May 26, 2016 – The talented tenor crooning “You light Up My Life” at the Karaoke restaurant in Saigon exited the stage beaming.
The singer, who was also the CEO of a successful business in the city, pushed the list of songs toward me. “Your turn,” he said, smiling.
I demurred, and attempted to redirect the conversation to business operations in the country, which was the purpose of my trip. He ignored my “pivot” and pointed to several options, from KC and the Sunshine Band to Taylor Swift, urging me to “pick one.”
I again declined, and he again insisted. His smile broadened, indicating not happiness, but confusion, a Vietnamese cultural response that often confounds American visitors to the country.
It was clear that in this Karaoke-adoring society, refusal to participate was perplexing.
It was only after our translator graciously thanked the CEO while explaining that my off-key singing meant that doing Karaoke would embarrass not only me but also my entire family, did my host suddenly shift to discussing the to-die-for Bánh Xèo – Vietnamese Crepes – on the menu.
Just as the evening was careening toward something resembling an Anthony Bordain episode rather than a business meeting, my host leaned over and confided in English, “You know. Vietnam today is not that napalm-bombed rice paddy so many Americans associate with our country.” He again smiled, this time genuinely, “Vietnam is a thriving, economically advanced country, and we are moving forward very, very fast.”
My host winked and pointed to the notepad next to my dinner plate, “Tell your clients this: if they wait to long, they will be outside looking in, stuck out there, and they will be sorry.”
Vietnam is an ancient country that has undergone tremendous growing pains over the last 100 years. Today, Saigon/Ho Chi Minh City is a teeming metropolis bursting with potential. It is a country of hard-working laborers and innovative entrepreneurs “who are mostly honest,” says my host.
Although the country remains under a Communist government, it is opening politically and socially and, most obviously, economically. The country is skitting along the path paved by China, trying to expand its economy while operating under a Communist regime. Foreign investment is actively courted by government officials, and underneath the top level of Communism, a free market economy is flourishing.
How flourishing, you ask? GDP is growing at about 6.6% a year, it is poised to be the fastest growing economy in Southeast Asia, it will benefit significantly from the Trans-Pacific Partnership. Additionally, it has a young population, very low labor costs, and is experiencing a manufacturing explosion. Stir in exploding domestic demand and improved credit conditions, and voila, you have a Communist-controlled free market economy wooing foreign investors.
Confusing, yes; contradictory, yes; ripe for investors; yes.
A quick word of warning, however. This is still a very young stock market with quirks that can make it daunting for the weak of heart. The market has crashed twice since 2000 when it was established, and there are a relatively small number of domestic investors. By lifting the 49% limit of foreign investment limits, the government has attracted non-Vietnamese into the markets, but the number is still comparatively low.
Corruption and lack of transparency are also hallmarks of the system, which can make investing difficult at times.
There is also the pesky problem of a Communist government. While it wants foreign investors, and is moving toward opening the markets (and the economy) even further, it does tend to stick its socialist fingers into companies whenever it decides it wants to. This, obviously, can skew things fairly dramatically.
But with a little analysis and research, investors will find Vietnam a great place for foreign investment dollars. You might not want an all-Vietnam portfolio, but now is definitely the time to start wading into this particular Southeast Asian paddy.
Party Congress Reaffirms Economic Emphasis
All eyes were on the Vietnam Communist Party’s 12th National Congress in January, watching whether the ruling Communist Party would continue its path of economic progress or whether it would slide backward.
When current General Secretary Nguyen Phu Trong was re-named to the position over Prime Minster Nguyen Tan Dung, many foreigners saw it as a negative. Dung is known as a reformer, both economically and politically, while Trong is more cautious and tends to support government control of the economy. Trong is also suspicious of foreigners and considered less likely to invite in foreign investors.
The power struggle received significant headlines and warnings that a Trong administration would hurt the economy while Dung would institute massive liberalization policies.
In fact, neither is completely true. Vietnam remains ruled by the Communist Party, with individuals only variations of a theme. Neither individual is likely to have any immediate, massive impact on the economy, and decisions will still be made by the Party.
Trong’s re-appointment signals steady adherence to the current path. It means the Party is going to continue moving forward, albeit cautiously. The Vietnam ruling party – much like China’s government – recognizes that it needs to continue to deliver economic well-being to avoid political upheaval, and it will deliver on that promise. Enhanced openings are not likely in the near term, but neither are roll-backs of liberalization policies.
The Congress also signaled that the Party plans to step-up efforts to protect its sovereignty, particularly when it comes to China and the South China Sea. This is likely to translate into expanded relations with countries other than China and an effort to diversify its foreign ties.
