The State Bank of Vietnam
(SBV) estimates NPLs to be 10.9%, according to VinaCapital. This has acted as a drag
on lending and restricted credit growth.
Questions over effectiveness of
VAMC
The government has established the Vietnam Asset Management Company (VAMC) as
a “bad bank” to acquire NPLs from the commercial banks in return for a bond which
allows them to amortise these loans over a five year period. The VAMC purchased $1bn
of bad debts in the first nine months of 2014, bringing the total purchased to $2.9bn
since the programme began in October 2013. The target is $3.3-4.7bn by end of 2014.
However, the effectiveness of the VAMC has been widely questioned, as the
government is simply warehousing the loans at present, and no effective mechanism
has yet been determined in order to sell the loans to foreign investors.
But banking crisis now seems
unlikely
Nevertheless, the slow reform in the banking sector is not expected to result in a crisis.
VinaCapital estimates that NPLs would require an additional provision of $3.7bn,
assuming a 40% recovery rate. It believes this is manageable in relation to $22bn of
total equity value in the banking sector and in context of the country’s total GDP of
$188bn. In addition, NPLs, while high, are continually falling as a proportion of loan
books, down from an estimated 18% a couple years ago. Most of the bad loans are
linked to the real estate sector and this market appears to have passed its trough, with a
recovery in activity and prices since late 2013.
Efficiency of SOEs
SOEs are inefficient
There are around 1,000 SOEs representing 35% of GDP, and these are typically less
efficient than domestic private or FDI sectors. Easy availability to credit encouraged
SOEs to diversify into other business areas, and corruption has been a widespread
problem. Reforms are resisted by powerful interest groups, and an equitisation
programme which started in 2007, stalled as Vietnam’s equity market fell.
Plans for 432 equitisations in
2014/15
The government has been keen to encourage reforms, and has been looking to achieve
the equitisation of 432 state-owned enterprises (SOEs) during 2014/15. Effectively, this
is a privatisation programme that seeks to raise money for the government and to
improve the efficiency of the state run businesses. The aim is to cut the number of
SOEs to c.500 by the end of 2015, with the remaining companies primarily involved in
strategic industries such as defence and public utilities.
SOEs expected to gain stock
exchange listing within 12 months
of equitisation
Equitisation (often called IPO) in Vietnam involves the conversion of an SOE into a Joint
Stock Company, and once these have over 100 shareholders, they are eligible to trade
on the OTC market as a “public company”. The aim is to gain a full listing on the HCMC
(HOSE) or Hanoi (HNX) stock exchanges at a later date. Indeed, the latest equitisation
programme explicitly requires companies to seek a listing within 12 months, and the
government is threatening to change management if this does not happen.
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High profile arrests to target
corruption
There have also been some high profile arrests of prominent banking figures as part of
the government’s effort to tackle corruption and curb inefficient lending. For instance,
the Chairman of Ocean Commercial Bank was arrested in October 2014, reportedly due
to the approval of an inappropriate loan worth $25m without collateral.
Political Tensions with China
Hostilities with China had
temporary impact on tourism
Q2 2014 saw significant political tension between Vietnam and China over the
placement of a Chinese deep-sea oil rig in disputed waters of the East Sea (South
China Sea). This led to anti-Chinese protests in Vietnam, which hit tourist-related
businesses and had a temporary impact on FDI and real estate transactions (there was
a slowdown in tourism in Q2, but international visitors to Vietnam still rose 5.4% yearon-year in the first 11 months of 2014 to 7.2m). The oil rig was removed in July, and no
long term impact is expected. At present, both sides appear reluctant to inflame the
situation and it is notable that China is primarily a source of imports: Vietnam is running
a fiscal deficit of $26.4bn with China in in the first 11 months of 2014.
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Vietnam Stock Market
Size of Vietnam’s Equity Market
Two stock exchanges in Vietnam
Vietnam has two stock exchanges, the Ho Chi Minh City SE (HOSE) and the Hanoi SE
(HNX), both state-owned. The combined market capitalisation of the exchanges is
currently $50bn, of which 88% is represented by the HOSE. There are 666 quoted
companies in total, with over half by number listed on the HNX.
Figure 26: Market Value of Vietnam Exchanges
Figure 27: Vietnam Stock Market - Turnover
Average Daily Turnover $m
160
Hanoi SE
$6.2bn
140
120
100
80
60
40
20
0
2014
2013
Growth in size of market driven by
privatisation of SOEs
2012
Source: Bloomberg
2011
Ho Chi Min SE
2010
2009
2008
2007
2006
2005
Ho Chi Min
SE $44.5bn
Hanoi SE
Source: Numis Securities Research, Bloomberg
The HOSE was first established in 2000, but at the end of 2005 there were still only 40
listed companies and turnover was low. In 2006/2007, however, there was rapid growth
in the size of the market driven by listings of privatised state-owned enterprises. The
Hanoi SE was set up in mid-2005 and has evolved to focus on small cap stocks (as well
as bonds and OTC stocks), while the HOSE includes most of the mid/large cap equities.
However, there is by no means a clear distinction and several large-cap stocks still
trade on the HNX, including PV Technical Services (PVS) and Asia Commercial Bank
(ACB). Turnover in the market slumped during 2011 following the VND devaluation, but
picked up strongly in 2014 helped by recent IPOs of large companies such as Mobile
World and PV Gas.
Stock and Sector Weightings
Vietnam Index is not fully
investable
The most widely used measure of performance for Vietnamese equities is the Vietnam
Index, which represents the market cap weight return for stocks listed on the HOSE. In
reality, however, this is not a fully investable index due to the combination of Foreign
Ownership Limits (discussed below), and limited freefloats. For instance, PetroVietnam
Gas has a market cap of $6.2bn and makes up 14.0% of the Vietnam Index, but has a
freefloat of just 3% (it represented as much as 20% of the index in mid-2014).
Vietnam Holding, the AIM traded closed-end fund, has adopted the Vietnam All Share
Index (VNAS) as its benchmark, as it is free float adjusted index, and excludes stocks
with a free float under 5%, including PV Gas. It also caps the maximum stock weighting
at 10% and excludes stocks that do not meet specified trading liquidity criteria. Whilst
we can see the merits of the VNAS, we use the Vietnam Index for performance
comparisons throughout this report as this remains the most widely accepted
stockmarket index within Vietnam.
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Figure 28: Vietnam Index - Weightings by Stock
Saigon Secs
1.0%
287 Others
26.6%
Figure 29: Vietnam Stock Market by Sector
PV Gas
14.0%
Mobile Wld
1.2%
PV Fert
1.2%
Kinh Do
1.3%
Military Bank
1.6%
Exim Bank
1.7%
FPT
1.7% HAGL
1.8%
Vietinbank
PV Drilling
1.9%
2.1%
BIDV
Bao Viet
Hoa Phat 3.8%
Sacombank
2.3%
2.7%
2.3%
Other
Resources
2.7%
Vinamilk
10.0%
Other
2.1%
Banks
19.9%
Oil & Gas
15.8%
Real Estate
10.7%
Utilities
1.9%
Vietcombank
8.9%
Other
Financials
11.0%
M'facturing
4.0%
Vingroup
7.3%
Industry
12.9%
Masan
6.4%
Consumer
3.6%
Telecom
2.7%
Source: Bloomberg
Food &
Beverage
12.8%
Includes both HCMC and Hanoi SE
Source: Numis Securities Research, Bloomberg
Table 11: Vietnam - Largest Quoted Equities (HOSE and HNX Stock Exchanges)
Market
Free
Cap $m
Float
HOSE
HNX
Oil & Gas E&P
6,247
3%
14.0
-
7.7
11.6
3.8
78.6
11.3
VNM
Dairy Products
4,466
57%
10.0
-
2.1
16.8
5.3
56.5
(13.4)
Vietcombank
VCB
Banks
3,975
23%
8.9
-
3.3
17.5
2.0
1.1
40.4
Vingroup
VIC
Real Estate
3,244
50%
7.3
-
3.0
16.5
3.7
14.5
2.7
Masan Group
MSN
Holding Company
2,856
32%
6.4
-
n/a
n/a
4.3
(20.1)
(0.8)
Vietinbank
CTG
Banks
2,402
33%
1.9
-
7.2
10.8
0.9
(10.4)
(10.4)
BIDV
BID
Banks
1,669
4%
3.8
-
6.7
8.0
1.1
n/a
n/a
Hoa Phat Group
HPG
Manufacturing
1,194
45%
2.7
-
2.5
8.1
2.2
99.6
50.2
Bao Viet Holdings
BVH
Insurance
1,018
26%
2.3
-
4.7
17.5
1.8
0.1
(13.6)
Sacombank
STB
Banks
962
90%
2.3
-
n/a
8.4
1.3
4.6
3.2
PV Drilling
PVD
Oil & Gas Services
914
48%
2.1
-
2.8
7.6
1.8
79.2
16.8
HAGL
HAG
Real Estate
816
45%
1.8
-
n/a
9.3
1.2
7.3
16.9
FPT Corp
FPT
IT
772
70%
1.7
-
4.6
10.0
2.2
36.5
31.0
Exim Bank
EIB
Banks
736
75%
1.7
-
3.1
30.7
1.1
(14.2)
3.9
Military Bank
MBB
Banks
710
65%
1.6
-
5.3
6.3
1.0
9.6
10.2
Asia Commercial Bank
ACB
Banks
655
94%
-
10.8
4.5
25.7
1.2
(2.6)
1.9
Kinh Do
KDC
Food
595
37%
1.3
-
3.3
21.4
1.9
30.9
19.7
PV Technical Services
PVS
Oil & Gas Services
562
48%
-
9.0
4.5
7.3
1.4
61.2
35.3
PV Fertiliser
DPM
Chemicals
547
33%
1.2
-
9.7
9.8
1.3
27.1
(17.0)
Mobile World
MWG
Cellular Telecom
543
34%
1.2
-
n/a
n/a
9.0
n/a
n/a
Saigon Securities
SSI
Financial Services
455
70%
1.0
-
3.6
13.6
1.7
15.4
56.0
Quy Nhon Mining
SQC
Mining
401
59%
-
6.6
n/a
n/a
8.5
(3.3)
0.9
Pha Lai Thermal Power
PPC
Electric Utility
393
25%
0.9
-
3.0
11.3
1.6
116.1
14.6
Hau Giang Pharma
DHG
Pharma
391
92%
0.9
-
1.6
15.1
3.9
60.0
12.4
REE
REE
Refrigeration systems
355
72%
0.8
-
5.7
9.0
1.4
89.2
(1.6)
Minh Phu Seafood
MPC
Fisheries
336
30%
0.8
-
4.8
10.7
3.6
(20.5)
379.5
Saigon Hanoi Bank
SHB
Banks
336
83%
-
5.4
9.3
8.9
0.7
17.5
25.1
Kinh Bac City
KBC
Real Estate
290
45%
0.7
-
n/a
13.6
1.2
64.1
60.0
Tan Tao Investment
ITA
Real Estate
269
59%
0.6
-
n/a
45.2
0.7
52.6
19.5
Vinaconex
VCG
Construction
262
21%
-
4.2
3.1
8.6
1.0
17.4
27.8
Company
Ticker
Industry
PV Gas
GAS
Vinamilk
Index Weight % Dividend
US$ Total Return
Yield % PE Ratio P/Book
2013
2013
Source: Numis Securities Research, Bloomberg
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Performance of Vietnam’s Equity Market
Investor focus on Vietnam proved
short-lived
In 2006/2007 Vietnam was one of the best performing stock markets in the world.
However, enthusiasm proved short-lived due to inflation problems, followed by the
global financial crisis. For several years, Vietnam was out of favour with international
investors, reflecting concerns over the boom/bust economy and sustainability of the
currency. From being regarded as the next “Asian tiger”, investors focused on Vietnam’s
problems, including NPLs in the banking sector. The market also suffered from a lack of
liquidity and limits on foreign ownership.
Vietnamese equity market has
been strong since 2012
There was a brief, credit induced rally, in 2009, but during 2010-2011 the Vietnam Index
fell 33% while the MSCI AC Asia was unchanged and the MSCI World rose 7% (all total
return in US$). Unsurprisingly, international interest in Vietnam suffered. Since 2012,
however, performance has improved, with the market up 73% in US$ on a total return
basis, well ahead of regional and global equity indices. At the same time, there have
been significant inflows into Frontier Market equity funds, and interest in Vietnam has
started to pick up again.
Figure 30: Vietnam Index - Performance over Long Term
Figure 31: Vietnam Index - Performance since 2012
500
Total Return Index (US$)
220
Total Return Index (US$)
450
400
350
300
250
200
200
180
160
140
150
120
100
100
50
80
Jan-15
Oct-14
Jul-14
Apr-14
MSCI AC Asia
Jan-14
Oct-13
Jul-13
Vietnam’s equity market is driven
by domestic factors
Apr-13
Source: Bloomberg, Datastream
Jan-13
Vietnam
Oct-12
Jul-12
MSCI World
Apr-12
2014
2013
2012
MSCI AC Asia
2011
2010
2009
2008
2007
2006
2005
Vietnam
Jan-12
0
MSCI World
Source: Bloomberg, Datastream
Vietnam is not directly susceptible to hot money flows due to its high reserves, trade
surplus, and low non-ODA related external debt. As a result, the performance of the
Vietnam equity market tends to be driven by domestic factors, in contrast to most Asian
markets, which have been impacted by fund flows related to US monetary policy.
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12 January 2015
Figure 32: Vietnam Index - Total Return by Calendar Year in US$
200%
145.1%
150%
100%
51.0%
50%
27.3%
24.1% 25.3%
25.1%
10.9%
0%
-4.4%
-29.4%
-50%
-67.1%
-100%
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Source: Bloomberg
Falling interest rates has boosted
domestic demand for equities
Another key driver of demand for Vietnamese equities has been the fall in VND deposit
rates to c.5%, which has encouraged local retail investors to allocate more to the stock
market: $320m of new money moved into securities accounts in the first nine months of
2014, up 39% on the figure for the whole of 2013. There was also a net inflow of $283m
from foreign investors in the first 11 months of 2014, although this remains very small in
relation to foreign direct investment in the country.
Figure 34: Performance 2012-2014 by Market
Source: Bloomberg
Korea
Indonesia
Sri Lanka
Malaysia
MSCI Emg Mkts
MSCI AC Asia xJ
Taiwan
Singapore
Korea
Malaysia
MSCI Emg Mkts
Singapore
MSCI AC Asia xJ
Taiwan
Hong Kong
MSCI World
Vietnam
Thailand
Indonesia
Philippines
India
Sri Lanka
China
Pakistan
-10
Hong Kong
0
India
10
Thailand
20
China
30
MSCI World
40
Vietnam
50
220
200
180
160
140
120
100
80
60
40
20
0
Pakistan
% Total Return in US$
% Total Return in US$
60
Philippines
Figure 33: Performance by Market in 2014
Source: Bloomberg
Banks have lagged the broader
market, while Oil stocks hit
recently
Performance of the Vietnam market has been held back by problems in the banking
sector, as these stocks continue to struggle as a result of weak profits and rising
provisioning for NPLs. The Real Estate sector has also lagged behind the broader
market. In contrast, the Oil & Gas stocks had surged until September 2014, since when
they have hit by sharp falls in the global oil price due to the high weighting of stocks
such as PV Gas (-32% in Q4 2014 in US$) and PV Drilling (-34%). PV Technical
Services also fell 34%, although this stock is listed on the Hanoi SE.
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Figure 36: Oil & Gas Stocks vs Vietnam Index
220
450
200
400
Total Return Index in US$
Total Return Index in US$
Figure 35: Vietnam Banks Lag Behind Equity Market
180
160
140
120
100
80
350
300
250
200
150
100
60
Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14
Banks
50
Jan-12
Jul-12
Vietnam Index
Market Cap weighted average of VCB, CTG, BID, STB, MBB, EIB, ACB and SHB
Source: Numis Securities Research, Bloomberg
Jan-13
Oil & Gas
Jul-13
Jan-14
Jul-14
Vietnam Index
Market Cap weighted average of PV Gas, PV Drilling & PV Services
Source: Numis Securities Research, Bloomberg
Valuation
Market has rerated
At the start of 2012, the Vietnam stock market traded on a P/E ratio of under 10x, and
was at a material discount to both its history and regional peers. There was a significant
rerating up to September 2014 when the PE reached 16x. However, the historic P/E for
the Vietnam Index has fallen back to 13.8x following market weakness.
But still cheaper than most other
Asian markets
Vietnamese equities are no longer outstandingly cheap, but valuations are still
competitive with other Asian markets. Moreover, the macro-economic situation in
Vietnam appears to be on an improving trend which provides a favourable backdrop for
corporate earnings growth. Healthcare, consumer staples, and materials companies, in
particular, look cheaper in Vietnam compared to other Asian markets, according to
Dragon Capital.
Earnings growth in 2015 expected
to be 11%
Headline profits growth for the HOSE in H1 2014 was weak, falling 5% overall. This
reflected falling earnings year-on-year from four of the five largest stocks: Vinamilk,
Masan, PV Gas and Vingroup, albeit that the latter two reflected extraordinary earnings
booked in the previous year. Excluding these stocks, the remaining companies listed on
the HOSE reported an average of 17% growth in net profit, despite weakness in the
Banking sector which delivered net profits growth of just 1.7% in H1 2014. VinaCapital is
forecasting earnings growth of 3% in 2014, followed by 10-17% in 2015, while Dragon
Capital earnings growth of 11% in 2015, putting the market on a prospective P/E ratio of
12.5x.
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12 January 2015
Figure 37: PE Ratios by Market
Figure 38: Vietnam Index - Historic PE Ratio (x)
25
50
45
40
Historic PE Ratio
Historic PE Ratio
20
15
10
5
35
30
25
20
15
10
5
Indonesia
Source: Bloomberg as at 31 Dec 2014
Jan-14
Jan-13
Jan-12
Jan-11
Jan-10
Jan-09
Jan-08
Jan-07
0
Jan-06
Philippines
India
MSCI World
China
Malaysia
Taiwan
Singapore
Sri Lanka
Korea
Vietnam
Pakistan
Hong Kong
Thailand
0
Source: Bloomberg
Analysis from Dragon Capital shows that Vietnam’s equity market looks particularly
cheap against its regional peers if one excludes the five largest stocks in each market.
