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Exploring opportunities in Vietnam

Khairani Afifi Noordin
Khairani Afifi Noordin • 16 min read
Exploring opportunities in Vietnam
Tech unicorn VNG Corp, the online game producer and operator of the messaging app Zalo, is backed by Singapore state investor Temasek and listed on the Upcom of the Hanoi Stock Exchange. Photo: Bloomberg
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Vietnam’s rapid growth and strategic partnerships, supported by strong government policies, are attracting droves of investors.

Vietnam emerges as a prime opportunity for investors on the hunt for hidden gems, boasting rapid growth in the region. With its competitive production costs, a dynamic young workforce, significant government investment in public projects and promising urban development prospects, the Land of the Blue Dragons has recently seized the spotlight among foreign investors.

Dragon Capital portfolio manager Quynh Le tells The Edge Singapore that these positive tailwinds have led Vietnam to achieve high, sustainable long-term growth. The country has recorded a 10-year average GDP growth of about 5.8%, even delivering a positive growth rate of 2.9% in 2020, when many countries posted negative growth because of the pandemic. She adds that this is achievable due to the government’s supportive social and economic policies.

According to Tyler Nguyen, head of institutional sales at Maybank Securities Vietnam, the country has positioned itself as a significant player in the global supply chain diversification trend in recent years. The country has attracted high foreign direct investment (FDI) disbursement of about US$23.1 billion ($30.7 billion) in 2023, up 3.5% y-o-y, aside from achieving a five-year high in registered FDI of US$36.6 billion, a 32.1% increase y-o-y. 

“The government’s proactive measures, including establishing an Investment Support Fund, aim to sustain FDI interest after implementing the Global Minimum Tax (GMT), promising a positive long-term outlook for continuous FDI inflows.” 

Vietnam has strengthened ties with major global economies, recently cementing comprehensive strategic partnerships with the US and Japan. Nguyen says this highlights the government’s commitment to leveraging the global supply diversification trend, speeding up FDI opportunities and enhancing export capacities to drive the country’s economic growth.

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Big companies like Crystal Group, ShunSin Technology (a Foxconn subsidiary) and LG Innotek M14 -

are establishing operations in Vietnam. Crystal Group is adding a sixth Rang Dong Textile Industrial Park factory. ShunSin Technology plans to build a factory worth $200 million and LG Innotek is investing $2 billion in Vietnam.

Nguyen says that in terms of valuations, as of the end of January, the Vietnam Ho Chi Minh Stock Index’s (VN-Index) forward P/E stands at 15.7 times, relatively more attractive compared to regional peers such as Thailand (16.8 times) or Indonesia (17.5 times).

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Dragon Capital portfolio manager Quynh Le. Photo: Dragon Capital

Vietnam’s stock market has roots in the Ho Chi Minh Stock Exchange (Hose), which was launched as a securities trading centre in 2000 before being upgraded in 2007.

Similarly, the Hanoi Stock Exchange (HNX) was a securities trading centre launched in 2005 before being officially inaugurated as a stock exchange in 2009.

In 2021, Hose and HNX were merged to form the Vietnam Stock Exchange, which operates alongside HNX’s Unlisted Public Company Market (Upcom), a mezzanine exchange set up to encourage unlisted firms to participate in the securities market. An example of a company listed on Upcom is Temasek-backed tech unicorn VNG Corp. Previously known as VinaGame, VNG is an online game producer and operator of messaging app Zalo.

As of the end of January, VN-Index’s market cap stood at just US$240 billion, representing 56.4% of GDP — whereas regional peers’ equity markets like Thailand and Malaysia may account for over 100% of GDP. This leaves Vietnam with abundant room for development, Nguyen says. “The growth potential is evident for retail and institutional participation, with domestic investors constituting only about 7.5% of the total population,” he adds.

The stock market has developed significantly over the years. Le recounts that when Dragon Capital’s Vietnam Equity Fund (VEF) was launched in 2013, the market cap stood at only US$43 billion. Aside from new listings of private companies, the rapid expansion over the past decade to the current US$240 billion was due to privatisation, as the government gradually divested its stake in sectors such as food and beverages, transportation and financial services. The stock market doubled, from around 800 in 2013 to over 1,600.

