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233. Bull, Bear & Beyond – Vantage: VietNam Holding’s 20th anniversary and Vietnam’s reform-driven future
17 Plays4 days ago
In this Vantage interview, Edison's Neil Shah speaks with Craig Martin, chairman of Dynam Capital, who looks back at the 20-year history of VietNam Holding, an investment company that pursues an all-cap, high-conviction, valuation-aware strategy focused on Vietnamese equities. He explains the Vietnamese government’s capitalist mindset and how its drive towards domestic reforms are illustrated by its new agenda, which some compare to the Doi Moi reforms in the 1980s. He then discusses the impact of Vietnam’s upgrade to a secondary emerging market by FTSE Russell and the prospects for a similar upgrade by MSCI, as well as a potential upgrade of Vietnam’s sovereign credit rating to investment grade. Finally, he also looks at how the Vietnamese economy is dealing with the impact of the war in the Middle East.
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Transcript
Introduction to Vietnam's Economic Focus
00:00:06
Speaker
Welcome back to Vantage. Now, Vietnam has been a focus for us. You would have seen our thematics on this subject. Our very own Milos Pap was recently quoted in the Investors Chronicle in terms of how to get exposure to ah to the country.
00:00:20
Speaker
I am delighted to welcome back an old friend to the Vantage cameras.
Vietnam Holdings: 20 Years of Growth
00:00:25
Speaker
ah Craig Martin, welcome back to Vantage. It's a real pleasure to be back here, Neil. ah Now, you have recently celebrated Vietnam Holdings 20th anniversary. um I'd love to understand how you'd summarise the company's achievements since its inception.
Vietnam's Economic Growth and Investment Strategies
00:00:41
Speaker
Well, I think it's just keeping up with the tremendous trajectory of Vietnam itself. yeah right If you look back over 20 years, how the economy has grown so rapidly by multiples, I'd say the one thing that's really interesting is how the domestic consumer has changed.
00:00:57
Speaker
And as an investor, that's really exciting as well. And the rise in domestic consumerism, um it's really like a you know rocket that fires in different stages. Back in maybe 20 years ago, per capita GDP was between one and maybe $2,000 per head. And you started to see people consuming brands and spending more money.
00:01:19
Speaker
Now that per capita GDP is north of $5,000. And so there's another consumer spend surge, and that's seeing tremendous opportunities around modern trade and the penetration of modern trade. And then who knows in the next 10 years when the final phases of that rocket trajectory take off. So I think the last 20 years has been keeping up and catching up with Vietnam's fundamental growth.
00:01:46
Speaker
It hasn't always been a smooth trajectory, so you've got to be nimble, you've got to be active, you've got to be focused and really know what you want to be looking at. So at the end of the day, we're stock pickers, the economy's changed and grown rapidly, the opportunities have got more wide in terms of the opportunity set.
00:02:05
Speaker
But you mustn't get carried away. You've got to stick to discipline and ah be ah an active, you know responsible investor and not get too carried away. Okay, well, firstly, congratulations on hitting the mark. Twenty years is significant. And within that last answer was a hint that the journey is not done, right? so
Government Reforms: Echoes of Doi Moi
00:02:24
Speaker
No, that's true. yeah so that that i mean I'd like to focus actually on the Vietnamese government and the sort capitalist mindset that they have. and their drive towards sort of domestic reforms illustrated by the the new agenda. A lot of people are comparing it to the sort of previous ah reforms the deymoy reforms of the 1980s, which opened up the company the country to more global trade.
00:02:48
Speaker
What are the new reforms and you know what hope do they give you? Well, they're very far-reaching and the reforms are really being led by the leadership, by Thu Lam.
00:03:01
Speaker
um You could look at them as four pillars. The first pillar would be around science, technology, digital transformation, and that's probably underpinned by the push on education, STEM, science, technology, engineering, maths, and the and the acceleration of infrastructure for a digital economy. so that's the first pillar.
00:03:22
Speaker
The second pillar is around international integration and international inclusion. ah You mentioned trade. Well, of course, that's one dimension of that. Vietnam's got a very open trade policy. yeah The made in Vietnam story, trading with everyone.
00:03:37
Speaker
But also there's a softer side to that, which is around bamboo diplomacy and being very active, negotiating Vietnam's position within ASEAN, but then within the world.
00:03:50
Speaker
you know Do you balance US versus China? It's a difficult path, but that's the second pillar. I'd say the third pillar is around judicial and legal reform. That's to make the system more efficient. Remove some of the red tape, the bureaucracy. It's not done yet. um And sometimes that comes with some unintended consequences. You have to kind of cut some wood ah to to make sure that the the tree grows properly. yeah And I'll say the last one is probably the most important, which is the focus on the private sector.
00:04:23
Speaker
Now this really got the local stock market excited last year. This is um kind of resolutions to enhance the role of the private sector and push the economy really forward into a more modernized phase.
00:04:36
Speaker
And so the local stock market got really, really super excited around that. So I'd say that private sector drive, not ignoring the state-owned enterprises and the companies that aren't in that private sector pool,
00:04:49
Speaker
but enabling, you your phrase was capitalist, enabling a capitalist system yeah to evolve and operate in a fairly small-c conservative,
00:05:00
Speaker
um single-party kind of stable political environment. So it's a great opportunity, it's with challenges, yeah but the government's committed because they want to see by 2045,
00:05:13
Speaker
Vietnam be a very modern, high-income, developed economy. So they've got a very long, ambitious plan and it's reform-led.