Figure 39: Valuation and Earnings Growth vs Asian Peers
Figure 40: Trailing PEs (excl. five largest stocks)
19
22
Phillipines
18
Philippines
China
17
Malaysia
20
India
15
India
Thailand
Indonesia
14
13
12
Vietnam
Thailand
11
10
9
PE Ratio (trailing)
PE Ratio 2015F (x)
16
18
Indonesia
16
14
Malaysia
Sri Lanka
Pakistan
8
7
China
12
6
7
8
Vietnam
9 10 11 12 13 14 15 16 17 18 19 20 21
Earnings Growth 2015 (% local currency)
10
Source: Dragon Capital as at 30 Nov 2014
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Source: Dragon Capital as at 30 Nov 2014
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12 January 2015
Stock Market Developments
SOE Equitisation Programme
Potential for SOE privatisations to
broaden market
As highlighted above, the government announced plans for the equitisation
(privatisation) of 432 SOEs during 2014/2015. Although equitisation does not
immediately lead to a stock exchange listing, there is the potential over time for the
programme to broaden the depth and liquidity of Vietnam’s equity market.
But equitisation programme is
behind plan
However, the track record of recent equitisations has been mixed. To-date, the
programme is behind plan, with 60 equitisations in the first nine months of 2014, and
some have received less than a 50% take-up. Part of the problem has been the
difficulties faced by some in SOEs creating suitable accounts for valuation purposes.
Moreover, the Vietnam government often retains a substantial stake, and free floats are
often limited. In some cases, the government is focused on finding a strategic investor
rather than encouraging broader ownership. For instance, the recent equitisation of
Vietnam Airlines involved selling a stake of just 3.5% to financial investors for $51.3m.
In addition, the pricing was high, valuing the business at $1.5bn, even though it is
making profits of just $16m this year. As a result, there was no interest from foreign
investors, even though we understand that the government is hoping to place a stake of
c.20% of the share capital with strategic investors.
Pricing of equitisations is not
consistent
VinaCapital believes that many of the SOEs are mis-priced, albeit to the advantage of
the buyer in some cases. One of the larger offerings this year was Vinatex, a clothing
manufacturer (market cap $260m) which was 10% under-subscribed and the winning
(final) price was the starting price. However, some issues have been in strong demand.
For instance, Vocarimex ($78m market cap), a cooking oil company, sold 32% to
strategic investors and 31% to the public in July 2014. This issue was over-subscribed
by 2.2 times and the average winning price was 19% higher than the starting price. In
addition, South Airport Service Corporation (Sasco, $120m market cap) was nearly five
times oversubscribed, with an average winning price 90% higher than the starting price.
Forthcoming issues include ACV (airport services); Bin Son Refining (oil refinery);
Mobifone (mobile carrier) Satra (food processing), Vicem (cement); and Vissan (meat
products).
Foreign Ownership Limits
Vietnam listed stocks are subject to Foreign Ownership Limits (FOLs) of 49%, or 30%
for banks. To access stocks such as Vinamilk, investors have often had to pay a large
premium to the market price of 25-30%, although these are currently lower at 5-10%.
Dragon Capital estimates that as little as $3bn of liquidity is available for overseas
investors after adjusting for free-floats and FOLs, equivalent to less than 6% of the
overall market cap.
Proposals to relax FOLs have
stalled
During 2013, it was widely expected that the government would raise the limit on voting
stock from 49% to 60% across several sectors. Increasing FOLs was expected to
increase interest in the market and could be the catalyst for a broader rerating.
However, the proposals appear to have stalled due to vested interests. Some
commentators have suggested that the government is keen for foreign investors to
focus on SOE equitisations, although others believe it simply reflects a reluctance to
allow foreign investors to gain controlling stakes (introducing non-voting share classes
in more sensitive industries has been discussed). Whatever the reason, FOLs look set
to remain a feature of the Vietnam stock market for some time.
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Potential for Promotion to MSCI Emerging Markets Status?
Markets in UAE and Qatar saw
strong gains on promotion
There has been speculation that Vietnam could be reclassified from the MSCI Frontier
Markets Index to the Emerging Markets Index at some stage. This would be expected to
lead to a significant increase in interest from international investors, as reflected by
strong gains for stock markets in Qatar and the UAE as a result of their promotion to
Emerging Markets status at the end of May 2014.
But change does not appear
imminent
However, MSCI currently has no Frontier Markets listed as being in line for a possible
upgrade to Emerging Markets status, and even when a country is included on the list, it
can take several years for the change to be implemented. Vietnam’s failure to relax its
foreign ownership limits is also a stumbling block, in our view, albeit that Qatar was
promoted even though it has FOLs of 49% in place.
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VinaCapital Funds
Manages three AIM traded funds
VinaCapital IM was founded in 2003 and currently has $1.4bn in assets under
management, primarily through its three AIM traded funds: VOF ($722m net assets),
VinaLand ($400m), and Vietnam Infrastructure ($206m). It also manages an unlisted
technology venture capital fund with Draper Fisher Jurvetson, and recently established
a local wealth management entity that runs two small open-ended funds (one fixed
income and the other equity focused). The group is based in Ho Chi Min City, with
offices in Hanoi, Danang, and Singapore.
Key individuals within the group are:
● Don Lam (CEO): a founding partner, with over 15 years’ experience in Vietnam. He
was formerly a partner at PwC (Vietnam), where he led the Corporate Finance and
Management Consulting practices throughout the Indochina region. He has also
held management positions at Deutsche Bank and Coopers & Lybrand in Vietnam
and Canada.
● Brooke Taylor (COO): a New Zealander with more than 20 years’ management
experience, including eight years as a senior partner with major accounting firms in
Vietnam, including Deloitte and KPMG.
● Andy Ho (MD and CIO): Responsible for capital markets, private equity and fixed
income investments. Previously, he was Director of Investment at Prudential
Vietnam and also worked for Dell Ventures
● David Blackhall (MD): Head of Real Estate team. An Australian with 28 years’
experience in property, design and construction, with the last 20 years in real estate
fund and asset management. Prior to joining VinaCapital in 2007 he worked for a
Vietnamese property developer and also for RREEF Funds Management, one of
Australia’s largest property fund managers.
VinaCapital Vietnam Opportunity
VOF is the largest and most liquid
CEF investing in Vietnam
VOF was launched in September 2003 with assets of $10m and following a series of
secondary fund raisings it reached a market cap of over $1.1bn at its peak in 2007.
Whilst its market cap has fallen to $600m, through market movements and share buybacks, it remains the largest and most actively traded closed-end fund investing in
Vietnam.
Mandate and Strategy
Strategy is now much clearer
VOF invests in equities, pre-listings (OTC), private equity and real estate, as well as a
small allocation to fixed income. The emphasis by asset class has shifted over time, but
there is now a clear strategy to:
● Maintain a high weighting to listed stocks of 50-60%, versus 30-35% historically.
● Increase exposure to OTC/Private Equity, which has fallen to just 5.1% of the
portfolio following a number of successful realisations.
● Reduce exposure to development real estate projects through an active divestment
programme alongside VinaLand. In future, the fund’s exposure to real estate will be
via listed companies or through buying yielding assets, and it will no longer invest in
early stage developments. Real estate and related sectors currently represent
around 30% of VOF’s NAV.
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Figure 41: VOF - Portfolio by Asset Class
Bonds
4.9%
Other
1.7%
Figure 42: VOF - Portfolio by Sector
Mining/ Oil &
Gas
8.7%
Financial
Services
6.2%
Cash
6.2%
Funds
3.6%
Listed
Equities
49.7%
Real Estate
16.1%
Consumer Other
Disc.
Sectors
3.3%
4.9%
Cash/Other
7.9%
Real Estate
Projects
16.1%
Industrials
1.3%
Agriculture
4.3%
Hotel
8.8%
Food &
Beverage
15.8%
Hospitality
8.8%
Private
Equity
6.2%
Pharma/
Health
3.7%
OTC
2.8%
Construction
10.4%
Other represents1.7% earmarked for investment
Source: Company data as at 30 Nov 2014
Real Estate
Equities
8.5%
Source: Company data as at 30 Nov 2014
Management
VOF’s key manager is Andy Ho, supported by:
Former Head of Research at PXP
● Duong Vuong (Deputy MD): Responsible for VOF’s capital market investments. He
joined VinaCapital in June 2014 and has 19 years’ investment experience, including
seven years in Vietnam. His was previously Research Head at PXP AM, and before
that worked as an analyst for ADIA in Abu Dhabi and Merrill Lynch in London.
● Dang Pham Minh Loan (Deputy MD): Responsible for VOF’s private equity
investments. Joined VinaCapital in 2005, having previously worked at KPMG
Vietnam and Unilever Vietnam.
Real Estate development projects
managed alongside VinaLand
Andy Ho remains responsible for VOF’s investment in the Sofitel Metropole Hotel, while
VOF’s other direct Real Estate investments are managed alongside David Blackhall,
who heads VinaCapital IM’s Real Estate team of c.40 people. Don Lam (CEO of
VinaCapital) remains closely involved with both the Capital Markets and Real Estate
portfolios.
Listed Equity Portfolio
Seeking to maintain a 50-60%
weighting in listed stocks, subject
to valuations
Around 50% of the portfolio is now invested in stocks listed in Vietnam (HOSE or VNX).
The strategy is to maintain a large weighting to listed securities of 50-60%, whilst being
sensitive to valuations and the size of premiums on stocks where foreign ownership is
restricted. At present, the aim is to deploy free cash into the market on weakness by
adding to existing holdings in companies with strong growth potential. The focus is
currently on more cyclical stocks such as oil & gas, property, construction, materials,
tyres and technology. In contrast, holdings in defensive consumer stocks may be
reduced. No significant investments have been made in the Banking sector in recent
years due to the problems with NPLs, but the managers continue to monitor the area for
valuation opportunities.
Focused portfolio
There are 24 quoted stocks in the portfolio, with an emphasis is on large caps over
$100m market cap. The managers will also look at mid-caps, but are unlikely to buy
stocks under $20m market cap due to liquidity constraints.
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Research process is more
rigorous
Over the past year, the Capital Markets team has been strengthened by the
appointment of Duong Vuong who has implemented a more co-ordinated research
process, combining stock picking with a top-down sector overlay. New hires have also
been made of analysts covering Oil & Gas, Logistics and Real Estate securities,
bringing the size of the team to 15, including four focused on Private Equity
investments.
The aim is to invest in companies that benefit from domestic growth and have two or
more of the following characteristics: strong brand, comprehensive distribution channel
and/or scalable manufacturing capability. VOF is keen to make PIPE deals (private
investment in public equity) where it can negotiate favourable terms to gain access to
attractive companies, and invested in PV Drilling in 2014 through this route.
Table 12: VOF - Largest Investments
Investment
Ticker
%
Description
Vinamilk
VNM
9.9
Dairy company
Sofitel Legend Metropole Hotel
-
8.8
5* Hotel in Hanoi
Hoa Phat Group
HPG
8.5
Steel manufacturer
Eximbank
EIB
4.3
Bank
Petrovietnam Technical Services
PVS
4.3
Oil & Gas technical services
International Dairy Product
-
3.8
Unlisted dairy company
Hau Giang Pharma
DHG
3.7
Pharma
PetroVietNam Drilling
PVD
3.4
Drilling contractor
Century 21
-
3.2
Real Estate project in HCMC
VinaLand
VNL (AIM)
2.8
Real Estate projects
Top 10
52.7
Source: Company data as at 30 Nov 2014
Private Equity / OTC Portfolio
PE weighting increased by recent
investment in dairy company
The proportion of the portfolio invested in Private Equity (PE) stocks has shrunk
following a number of exits in recent years and was just 2.4% at 31 October 2014. On
18 December 2014, however, VOF announced that it had acquired a 70% stake in
International Dairy Products, one of Vietnam's leading dairy producers, in a $45m
investment alongside Daiwa PI Partners. VOF’s share of the co-investment is 80%
($36m). International Dairy Products (IDP) specialises in producing and selling UHT
milk, pasteurised fresh milk, and yogurt. Total revenues in 2014 are expected to exceed
$80m. Daiwa PI Partners is a Japanese financial investor with considerable experience
in private equity and debt investments. This is its first PE deal in Vietnam, and it aims to
use its contacts to enhance IDP’s production technologies and distribution chain.
Target is to increase PE to at least
10% of net assets
Once fully drawn, VOF’s investment in IDP is equivalent to 4.8% of net assets, and the
aim is to increase the PE weighting to at least 10% of net assets within next 12-24
months. Closing PE deals in a frontier market is never straightforward and often takes a
long time to complete. However, Andy Ho recently highlighted that VOF has a deal
pipeline of c.$100m, including IDP and a media related business. In general, the focus
is on domestic businesses, notably education, financial services, food & beverages,
media and healthcare. VOF favours PE deals of $20-30m and will not look to invest less
than $5m due to the time and effort involved.
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Table 13: VOF - OTC and Private Equity Portfolio
Company
Business
Private Equity
Stake
% Net Assets
-
6.2%
56.0%
4.8%
100.0%
1.0%
International Dairy Product
Dairy products
American Home Vietnam (IBS)
Ceramic tiles
Cau Tre Enterprise
Frozen food producer
37.3%
0.6%
SSG - Saigon Pearl
Real estate developer
6.0%
0.6%
Yen Viet
Birds nest nutritional products
65.0%
0.2%
-
0.1%
3 Other PE
OTC
2.8%
Vinatex*
Textiles
3.0%
South Basic Chemical
1.0%
Chemicals
17.3%
0.6%
Binh Dien Fertilizer
Fertilisers
10.8%
0.5%
Cienco 4
Construction
8.4%
0.4%
Tin Nghia Industrial Park
Industrial park
6.0%
0.1%
-
0.1%
Other OTC
* OTC traded, but VOF has Board representation. Source: Company data as at 30 Nov 2014
OTC stocks are pre-IPO
investments
At present, VOF also has 2.8% invested in OTC traded stocks. Typically, OTC stocks
are pre-IPO investments where VOF will take a small minority stake. In contrast, PE
investments are privately negotiated investments in which VOF will seek clear minority
rights and downside protection e.g. convertible securities and predetermined exit rights.
However, VOF’s PE team will sometimes be responsible for investments in OTC stocks,
as was the case for Vinatex, a recent SOE equitisation.
Opportunity to invest in SOE
privatisations
VOF also expects the weighting in OTC stocks to rise as further opportunities become
available to invest in SOEs on a pre-IPO basis. During 2014 it invested in Vinatex,
South Basic Chemical, and Cienco 4. Andy Ho believes that the quality of the SOEs is
mixed and many are mispriced, but sometimes this is to the advantage of the buyer. For
instance, Andy Ho highlights that the investment in South Basic Chemical Company
was acquired at a P/E ratio of just 4.5x. Moving to a full listing on the HOSE or the HNX
can lead to significant gains for OTC investors, and historic analysis shows that VOF
has added significant value by exploiting this valuation gap. OTC investments are
typically valued using a minimum of two broker quotes.
An Giang Plant Protection was a
successful exit in 2014
The most notable exit from the PE/OTC portfolio over the past year has been the sale of
VOF’s stake in An Giang Plant Protection, a pesticide company, which was sold to
Standard Chartered PE in September 2014, generating proceeds of $63.1m, equivalent
to an IRR of 24% over five years. VOF invested in the company as a private investment,
and it subsequently traded on the OTC market.
Good track record of exits from PE
portfolio since 2011
Since 2011 VOF has made 11 major divestments from its PE investments (over $10m),
including several to strategic global investors. These have realised proceeds of almost
$300m at an average multiple over cost of 1.9x and an average IRR of 32.5%.
Furthermore, the exits have typically been at significant uplifts to VOF’s carrying value.
Notable exits include:
● Halico (a vodka producer): sold to Diageo in January 2011 for $48.7m, generating
an IRR of 57% and an exit multiple of 5.3x.
● Prime Group (ceramic tile manufacturer): sold to a subsidiary of Thailand’s Siam
Cement Group in December 2012, generating an IRR of 33% and an exit multiple of
2.4x on an investment of $15.2m.
● Indochina Food (a sugar and ethanol producer) sold to an international strategic
investor in September 2012 for $28.5m, representing an IRR of 17% and an exit
multiple of 2.0x.
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● Hoan My Medical Corporation (healthcare provider): sold the majority of its 24%
stake to Fortis Health in 2011. Overall, the investment generated proceeds of
$22.4m, representing an IRR of 32% and an exit multiple of 2.2x.
Private equity in Vietnam involves
little or no debt
Private equity is a nascent industry in Vietnam, although there are a number of
international investors that specialise in making minority growth capital and pre-IPO
investments in the country. There are some buyouts, though the level of debt funding
tends to be small as Vietnamese banks traditionally prefer to lend on hard assets, such
as property, rather than on cash flow projections. Private equity holdings are typically
held at “fair value” based on the International Private Equity and Venture Capital
(IPEVC) valuation guidelines.
Interest from Global Private Equity
Groups
Vietnam’s retail and food/beverage industries are target sectors for private equity
investments, with one of Asia’s youngest populations and a burgeoning middle class
supporting both industries. Foreign interest in Vietnam is illustrated by a number of
private equity/OTC investments in recent years including: Warburg Pincus ($200m for a
20% stake on a retail property JV with Vincom); KKR ($200m for a 10% stake in Masan
Consumer); TPG ($50m for a 49% stake in Masan Agriculture); Fortis Healthcare
($130m acquisition of hospital group); Bank of Tokyo Mitsubishi UFJ ($240m for 20%
stake in VietinBank); Sumitomo Life ($340m for 18% stake in insurer Baoviet) and Siam
Cement Group ($240m for 85% stake in Prime, a tile producer). In addition, Standard
Chartered’s private equity arm has recently made its first investments in Vietnam,
buying a $35m stake Golden Gate, a restaurant chain from Mekong Capital, as well as
An Giang Plant Protection, Vietnam’s largest rice seed distributor, from VinaCapital and
DWS.