For investors, this suggests the much-needed structural changes may happen, but they are not likely to take place immediately. International investors are now more welcome, but the business environment will remain somewhat challenging. Likewise, the government is not yet comfortable with complete competitiveness, and will keep its finger firmly on the pulse of the economy.
Vietnam will continue along its positive economic path, but it is not going to rev ahead at the speed it could reach under a more open government.
The momentum, however, is going to keep pushing the economy forward.
Options for Foreign Investors
My host in Vietnam is right: This is a fantastic time for foreigners to invest in Vietnam. Yes, there are still problems and yes there is still risk, but there are also real opportunities in this Southeast Asian market.
Two overwhelming trends here are real estate and the rise of the consumer.
Vietnam’s real estate market has literally exploded. Over the last year, the number of successful property transactions has doubled, and unsold inventory is reaching record lows. New construction is up 174% from last year, and prices are climbing quickly.
“You want to know how fast the real estate market is growing? Just look around,” said one real estate investor in Vietnam. “Vietnamese, foreigners…everyone is buying. We are even building some of the tallest buildings in the world!”
All types of real estate are benefiting, from commercial to industrial to residential. Construction firms are benefitting from positive changes in credit, and property developers are buying and developing prime sites as soon as they get on the market.
But not all Vietnam’s real estate stocks are created equal. Management, access to capital, and a strong stable of properties are critical when evaluating where to put your foreign dollars.
My top pick in the real estate sector is property developer Vingroup JSC. Vingroup is the largest real estate developer in the country and is extremely well-positioned for future growth. It is involved in all types of property, and focuses on the much sought-after luxury portion of the market. Their recent foray into retail properties has proven as successful as their residential and commercial properties, although they are entering that space cautiously.
Vingroup is the only property developer in Vietnam that consistently purchases large, highly sought after sites. Previously, only government-backed companies had that kind of success. According to sources inside Vietnam, Vingroup “carefully cultivates” government relations to ensure that it continues to succeed. The company is also lauded throughout the industry for its construction techniques, which are state of the art. This ensures high quality construction at a pace faster than its competitors in the market.
Don’t be dissuaded by the 10% revenue decline the company faced last year. This was due to delayed delivery of units to clients in fourth quarter 2015 and the entry into the retail sector. However, 2016 is setting up as a fantastic year, with guidance of 117% increase in revenue. The stock trades at a 21% discount to net asset value.
The other galloping sector in Vietnam is all things consumer. With the expanding economy, Vietnamese are buying, traveling, and, well, consuming at record paces. This means that everything from clothing to taxis, restaurants to jewelry is gaining and growing. It also means new entries are constantly bombarding the market in hopes of capitalizing (no pun intended) on the spending exuberance.
While there are numerous stocks to choose from here, my favorite is Vinamilk, The Viet Name Dairy Products Joint Stock Company. I saw Vinamilk’s yellow stickers everywhere in Vietnam, on yogurt and other dairy products, which are fast becoming a staple in the diet of the increasingly wealthy Vietnamese population.
The company also got a huge boost in February when it won a contract to export powdered milk to Dubai for Gulfood 2016, expanding its international presence to Africa and the Middle East, and is likely to translate into still more international sales. The company is already in 42 markets around the world, and this will boost it’s exports even further – that’s hard to do, considering the company had an 800% increase in exports last year.
Vinamilk also bought back more than 400,000 shares early this year, and recorded a 28.5% increase in overall revenue.
As an added bonus, Vinamilk maintains strict accounting practices, which can slide in other Vietnamese companies. One accounting source noted that the company has always maintained an eye toward the international market, and has placed extremely tight corporate governance practices in place to make sure foreign investors are comfortable with the company.
Management is recognized as exceptional by fund managers and analysts around the world, for operating practices and for vision.
Oh, and since it started selling shares in 2005, investors have increased their investment by 22 times.
Because the government owns 45% of the company, it has what you might call a vested interest in its success. Sources report that this helps position Vinamilk for even greater future success.
Move now or forever hold your peace…
Some investors are still hesitant to enter Vietnam, thanks to vague laws and a quickly changing landscape. They prefer the steady slow growth of US and Europe, whose volatility at least usually falls within a certain acceptable range.
However, investors interested in Vietnam may need to move quickly. Foreign ownership of most of Vietnam’s companies is still capped, and with investors swarming into the best of Vietnam’s stocks, opportunities could fail. Foreign ownership Vingroup, for example, is capped at 29% of outstanding shares, and just over half of that is already met.
If you aren’t prepared to take advantage of this opportunity now, you are likely to miss the proverbial boat.