Agreeing with Nguyen, Le highlights the liquidity of the Vietnamese Stock Exchange, which now exceeds US$1 billion in daily trading value, with over 80% of this attributed to retail investors. She adds: “One of the main characteristics of Vietnam is that we have a big population with a rapidly expanding middle-income class. Previously, most of their savings would be in term deposits. During the pandemic in August 2020, Vietnam introduced an e-KYC (electronic know-your-customer) system, which allowed people to open a trading account from home. Since then, the number of new trading accounts has almost tripled, as the liquidity before the pandemic was only around US$300 million.”

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The total number of trading accounts in Vietnam is eight million, although Le believes the active accounts are only up to three million. The penetration level is still very low compared to the total population of around 100 million. Dragon Capital believes the stock market is still at a very early stage, notwithstanding the significant developments.

The development also included the sophistication of products, with the issuances of local and foreign exchange-traded funds (ETFs), futures and derivatives markets. In 2021, the government also allowed the introduction of private pension funds, which Le believes have contributed to stabilising the volatile stock market, given retail investors, who previously tended to short-term trade, are channelling their money into private pension funds instead.

While Vietnam’s equity markets have gained popularity among foreign investors, several challenges still impede further foreign participation. Nguyen says a crucial hurdle lies in its stock index remaining classified as a frontier market (FM) by the MSCI and FTSE, in which foreign institutional investors’ participation is only about 12% to 15% of the market. This trails behind the 30% to 50% typically observed in regional developing peers that have attained emerging market (EM) status, such as Indonesia, Malaysia, Thailand and the Philippines. 

“This is partly attributed to the country’s ongoing stock market reform, which has not been as quick as the market hopes. This is exemplified by the continued requirement for pre-funding, which creates a significant hurdle for investors and leads to suboptimal participation,” adds Nguyen. 

While market cap and liquidity are rising, they have not yet reached levels many institutional investors feel comfortable with. Additionally, Vietnam, Thailand and Indonesia impose caps on foreign ownership, restrict free-float levels and exhibit a relatively high degree of state ownership. This leaves investors with limited options that meet their minimum mandate.

Nguyen adds that some domestic companies are also not fully prepared for or embrace the potential of foreign investments. Despite relaxed foreign ownership limits (FOL) in various industries, some listed companies choose to maintain restrictions. Widespread adoption of information disclosure in English or the International Financial Reporting Standards (IFRS) has not yet been achieved, leaving room for desired transparency.

Despite these challenges, Maybank remains optimistic about the attractiveness of Vietnam’s equity market to foreign investors over the medium to long term. “The government’s strong commitment to resolving regulatory and technical obstacles is evident, aiming for Vietnam’s market upgrade to EM status by 2025. Vietnam’s State Securities Commission is proactively engaging with brokers for feedback and collaborating closely with relevant authorities to address regulatory bottlenecks, such as the pre-funding requirement and FOL,” he adds.

The Vietnamese stock market is known for its volatility. Le says that the VN-Index rose by approximately 40% in 2021 but fell by about 30% the following year due to problems in the corporate bond market. In the first three quarters of 2023, the index climbed by over 20%, only to see all gains erased in September due to a slight shift in monetary policy.

Coupled with the lopsided participation of retail investors over institutional investors, low liquidity levels compared to regional EM peers and transparency issues, it may be understandable that foreign investors would view Vietnam as a “risky” market. 

However, Nguyen notes that these characteristics are quite common among FMs. From Maybank’s perspective, despite being a relatively young market established just over 23 years ago, Vietnam’s equity market shows a dynamic and evolving landscape concerning policy frameworks, stability, efficiency and overall development.

“Having strong retail participation should not necessarily be seen as negative. The active participation of local individual investors is viewed positively by global fund managers, as it facilitates quicker stock re-rating to fair value compared to more developed markets.”

He adds: “Considering Vietnam’s political and economic stability, along with government initiatives aimed at upgrading market status to EM, we anticipate the gradual influx of foreign institutional investors will counterbalance retail-driven volatilities, supporting the sustained long-term growth of the local equity market.” 

Currency risk and opportunities

Foreign investors also face currency risk, as fluctuations in currency values can affect their returns, especially if the Vietnamese dong experiences significant volatility. As of March 14, the Vietnamese dong is one of the weakest currencies globally, with approximately VND24,665, equivalent to $1.33.

VinaCapital Group CIO Andy Ho reiterates Vietnam’s appealing valuation, remaining one of the few markets that provides substantial earnings growth potential. In the long run, Ho believes businesses will continue to grow earnings at a healthy pace of 15% to 25% per annum, supported by steady economic growth of 6% to 7% per annum over the medium and long term.