Real Estate portfolio
A third of VOF’s net assets
exposed to Real Estate sector
VOF’s real estate weighting rose sharply in late 2008 when equity markets fell, partly as
a result of valuation lags. Since then, the strategy has been to reduce this weighting and
to improve liquidity. Exposure to the asset class now represents around a third of VOF’s
overall portfolio, although investments in listed Real Estate equities (8.5% of assets) are
part of the Capital Markets portfolio.
The Metropole, Hanoi is Vietnam’s
best-known hotel
Most of VOF’s direct real estate investments are co-owned with VinaLand. However, it
also holds a stake in VinaLand (discussed below), and its largest individual real estate
asset is a 50% stake in the 5 star Hotel Metropole in Hanoi (8.4% of assets) which was
bought a decade ago prior to the launch of VinaLand. This 364 room hotel is a trophy
asset that is able to charge premium prices despite an oversupply of luxury hotels in
Hanoi. After a record year in 2013, occupancy was behind budget in 2014, partly as a
result of the tensions with China in Q2. The occupancy rate was just 68.4% in H1 2014,
but has recovered and the target for FY 2014 is to achieve $38.7m revenue and $20.5m
gross profit, up 2.9% and 2.0%, respectively. Net income was $9.7m in FY 2013 and the
hotel pays a healthy yield of c.7%.
Active realisation strategy for
development assets
Andy Ho is responsible for VOF’s investment in the Metropole Hotel, and we understand
that he is not looking to sell in the immediate future unless there is an unexpected
approach (this is complicated by the government holding a 50% stake). In contrast,
there is an active realisation strategy for the development assets, managed by
VinaCapital’s Real Estate team, alongside VinaLand (as discussed later in this report).
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Funds
VOF holds stakes in both
VinaLand and Vietnam
Infrastructure
In August 2009, VOF’s Board decided to invest up to 10% of net assets in shares of
other Vietnam-focused closed-end funds trading at substantial discounts. Subsequently,
it acquired 36.2m shares in the sister fund, VinaLand, which is equivalent to a stake of
8.3% and has a current value of $21.2m (2.8% of VOF’s net assets). Previously, VOF
co-invested with VinaLand, but the Board believed that it made more sense to buy a
direct stake given that the sister fund was trading at a significant discount. In addition,
VOF acquired 12.0m shares in Vietnam Infrastructure at a cost of $4.5m, which has a
current value of $5.9m. There is no double charging of fees on these fund holdings, with
the underlying fees rebated to VOF. Furthermore, in order to overcome conflicts of
interest, the holdings are the responsibility of VOF’s Board rather than the VinaCapital
management.
Cash/Bonds
Cash held in a mixture of VND and
US$
VOF currently has 4.9% of net assets invested in local currency government bonds, as
well as free cash of 6.2% which is invested 50% in US$ deposits and 50% in
Vietnamese Dong (earning around 5.5%). In recent months, the monthly report has
included a substantial weighting of 5.0% in “Other” which represented cash ear-marked
for the investment in IDP.
Fees
New fees from July 2013
VOF’s fees were originally based on 2.0% of net assets plus a 20% performance fee
subject to a compound hurdle of 8% pa NAV growth. However, a new investment
management agreement was put in place at the time of VOF’s continuation vote in July
2013. The base fee was cut to 1.5% pa of net assets and there were a number of
changes to the incentive fee:
● Reduced performance fee: The performance fee is now based on 15% of
outperformance, rather than 20%.
● Split performance fee: The performance fee is now split into two parts, with the
Real Estate portfolio now treated separately from the Capital Markets portfolio
(which includes private equity). As a result, an incentive fee may now be earned on
one Portfolio but not the other. The Real Estate performance fee is only paid based
on realised gains, whereas the Capital Markets fee is wholly based on NAV
movements.
● High Water Mark reset: The HWM was re-set from c. $4.09 per share to the higher
of 30 June 2013 NAV plus 5% or $3.037.
● No catch-up: The hurdle is still 8% pa compound growth, but there is no longer a
catch-up provision.
● Cap introduced: Incentive fees for any single year are now capped at 1.5% of the
respective portfolio. Unpaid fees above this cap may be paid in subsequent years,
providing that the NAV of the relevant portfolio remains above the hurdle rate.
Performance fee in excess of cap
is carried forward
During the financial year to June 2014, VOF’s Investment Manager earned an incentive
fee on the Capital Markets portfolio but not on the Real Estate portfolio. The incentive
fee paid of $9.0m was capped at 1.5% of the capital markets portfolio and the excess of
$2.4m has been carried forward to future years. The ongoing charges ratio was 1.7% of
average shareholders’ funds or 2.9% including the performance fee.
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Performance
Assessing VOF’s NAV performance record is not straightforward due to its multi-asset
approach, which means that it tends to have a low beta relative to its peers and the
Vietnam Index. In part, this is due to a valuation lag for property and private equity
holdings.
Figure 43: VOF - Long Term Performance vs Vietnam Index
700
Total Return Index (US$)
600
500
400
300
200
100
0
Dec-14
Dec-13
Dec-12
Dec-11
Dec-10
NAV
Dec-09
Dec-08
Dec-07
Dec-06
Dec-05
Dec-04
Dec-03
Price
Index
Source: Morningstar
VOF’s NAV has a far lower
volatility than the market
Against the Vietnam Index, VOF’s NAV marginally underperformed in 2004, with a
return of 8.3% pa versus 10.9% pa for the Vietnam Index. As would be expected, its
NAV returns have been less volatile than the stockmarket (9.1% pa versus 22.5% pa
over the past five years). In addition, it has outperformed significantly in weak markets:
2008 (-46.7% versus -67.1%) and 2011 (-7.6% versus -29.6%).
Discount tends to narrow when
markets are strong
VOF’s NAV is likely to lag behind a rally in the Vietnam Stock Index, at least in the short
term, though the share price return may be stronger if improved sentiment leads to a
narrowing of the discount. For instance, since the start of 2012, VOF’s NAV is up 46%
versus a 69% rise in the Vietnam Index, but its share price has risen 97%.
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Figure 44: VOF - Price & NAV vs Vietnam Index by Calendar Year
120%
100%
80%
60%
40%
20%
0%
-20%
-40%
2009
2010
VOF Price
2011
2012
VOF NAV
2013
2014
Vietnam Index
Note: Performance by calendar year.
Source: Morningstar
Capital markets portfolio has
performed well in recent years
During strong markets over the past few years, the NAV has lagged the Vietnam Index,
largely as a result of the exposure to direct Real Estate. However, VinaCapital believes
that this market has passed its trough. Furthermore, it highlights that VOF’s Capital
Markets portfolio (defined as listed equities plus OTC stocks) has outperformed, as
illustrated in the chart below:
Figure 45: VOF - Outperformance of Capital Markets Portfolio
30%
Total Return in US$
25%
22.3%
20%
16.7%
24.3% 23.7%
17.4%
14.2%
15%
10%
8.2%
4.5%
5%
5.7%
0%
FY 2013
VOF NAV
FY 2014
Capital Markets
FY 2015*
Vietnam Index
Note: Financial year ended 30 June * to 31 Oct 2014.
Source: Company data
The key contributors to VOF’s performance in recent financial years (to 30 June) have
been:
● FY 2013: sale of Prime Group; strong performance of listed stocks, notably Vinamilk,
but also Kinh Do, Hoa Phat Steel, and Lam Tao Fertiliser.
● FY 2014: Hoa Phat Steel, Kinh Do, Hau Giang Pharma, PV Services, PV Drilling and
An Giang Plant Protection.
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Discount History and Buy-backs
Discount widened to 60% in late
2008
While VOF’s NAV has had a low beta relative to the market, shareholder returns have
been impacted by huge swings in the premium/discount, ranging from a 60% premium
in early 2007 to a 60% discount at the end of 2008. Initially, VinaCapital was wary of
discount controls, but a share buy-back programme was introduced in November 2011
at a time when the discount was 42%. In addition, the company has improved the
quality of information provided on the portfolio and has been more active in marketing to
new/existing investors.
Real Estate weighting has
contributed to the discount
These actions have helped to narrow the discount to c.20%, although this remains wider
than the average discount of Vietnam CEFs focused on listed equities. We believe this
is partly due to the fund’s exposure to Real Estate, as investors have been sceptical
about historic property valuations. However, this part of portfolio is shrinking through
realisations and an improving outlook for the asset class means that it should become
less of a drag on the fund’s performance and rating in future.
Figure 47: VOF - Market Cap (US$m)
60
1200
40
1000
20
Market Cap $m
% Discount(-)/Premium(+)
Figure 46: VOF - Discount History
0
-20
800
600
400
-40
-60
200
-80
0
Dec-14
Dec-13
Dec-12
Dec-11
Dec-10
Dec-09
Dec-08
Dec-07
Buy-backs have added 12.9% to
the NAV
Dec-06
Dec-05
Dec-04
Dec-03
Dec-14
Dec-13
Dec-12
Dec-11
Dec-10
Dec-09
Dec-08
Dec-07
Dec-06
Dec-05
Dec-04
Dec-03
Source: Morningstar
Source: Morningstar
Since the start of the buy-back programme, VOF has repurchased 97.9m shares with a
value of $197.1m, equivalent to 30.2% of the share capital. This has contributed 38
cents accretion to the NAV per share (12.9%). The Board believes that the discount
remains too wide and is committed to continuing the buy-back programme.
Registered No 02285918. Authorised and Regulated by The Financial Conduct Authority. A Member of the London Stock Exchange
49
49
12 January 2015
45
8%
40
7%
35
6%
30
5%
25
4%
20
3%
15
2%
10
1%
5
0
Quarterly Buyback as % Share Capital
Value of Buybacks $m
Figure 48: VOF - Share Buy-backs
0%
Q4
2011
Q1
Q2
Q3
Q4
Q1
2012
Value £m (LHS)
Q2
Q3
2013
Q4
Q1
Q2
Q3
Q4
2014
% Share Capital (RHS)
Source: Numis Securities Research
Lazard has built a stake of 7.1%
VOF’s shareholder base is broadly spread with an estimated 20% in Switzerland, 14%
US, 14% UK and 6% Japan, with much of the remainder spread across private banks in
continental Europe. Historically, the fund has had a relatively low profile with traditional
buyers of London-listed funds, although Lazard AM, the fund of fund investor, is now the
largest single shareholder with a stake of 9.1%.
Move to main market of London
SE could lead to buying by tracker
funds
Stock Exchange Listing: As part of VOF’s efforts to raise its profile with investors, it is
considering the potential benefits of applying for a premium listing of VOF shares on the
main board of the London Stock Exchange. The aim is “to ensure that VOF is the first
choice for investors looking at a diversified, liquid, well governed investment in the
country”. If VOF adopted a Sterling quote for its shares, it would become eligible for
inclusion in the FTSE All Share if it had a main market quote. This would lead to
significant buying by tracker funds which own c.8% of the UK market. The fund could
still state its accounts and NAV in US$, and shareholders would be able to trade with
market makers based on a quote in US$.
Change in domicile could form
part of the proposal
We believe that such a move may also involve a change of domicile from the Cayman
Islands to a financial centre more widely recognised by listed fund investors such as
Guernsey. At present, VOF is the largest AIM traded closed-ended fund, with a market
cap of $563m.
Corporate Governance
Board is now fully independent of
investment manager
VOF has taken significant steps to improve its corporate governance, and held its first
AGM last year, in Switzerland. This year, the AGM was held on 26 November in
Singapore. Furthermore, there have been a number of changes to the Board, including
the departure of Don Lam, VinaCapital’s CEO, which means that the Board is now fully
independent. Martin Glynn also stepped down, having served for seven years, while
Thuy Dam was recently appointed to the Board. She has had a distinguished career in
banking in the region, mostly with ANZ Bank, having been CEO of its Vietnam operation
and Vice Chairwoman for the Greater Mekong Region. The Chairman is Steven Bates,
an experienced Emerging Markets investor, previously at Jardine Fleming. The other
directors are Martin Adams (a director of a number of listed funds) and Michael Gray
(accountancy background).
50
50
Registered No 02285918. Authorised and Regulated by The Financial Conduct Authority. A Member of the London Stock Exchange
12 January 2015
VinaLand
Real Estate boom ended abruptly
in 2008
VinaLand was launched in March 2006 to invest in a diversified real estate portfolio in
Vietnam. It raised gross proceeds of $198m at IPO and a further $407m in March 2007
through a secondary issue at $1.38 per share. VinaLand traded on a large premium
following launch and the share price reached a high of $1.69 per share. However, the
fund suffered a sharp derating in H2 2008, with the discount reaching 80% at the end of
Q1 2009 with a share price of just $0.29. It is currently trading at $0.5875 per share
which represents a discount of 36% to the last published NAV of $0.92 as at 30
September.
Historic Strategy
Initial capital was invested across
a broad range of development
projects
In the first two-to-three years following IPO, the managers were active in investing the
capital across a broad range of projects ranging from operating hotels to township
developments (land banks). The original aim had been to use equity to acquire land and
to finance development using a combination of debt and pre-sales. However, a surge in
inflation in Vietnam during 2008, together with the impact of the global financial crisis,
impacted on demand for real estate and made debt funding more expensive and difficult
to achieve. In addition, the process of gaining investment licences took longer than had
been originally expected, largely due to the bureaucracy of the planning regime, but also
because land clearance proved difficult for some projects.
VinaCapital responded to the challenging market environment in 2008 by adapting the
fund’s strategy to reflect the conditions with a focus on properties that would appeal to
local buyers (e.g. mid-range residential housing) rather than international investors. The
emphasis was on residential sales for existing projects; adding value through planning
improvements; and finding buyers for hotels, land bank assets and selected other
projects. It sought to divest of projects where possible, and to add value through
planning approvals.
Focus on Realisations since 2012 EGM
Shareholders approved a new
three year strategy
Despite a number of profitable exits, the fund continued to suffer from challenging
market conditions, with cash constraints, a steadily declining NAV and a weak share
price. It faced a continuation vote by March 2013, seven years after its launch on AIM,
but the Board brought forward the vote to November 2012. It recommended that
shareholders voted against the continuation of the company (a Special resolution which
needed 66.7% support) and instead gained shareholder approval for a new strategy
over the three years to November 2015 (via an Ordinary resolution that required a
simple majority of votes cast).
Focus on realisations, whilst
maintaining portfolio value
Over the three year period VinaLand has adopted a realisation strategy, with no new
investments made, and a focus on divesting assets “in a controlled, orderly and timely
manner”. Given the company’s cash constraints, developments will only be started if
there were a clear exit route through pre-sales or if equity finance is provided by a thirdparty investor. In addition, net proceeds from portfolio realisations are returned to
shareholders, subject to requirements to make follow-on investments and to meet the
company's working capital requirements.
Registered No 02285918. Authorised and Regulated by The Financial Conduct Authority. A Member of the London Stock Exchange
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12 January 2015
Expected distributions reduced to
$98m over cash return period
At the time of the 2012 EGM, David Blackhall, MD of VinaCapital’s Real Estate team,
estimated that realisations of $250m could be achieved over the three years which
would result in distributions to shareholders of c.$142m (allowing for fees, other costs
and follow-on investments). However, sales have been slower than forecast due to
market conditions. To-date, there have been eight full and one partial divestment,
resulting in net proceeds of $65m, and management has now revised down the
estimated level of gross realisations by the end of 2015 to $219m. Estimated
distributions to shareholders are now $98m over the three year period, with a further
$17m distributed in 2016 in relation to exits achieved the previous year. This brings the
manager’s estimate of shareholder distributions to $115m during the Capital Return
Period.
Figure 49: VinaLand - Projected Exits & Distributions by Nov 2015 (US$m)
300
250
249.5
219.0
US$m
200
150
153.6
142.3
98.0
100
75.4
65.4
50
22.6
0
EGM
Nov-12 to
Jan-15
Revised
Nov-12
Dec-14
to Nov-15
Total
Net proceeds from Exits
Distributions to shareholders
Note: Revised total is manager estimate as at Oct 2014. Note: excludes further $17m of realised proceeds at Nov-15 distributed to
investors in the following 12 months bringing the estimated total to be distributed in the Capital Return period to $115m.
Source: Numis Securities Research, Company data
Whether the latest realisation schedule is realistic is difficult to assess, in our view.
However, the management group is heavily incentivised to return capital to
shareholders in order to “earn back” its historic performance fee:
VinaCapital entitled to 20% of
shareholder distributions to “earn
back” accrued fee
50% of any fee must be used by
the manager to purchase shares
52
52
VinaCapital, is entitled to historic performance fees of $28.2m relating to 2008 that have
been accrued in the NAV but not yet paid. As part of the continuation proposals in 2012,
the payment of this deferred fee has been made conditional on distributions by
VinaLand to shareholders. VinaCapital will be entitled to receive 20% of any
distributions to shareholders during the three year Cash Return Period, subject to the
following conditions:
a.
VinaLand shareholders will be entitled to the first $50m available for distribution.
b.
The investment manager will be entitled to 50% of all subsequent distributions until
the 80:20 split has been reached.
c.
50% of cash payments received by the investment manager from the deferred
performance fee will be used to purchase VinaLand shares in the secondary
market. These shares will be subject to lock-in arrangements, whereby after 12
months, one third of the shares acquired will be released from the lock-in each six
months.
Registered No 02285918. Authorised and Regulated by The Financial Conduct Authority. A Member of the London Stock Exchange
12 January 2015
d.
The deferred performance fee outstanding at the end of the Cash Return Period is
capped at a maximum of $5m should the investment manager not have recovered
the full amount during the Cash Return Period or subsequent 12 month period (to
enable cash to be returned from the SPV level to VinaLand and onto VinaLand
shareholders). If payable, this residual amount would be satisfied through
VinaLand shares (with value of the shares based on NAV rather than market
price). Any accrued fees in excess of $5m that are not recovered by VinaCapital
during the time period will be forfeited.
