Frontier Market

I started to invest in Vietnam at the beginning of June and now hold three funds that are showing a loss of 2.5%. It is a volatile market in which to invest for the long term so I’m not worried. Indeed one of my funds, VinaCapital, advises investors to take a five year view.

The same VinaCapital do not do the same themselves and I’m glad. Here’s what they did in February this year.

In February, we announced a sizeable private equity investment in a company called Ba Huan, one of the most recognisable and leading poultry businesses in Vietnam, with more than 30 percent share of the pasteurised egg market. The company has made significant investments in its operations, importing modern production lines from Europe and adhering to international food safety practices and standards. The company has implemented a fully integrated and enclosed value chain from feed production and farming, to producing fresh, safe, and clean meat, eggs, and processed foods, enabling it to fully control product quality across the value chain, and allowing consumers to fully trace its products. Ba Huan’s products are distributed to both the general trade and modern trade channels such as major grocery chains, and major international fast food businesses via a comprehensive distribution network of more than 2,000 agents and points of sale throughout Vietnam. In 2018, the company expects revenue to surpass USD90 million.

The fund has invested USD32.5 million to acquire a significant minority stake in Ba Huan, and may invest a moderate amount of additional capital during the next twelve months as Ba Huan delivers on mutually agreed milestones.

They may have put all their eggs in one basket but they are keeping a close eye on it and don’t like what they see. Here’s the latest news, dated 9th August.

Ho Chi Minh City – VinaCapital Vietnam Opportunity Fund (LSE:VOF), the flagship fund of VinaCapital (the ‘Manager’), announces that it has reached an agreement with Ba Huan JSC, a Vietnamese poultry producer, to cease its investment, with all capital being returned to the fund.

In February 2018, VOF announced that it had invested USD32.5 million to acquire a significant minority stake in Ba Huan. Due to different interpretations of key terms by both parties, the Manager came to the conclusion that it would not be able to play a constructive role in helping Ba Huan grow as anticipated. The Manager has determined that it can better deploy capital in other opportunities.

In developed markets this volte-face would seem to show a degree of incompetence. In Vietnam it shows that watchfulness and flexibility are necessary. VinaCapital do not pull their punches. In their June update they note:

Update on Phu Nhuan Jewelry (PNJ)

PNJ stock has declined almost 40% over the last three months following the news on 4 April 2018 that the former CEO of DongA Bank (who is also the husband of PNJ’s Chairwoman)- Mr Binh Tran and 20 others were prosecuted for mismanagement and fraudulent that led to a USD150 million loss. On 16 April 2018, the government’s investigation branch requested the Police to extend the investigation of the DongA Bank case and as a result, on 14 June 2018, a PNJ’s Board Member and ex-Deputy CEO, who was also Head of the Supervisory Board of DongA Bank from 2007-2014, was placed under surveillance. This individual subsequently resigned from PNJ’s Board of Directors, after having resigned as Deputy CEO in May 2017 for other reasons.

Beside the violations at DongA Bank, the Police found out that Mr Binh also used the identities of his wife, her father and their two children to buy 3.1 million shares of the bank without any actual cash disbursement. After investigation, the Police concluded that Mr Binh counterfeited the signatures of the four individuals, who were unaware of the matter and thus had not violated any law. PNJ’s Chairwoman reacted quickly by informing investors that neither she nor PNJ are related to the DongA Bank case and will not be affected by it in any way.

On the business side, PNJ continues to deliver strong business results. Five-month sales increased 34% year- on-year (y-o-y) to USD277 million whilst net profit increased 36% y-o-y to USD20 million, driven by the robust retail gold jewellery segment (sales grew 44% y-o-y). The current consensus forecast for this year is 25% sales growth and 30% net profit growth. At the current stock price of VND81,000, PNJ is trading at only 2018 P/E
of 14x (versus the VN Index’s 15x) and 2019 P/E of 11x. Our suggestion to PNJ is that senior management purchase shares in the open market or that the company implements a share buyback, as we think the stock is undervalued and such moves would be a vote for confidence in the company’s future.

Vietnam is a frontier market and fortunately VinaCapital has local expertise and feet on the ground. When Anthony Bolton started a China fund for Fidelity in 2010 he applied the same skills he used to invest in UK equities and lost his shirt. Of course I may become topless in Vietnam but I like the close attention the fund managers pay to their portfolios. Two of my funds report monthly and one weekly. I like it like that.

https://youtu.be/vKb8GhdOepk