Vietnam has maintained relatively low inflation, ranging from 2% to 4% per annum and its local currency has remained stable against the US dollar. These macroeconomic factors are expected to positively impact shareholder value growth in the medium to long term.

Implementing the stock exchange’s new Korea Exchange (KRX) developed trading system in 2024 is widely anticipated to help solve certain technical problems, helping the market upgrade to EM. “As valuations improve and there is more interest from foreign and institutional investors, we expect the IPO window to re-open and thrive once again,” says Ho.

The KRX trading system, marked by rigorous testing and regular progress conferences, is expected to significantly enhance transaction fluidity, introduce new products and enable shortened settlement cycles, thereby boosting the efficiency and capabilities of Vietnam’s equity market. Initially expected to be launched at the end of 2023, it is currently in the final user testing phase.

Maybank Securities Vietnam head of institutional sales Tyler Nguyen. Photo: Maybank Securities

So, which sectors should investors consider? Maybank favours the real estate sector within Vietnam equities, which has seen significant discounts since last year. While sector-related issues persist, primarily stemming from local regulatory challenges like the corporate bond saga, liquidity shortages and legal bottlenecks, the sector’s fundamental catalysts, such as demand, remain strong, says Nguyen.

Since late 2022, several measures have been introduced to tackle the sector’s short- and mid-term challenges. Most notably, the National Assembly recently passed the landmark Revised Land Law. This is expected to establish a comprehensive regulatory framework to resolve previous legal bottlenecks, boost project approvals and ensure long-term growth in the real estate market.

“Although the meaningful impact may span up to 18 months to materialise, the approval of the Revised Land Law should sustain the growth of the Vietnam real estate market, opening up a new growth cycle for the real estate sector,” adds Nguyen.

VinaCapital’s Vietnam Opportunity Fund (VOF) invests in Khang Dien House Trading and Investment (KDH), a prominent developer specialising in townhouses and villas in Southern Vietnam. With strong financials, brand recognition among buyers and a reputation for clear licensing and paperwork, KDH is poised for success in the property market recovery ahead, says Ho. VinaCapital has been involved with KDH since 2008, serving on its board and actively contributing to its development and expansion.

VOF also invests in Hoa Phat Group, a top construction steel company holding over 30% market share. Known for its high-quality products, Hoa Phat supplies construction steel to various sectors, including factories, industrial parks, logistics, infrastructure projects and residential developers.

In 2007, VOF entered Hoa Phat via a private investment, facilitating the establishment of a vertically integrated steel factory for the company. “We expect Hoa Phat to remain a key beneficiary of the government’s fiscal expansion and it will benefit from the property market recovery in 2024 and beyond, boosting its sales volume and leading to stronger earnings growth,” says Ho.

Another sector to consider is banks, the market’s top performers year-to-date. State-owned banks have consistently registered solid gains, fuelled by positive FY2023 results, robust asset quality figures and imminent stake sales to foreign investors. These include the Commercial Bank for Investment and Development of Vietnam and the Commercial Bank for Foreign Trade of Vietnam (Vietcombank). Nguyen says that the Commercial Bank for Industry and Trade may also experience a re-rating from a low FY2023 base.

“We reiterate that banks will recover further in 2024, with an earnings growth outlook of about 18%. For the base case, we expect about 20% upside for the sector in 2024. For the bull case (assuming significant market upgrade progress by 3QFY2024), we anticipate the sector to experience a stronger upside of 30% to 50%, driven by significant P/B re-rating.

“With easing macro headwinds, cooling lending rates and the State Bank of Vietnam’s full allocation of credit quotas this year, we continue to see a promising 2024 for banks’ earnings’ outlook,” he adds.

Dragon Capital’s VEF has three banks in its top five holdings as of Dec 31, 2023 — Military Commercial Bank (MB Bank), Vietcombank and Saigon Thuong Tin Commercial Bank (Sacombank). Le says the firm likes MB Bank as it is the most profitable private bank in Vietnam, which heavily invested in modernisation and digitalisation. This allowed the company to have a lower cost of funding and higher net interest margin without physically opening up any new branches. 

Sacombank may not match MB Bank's performance, but the private bank has shown a promising turnaround story with notable fundamental improvements.