The situation has been complicated by the ZDP issue in December 2013, as these have
a covenant that forces VinaLand to deposit an amount equivalent to 25% of any
distribution to Ordinary shareholders into a reserve account for the ZDPs. However,
share buy-backs of up to of $1m per month are not being considered distributions in this
context.
Buy-backs of £26.2m since 2012
EGM
Since starting its buy-back programme in October 2011, VinaLand has repurchased
64.6m shares with a value of $35m, equivalent to 12.9% of the share capital. This
includes £26.2m since the EGM in 2012. Buy-backs were modest in 2013 due to cash
constraints, but picked up in 2014.
Figure 50: VinaLand - Share Buy-back History
3.5%
Value of Buybacks $m
9
3.0%
8
2.5%
7
6
2.0%
5
1.5%
4
3
1.0%
2
0.5%
1
0
Quarterly Buyback as % Share Capital
10
0.0%
Q4
2011
Q1
Q2
Q3
Q4
Q1
Q2
2012
Value £m (LHS)
Q3
2013
Q4
Q1
Q2
Q3
Q4
2014
% Share Capital (RHS)
Source: Numis Securities Research
Outlook for Realisations
Four potential exits in Q1 2015
David Blackhall is more upbeat about Vietnam’s Real Estate market than he has been
at any time since the 2012 EGM. He has indicated that there are four potential exits by
the end of Q1 2015 from projects in the South and Central Vietnam. These include a
residential project in District 9, HCMC and a commercial project in District 1, HCMC.
There is also more interest, in general, from investors, with some enquiries relating to
the fund’s largest investments, including Century 21, a large mixed use project in District
2, HCMC.
Chinese demand hit by political
tension in H1 2014
In early 2014, there had been some potential interest from Chinese investors in buying
the golf club and undeveloped land at Danang Beach Club. This went away following
the political tensions with China that resulted in a drop in Chinese tourism, but charter
flights from the country to Danang have now resumed.
Registered No 02285918. Authorised and Regulated by The Financial Conduct Authority. A Member of the London Stock Exchange
53
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12 January 2015
There are a number of positive trends that should be supportive for realisations:
● Lending rates for real estate are trending down: They are now 9.0-10.5%, down
from over 20% two years ago.
● Liquidity is improving: Most of the NPLs held by banks relate to real estate, and
they have been reluctant to lend more to the sector in recent years. However, this is
beginning to change, with property developers able to access capital once again.
● Increasing investor interest: With falling interest rates on cash and a weak gold
price, local investors are starting to turn their attention to real estate once again.
Domestic investors continue to dominate the Real Estate market, and local
developers are once again able to access finance. However, interest is growing from
international investors, primarily Korea, Singapore and Japan.
Figure 51: Real Estate Buyers
Offshore Thailand
4%
4%
Figure 52: Real Estate Sellers
Taiwan
2%
Japan
Netherlands Malaysia
2%
3%
5%
Japan
6%
Offshore
8%
Singapore
8%
Korea
13%
Korea
13%
Domestic
54%
Domestic
63%
Hong Kong
15%
Source: CBRE Q3 2014
VinaLand does not have the
resources to develop large
projects
Source: CBRE Q3 2014
Although no new investments will be made, investment is required to make some
projects more attractive for sale. However, VinaLand does not have the resources to
develop the major mixed-use projects (e.g. related to infrastructure and planning). For
instance, David Blackhall estimates that Times Square in Western Hanoi would cost
$280m to build out.
Historic Exits
Exits have typically been above
carrying value
Prior to the EGM in November 2012, VinaLand sold 10 assets at an average multiple
over cost of 1.53x and at a weighted average of 9% over carrying value prior to exit.
Since then, it has completed a further eight divestments with a gross sale value of just
over $100m and net proceeds of $64.5m. These have been achieved at 32% above the
valuation at the EGM and 9% above carrying value at exit. VinaLand no longer
publishes its original investment cost for each holding, and some of the recent
realisations will have been at a loss, notably the sale of the Sheraton Hotel in Nha
Trang. However, this sale released the fund from significant debt, as well as future
capital commitments.
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Registered No 02285918. Authorised and Regulated by The Financial Conduct Authority. A Member of the London Stock Exchange
12 January 2015
Table 14: Table 11: VinaLand - Record of Exits (US$m)
Exit
Date
Investment
Type
Location
May-09 Bai Dong
Beachfront plot
Cam Ranh
Jun-09 Hilton Hanoi Hotel
5* Operating Hotel
Hanoi
Jun-09 Central Garden
Net
Value at
Proceeds
Exit
Cost
Value at
EGM
IRR
Return on Return since
Cost (x)
EGM (x)
Removed
Debt
2.1
2.8
1.9
-
10%
1.07
-
-
27.2
33.8
9.8
-
23%
2.78
-
-
Residential apartments HCMC
16.2
14.5
14.0
-
10%
1.16
-
-
Dec-09 Oasis
Mixed use devel. site
21.8
13.4
13.8
-
22%
1.58
-
-
Dec-09 Golden Westlake
Residential apartments Hanoi
27.2
29.2
15.2
-
20%
1.79
-
-
Jun-09 Mandarin Gardens
Residential apartments Hanoi
57.1
49.2
41.0
-
29%
1.39
-
-
Oct-10 Quoc Te
Residential devel. site HCMC
10.6
8.6
5.7
-
16%
1.86
-
-
May-11 Bai Dai
Beachfront plot
Nha Trang
1.6
1.0
1.2
-
9%
1.38
-
-
Aug-11 Savico Tower
Office devel. site
HCMC
18.7
16.1
11.5
-
16%
1.63
-
-
Mar-12 Legend Hotel
5* Operating Hotel
HCMC
23.1
19.5
21.0
-
3%
1.10
-
-
205.5
188.1
135.0
HCMC
Total pre-EGM Nov-12
1.52
Jan-13 Nguyen Du
Operating office
Hanoi
3.2
3.00
3.40
3.4
-2%
0.94
0.94
0.0
May-13 Sheraton
5* Operating Hotel
Nha Trang
3.1
2.7
37.5
2.7
-55%
0.08
1.15
25.0
Jul-13 Signature 1
Condo devel. site
HCMC
2.7
2.8
2.8
2.8
-1%
0.96
0.96
0.0
Oct-13 Hao Khang
Residential devel. site HCMC
4.6
4.5
5.1
5.0
-2%
0.90
0.92
0.0
Dec-13 Mercure Hotel
3/4* Operating Hotel
Hanoi
1.7
1.8
n/a
2.5
n/a
0.68
4.0
Jan-14 Movenpick Saigon
5* Operating Hotel
HCMC
16.1
13.5
25 #
14.9
n/a
1.08
1.7
Jul-14 Movenpick Hanoi ~
5* Operating Hotel
Hanoi
19.9
19.0
n/a
6.3
n/a
3.15
0.0
Aug-14 Marie Curie
Office/Resi devel. site
HCMC
10.9
9.5
n/a
8.7
n/a
1.25
0.0
Oct-14 Capital Square (partial)
Mixed use
Danang
3.2
3.3
3.3
65.4
60.1
49.7
1.32
30.7
Total since EGM Nov-12
Note: value of Capital Square partial disposal was not valued separately at time of EGM in Nov-12, but we have included at carrying value prior to sale of $3.3m.
Cost of investments not released for recent exits # value in mid-2011, ~ included other small hotels
Source: Company & Numis Securities Research
Fees
Moved to declining fixed fee
following 2012 EGM
As part of the 2012 EGM proposals, the Board negotiated significant changes in the
remuneration of the investment manager in order to reduce costs and incentivise
realisations. The management fee was reduced from 2% of NAV, equivalent to $11.25m
pa, to a fixed annual fee of $8.25m in the first year, $7.5m in the second year and $6.5m
in the third year (currently equivalent to 1.59% of net assets). In addition, the previous
performance fee arrangement was terminated. This was based on 20% of NAV returns
above an 8% pa hurdle, subject to a high watermark. Rather, there was an incentive for
VinaCapital to “earn back” its historic performance fee of up to $28.2m that had been
accrued but not paid (as described above).
Registered No 02285918. Authorised and Regulated by The Financial Conduct Authority. A Member of the London Stock Exchange
55
55
12 January 2015
Current Portfolio
The breakdown of the portfolio by stage and geography is summarised below. Most
investments are located in HCMC, although there are also significant assets in Danang,
Nha Trang and Hanoi.
Figure 53: VinaLand - Investments by Stage
Developme
nt Stage
29.0%
Figure 54: VinaLand - Portfolio by Geography
Operating
Assets
1.5%
Central
Vietnam
29%
Hanoi
8%
Land
Banking
8.1%
Ho Chi
Minh City
63%
Planning
Stage
61.9%
Source: Company data as at 31 Oct 2014
Source: Company data as at 31 Oct 20144
There are four projects under development with a combined value of $120.2m,
equivalent to 29% of net assets:
Focus is on more affordable
developments
● Danang Beach Resort (13.4% NAV): This is a 260 ha resort in Danang, central
Vietnam (held in two parcels: the main site 248 ha and an adjoining beachfront plot
of 12 ha). It includes a Greg Norman designed golf course and a number of
residential developments. Sales of the Ocean Villas began in 2010, and 97 have
now been sold and handed over to buyers at prices of $575,000 upwards, with just
five beachfront properties remaining. A smaller 15 villa development on the golf
course (The Dunes Residences) also sold well, and a further 40 three-bedroom
villas are planned (reservations have been received for 13 of the first 20 in Phase 1
of the development at prices of c.$240,000). Building on the Cham apartments
stalled in 2012, but the project was relaunched as the Ocean Apartments in April
2014, with 34 of 46 apartments sold at prices of $90-235,000, allowing construction
to recommence. However, the luxury Norman Estates villas at prices in excess of
$1m have struggled to sell. In addition, there had been some interest from Chinese
buyers in acquiring the golf course and some development land, although this stalled
in Q1 following the political hostilities (charter flights have only recently resumed
from China to Danang).
An island development near HCMC
● Dai Phuoc Lotus (7.5% NAV): This is a 198.5 ha island township project in Dong
Nai province, near Ho Chi Minh City. To-date, 209 out of 332 villas released have
been sold, with 152 handed over to buyers. The project has little debt, and
VinaCapital is seeking to refine its planning permission to allow for smaller lot sizes,
as well as for the right to sell off undeveloped land plots.
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Registered No 02285918. Authorised and Regulated by The Financial Conduct Authority. A Member of the London Stock Exchange
12 January 2015
Retail development should help
sales of Azura tower
● Capital Square Danang (4.2% NAV): This is a mixed-use development in central
Danang, formally called the World Trade Centre. The residential Azura apartment
tower was completed in 2012, but to-date only around 40% of the 225 units have
been sold. However, VinaLand recently agreed to sell its 38.25% holding in 2.07 ha
of the 8.6 ha site to a large retail developer for $3.2m. The buyer is planning to build
a modern shopping mall and hotel, which should be positive for VinaLand’s
residential sales.
A large scale residential project in
central Vietnam
● My Gia township (c.4% NAV): This is a large-scale 150 ha township project in Nha
Trang, central Vietnam. The first phase commenced with a 28.5ha parcel in land
plots of 100 sqm. As at Q3 2014, 571 lots out of 763 launched had been sold. The
strategy is also to sell bigger land parcels to investors.
Residential sales performance has been picking up in recent months, albeit following a
low level. There were net sales of 121 units in first nine months of 2014 up from 93 in
the same 2013.
Most of VinaLand’s projects under construction are now mid-range residential
homes/villas with land. This is because construction can largely be self-financed through
pre-sales and staged payments (rather than via debt). In addition, it is possible to phase
the stages of development, particularly for the larger projects, to allow for market
conditions. In contrast, condominium projects require significantly more debt funding
and have far less flexibility to make adjustments to allow for market conditions.
Residential developments can be
largely self-funded
Figure 55: VinaLand - Valuation by Sector
Figure 56: VinaLand - Number of Investments by Type
9
200
Number of Investments
8
US$ million
150
100
50
Danang
Beach
7
Capital
Square
6
Dai Phuoc
Lotus, My
Gia
5
4
3
2
1
0
0
Residential Mixed Use
Investment
Township
Value
Hospitality
Debt
Residential
Mixed Use
Planning
Construction/Sales
Source: Company data as at 31 Oct 2014
Registered No 02285918. Authorised and Regulated by The Financial Conduct Authority. A Member of the London Stock Exchange
Township
Hospitality
Operating
Source: Company data as at 31 Oct 2014
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57
12 January 2015
Number of assets reduced to 27
There are now 27 assets in the portfolio, down from a peak of 46 in early 2009. The
largest investments are listed below.
Table 15: VinaLand Portfolio as at 31 October 2014
Site
Value
Bank
$m Projected
$m
Debt $m
Investment*
Status
17.1
72.3
21.2
0.2
Planning
248.3
13.4
56.6
12.7
3.9
Development
198.5
7.5
31.7
0.8
2.0
Development
0.0%
1.4
7.1
29.9
24.7
8.1
Planning
46.5%
15.5%
3.1
6.7
28.1
0
0.6
Planning
Mixed Use
65.0%
0.0%
4.0
6.2
26.0
0
0.0
Planning
Dong Nai, HCMC
Township
40.0%
0.0%
250.2
5.1
21.4
0
3.3
Planning
Trinity Park
District 9, HCMC
Residential
75.0%
25.0%
33.7
4.8
20.3
0
1.1
Planning
Green Park Estate
HCMC (nr airport)
Mixed Use
52.6%
28.3%
15.7
4.4
18.6
0
0.0
Planning
Capital Square (Danang WTC)
Danang
Mixed Use
61.0%
20.3%
9.0
4.2
17.9
4.2
6.1
Development
Top 10
76.4
322.7
63.7
25.3
17 Other Investments
23.6
99.5
7.6
5.9
100.0
422.2
71.3
31.2
Investment
Location
Sector
VNL
VOF
Century 21
District 2, HCMC
Danang Beach Resort
Dai Phuoc Lotus
Residential
75.0%
25.0%
30.1
Danang
Residential
75.0%
25.0%
Dong Nai, HCMC
Township
54.0%
18.0%
Pavilion Square
District 1, HCMC
Mixed Use
90.0%
VinaSquare
District 5, HCMC
Mixed Use
Times Square Hanoi
My Dinh, Hanoi
Aqua City
Total
Area ha % NAV
* To 2015 Debt and projected investment represent VNL portion as at 30 Jun 2014
Source: Company data
Outlook by Sector
Residential: Demand is focused on landed townhouses in a price range of $100,000$150,000, as well as low end/affordable condominiums. The average price of $1,0001,500 sqm for condos in the major cities is cheap relative to elsewhere in Asia, but the
prices are still high relative to income. Most purchases are in cash, supported by family
wealth, although mortgages are available for up to 70% LTV, as well as favourable
payment terms from developers offering two-to-five years credit.
From July 2015 it will be easier for
foreigner investors to own
property
Since September 2009, restrictions on overseas Vietnamese (Viet Kieus) owning more
than one house/apartment have been relaxed. In addition, resident foreigners have
been allowed to buy apartments for the first time. With effect from 1 July 2015, the rules
on foreign ownership will be relaxed further, allowing foreigners to lease and own up to
30% of an apartment building or 250 villas or detached houses in a ward administrative
unit (or a residential area with equivalent population). It will also be possible for
foreigners to get access to mortgages in Vietnam. Secondary residential property prices
have been rising for the first time in years, and these measures should be supportive of
further liquidity.
Townships: These are larger projects over 100 ha, principally focused on residential
development. In some cases, VinaLand’s township investments are at an early stage
and they are essentially land banks. However, two townships are currently being
developed (Dai Phuoc Lotus and My Gia).
Oversupply of top-end retail
Retail: VinaLand has a number of Retail sites as part of Mixed-Use developments in
prime sites, including Hanoi (Times Square), HCMC (Pavillion Square and VinaSquare)
and Danang (Capital Square). The aim is to get pre-commitments from large
international retailers before construction of any project commences or to sell the sites
with planning permission. There are positive long term fundamentals in the Retail sector
reflecting the growing disposable wealth in Vietnam, and both Starbucks and
McDonalds recently entered the country. However, there is currently an oversupply of
high end retail sites in Hanoi, and a number of new shopping centres are due to open in
HCMC in 2015 which is expected to put downwards pressure on rentals in the near
term.
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Most of VinaLand’s hotels have
been sold
Hospitality: Hotels formed a core part of VinaLand’s original strategy and it was active
in acquiring and refurbishing existing hotels, while it also built the Sheraton in Nha
Trang. However, most of these have been sold in recent years. Although the equity
proceeds were sometimes modest, the sales significantly reduced the fund’s debt levels
(notably the Sheraton) and future capital commitments (e.g. Legend, HCMC). VinaLand
still has six hotels, but these are small, representing just 3.5% of net assets. The fund
does not have a stake in the Hanoi Sofitel Metropole which is held solely within VOF.
The hotel sector was impacted by political tensions with China in Q2 2014, and although
the number of international visitors still increased in 2014, there is an over-supply of topend five star hotels.
VinaLand has little exposure to
Offices
Offices: Vietnam’s office market suffered post Financial Crisis, with significant over
capacity and falling prices. The commercial market is now strong in HCMC with c.10%
vacancy of Grade A office space at $35/sqm, whereas it remains weak in Hanoi with
over 30% vacancy and prices of 30 sqm in CBD offices. VinaLand’s exposure to this
market is solely through mixed use projects.
Balance Sheet
As at 30 September, VinaLand had cash of $33.4m, equivalent to 8.1% of net assets. It
has gearing of 6.5% of net assets at the fund level through ZDPs, as well as underlying
project debt equivalent to 17.7% of net assets.
8% ZDPs issued in Dec 2013 with
three year life
● ZDP: In December 2013, VinaLand issued £15m Zero Dividend Preference shares
(ZDPs) with a gross redemption yield of 8% pa and a three year life. On the face of
it, the issue of the ZDP was unnecessary, as the fund has generated sufficient
proceeds from realisations to meet expenses and maintain the buy-back
programme. However, David Blackhall points out that holding cash has enabled
VinaLand to refinance the debt of several projects at more attractive terms.
