Sunday, June 5, 2016

Vietnam Opportunity Fund April monthly update

Link:

As at 30 April 2016, VOF’s net asset value was USD747.0 million, or USD3.53 per share, representing a 3.3% increase from the net asset value of USD3.42 per share at 31 March 2016. April was one of the best months for the market in nearly a year, with the VN Index up over six percent. The capital markets component of VOF’s portfolio gained 5.5%, while the MSCI Asia ex-Japan Index and MSCI Emerging Markets Index decreased by 1.0% and 0.4% respectively.

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For foreign investors, the focus in the near term will be on VNM. Not only did the company recently post very strong first quarter results, with revenue and profit increasing 18% and 38% respectively, but in a note sent to shareholders dated 16 May 2016, the company officially announced its intentions to completely remove its foreign ownership limit (FOL). This a significant event not just for VOF, whose holding in VNM represents 15% of the fund’s NAV, but also for the market as a whole, as VNM is the largest component of the VN Index and one of the country’s strongest and most recognisable brands. VNM will become the first state-owned enterprise of real significance to fully remove its FOL, and in our view could be the impetus needed to build momentum in foreign ownership expansion and privatisation in Vietnam.

The developing news around Vinamilk possibly lifting its foreign ownership limits will be a gigantic catalyst for the Vietnamese stock market. There is actually quite a bit of money that wants to flow into the country but it is being held back due to these foreign ownership limits. The government realized this and changed the law last year. 

In June 2015 the Vietnamese government released the long-anticipated decree 60, which declared Vietnam ready to open its equity markets to full foreign participation after a decade of being restricted to 49% across most sectors. Investors excitedly turned their attention to the capital markets, Bloomberg called, and the VN index rallied as retail investors started front-running the expected influx of foreign capital. 

This excitement was short-lived, however, as many of the details were vague about how and when the changes under decree 60 would be implemented. Eventually, the government clarified that companies are responsible for setting their own limits. Thus far, only brokerage firm Saigon Securities Incorporation has lifted its foreign ownership cap (to 100%). Five months after decree 60 was issued, it appears that a unique mix of economic momentum and fiscal challenges could spur Vietnam to start jogging, rather than walking, along the road to privatisation and a more fully functioning capital market. 

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In October, the Vietnamese government announced its intention to reduce its holdings in several companies, including Vinamilk and Binh Minh Plastics, which currently trade at the foreign ownership limit. If the government is to realise full value for its holdings, then it must invite international investors to the table, and to do that, these companies must lift their foreign ownership limits (Vinamilk has already asked for government approval of 100% foreign ownership). 

These companies will serve as change agents, and other companies are likely to follow suit once the uncertainties of removing foreign ownership limits are overcome. This will be a gradual process but could mark the start of the market re-rating investors have long sought. 

The sale of non-core commercial assets is the right move to raise additional funds. The government does not need to be in many of the sectors currently dominated by SOEs, and the proceeds from the sales can be better invested in areas such as infrastructure, where the economic gains are significant. 

The process is happening albeit slower than I would like to see. The upshot is that an investment in VOF means you are buying $3.53 of assets for $2.79 a 21% discount. Plus you have the wind to your back with the economy in Vietnam growing over 6% and the catalyst of increased privatisations and removal of foreign ownership limits. The forsting on the cake is you have the managers of the fund opportunistically buying back shares to lower the discount to NAV.  This looks like it could turn out rather well over the next couple of years.

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