Emerging Market Status and Capital Impact
00:05:22
Speaker
Okay. And look, I mean, this success has led to um actually an emergence of the market. So FTSE Russell recently confirmed Vietnam being upgraded to a sort of secondary emerging market status.
00:05:38
Speaker
I'd love to understand what the impact um of that has been so far in terms of capital flows and ah what use are there similar prospects for an upgrade from MSCI?
00:05:49
Speaker
And ultimately, you know there's this potential upgrade of Vietnam's sovereign credit rate yeah into investment grade status. How is that going to impact the way you're thinking about it and what do you think is that's going to do in terms of capital flows into Vietnam? Well, these are all good road markers on that journey. yeah So the FTSE Russell upgrade, which as you say, kicks in in September this year, has been seven years in the making. So it's not overnight. So the reforms and the process to modernize stock market infrastructure, satisfy the requirements of the stakeholders of FTSE Russell have been important. So those improvements have made for a better operating environment for investors.
00:06:35
Speaker
We've seen a little bit of of excitement from the domestic market ahead of that, um but we haven't seen the flows from the foreign investors. That will take time. In fact, to be fair, across the whole of Southeast Asia, there's been a lot of outflow into either, say, Taiwan for TSMC or into Korea yeah or back to the US. So it's been a soft period generally for emerging markets. But now Vietnam is going to be positioned as a secondary emerging market rather than the frontier market.
00:07:05
Speaker
I think MSCI is still a few years away. yeah But I think what is more important is what you also alluded to, is the upgrade in the sovereign rating. So Vietnam's debt is about one notch below sovereign a quality i'd be be below investment grade. rather yeah And where that's really important is the country has an ambitious plan for investing in infrastructure, yeah particularly in power yeah and power generation. It's all about electrons, right? Today's electrons to tokens. so you need the electrons, you need the energy.
00:07:35
Speaker
That's a huge amount of capex. which today the bond market is not able to to finance. So Vietnam can get upgraded on the debt side, I think that opens up a whole new avenue to co-finance these projects, yes, with some equity, and you've got ah an emerging market, capital markets, the most liquid in Southeast Asia on a daily basis. yeah And then you've got an improved debt market. And those two are very powerful tools to help finance that much needed infer infrastructure spend yeah to keep this modernization trend going.
00:08:09
Speaker
Okay.
Energy Self-Sufficiency Amid Global Crises
00:08:10
Speaker
And ah look, i mean the economy is one which I would characterize as as it's been resilient. you know it's It's managed to sort of navigate some challenges. How um the most recent so shock being you know the crisis in the Middle East, how's the economy dealing with ah the impact of supply chain constraints from energy and other materials? well I think resilience is the key. And so actually it's done remarkably well considering those headwinds. And that's partly because Vietnam has a lot of its own energy. yeah It doesn't have everything. it has to import about $5 billion dollars a year of of crude.
00:08:46
Speaker
But it produces its own fertilizer from its own gas sources. That's very important. And it's got an increasing mix of renewable energy in addition to hydro. So that's well positioned.
00:08:57
Speaker
um And so it's been resilient against what's been happening in the Middle East. But I think we need to be realistic. The longer the war goes on, I think there's a danger, isn't there, of higher inflation getting baked into many economies. yeah And so that's something we're keeping a very close eye on. Obviously, we'd like the war to end sooner than later.
00:09:16
Speaker
But Vietnam's been much better placed than many of its peers within the rest of Asia. Okay, so now let's try and bring it all together. you know We've talked about domestic reform, the growth of the consumer, the upgrade effectively potentially of the sovereign rating, um the resilience to energy supply shocks, etc.
00:09:39
Speaker
How you then thinking about positioning the portfolio for all of these
Investment Strategies: Retail, Banking, and Real Estate
00:09:43
Speaker
developments? well We're very much domestically oriented here and we've had some great success over decades with some retailers within Vietnam that have been growing and compounding their earnings.
00:09:56
Speaker
They've got high returns on invested capital, north of 25% on average over the last 10 years, and yet today they're cheap. 10 to 12 times PE e on a forward basis. yeah And yet they've got north of 20% earnings per share growth.
00:10:12
Speaker
So these are names we like. There are compounding stocks, high quality earnings. So we're putting ah a large part of our conviction into those names. These are names we've known for a long time. They've done a great job of returning capital to to investors, but there's a long growth still ahead. So that would be one part.
00:10:32
Speaker
We're also quite convicted on some of the high quality banks in Vietnam. yeah And again, they've got a long runway of growth. Keeping an eye on where interest rates are going and inflation, of course.
00:10:43
Speaker
But that's an interesting opportunity for us. We're probably less, we're probably underweight ah real estate. you know We're not trying to be an index hugger. We're led by conviction. We're a stock picker.
00:10:56
Speaker
And that's served as well over the long term. However, there will be periods when we underperform an index and you've just got to be prepared to be resolute and and resilient as a stock picker in those times. So we're looking at long term, high growth compound earnings, I would say largely from those domestic champions yeah in Vietnam.
00:11:17
Speaker
Okay, perfect. Craig, you know it's thank you firstly to taking the time. I know a lot of demands on your time on a sort of 20 year anniversary. for It's great to have you back in front of the cameras. Congratulations again to not just you but the entire team for the milestone achieved.
00:11:33
Speaker
And we look forward to revisiting you in a few months time and to getting an update on the story. Thank you very much, Neil.