Vietnamese banks are unable to roll loans forward, and the company’s cash enables
the loans to be repaid and then replaced with new debt. The ZDPs are currently
trading at 112.5p, equivalent to a GRY of 5.9%.
Project debt is modest
● Project debt: VinaLand’s projects are financed through a mixture of debt/equity
funding as well as pre-sales, particularly in residential developments. In general,
debt tends to be higher for hotels and commercial projects where there is less presale financing, although residential developments also need investment in
infrastructure (e.g. the golf course for the Danang Beach Resort). If a project
borrows from a Vietnamese bank, the debt must be denominated in VND, other than
where it relates to overseas expenses. As a result, a development would typically
have 80% VND borrowings and 20% US$. This debt usually has a 4-5 year maturity
and a floating interest rate, adjusted quarterly.
Taxation
Onshore sales to locals incur a
22% tax liability
All else being equal, it is easier for VinaLand to sell to foreign buyers as the corporate
entity can usually be sold overseas without triggering a tax liability (its investments are
typically structured as a Singapore SPV due to the country’s double tax treaty with
Vietnam). In contrast, selling a property onshore in Vietnam will result in taxation of 22%
on profits. Furthermore, the proceeds can only be repatriated once there is sign-off from
the tax authorities following the fiscal year-end. On the other hand, local property
investors in Vietnam tend not to be IRR focused as they regard land as a store of wealth
and an alternative to gold. Furthermore, they are often willing to pay high prices for
“trophy” assets.
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Residential Sales Contracts
Payments on residential sales are
staged
The majority of VinaLand’s residential sales contracts relate to pre-purchase
agreements, whereby home buyers make staged payments throughout the construction
period, with collections occurring over an 18-24 month timeframe. Typically, buyers of
residential properties in Vietnam make a 10-15% deposit once the foundations are in
place, with regular payments to reach 95% of the sale price at hand over (with the
remaining 5% paid on receipt of the “Red Book” which represents legal ownership).
Although VinaLand does not own the land at projects such as Danang Beach Resort, it
is able to sell houses with freehold land status to local investors.
Under SPAs, payments can only be received once the slab on a property has been laid
for foundations. In 2010, however, the government also introduced Capital Contribution
Agreements (CCAs) whereby developers can pre-sell up to 25% of a project. The
rationale for this was that developers were finding ways to get deposits from investors
without legal sales contracts in order to finance projects.
Foreign developers can now sell
land lots
One positive development for VinaLand has been a decree that came into effect in
March 2013 that allows foreign real estate investors to sell land lots with completed
infrastructure, subject to approval by the local authorities. Previously, land sales could
only be made in conjunction with a property. Planning consent for the change is taking
time to achieve but should be positive for VinaLand’s township developments such as
My Gia and Dai Phuoc Lotus, as most of the profit comes from the value of the land,
rather than through construction of the villas (many are sold as shells).
NAV Performance and Valuation Policy
VinaLand’s NAV has fallen modestly since launch in March 2006 from $0.97 to $0.92
per share at 30 September 2014. However, this disguises significant unrealised gains in
2007 and H1 2008 based on the revaluation of projects following land acquisition and
planning approval. Despite a number of profitable exits, the NAV suffered in subsequent
years from a write-down of assets (particularly hotel and land bank projects) to reflect
weaker market conditions.
Although the NAV has been falling for some time, VinaCapital believes that the
development property sector has reached a cyclical trough, helped by lower interest
rates and funding costs. Liquidity is picking up and prices are expected to improve over
the next three-to-five years. Reflecting this, VinaLand’s NAV was flat in the first nine
months and we see scope for a modest increase at the year-end valuation.
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Figure 57: VinaLand - NAV by Calendar Year
40%
33.8%
% MAV Return
30%
17.1%
20%
10%
1.1%
1.0%
0%
(2.2%)
-10%
(11.3%)
(13.2%) (11.9%) (12.5%)
-20%
2006
2007
2008
2009
2010
2011
2012
2013
2014
YtD
Note: to 30 Sep 2014
Source: Company & Numis Securities Research
Quarterly NAV, with each asset
valued independently every 12
months
VinaLand’s NAV is released quarterly and is determined by a valuation committee,
consisting of independent Board members. Each property is valued at least every 12
months by two independent valuers including: CB Richard Ellis, Savills, Jones Lang
LaSalle and Colliers. The Board evaluates the valuations provided and does not simply
take an average of the two. In addition, the properties are assessed for impairment by
the valuation committee each quarter.
Valuations difficult due to lack of
transactional data
Projects are typically revalued at various approval stages such as Investment licence,
construction permit and 1-500 planning approval, while adjustments are also made
based on firm offers. Unfortunately, there is little transparency over property prices in
Vietnam as there is no history of transactions and many deals are purely financed
through cash. Accurate valuations can be particularly difficult for large development
sites due to the number of assumptions that need to be made. Projects are typically
valued at cost if they do not have Investment Licence or Master Planning approval. As
at 30 September 2014, projects held at cost represented 7.6% of net assets.
Share Price Returns and Discount
Price has risen over past year
VinaLand’s share price peaked at $1.69 in March 2007 and then touched a low of $0.29
in March 2009 during the global financial crisis as a result of distressed selling by
certain shareholders. The price recovered strongly in 2009 and rallied to $1.00 after the
result of a strategic review was announced on 28 October 2010, promising the return of
capital to shareholders. However, it weakened in 2011 due to the combination of a
difficult economic environment in Vietnam, general investor risk aversion, and delays in
the return of capital. At the time of the EGM in November 2012, the share price was
$0.4285, but has risen this year to $0.5875, representing a discount to NAV of 36%.
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We expect buy-backs to accelerate
In order to tackle the discount, the Board/Managers have significantly improved the
levels of portfolio transparency, adopted more proactive marketing and used free cash
to buy-back shares. We expect buy-backs to accelerate over the next year as
realisations pick up, and there is the potential for a larger return of capital via a tender if
there is an exit from one of the major investments in the portfolio. The Board has
flexibility on how to return capital, and we believe that an effective mechanism would be
to hold a reverse auction tender. Under the auction process, the company specifies the
value that can be repurchased, and shareholders choose the price (or discount) at
which they are willing to sell all, or part of, their holding. The tender price is then set at
the clearing level at which the aggregate supply of stock from shareholders matches the
overall value to be redeemed.
Figure 58: VinaLand - NAV & Price Returns
Figure 59: VinaLand - Discount History
3.0
80
60
% Discount(-) / Premium(+)
Total Return (US$)
2.5
2.0
1.5
1.0
0.5
40
20
0
-20
-40
-60
-80
Price
NAV
Mar-14
Mar-13
Mar-12
Mar-11
Mar-10
Mar-09
Mar-08
Mar-07
Vietnam SE
Note: Index rebased to $1.00. Source: Datastream, Bloomberg
Primarily owned by Swiss
investors
-100
Mar-06
Mar-14
Mar-13
Mar-12
Mar-11
Mar-10
Mar-09
Mar-08
Mar-07
Mar-06
0.0
Source: Datastream, Bloomberg
VinaLand has a broadly diversified shareholder base. Swiss investors, primarily private
banks and family offices, own an estimated 45% of the share capital, with c.15% held by
investors elsewhere in continental Europe and c.10% in the US. In addition, VOF holds
a stake of 8.3%. The ownership of UK investors is far lower than for most other Londonlisted funds.
Longer Term Future
Ongoing commitment to return
capital expected whilst discount
remains wide
The three year realisation strategy EGM in November 2012 bought VinaLand some time
to try to maximise value from the portfolio. However, the company will have to come
back to shareholders by November 2015 with a further proposal for continuation (a
special resolution requiring the support of 66.7% of votes cast). In our view, it is too
early to speculate on the outcome. The realisation programme is currently behind
schedule, but the outlook is improving and the share price is starting to recover.
Provided this momentum is maintained, we believe that investors would be likely to
approve the fund’s continuation. However, we feel that there would need to be an
ongoing commitment to return capital to shareholders whilst the discount remains wide.
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Full realisation strategy could
have an implication for asset
valuations
An alternative would be for VinaLand to adopt a permanent realisation strategy,
potentially with a new fee structure to incentive shareholder distributions. However,
being seen as a forced seller of assets could lead to a significant destruction of value, in
our view. This is partly because the company’s bargaining power in the market would be
weakened. In addition, most investment licences and approvals in Vietnam contain
obligations to undertake development works within a specified period of time. In the
past, the authorities have withdrawn investment licences from investors/developers who
are deemed to have not fulfilled their obligations. Although this is rare, two of
VinaLand’s investment licenses in Hanoi were withdrawn by the government for
alternative uses, but VinaCapital was able to negotiate a positive outcome via a land
swap.
If the discount continues to tighten, it may be possible for the manager to gain support
to reinvest a proportion of exit proceeds in new projects or to develop existing assets.
However, David Blackhall is clear that VinaLand is an investment fund, rather than a
real estate development company. Any future investments would be opportunistic,
primarily in residential developments or refurbishments, rather than townships/land
banks or big mixed-use developments.
Vietnam Infrastructure
Raised over $400m in 2007
Vietnam Infrastructure (VNI) was launched on AIM in July 2007 at the top of the market
before the financial crisis, having raised $402m to invest in infrastructure and
infrastructure-related assets in Vietnam.
Struggled to meet original
mandate
Performance has suffered in a difficult market environment since the fund’s launch, and
there have been a number of write-downs in the company’s early investments. In
addition, the fund has been struggling to seek an identity, with questions over the
original mandate given the difficulty of investing directly in infrastructure projects in
Vietnam on a commercial basis. The fund faced a continuation vote in 2017, and the
recent strategy has been to focus on more liquid quoted infrastructure investments.
Reconstruction
Shareholders approved proposals
to restructure
On 9 October 2014, the Board announced that, following consultation with a number of
shareholders, it would to bring forward proposals to restructure the company. These
proposals were approved by shareholders at an EGM on 15 December. The aim is to
allow long-term investors to retain exposure to Vietnam, whilst providing a phased exit
for shareholders seeking to realise their investment. The restructuring involves splitting
the portfolio into two pools represented by two share classes, both listed on AIM:
To invest all listed assets in new
open-ended fund
● Listed Portfolio Shares: Shareholders will be issued one new “Listed Portfolio
Share” for every current share held. This will invest all of its assets into a new openended fund, called the VCG Partners Vietnam Fund (VVF), which will be a sub-fund
of Forum One, an existing Luxembourg OEIC. VNI’s listed equities and bonds will be
transferred to VVF which will have a “broad investment strategy focused on Vietnam
equities”. Initially, there will be no other investors in VVF.
Target exit date of June 2017
● Private Equity Shares: VNI’s existing share class will retain the private equity
assets. A realisation strategy will be adopted, with a target exit date of June 2017, to
coincide with the scheduled continuation vote. Proceeds from the portfolio will be
distributed to holders of the Private Equity Shares in cash or as units in VVF (with
the latter being the default option).
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Scheme to be implemented in Q1
2015
As at 30 November, $101.1m was invested in listed equities bonds, with $102.7m in
unquoteds and $12.4m in cash. The restructuring is expected to take place in Q1 2015,
once regulatory approvals have been received. However, the manager is seeking to
realign the Listed Portfolio ahead of this date.
Three switching dates into VVF
Ability to Exchange: Holders of the Listed Portfolio Shares will be able to exchange a
portion of their investment for units in VVF on three distribution dates in the 12 months
following VNI’s reconstruction, on the basis shown in the table below.
Table 16: VNI - Exchange of Listed Portfolio Shares into VVF
Distribution
First distribution date
Second distribution date
Final distribution date
Date
UCITS shares distributed
Exit Discount
21 days after admission to AIM
33.3%
4%
6 months after First distribution date
50% of remaining shares
2%
12 months after First distribution date
100% of remaining shares
0%
Source: Company data
The discount will accrue to the benefit of remaining holders of Listed Portfolio Shares,
and there will be a “mix and match” facility to enable shareholders to exit from more
than their basic entitlement to the extent that others do not elect to exchange. At the
final distribution date (12 months after reconstruction), all remaining Listed Portfolio
Shares will be automatically exchanged into VVF units, and the listing on AIM of this
share class will be cancelled. VVF units will be redeemable twice a month at NAV with
no redemption fee for investors who acquired their shares through VNI.
We expect most investors to seek
an exit
The phased exit from the Listed Portfolio Shares into VVF is unusual, but gives
VinaCapital time to reorganise the quoted portfolio in an orderly manner. It also provides
an open-ended vehicle for VinaCapital that will have initial assets of over $100m.
However, we believe that the group will need to attract new buyers within the first year
as we believe that most of the existing investors are likely to seek an exit.
Quoted Portfolio
VVF will have a much broader
quoted portfolio
As at 30 November, there were 17 listed investments in the portfolio and four bonds.
The listed holdings were all infrastructure related, but the aim is now to invest across all
sectors. The number of stocks will increase to c.40 and will include mid-caps, as well as
“blue chips”.
VNI’s listed portfolio has had a strong track record since 2012, as illustrated below,
although we believe that this is partly because listed infrastructure stocks have
performed strongly over this period.
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Figure 60: VNI - Quoted Portfolio Track Record (US$)
60%
50%
40%
30%
20%
10%
0%
2014 YtD
2013
VNI listed portfolio performance
2012
Vietnam Stock Index
Source: Company data to 30 September 2014
Unquoted Portfolio
There are six unquoted assets, but the vast majority of the value is represented by three
investments:
BTS tower company
● SEATH (28.7% of net assets): Southeast Asia Telecommunications Holdings is a
Singapore-based holding company that is the largest private investor in Vietnam in
base transceiver station (BTS) towers for mobile networks. The business has grown
through acquisitions, and as at 30 June 2014 it had 1,927 BTS towers leased under
long-term contracts with key mobile operators at a tenancy ratio of 1.2. In H1 2014,
SEATH had an EBITDA margin of 59.0% and a net margin of 21.0%.
First phase of park completed
● Ba Thien Industrial Park (11.5%): a 308ha project located in Vinh Phuc province,
20km from Noi Bai International Airport and 45km from Hanoi city. Infrastructure for
the first 40ha phase of the project has been completed, and work on the second
40ha phase started in Q2 2014. A number of tenants are building factories on the
site (including Nippon Paint, Deahuynst and Suzukaku), with marketing targeted at
Japanese and Korean investors.
Aircraft leasing company
● VALC (4.9%): Vietnam Aircraft Leasing is the only aircraft leasing company in
Vietnam. Founded in 2007, has a fleet of 15 planes leased to Vietnam Airlines
including the ATR-72 and Airbus A321. In H1 2014, VALC generated revenues of
$40m and net income of $12m. The company had assets of $776m, with
shareholders’ equity of $64m.
In discussions to sell stake in
Long An Industrial Park
There are three other unquoted investments representing c.2.5% net assets. These
include Long An Industrial Park, a 1,925 ha green-field project in Long An Province,
30km south of HCMC. The mixed-use project is divided into four components,
comprising a 396 ha industrial park, a 236 ha industrial service area, a 1,145 ha
residential area and a 145 ha sea port with 2.4km of frontage. VNI had no involvement
in the residential area, but held stakes in the industrial park (37.5%), sea port (50.0%)
and industrial service area (37.5%). VNI has already sold its stake in the industrial park
and sea port to its domestic joint venture partner, Dong Tam Group (DTG). It is in
discussions to sell the remainder, with payment expected to be spread over 24 months.
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Management and Fees
Tony Hsun will remain manager of
VVF
VNI is managed by Tony Hsun who joined the group in October 2009, following over 25
years’ experience investing in infrastructure projects on a global basis. Previously, he
was Senior VP of business development at Orix Corp in Tokyo. He will remain in charge
of the unquoted portfolio and is expected to become lead manager of VVF.
Revised fee structure
There will be no management fee on either listed share class. However, VinaCapital will
charge a fee of 1.5% of NAV on VVF (with no performance fee). In relation to the
Private Equity portfolio, VinaCapital will receive 3% of sale value once an asset is
realised and the proceeds distributed to shareholders, as well as an incentive fee of
10% of the aggregate of all sales proceeds over the aggregate of 75% of book value as
at 30 June 2014. The incentive fee will only be paid once all assets have been realised
and the proceeds distributed to shareholders. The Board states that the fee structure is
designed to “incentivise VinaCapital to maximise the sale proceeds and to minimise the
time taken to realise the private equity assets at attractive valuations”.
Historic Performance and Discount
The historic performance of Vietnam Infrastructure is disappointing, with the NAV down
c.28% since launch on a total return basis. This was partly a reflection of the timing of its
IPO, although we believe that the original management team also made some poor
investments in illiquid assets that have subsequently been written down (e.g. hydropower plants with insufficient water flow). There are no directly comparable funds or
indices, making it difficult to benchmark relative performance.
VNI has operated an active buyback programme
VNI’s share price collapsed in late 2008 as a result of distressed selling and reached a
low of less than 10c, equivalent to a discount of 80% and well below the value of the
company’s free cash resources. In response to this, VNI returned $40.2m ($0.10 per
share) to shareholders through a special capital distribution on 16 January 2009. The
share price subsequently recovered, helped by the introduction of a buy-back
programme (it has repurchased 12.9% of its share capital since August 2012, with a
value of $18.4m). The Board suspended its share buy-back programme when its
restructuring proposals were announced in October 2014, and the future policy towards
buy-backs will be reviewed once the reconstruction has been completed.
Shareholder base became
dominated by value investors
The discount has narrowed in recent years, but the shareholder base has become
increasingly dominated by value investors. Ironsides Partners, a hedge fund group
managed by Robert Knapp, has built a stake of 23.5%, having acquired a 10.7%
position in June from Temasek the Singapore investment group (which had invested at
IPO). In addition, Weiss AM, a US hedge fund, owns a stake of 11.1%. Ultimately, the
listed structure never matched the long term investment horizon needed to invest in
infrastructure development projects in Vietnam. Instead, listed investors have focused
on operating infrastructure assets in developed markets that are able to pay a
predictable yield.