Meanwhile, VOF invests in Asia Commercial Bank, Vietnam’s sixth-largest bank in terms of market capitalisation. The bank focuses on the rapidly growing affluent retail and small and medium enterprise segments while undergoing significant digital transformation. 

The tech sector is also present: Both VOF and VEF have large holdings in FPT Corp. Established in 1988, FPT is the largest IT company in Vietnam. Its core businesses focus on consulting, technology and telecommunications services. FPT commands about 22% of the telecom market share, providing broadband internet to households and businesses in Vietnam.

Le says that while the telecom business is a cash cow, it does not provide FPT with much growth.

FPT’s segment that does provide growth is its global IT services. The company provides outsourcing services to clients from the US, Europe and Japan, providing more than 20% annual growth. “FPT has been doing this for many years; they have good experience running the business and have built their relationship and reputation with their clients. As the market is very large, we see a huge upside potential,” says Le.

The firm operates in a human resource-intensive industry, so it needs more talent and IT expertise to expand. The company established its university in 2006, helping FPT train and supply its high-quality human resources. This business has grown considerably and is becoming a large profit-contributing segment for the company, adds Le.

FPT is shifting its focus to new ventures, such as semiconductors. Less than a year after establishing its semiconductor subsidiary in 2022, FPT’s semiconductor power management integrated circuits have completed the development phase. The company has now proceeded with mass production, securing orders for 70 million chips scheduled for fulfilment by 2025. 

Dragon Capital is bullish on the retail sector, capitalising on consumer spending trends. Among its top holdings is Phu Nhuan Jewelry (PNJ), which boasts the largest jewellery factory in Vietnam. With an annual production of four million items, PNJ serves nearly 400 retail outlets and 3,000 wholesale clients across Vietnam’s cities and provinces and in 13 overseas countries.

“As they produce and sell their product through their network, their profit margin is very high. The company has a solid financial position, with relatively low debt and strong cash flow, which allowed it to stay resilient during the pandemic. PNJ managed to secure the market share left by its dying competitors, allowing it to increase its market share in branded jewellery from about 37% pre-pandemic to almost 60%,” says Le.

Tourism is also worth noting, with its contribution to Vietnam’s GDP rising from 5.2% in 2022 to 6.6% in 2023. Although still below the pre-Covid-19 level of 9.7% in 2019, this shows a positive trend in recovery and promising potential for further growth.

Nguyen says the sector is currently displaying signs of revival, exemplified by Vietnam’s retail sales in 2023 reaching US$259.6 billion, a 9.6% growth y-o-y, primarily propelled by tourism revenue totalling US$28.2 billion — an increase of 34.4% y-o-y and a 266% rise compared to the lockdown period in 2021. 

“With Vietnam implementing a relaxation of the visa scheme from 2023 to stimulate tourism rebound and boost socio-economic development, we anticipate further recovery for the retailing and aviation sectors heading into 2024,” adds Nguyen.

Market sentiment

In the next 12 to 24 months, Ho expects interest rates to remain stable and for domestic investors to continue diverting money away from bank deposits towards the stock market and real estate. 

Earnings growth and valuations will be an area of focus for investors — given the flat earnings growth for 2023 — while valuations remain very attractive and below historical averages. This should be supportive of the stock market, says Ho. 

“Our research team expects the earnings growth of Vietnam’s stock market to recover from no growth in 2023 to 10% to 15% earnings growth in 2024 and 20% in 2025, although our forecast tends to be slightly more conservative than market consensus. Public equity valuations are at a 26% discount to regional peers and with a P/E growth ratio or PEG ratio of 0.8 times, Vietnam continues to offer valuation appeal while delivering reasonable growth,” he adds.

Maybank’s Nguyen says the focus this year and beyond is on the progress of Vietnam’s stock market upgrade to EM status. He expects significant benefits from increased capital inflows from institutional investors.

Passive funds that track the FTSE and MSCI indices are expected to initiate significant equity inflows swiftly. They will automatically direct a portion of their assets to the newly upgraded market, potentially injecting up to US$4 billion in liquidity once the upgrade is completed. This mirrors the experience of peers like the Philippines following market upgrades.

He adds: “We anticipate higher inflows from existing funds already operating in Vietnam, complemented by potential capital injections from active funds seeking exposure to this burgeoning emerging market.”

Once the Vietnam stock market upgrade materialises, Maybank anticipates the VN-Index will experience a liquidity boost and attractive valuations re-rating. 

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