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Figure 61: VNI - Price and NAV History
Figure 62: VNI - Discount History
1.2
10
0
% Discount(-) / Premium (+)
1.0
US$ per Share
0.8
0.6
0.4
0.2
0.0
-30
-40
-50
-60
-70
-80
-90
Jul-14
Jul-13
Jul-12
Jul-11
Jul-10
Source: Morningstar
Jul-09
Jul-08
Price
-20
Jul-07
Jul-14
Jul-13
Jul-12
Jul-11
Jul-10
Jul-09
Jul-08
Jul-07
NAV
-10
Source: Morningstar
VNI’s share price rose 11% to $0.50 when the restructuring proposals were first
announced in October, but the price has since fallen back a little due to weakness in
Vietnam’s quoted market. The current price of $0.49 per share represents a market cap
of $172m and a 20% discount to estimated NAV. It is difficult to estimate the realisable
value of the unquoted portfolio, but the largest two investments both appear attractive,
in our view. As a result, we see potential upside from the current share price and it
appears an attractive way to gain access to the open-ended fund if looking for exposure
to the Vietnamese equity market.
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Dragon Capital Funds
Established 20 years ago
Dragon Capital is the longest established closed-end fund manager in Vietnam having
been formed in 1994 at a time when there was no publicly traded equity market. The
firm has grown to a headcount of 95 with $1.3bn under management, principally in listed
equities. Dragon Capital is based in Ho Chi Minh City, and has offices in Hanoi,
Bangkok, Hong Kong and the UK (regulated by the FCA).
Bulk of Dragon’s assets still
represented by OTC traded closedend funds
At one stage, the group managed five closed-end funds, mostly OTC traded vehicles
domiciled in the Cayman Islands. However, Vietnam Resources adopted a realisation
strategy in 2010, while Vietnam Dragon (a fund primarily owned by Japanese investors)
open-ended in 2011. Dragon’s largest mandates are still the CEFs, VEIL ($544m) and
Vietnam Growth ($292m), while it also runs Vietnam Property Fund ($66m). However,
Dragon launched an Irish UCITS fund in September 2013, which has assets of $13m,
and it also manages an open-ended debt fund ($43m) and a Mekong Clean Tech Fund
($40m).
Group suffered from Tiberon
investment in 2009
Dragon Capital went through a difficult time in 2009 due to an ill-fated investment in
Tiberon, which held a controlling interest in the Nui Phao Tungsten mining project
located to the north of Hanoi. Vietnam Resources made a substantial investment
following its launch in 2007, but Dragon also took significant stakes across its other
funds (with the exception of the Property fund). Falling equity markets in 2008 meant
that Tiberon became a substantial holding in all of these funds (VEIL initially invested
around 10% of assets in Tiberon, but this reached more than 20% of the portfolio in
2008). However, there were significant writedowns in value after the mine failed to
obtain project finance. Subsequently, the government threatened to withdraw the mining
licence, and Dragon was forced to sell its interest to Masan Group Corporation in mid2010, with VEIL and VGF receiving restricted securities in Masan.
Management Resources
Well-resourced and experienced
team
This episode led investors to question the group’s risk controls, and in response, a more
formal investment process was implemented. Dominic Scriven, a Vietnamese speaker,
was appointed in a new role of CEO, while John Shrimpton, the other co-founder,
resigned from the firm. Dominic is supported by Bill Stoops (CIO), who joined the group
in 2006. VEIL and VGF both have two portfolio managers, responsible for stock
selection, supported by seven equity analysts who specialise by sector. The group also
has two economists, two fixed income analysts and a clean technology analyst. The
Property team that manages Vietnam Property Fund is led by Fraser Wilson, supported
by a team of four.
Vietnam Enterprise Investments (VEIL)
Largest Vietnam CEF with an
equity focus
Launched in 1995, VEIL grew though C share issues in 1997, 2001 and 2002 and 2006.
At the peak in 2007 it had a market capitalisation of over $900m and traded on a
substantial premium. However, weak markets and a widening discount saw its market
cap fall to $170m in 2009, though it has since recovered to $431m, making it the second
largest Vietnam focused closed-end fund.
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Investment Strategy
Historically had a high weighting
in Banks
Historically, VEIL was differentiated from its peers by its strategic ownership of Bank
stocks. For instance, at the end of 2009, 38% of its portfolio was invested in the sector,
principally through ACB (22.2%) and Sacombank (12.1%), having held both since
before they were first listed. Dragon believed that development of the financial system in
Vietnam would be a core part of the country’s economic growth. In addition, foreign
ownership of the Banking stocks was at the upper limit of 30%, meaning that it would
have been difficult to trade in and out of the sector. Nevertheless, the holding in
Sacombank was reduced in 2010, and banks have been through a difficult few years as
a result of weaker economic growth and a high level of non-performing loans (NPLs).
VEIL’s exposure to Banks is now far lower at 12.6%, which is less than the Vietnam
Index weighting of 18%.
Mandate was modified in 2010
In the past, VEIL has had significant exposure to private equity and OTC stocks.
However, following the experiences of the investment in Tiberon, VEIL’s mandate was
modified in 2010 with an objective to exceed the Vietnam Index (total return in US$
terms) on a rolling three-year basis. The emphasis is now on listed equities and VEIL’s
exposure to Private Equity/OTC has fallen from 25.6% in 2011 to just 1.1% today. It will
still invest in OTC stocks, including SOE privatisations, provided that they are expected
to list within two years.
Portfolio
Low turnover, fundamental
approach
VEIL’s portfolio has around 25 holdings, and the manager seeks to add value through
taking core positions in stocks that offer value but have strong growth characteristics
and good corporate governance. The portfolio turnover is low at just 26% over the past
three years reflecting the long term approach, and the fund can take strategic holdings
and invest in less liquid mid-caps.
The managers seek to identify top-down themes and have been adding to Real Estate
companies, with an emphasis on small developers. They are considering the timing of
when to add to Banks again given the benefit of falling NPLs and stronger economic
growth. In addition, they are looking at adding to energy service exposure where share
prices have been hit by weak oil prices.
Portfolio became highly
concentrated
The portfolio has been very concentrated, and 60% was represented by just three
stocks at the end of 2011. Vinamilk and ACB were long standing investments, both
acquired more than a decade ago before they were listed, while VEIL’s exposure to
Masan came in 2010 as “compensation” for the loss of the stake in Tiberon. Initially,
these were in the form of promissory notes, but these were subsequently converted into
Masan shares subject to a lock-in. Some of the shares were sold in 2013 and VEIL is
now able to sell up to 50% of its position, with the remainder locked-up to September
2015.
But largest investments have been
reduced
ACB’s weighting has fallen as a result of underperformance, reflecting the tough market
for banks. However, VEIL has had a deliberate strategy to reduce the portfolio
concentration over the past year or so, with the holding in Vinamilk reduced in late 2013
and again in mid-2014, taking advantage of the foreign premium. As a result, the top
three investments now represent 34% of net assets.
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12 January 2015
Figure 63: VEIL - Portfolio becoming more diversified
Figure 64: VEIL - Performance of Largest Holdings
70%
30
60%
50%
% Total Retun in US$
% of Net Assets
25
20
15
10
40%
30%
20%
10%
0%
-10%
5
-20%
-30%
0
Vinamilk
Dec-11
Dec-12
Vinamilk
Dec-13
Masan
Masan
ACB
Nov-14
ACB
2011
2012
2013
Vietnam
Index
2014
Source: Company data
Source: Bloomberg
Table 17: VEIL - Largest Holdings as at 30 November 2014
Weight
Return
P/E
Net assets in VN Index
%
2014 YtD
2014
2014
2015
P/BV
Yield
10.0
(10.1)
16.6
(8.7)
14.7
5.1
3.4
10.1
2.7
52.0
7.5
74.8
2.6
2.5
5.6
10.0
6.4
(3.6)
73.3
69.9
166.8
3.9
-
Banks
7.9
-
0.8
14.5
19.2
14.3
1.0
-
REE
Refrigeration systems
7.3
0.8
(3.8)
7.9
(12.8)
(5.2)
1.3
5.8
Saigon Securities
SSI
Financial Services
6.9
1.0
71.6
13.7
85.9
(16.3)
1.9
3.3
FPT Corp
FPT
IT
5.9
1.7
31.6
10.5
(2.5)
13.9
2.2
4.2
Kinh Bac City
KBC
Real Estate
4.0
0.7
68.4
21.2
221.8
118.8
1.2
-
Hau Giang Pharma
DHG
Pharma
3.2
0.9
22.2
16.9
0.5
9.1
1.7
4.3
PV Gas
GAS
Oil & Gas E&P
3.2
14.0
10.3
14.4
(3.5)
22.5
3.6
2.1
36.4
15.7
19.9
22.6
2.0
2.9
Company
Ticker
Industry
Vinamilk
VNM
Dairy Products
14.3
Hoa Phat Group
HPG
Manufacturing
Masan Group
MSN
Holding Company
Asia Commercial Bank
ACB
REE
EPS Growth
Other
26.2
Cash
1.0
-
-
-
-
-
-
-
VEIL
100.0
-
11.0
13.2
27.4
31.0
2.6
2.9
14.5
12.7
4.9
11.1
2.0
3.5
Vietnam Index
* Valuations for Vietnam Index are for top 50 stocks representing 86% by value. Source: Dragon Capital
Fees
Performance fee can be ignored as
it is so far below water
VEIL charges a management fee of 2.0% of net assets, with a performance fee based
on 20% of NAV returns subject to a rolling performance hurdle and high watermark.
VEIL earned a performance fee of $30.4m in 2007. However, the high watermark rises
by 8% pa from launch, and we estimate that it is currently $9.31 versus an NAV of
$3.36. In our view, therefore, the performance fees can be ignored by investors, as
there is no likelihood of dilution in the foreseeable future. We believe it would make
sense for Dragon to simplify the fee structure by abolishing the performance incentive
altogether.
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12 January 2015
Performance
Long term record is impressive,
but relative performance suffered
in 2009/2010
VEIL’s historic NAV performance pre-financial crisis was strong, helped by its strategic
weighting in Banks. However, it significantly underperformed in 2009/2010 when its
portfolio was impacted by the holding in Tiberon due to its size and non-market related
valuation. In addition, the exposure to Banks and Real Estate proved to be a drag on
returns. However, VEIL outperformed in 2011 and its NAV has kept pace with the rally
in the Vietnam Index over the past three years despite a drag on returns from ACB and
Masan.
Figure 65: VEIL - NAV Performance by Calendar Year
Figure 66: VEIL - NAV Relative to Vietnam Index
15
160
10
5
% Relative Total Return
% Total Return
120
80
40
0
0
-5
-10
-15
-20
-25
-40
-30
-35
-80
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
NAV
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Vietnam Index
Source: Company & Numis Securities Research
PV Gas had a major impact on
performance in 2014
Source: Company & Numis Securities Research
In the first half of 2014, VEIL’s NAV return of 6.8% lagged behind the Vietnam Index
which rose 15.6%. Vinamilk, a key positive contributor in recent years was weak, falling
9.2%. However, the key impact on relative performance in 2014 has been PV Gas due
to its high weighting in the Vietnam Index, despite its small free-float of just 3%. In the
first eight months of 2014, PV Gas rose by 90%, but has since given back most of these
gains and is now only marginally ahead of the Vietnam Index. As a result, VEIL’s
relative performance has significantly improved.
Registered No 02285918. Authorised and Regulated by The Financial Conduct Authority. A Member of the London Stock Exchange
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12 January 2015
Figure 68: Vinamilk Performance in 2014
200
140
180
130
Total Return in US$
Total Return in US$
Figure 67: PV Gas Performance in 2014
160
140
120
120
110
100
100
90
80
80
Dec-14
Nov-14
Oct-14
Sep-14
Aug-14
Jul-14
Source: Bloomberg
Jun-14
Vinamilk
May-14
Apr-14
Mar-14
Feb-14
Jan-14
Vietnam Index
Dec-13
Dec-14
Nov-14
Oct-14
Sep-14
Aug-14
Jul-14
Jun-14
May-14
Apr-14
Mar-14
Feb-14
Jan-14
Dec-13
PV Gas
Vietnam Index
Source: Bloomberg
Discount History
Having traded close to NAV for a sustained period, VEIL’s discount widened to more
than 50% in H1 2009 due to a combination of weak markets and concern over Tiberon.
The discount subsequently narrowed, but the fund has not regained its premium rating,
trading between a 10-25% discount in recent years.
VEIL tends to buy-back shares if
discount approaches 20%
VEIL has the ability to repurchase up to 15% of its share capital. There is no official buyback policy, but VEIL will consider buy-backs if the discount exceeds 15% and
particularly 20%. In addition, the managers have used their own proprietary capital to
trade in the shares. The company is wary of providing details on its strategy as it
believes that this would be exploited by arbitrageurs. As a result, share repurchases are
only announced on a monthly basis in arrears.
Able to sell treasury shares at a
discount
VEIL can hold shares repurchased in treasury and resell them at a higher price and
tighter discount than they are repurchased. In 2012, the fund sold 5.7m shares from
treasury at a discount in order to provide liquidity from a buyer. However, we understand
that the fund is unlikely to sell treasury shares at a discount in future.
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Registered No 02285918. Authorised and Regulated by The Financial Conduct Authority. A Member of the London Stock Exchange
12 January 2015
Figure 69: VEIL – Discount History
Figure 70: VEIL - History of Share Repurchases / Treasury
10%
20
8%
10
6%
% Share Capital
% Discount(-) / Premium (+)
30
0
-10
-20
-30
2%
0%
-2%
-40
-4%
-50
-60
Dec-04
4%
-6%
2010
Dec-06
Dec-08
Dec-10
Dec-12
2011
Repurchase
Source: Morningstar, Numis Securities
Shareholder base is broadly
spread
2012
2013
2014*
Dec-14
Treasury Sale
Source: Company data
The fund’s shareholder base is largely institutional and is broadly spread geographically
across Europe, and US, with some investors in Asia. The UK represents only a small
part of the register and we believe that the fund’s Cayman domicile and OTC listing limit
its appeal with traditional buyers of listed funds.
Board
Susie Rippingall recently joined
the Board
The Board includes four independent directors, as well as Dominic Scriven, Dragon’s
CEO, and Farida Khambata, a senior representative of the IFC which holds a stake in
Dragon Capital. Susie Rippingall, former manager of Scottish Oriental Smaller
Companies at First State Stewart, joined the Board in July 2014, as did Gordon Lawson.
The other directors are Wolfgang Bertelsmeier (since 2009) and Derek Loh (since
2011).
Vietnam Growth Fund (VGF)
Historically VGF differentiated
from VEIL by its low Bank
exposure
VGF was launched in 2004 and has a similar structure to VEIL except that its
investment mandate is limited to listed and OTC securities, with no investments in
property or private equity. Historically, its portfolio has been broadly similar to VEIL’s,
although it has always had a much lower weighting in Banks (currently 4.1%).
Since 2010, VGF’s objective has been to outperform the Vietnam Index over a two year
period. It is focused on more liquid investments, but can invest in OTC stocks, including
SOE privatisations, that are expected to gain a full listing within 18 months.
Portfolio became dominated by
Vinamilk and Masan
With hindsight, Dragon Capital admits that VGF’s portfolio had become too
concentrated, with Vinamilk representing 28.8% of net assets at the start of 2014, while
Masan represented 15.4%. Vinamilk is still the largest holding, but no longer dominates
the portfolio with a weighting of 15.6%. The manager is currently looking to increase its
exposure to the real estate and infrastructure sectors.
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12 January 2015
Table 18: VGF - Largest Holdings as at 30 November 2014
%
Weight
Return
P/E
Net assets
in Index
2014 YtD
2014
2014
2015
P/BV
Yield
Dairy Products
15.6
10.0
(12.0)
16.6
(8.7)
14.7
5.1
3.4
MSN
Holding Company
12.9
6.4
(2.4)
73.3
69.9
166.8
3.9
-
PV Drilling
PVD
Oil & Gas Services
8.5
2.1
36.1
9.4
28.8
0.0
2.0
2.6
Hoa Phat Group
HPG
Manufacturing
8.5
2.7
49.7
7.5
74.8
2.6
2.5
5.6
FPT Corp
FPT
IT
5.7
1.7
27.7
10.5
(2.5)
13.9
2.2
4.2
CII
CII
Infrastructure
5.0
0.2
(2.1)
18.4
34.7
59.3
1.2
6.3
REE
REE
Refrigeration systems
4.8
0.8
(7.1)
7.9
(12.8)
(5.2)
1.3
5.8
PV Services
PVS
Oil & Gas Services
4.5
-
61.6
7.3
26.7
(7.2)
1.7
3.7
Vingroup
VIC
Real Estate
4.0
7.3
2.6
15.8
(37.7)
9.9
3.8
1.0
Casumina
CSM
Tyres and rubber
3.6
0.3
22.2
8.9
(7.2)
17.7
2.1
3.4
-
11.2
32.8
10.6
1.5
4.3
Company
Ticker
Industry
Vinamilk
VNM
Masan Group
EPS Growth
Other
29.1
Cash
1.6
-
-
-
-
-
-
-
VEIL
100.0
-
8.3
13.2
25.1
30.1
2.7
3.4
14.5
12.7
4.9
11.1
2.0
3.5
Vietnam Index *
* Valuations are for top 50 stocks representing 86% by value. Source: Dragon Capital
Fees
VGF has the same fee structure as VEIL, and the high watermark on its performance
fee is substantially under water ($56.43 versus an NAV of $22.10).
Performance
Mixed performance record relative
to Vietnam Index
Pre-financial crisis, VGF’s performance lagged behind VEIL and the market, partly due
to the lack of exposure to Banks. As with VEIL, its relative performance suffered in
2009, partly because of the exposure to Tiberon. From 2010-2013, the low weighting in
banks was positive and it also benefitted from strong performance of stocks such as
Vinamilk, FPT, and REE. In 2014, however, the exposure to Vinamilk and Masan has
been a drag on performance relative to the index.
160
20
120
10
80
40
0
-40
0
-10
-20
-30
-80
-40
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
NAV
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Vietnam Index
Source: Company & Numis Securities Research
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Figure 72: VGF - NAV Relative to Vietnam Index
% Relative Total Return
% Total Return
Figure 71: VGF - NAV Performance by Calendar Year
Source: Company & Numis Securities Research
Registered No 02285918. Authorised and Regulated by The Financial Conduct Authority. A Member of the London Stock Exchange
12 January 2015
Discount History
Regular liquidity gate was
abandoned in 2011
Ahead of a liquidation vote in April 2010, the Board of VGF made a commitment to offer
shareholders a liquidity gate in April and October each year, starting in October 2010.
This enabled shareholders to request redemption of up to 10% of their shareholding at
NAV less a redemption fee of 2.5% (with no mix and match facility). However, after the
second Liquidity Gate, the Board decided that the regular redemption facility did not
achieve its desired results of reducing discounts, and instead negatively affected
portfolio management. As a result, the Board suspended the Liquidity Gate, although it
has continued to buy-back shares on a periodic basis. VGF faces a continuation vote at
the AGM next year, which is likely to be held after the summer.
Figure 74: VGF - History of Share Repurchases/Redemptions
20
14%
10
12%
0
10%
% Share Capital
% Discount(-) / Premium (+)
Figure 73: VGF - Discount History
-10
-20
-30
-40
8%
6%
4%
2%
-50
0%
-60
Dec-04
2010
Dec-06
Dec-08
Dec-10
Dec-12
2011
2012
2013
2014*
Dec-14
Repurchase
Source: Morningstar, Numis Securities
Redemption
Source: Company data
A Comparison of VEIL and VGF
Shared resources, but sector
preferences vary
VEIL and VGF use the same research resources, and Investment Committee.
Unsurprisingly, therefore the funds are broadly similar in terms of their stock names and
sector biases. Both portfolios have been very concentrated, with substantial stakes in
Vinamilk and Masan (following the sale of Tiberon). Historically, VGF has had a higher
weighting in Consumer stocks (Vinamilk), with less exposure to Real Estate and Banks
(notably ACB). In addition, there are some differences in the portfolio reflecting the
preferences of the respective portfolio managers. For instance, Dien Vu (VEIL) has a
greater emphasis on growth, whereas Kien Hoang (VGF) has a stronger bias towards
cash rich companies. Kien came from an Oil & Gas background and has been more
comfortable holding PV Gas and energy services stocks. In addition, he has had greater
exposure to rubber/tyre companies such as Casumina.
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12 January 2015
20
18
16
14
12
10
8
6
4
2
0
Figure 76: Dragon Funds - Sectors relative to Vietnam Index
Weighting relative to Vietnam Index
% Net assets
Figure 75: Dragon Funds - Key Sector Weightings
VEIL
15
10
5
0
-5
-10
-15
VEIL
VGF
Source: Company data as at 30 Nov 2014
VGF
Source: Company data as at 30 Nov 2014
Marginal differences in
performance objectives
In 2010, both funds faced continuation votes and Dragon sought to create greater
differentiation, introducing clearer benchmarks for performance. VGF seeks to
outperform the Vietnam Index over a rolling two year period, whilst VEIL measures
performance over three years. In theory, this means that VGF pays closer attention to
trading liquidity, while VEIL aims to take longer term positions with less regard to the
composition of the benchmark. This is reflected in their respective risk controls: VGF
can invest up to 30% of net assets in a single sector and up to 8% in a single stock, at
the time of investment; for VEIL the equivalent limits are 40% and 12%, respectively.
VEIL has ability to buy less liquid
investments
VEIL also has a broader mandate which includes the ability to invest up to 25% in
Cambodia and Laos (although it has not made any investments in these markets todate). In addition, it can invest in private equity, although the managers currently have
no intention of doing so. Both funds can participate in pre-IPOs and will seek to
participate in SOE equitisations on a selected basis (they recently invested in Vinatex).
However, there is a minor difference in that the definition of a pre-IPO for VEIL is up to
24 months before listing, compared with 18 months for VGF.
A merger was previously
considered
In 2006, Dragon Capital considered the possibility of a merger between VGF and VEIL
due to the similarity of their investment mandates. At that time, however, VEIL’s
shareholders were unwilling to dilute their weighting in Banks. Today, this argument no
longer applies and the portfolios are more similar. As a result, we believe there is a
strong argument that shareholders would benefit from combining the two vehicles to
create a fund with net assets of almost $800m. In practice, though, we believe that this
is unlikely, partly because mergers tend to be difficult when both funds are trading at
discounts as some investors may seek to gain an exit at NAV.
Continuation vote in 2015 may
prove a trigger for VGF
One alternative, in our view, is that VGF could convert to an open-ended structure,
which may make it more attractive to new investors. Although the Board of VGF
abandoned its redemption facility in 2011, it may be easier to retain assets now given a
more favourable outlook for Vietnamese equities. It could be combined with Dragon’s
existing UCITS fund which is currently sub-scale with net assets of just $13m. As
highlighted above, VGF faces a liquidation vote next year and this is likely to be the
trigger for a review of its mandate and structure.
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12 January 2015
Vietnam Property Fund
VPF was launched on AIM in April 2008 to invest in Vietnamese real estate, and is
Dragon’s only dedicated property vehicle. It delisted from AIM in April 2013 after
struggling to attract investor demand, and is now traded solely on an OTC basis. VPF’s
share price of $0.525 represents a 33% discount to NAV.
VPF is too small to lead real estate
developments
The lead manager is Fraser Wilson, a Scotsman who was previously a property fund
manager with ING in the UK. He is based in HCM City and is supported by a team of
Vietnamese locals. The fund has a broad mandate that includes development, income
producing assets and listed real estate equities. However, its size ($65m net assets)
means that the portfolio has been too small to achieve a balanced allocation by sector.
Instead, the manager seeks to invest on an opportunistic deal-by-deal basis. In larger
projects, such as retail/mixed use, the large lot size restricts the fund to either coinvestments or a minority shareholding. However, the manager has been reluctant to
invest during weak markets and the fund has retained a significant weighting in cash.
More recently, the strategy has been to find distressed situations, such as projects
where the developer has run out of cash or lending to developers at high interest rates
backed by good security.
SSI sold on a deferred basis
Much of the manager’s focus has been on managing the existing investments. In
November 2013, VPF agreed to sell its 10% share in the SDI golf course project to a
Vietnamese buyer at a price of $20.699m. This represented a 20% premium to cost,
although the payment was deferred by four years until November 2017 (VPF has a
guarantee from a Vietnamese bank). Whilst SDI was well located in District 2 of HCMC,
the project was blighted by shareholder disputes and mounting debts. It is now shown
as a receivable within VPF’s portfolio, representing 24.9% of net assets (the future
payment is discounted at a rate of 9.8% pa). VPF has also been seeking to cut its
losses in the residential project, Saigon South Residences located in Nha Be District of
HCMC.
Figure 77: VPF - Portfolio by Asset Class
Other
OTC
0.8%
Equities
2.0%
Figure 78: VPF - Portfolio by Sector
Cash
7.0%
Private
Equities
36.8%
Listed
Equities
7.9%
Property
Equities
9.9%
Others
0.8%
Cash
7.0%
Receivables
24.9%
Loan
20.6%
Receivables
24.9%
Property
Projects
57.4%
Source: Company data as at 30 Nov 2014
Registered No 02285918. Authorised and Regulated by The Financial Conduct Authority. A Member of the London Stock Exchange
Source: Company data as at 30 Nov 2014
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Other Closed End Funds
DWS Vietnam
Multi-asset mandate
DWS Vietnam follows a multi-asset approach with investments in fixed Income, listed
equities, OTC stocks, private equity and closed-end funds. The fund is domiciled in the
Cayman Islands and listed on the Irish SE, though it trades in London on an OTC basis.
DWS has had a good performance record in recent years, helped by some profitable
exits from its private equity portfolio, but the fund is relatively illiquid, and we believe that
its fee structure is a major drawback.
Management
Manager based in Singapore
The fund’s investment manager is Deutsche AM (Asia), although since 30 April 2009 the
portfolio management has been delegated to Duxton AM. There was no material
change in the personnel responsible for the management of the company as the key
investment staff of Duxton AM spun out from Deutsche AM (Asia).
A specialist manager with a strong
focus on agriculture investments
Duxton manages or advises assets of $690m, of which $460 million comprises
agricultural investments including the DWS Global Agricultural Land & Opportunities
Fund ($89m net assets). The group is based in Singapore and regulated by the
Monetary Authority of Singapore, while it also has offices in Australia and Germany.
Duxton’s Founder and CIO is Desmond Sheehy who was formerly Head of Complex
Asset Investment at Deutsche AM and a Senior Investment Officer at the IFC. In total,
there is an investment team of twelve, covering both listed and private equity. PXP
Vietnam AM has been appointed by Duxton AM to manage a segregated portfolio
focused on listed equities in Vietnam.
Duxton has been investing in Vietnam since 2006, and seeks to invest in high conviction
portfolio built through a bottom-up process. It seeks to identify private companies with a
leading market share in their sector (top 3-5), targeting an IRR in excess of 20% with a
clear exit strategy within 3 to 5 years.
Fees and Management Contract
Six monthly performance fee with
no high watermark
The investment management fee is 1.7% of net assets. However, the fund has an
unusually generous performance fee calculated on the basis of performance in its subportfolios every six months, with no high watermark. The fee is based on 20% of
performance, subject to a hurdle return of 8% pa with full catch-up.
Ongoing charges ratio of 8.8% inc
performance fee
In 2013, the fund paid a performance fee $15.33m to DeAM Asia, of which $7.66m was
paid to Duxton. A further $1.05m was paid to PXP in respect of the performance of the
listed equity portfolio. As a result, the ongoing charges ratio, including the performance
fee, was 8.8% of average shareholders’ funds. The way the fee is calculated means that
performance incentives may be payable even if the NAV falls over the financial year.
This contrasts with other closed-end Vietnam funds that have high watermarks or are
required to outperform a compound hurdle return since launch.
10 year management contract
At launch in December 2006, the investment manager was appointed for a 10 year
term. This provides a “poison pill” against corporate action as the manager can only be
replaced without cause by paying 1.7% of the maximum historic NAV over the
remaining term plus an implied performance fee based on the average annual
performance fee over the previous three years, multiplied by the number of years
remaining.
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12 January 2015
Portfolio
High cash weighting following sale
of An Giang Plant Protection
The portfolio included 45 positions across all asset classes at the end of November
2014. There was a large weighting in cash of 8.4% of net assets in September following
the sale of a stake in An Giang Plant Protection, but much of this had been reinvested
by the end of November, with the cash weighting falling to 4.6%.
Primarily invested in listed
equities and funds
Around half of the portfolio is allocated to direct listed equities (including the segregated
mandate managed by PXP Vietnam AM). However, exposure to listed equities and the
diversification of the portfolio is increased by holding 18.5% of assets in closed-end
funds. These are principally VEIL (5.9%), VGF (5.1%) and PXP-managed funds, plus
5.9% in DWS Vietnam itself, which is accounted for as an asset rather than as a share
reduction. There is currently little exposure to Fixed Income securities (which
represented 23% of the portfolio at the start of 2009).
29% invested in private equity
29% of the portfolio is classified as Private Equity, although this definition includes OTC
stocks, PIPEs and listed stocks that were acquired as unlisted securities. The fund
seeks to take significant minority positions in unlisted companies, typically through
convertible structures with minority protection. Since June 2009, a quarterly valuation
review of the unquoted investments has been carried out by the fund manager, while
OTC-traded shares are valued at the average price obtained from three brokers.
Figure 79: DWS Vietnam - Portfolio by Asset Class
Fixed
Interest
0.4%
Figure 80: DWS Vietnam - Portfolio by Sector
Packaging
1.8%
Consumer
Disc
3.9%
Cash
4.6%
Funds
18.3%
Listed
Equities
48.0%
Chemicals Banks
1.8%
1.2%
Marine
1.0%
Other
Financials
0.8%
Industrals
0.5%
Pharma
4.3%
IT
7.1%
Food
Products
35.8%
Metals/
Mining
9.5%
Private
Equity
28.7%
Building
Materials
10.1%
Real Estate
10.8%
Private Equity includes PIPE investments.
Source: Company data as at 30 Nov 2014
Energy
Equip &
Services
11.4%
Source: Company data as at 30 Nov 2014
Unlisted animal feed company is
largest investment
The largest investment in the portfolio is GreenFeed Vietnam, a producer of animal
feed. DWS invested $9.5m for a 17.2% stake in May 2010 and this was valued at
$39.32m at the start of 2014. The valuation has risen further over the past year and the
quarterly revaluation at 30 September 2014 led to a 27% ($11.7m) increase in the value
to $55.2m (15% of net assets), mainly due to the increase in P/E multiple of comparable
companies. The animal feed industry in Vietnam is highly fragmented and Greenfield is
seeking to be a beneficiary of consolidation.
Steel producer
The second largest unquoted investment is Corbyns International, which represented
4.1% of net assets at 30 November 2014, equivalent to a value of $14.6m. DWS
invested $12.2m via a convertible loan in Corbyns in February 2013, for an indirect
stake of 24.4%. The company owns Vietnam Industrial Investments (VII), a leading steel
manufacturer listed on the Australian SE, primarily manufacturing wire rods and rebars
used in construction and infrastructure projects.
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Another unquoted investment is Anova Corporation, which represents c.3% of net
assets. DWS first invested in Anova in May 2011, and the company is the leading
manufacturer of veterinary health products in Vietnam. DWS has a fully diluted stake in
Anova of 20.5%. DWS also owns a 19.5% stake in VTC Online, an online games
publisher and social media company. It invested $10m in July 2012, and the holding
was valued at $10.64m at the start of 2014. The fund also owns 13.2% of An Phat
Plastic, the largest plastic recycler in North Vietnam, having invested a further $1.4m
via a recent rights issue. DWS first invested in An Phat in 2007 and the company listed
on the Hanoi stock exchange in 2010.
Table 19: DWS Vietnam - Largest Investments
Company
Listing/Ticker
Sector
%
Greenfeed
Unlisted
Animal feed
15.5
Vinamilk
VNM
Dairy
7.7
Hoa Phat Group
HPG
Manufacturing
6.3
VEIL
OTC traded
Closed-end fund
5.9
DWS Vietnam *
OTC traded
Closed-end fund
5.9
Vietnam Growth
OTC traded
Closed-end fund
5.1
PVD
Oil & Gas services
4.2
Unlisted
Steel products
4.1
FPT Corp
FPT
IT
3.9
PV Gas
GAS
Oil & Gas E&P
PV Drilling
Corbyns Int'l
3.1
Top 10
61.7
Source: Company data as at 30 Nov 2014
Performance and Discount History
DWS’ multi-asset approach means that the NAV should not be expected to move in line
with the Vietnam Index. After launch, the fund underperformed in a rising market in
2007, and in the recovery during 2009. However, it outperformed during weak markets
in 2011 and has kept pace with the benchmark since the start of 2012. Unlike VOF, the
performance of DWS Vietnam has not been held back by exposure to development real
estate.
Performance boosted by funds
and unlisted investments
Figure 81: DWS - NAV Performance by Calendar Year
Figure 82: DWS - NAV relative to Vietnam Index
60
15
10
40
% Relative Total Return
5
% Total Return
20
0
-20
-40
0
-5
-10
-15
-20
-25
-60
-30
-80
-35
2007
2008
2009
2010
2011
2012
NAV
Vietnam Index
2013
2014
Source: Morningstar, Numis Securities Research
80
80
2007
2008
2009
2010
2011
2012
2013
2014
Source: Morningstar, Numis Securities Research
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Performance in recent years has been helped by a tightening of discounts for closedend funds held in the portfolio, as well as uplifts in the valuation of private equity
investments. There have been a number of profitable exits from its unquoted/OTC
portfolio, notably:
Sold to Standard Chartered PE in
August 2013
● An Giang Plant Protection: DWS’s stake in this OTC-traded pesticide company
was sold in August 2014 to Standard Chartered PE. DWS received $29m,
representing a 1.7x multiple and an IRR of 19.8% from the acquisition in September
2009, a period when the Vietnam Index declined by 13.5% in US$ terms.
● Prime Group: In April 2013, sold its stake in Prime, a ceramic tile manufacturer, to
SCG Building Material Co, for $31.5m, 84% above carrying value, and representing
a 1.6x multiple and an IRR of 11%.
Hospital operator
● Hoan My Corporation: In December 2011, DWS sold a 17.5% stake in Hoan My to
Fortis Healthcare, a leading private healthcare provider in Vietnam, for an exit
valuation of $98.5m representing a 94% valuation uplift (the fund retained a 4.9%
stake, subject to put and call options). Allowing for an unrealised value of $5.78m at
the start of 2014, DWS made a 2.4x multiple and a 39% IRR on its investment made
in September 2009 (we understand that the fund’s residual position has
subsequently been realised).
Interestingly, all three of these investments were shared with VOF.
Discount History
Typically traded on a wider
discount than the peers
DWS has typically traded on a wider discount than its peers. In our view this reflects a
lack of marketing, uncertainty over private equity valuations, relatively illiquid trading
and the fee structure. However, the discount has narrowed significantly over the past
two years from 50% to 29%, helped by strong NAV performance and improving investor
sentiment. The fund produces a monthly factsheet, available through the company’s
website (www.dwsvietnamfund.com). The fund repurchased shares on a periodic basis
from November 2008, but has not made any buy-backs in the past three years. We
believe there could be pressure for the fund to open-end when it reaches the end of its
initial 10 year life in 2016, although the exposure to unlisted investments may make this
complicated.
British Empire Securities holds
12% stake
We believe that the fund’s shares are held primarily by private banks in Singapore,
Korea, Thailand and Europe. However, some UK investors have acquired positions on
wide discounts, including British Empire Securities, an investment trust managed by
Asset Value Investors, which holds a stake of 12.2% in DWS Vietnam.
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Figure 83: DWS Vietnam - Price and NAV History
Figure 84: DWS Vietnam - Discount History
1.40
40
1.20
% Discount(-) / Premium (+)
20
US$ per Share
1.00
0.80
0.60
0.40
0.20
0.00
Dec-06
Dec-08
Dec-10
NAV
Dec-12
Dec-14
Price
Source: Numis Securities Research, Morningstar
0
-20
-40
-60
-80
Dec-06
Dec-08
Dec-10
Dec-12
Dec-14
Source: Numis Securities Research, Morningstar
PXP Vietnam
Moved listed to London SE in 2010
PXP Vietnam is a Cayman domiciled fund which was launched in 2003. In April 2010 it
moved its listing to the London SE, having previously been an Irish-listed, OTC-traded
fund. It is managed by Kevin Snowball, based in Ho Chi Minh City, and is solely focused
on listed stocks in Vietnam. It has a good track record, but its small size ($78m market
cap) and trading liquidity ($342,000 per day) remained a drawback.
Merger with VEEF
To open-end in early 2015
As discussed earlier in this report, the fund is to delist at the end of January 2015 and
will merge with Vietnam Emerging Equity Fund (VEEF), an equivalent open-ended fund
run by the same management team. After the merger, former PXP Vietnam
shareholders will be able to redeem their VEEF shares at NAV minus a 3% redemption
fee as of 1 April 2015 (subject to notice being given by 10 February), with monthly
redemption thereafter (the redemption fee is payable to the fund and reduces to 1%
after 12 months).
Same approach and similar
portfolios
PXP Vietnam and VEEF adopt the same fundamentally driven, stock-picking approach
and they have very similar portfolios, with eight stocks featuring in the top 10 holdings of
both funds. VEEF has a lower weight in Vinamilk (16.5% vs 20.8%), but has fewer
quoted investments (29 vs 41) and its top 10 represents 80% of the portfolio (versus
75%). PXP Vietnam has one unquoted investment representing 0.2% of assets,
whereas VEEF has three unquoteds representing 1.5%.
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Table 20: PXP and VEEF - Comparison of Largest Holdings
Company
PXP Vietnam
VEEF
20.8
16.5
HCMC Securities
9.3
12.4
Hoa Phat Group
8.5
13.0
REE
6.8
n/a
PV Drilling
6.4
7.9
Sacombank
6.3
6.9
FPT Corp
5.2
8.5
Danang Rubber
4.8
3.5
HAGL
4.2
4.8
VN Container Shipping
2.9
n/a
Dong Phu Rubber
n/a
3.6
Military Bank
n/a
2.8
75.2
79.9
Vinamilk
Top 10
Source: Company data as at 31 Oct 2014 for PXP Vietnam, 30 Sep 2014 for VEEF
Formed through open-ending of
CEF
VEEF ($42m assets) was originally established as an Irish-listed, Cayman Islands
domiciled closed-end fund, but delisted in December 2008. In January 2010, it
converted to a Mutual Fund, and in December 2010 it was merged with the Vietnam
Lotus Fund.
Fees
VEEF charges a performance fee
PXP Vietnam currently has a management fee of 2% pa of net assets, but is
differentiated from its peers by having no performance related fee. VEEF previously had
a management fee of 2% pa, plus a performance fee of 20% of returns over an 8% pa
hurdle, subject to a high watermark. However, the fees were reduced to 1.5% plus 15%
of returns (with the hurdle and high water mark unchanged) with effect from 1 January
2015.
Performance Record
Outperformance in strong markets
PXP Vietnam has performed strongly in recent years, with an NAV return of 100% from
2012-2014, versus a rise of 72% in the Vietnam Index in US$ (total return). The chart of
relative performance suggests that Kevin Snowball’s approach has tended to perform
best in strong markets. VEEF’s performance has been similar to PXP Vietnam’s in
recent years, although it has lagged behind as a result of dilution from the performance
fee.
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Figure 85: PXP - NAV Performance by Calendar Year
Figure 86: PXP - NAV relative to Vietnam Index
160
30
25
% Relative Total Return
120
% Total Return
80
40
0
20
15
10
5
0
-5
-40
-10
-80
-15
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
NAV
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Vietnam Index
Source: Morningstar, Numis Securities Research
Source: Morningstar, Numis Securities Research
Discount History
PXP Vietnam’s discount was 13% in September 2014 before the Board first announced
that it was considering open-ending the fund. It has since narrowed to 4%, although
gains to shareholders have been eroded by weak markets during this period.
Discount has narrowed sharply
Figure 87: PXP Vietnam - Price and NAV History
Figure 88: PXP Vietnam - Discount History
30
10
20
% Discount(-) / Premium (+)
12
US$ per Share
8
6
4
2
0
Dec-04
10
0
-10
-20
-30
-40
-50
Dec-06
Dec-08
Dec-10
NAV
Dec-12
Dec-14
Price
Source: Numis Securities Research, Morningstar
-60
Dec-04
Dec-06
Dec-08
Dec-10
Dec-12
Dec-14
Source: Numis Securities Research, Morningstar
Better placed to retain assets than
Vietnam Infrastructure
In our view, PXP Vietnam is better place to retain assets than Vietnam Infrastructure’s
listed portfolio following open-ending. This is because there is no change in mandate
and because of the nature of the shareholder base, with far fewer value investors on the
register. It will be interesting to see, however, whether PXP can turn the fund into a
platform for future growth in assets. In our view, the Cayman domicile and monthly
dealing are still drawbacks for many investors.
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Vietnam Holding
Vietnam Holding (VNH) was launched in June 2006 with the aim of exploiting SOE
privatisations. However, it now invests primarily in listed equities with an ESG
(environmental, social and corporate governance) overlay. The fund is domiciled in the
Cayman Islands and listed on AIM and the Entry Standard of the Frankfurt SE. The
fund’s size was increased in 2013 through the issue of short dated warrants, but it
remains relatively small, with net assets of $128m. Performance has been strong in
recent years, helped by an allocation to mid-caps, but the fees are high, in our view,
with the high watermark on the performance fee having been rebased in 2013.
ESG Mandate
ESG mandate adopted in late 2009
In November 2009, shareholders approved a change in investment policy to incorporate
ESG (environmental, social and corporate governance) factors into the fund’s
investment analysis and portfolio management. The fund is not limited to building an
ESG sensitive portfolio, but some companies may be excluded from the universe for
ESG reasons. In addition, VNH seeks to work with its portfolio companies to expand
and improve their management and disclosure of ESG issues. The ESG mandate
differentiates VNH and makes it more attractive to SRI sensitive investors, including
pension funds, family offices and charitable foundations.
Management
VNH is managed by Vietnam Holding AM (VNHAM) which is based in HCMC, with an
office in Zurich (www.vnham.com). Since April 2013, the group has also acted as
investment adviser to CBR, the manager of Lumen Vietnam Fund, a Liechtenstein
UCITS 4 open-ended fund with assets of c.$22m.
Seeking to recruit a new CEO
VNH has undergone significant changes in management since launch, with a
succession of lead managers. Mr Vu Quang Thinh, who had been the CEO of VNHAM
since mid-2011, had resigned for personal reasons with effect from 1 January 2014. In
mid-March, Mr Pham Ngoc Bich, formerly of Saigon Securities, was appointed as CEO
in his place, but he has since departed. As a result, Mr Vu Quang Thinh has remained in
charge of stock selection, and on 6 January 2015, the company announced that he
would move back to a permanent role as CEO.
Jean-Christophe Ganz is Chairman of VNHAM and Head of the Investment Committee.
In addition, there is an advisory council of five experienced individuals, including Juerg
Vontobel (founder of VNHAM) and Markus Winkler (a Swiss-based investment adviser,
heavily involved in Vietnamese funds). At the same time,
The Board of VNH consists of three independent directors and is chaired by Min Hwa
Hu Kupfer, former President of GE Capital in China. Board approval is required for any
investments exceeding 4% of NAV or sales where VNH holds 4% or more of a
company’s share capital.
Fees
High watermark for performance
fee rebased in 2013
At the AGM in September 2013, shareholders agreed to extend VNH’s life until at least
2016. In addition, a new fee structure was agreed with the base fee of 2.0% of net
assets reduced to 1.75% for assets over $100m and to 1.5% over $150m. The
performance fee was reduced from 20% to 15% of NAV outperformance of a hurdle of
5% pa, with an annual cap of 3% of NAV. In return, the high watermark for 30 June
2014 was reset at 8% over the NAV per share as at 30 September 2013.
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Ongoing charges ratio of 4.1% inc.
performance fee
VNH’s ongoing charges ratio was 3.2% of average shareholders’ funds during the
financial year to June 2014, or 4.1% including the performance fee of $0.95m. A third of
the incentive fee is donated to the VNH Foundation, and 15% of the remainder is paid in
shares from treasury (VNHAM received 63,499 shares in relation to the last financial
year). In addition, the managers committed to utilise a further 35% of their performance
fee to purchase VNH shares in the market.
Portfolio
In addition to the ESG overlay, VNHAM describes its investment approach as being
value-oriented, influenced by long-term growth megatrends. It seeks to adopt “dynamic
portfolio management”, with a conviction portfolio, including mid-cap stocks ($25-75m
market cap) with superior earning growth potential.
Core themes have provided
framework for portfolio
In recent years, there have been two key themes within the portfolio: Agriculture and
Domestic Consumption, although a third theme of Urbanisation was identified at the
start of 2014. From mid-2013 to mid-2014, the fund’s exposure to Agriculture was
reduced significantly to 14% from 30%, with sales of rubber producers and a stake in An
Giang Plant Protection, an OTC stock, partly for ESG reasons. In contrast, the weighting
in the Urbanisation theme increased to 26% from 14% over this period helped by strong
performance of stocks such as real estate developers. Real estate stocks in the portfolio
include Becamex (IJC), NBB and Ha Do (HDG).
As at 30 November 2014, the portfolio was invested in 23 stocks, with a median market
cap of $140m, and a historic PE of 10.9x versus 12.8x for the company’s benchmark,
the VNAS index.
Table 21: VNH - Largest Investments
Company
Ticker
Industry
Hoa Phat Group
HPG
Manufacturing
Market Cap ($m)
% NAV
1,194
Hau Giang Pharma
DHG
8.5
Pharma
391
Traphaco
8.1
TRA
Pharma
84
5.9
Thien Long Group
TLG
Office Supplies
66
5.9
Binh Minh Plastic
BMP
Plastic Pipes
155
5.8
Viconship
VSC
Marine Transport
81
5.7
Vinamilk
VNM
Dairy Products
4,468
5.5
PV Drilling
PVD
Oil-Field Services
914
5.3
Danang Rubber
DRL
Hydro-Electric Power
16
4.9
Phu Nhuan Jewelry
PNJ
Retail-Jewelry
Top 10
141
4.8
60.5
Source: Company data, Bloomberg as at 30 Nov 2014
Performance
VNAS adopted as benchmark in
2014
VNH has adopted the Vietnam All Share Index (VNAS) as its benchmark, as it is free
float adjusted index of stocks listed on the HOSE, and excludes stocks with a free float
under 5%, including PV Gas. It also caps the maximum stock weighting at 10%
(significantly reducing the weighting of Vinamilk) and excludes stocks that do not meet
specified trading liquidity criteria. The VNAS was launched on 27 January 2014, and
whilst we can see the merits of the index, we continue to use the Vietnam Index for
performance comparisons as this remains the most widely accepted stockmarket index
within Vietnam. During 2014, the VNAS delivered a capital return of 7.9% in US$ terms
versus an equivalent return of 6.6% for the Vietnam Index.
Good track record, helped by midcap bias
VNH has had a good track record in recent years against the Vietnam Index. Over the
past three years, the NAV is up 87% (23.3% pa) versus 72% (19.9% pa) for the index,
helped by exposure to mid-caps. Furthermore, a reduction in exposure to Vinamilk in
early 2014 proved well timed, and VNH benefitted from a foreign premium of c.10%.
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Figure 89: VNH - NAV Performance by Calendar Year
Figure 90: VNH - NAV relative to Vietnam Index
15
40
10
% Relative Total Retun
60
% Total Return
20
0
-20
-40
5
0
-5
-10
-60
-80
-15
2007
2008
2009
2010
VNH NAV
2011
2012
2013
2014
2007
2008
2009
2010
2011
2012
2013
2014
Vietnam Index
Source: Morningstar, Numis Securities Research
Source: Morningstar, Numis Securities Research
Discount History
Active investor relations
programme has helped to narrow
discount
The shareholder register is primarily made up of Swiss banks, although there are also
UK and German investors on the register. VNH has had an active investor relations
programme in recent years, and has attracted some attention as a result of its strong
recent performance. We believe that the warrant exercise created some overhang in
late 2013, but the discount has narrowed to 20% from 26% at the start of 2013.
According to Bloomberg, the shares had an average daily trading value of $214,000
during 2014.
Figure 91: VNH - Price and NAV History
Figure 92: VNH - Discount History
40
2.5
20
% Discount(-) / Premium (+)
3.0
US$ per Share
2.0
1.5
1.0
0.5
0.0
Jun-06
Jun-08
Jun-10
NAV
Jun-12
Jun-14
Price
0
-20
-40
-60
-80
Jun-06
Jun-08
Source: Numis Securities Research, Morningstar
Active buy-back programme
Jun-10
Jun-12
Jun-14
Source: Numis Securities Research, Morningstar
The Board remains mindful of the discount and has adopted an active Share
Repurchase Programme, with a target that the 52-week average discount should be at
least 5% lower than the weighted average of its peer group of funds focused on listed
equities in Vietnam (albeit that the peer group is shrinking as a result of the open-ending
of PXP Vietnam and Vietnam Equity Holding). During 2014, VNH repurchased 2.91m
shares, equivalent to 4.6% of its share capital, at a cost of $4.66m.
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Figure 93: VNH - Buy-backs and Warrant Exercise
Buy backs / Issuance ('000 shares)
14,000
12,000
10,000
8,000
6,000
4,000
2,000
0
-2,000
-4,000
Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
2010
2011
2012
Buy backs
2013
2014
Warrant Exercise
Source: Company & Numis Securities Research
Warrant Issue
Warrants issued on a one-for-three
basis
At the end of May 2012, Vietnam Holding (VNH) issued bonus warrants to shareholders.
These were unusual because they were issued on a one-for-three basis (which is
permitted on AIM), and because they had an extremely short life of little more than six
months to 13 December 2012. At the time, the exercise price of $1.196 represented a
10.2% premium to the share price. The Board expected that Vietnamese stock markets
would recover in H2 2012, and the warrants would be exercised in December. However,
markets weakened and the warrants were under water. As a result, VNH gained
shareholder approval to extend the life of the warrants, with two additional exercise
dates, on 25 April 2013 and 25 September 2013 (the exercise price was unchanged).
The warrants were listed on AIM, but had little value and minimal trading liquidity.
Effectively a deferred rights issue
at a discount
The warrant issue represented a way of raising capital whilst trading on a discount,
albeit on a deferred basis (effectively it was a disguised dilutive rights issue). In total,
12.96m shares were issued, mostly in September 2013, raising $15.5m. This dilution
reduced NAV returns for 2013 to 32% from 42% (VNH adjusts its historic performance
numbers for this dilution, although this is not industry standard practice).
It can be argued that warrants offer the potential to improve the trading liquidity of the
Ordinary shares. However, they also tend to lead to an overhang of stock when
exercised and potentially dilute NAV returns. We can understand the need for a very
small fund to grow its assets, and the warrants have helped to more than offset
shrinkage as a result of VNH’s buy-back programme. However, we do not believe that
dilutive issuance via short-dated warrants is a route that should be followed by other
Vietnam closed-ended funds.
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the date of original publication of this document.
The research analyst who prepared this research report also certifies that no part
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Market Making
As at the date of this research report, Numis and/or one or more of its affiliates
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This Numis Securities Limited ("Numis") research report is for distribution only under
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The following disclosures are addressed to non-US-based
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Sector Notes (mentioning 6 or more companies)
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prices and recommendations) which has already been published by us (see
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Ratings Key
Our aim is to identify funds where the share price will outperform the benchmark
on a risk adjusted total return basis. This may be through either a narrowing of the
discount or outperformance of the underlying portfolio. Funds are categorised as
either Core Recommendations or Trading Opportunities and are assigned a rating
of Buy or Sell.
Through the Core Recommendations we seek to identify buying opportunities
for investors in each asset class. Our time frame for Core Recommendations is
12-18 months. Core Recommendations will take into account valuation, but will
place a greater emphasis on the quality of management, performance record and
risk characteristics (including portfolio diversification, gearing and any outstanding
commitments).
Trading Opportunities are typically based on a shorter time frame of 3-6 months and
our views regarding these may change in a relatively short space of time depending
on movements in the premium/discount. These may include Buys and Sells, as
well as switching opportunities between funds with similar investment mandates.
When identifying Trading Opportunities, we tend to place a significant emphasis
on valuation, typically by assessing the upside and downside to the discount/
premium to net asset value based on a combination of historic trading ranges and
peer group averages. Where appropriate we will also take account of discount
control mechanisms (e.g. share buyback policies) or potential corporate action (e.g.
forthcoming continuation votes). Generally a Buy/Sell rating will be categorised by
expected out/under performance of at least 5% on an absolute or relative basis.
When making recommendations we take account of trading liquidity and, all things
being equal, favour the larger and more liquid funds within an asset class. When
any changes are made to the recommendations we will seek to explain the specific
reasons for including/excluding each fund.
For investment companies with Equity mandates we typically focus on the outlook
for relative, rather than absolute share price performance. For instance, we may
recommend a fund investing in Japan because we believe it will outperform the TSE
1st Section, but this does not necessarily mean that we favour the Japanese market.
For some funds there may be no appropriate benchmark or the target may be to
achieve absolute returns (e.g. Hedge Funds). We may still recommend such funds
as long as we believe they can add value on a risk adjusted basis allowing for the
nature of their structure (e.g. gearing) and the volatility of their asset class.
Distribution of Ratings
Follow this link http://www.numiscorp.com/x/ic-regulatory.html for the 12 month
historic rating.
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