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VEIL: Covid confirms Vietnam as manufacturing power

14 October 2020

The populous Asian nation has continued to strengthen its role in Asian manufacturing this year, despite the pandemic, says Dominic Scriven of Vietnam Enterprise Investments.

Vietnam has continued to strengthen its presence in Asian manufacturing this year, suggesting increasing interest in ‘reshoring’ presents little threat to the country’s frenetic growth, Dragon Capital’s Dominic Scriven has said.

The coronavirus pandemic has focused executives on supply chain security, a theme that had already been nurtured by the ongoing US-China trade war, opening up the possibility of more manufacturing moving back to western economies.

The founder of Dragon Capital, which runs £983m investment trust Vietnam Enterprise Investments (VEIL ), was clear that Vietnam’s prospects would be damaged if globalisation reversed. The trust enjoyed its 25-year anniversary last month, making the managers one of the oldest and largest foreign investors in the country, having set up shop after former US President Bill Clinton lifted US trade embargo in 1994.  

‘It’s difficult to find a populous economy anywhere in the world that is more exposed to trade,’ said Scriven.

Vietnam’s total trade, bridging imports and exports, stood at 210% of GDP last year, according to the World Bank. That is the eighth highest in the world, only behind city states like Hong Kong or smaller nations like Ireland. The figure for neighbour Cambodia is 124%.

‘Obviously there’s been much soul searching over the question of whether the traditional model is defunct and reshoring, protectionism, all these sort of things, are going to work against the country’s long-term interests,’ said Scriven (pictured).

‘What I’m picking up is there’s definitely people who would like to reshore, but I don’t know how practical that is at all.’

Japan and Korea on board

The investor said in the near term, the more dominant trend was companies diversifying away from China, to the benefits of its neighbour. That echoes the sentiment of £572m rival investment trust VinaCapital Vietnam Opportunity (VOF ) which earlier this year said Covid-19 would be a ‘powerful catalyst’ for production shifting to Vietnam. 

This summer, the Japanese government announced it would subsidise some firms to invest in factories in Japan and south east Asia, to reduce reliance on manufacturing in China.  

30 firms received support for shifting production towards ASEAN nations, including major companies like Shin-Etsu Chemical Co (4063.T), which will expand production in Vietnam.

Hyundai Motor (005380.KS) has also just begun construction on a second plant in Vietnam, which will its production capacity in the country by 100,000 cars a year.

While the company says it has become the best-selling brand in the quickly-growing domestic market, Scriven did not believe that was the key driver.

‘I think it’s because they’re thinking Vietnam is now an established and broadly credible launching pad for manufacturing,’ he said.

Those developments give the managers of VEIL, the largest of the three London-listed Vietnam-focused trusts, confidence the nation’s export-led growth story still has far to run.

The one-party state has also responded remarkably efficiently to the pandemic, limiting confirmed cases to barely 1,000. Regardless of scepticism over whether the case count can indeed be that low, Scriven said there was ‘no question’ that the outcome of multiple thousands or tens of thousands of cases had been avoided.

Investing in people

While it remains difficult to invest directly in exporters, which are often private businesses in opaque supply chains, VEIL looks to harness the domestic growth story that goes along with export growth.

‘What we do is we invest in those people who benefit from that,’ said Scriven.

The key themes there have been largely unchanged for 15 years. Banks make up nearly a third of the trust, benefiting from steps like people opening their first bank account or increased consumer borrowing.

Real estate accounts for nearly 30%, as part of an urbanisation theme, with swathes of the rural population moving to cities. Vinhomes, a 9% position at the end of August, is the country’s largest real estate developer, building mass suburban housing complexes to cater to that shift.

Top 9.7% holding Mobile World  is a leading consumer electronics and household appliances retailer. However, the company is also expanding its mini-supermarket chain, an evolving area compared to the traditional wet market provision of food.

Scriven said it had been the way they accessed these themes which had tended to shift.

While privatisations have dwindled in the current environment, this has presented a major opportunity set in recent years. Though its fortunes have been hit in 2020, he picked out Airports Corporation of Vietnam as an example of the pros and cons for investors.   

It was privatised in 2015 at the value of London City Airport, according to Scriven, presenting a huge opportunity given it controls 22 civilian airports in Vietnam amid ‘stratospheric’ growth in air traffic. However, a dispute flared up between the government and company last year over whose responsibility it was to repair runways still owned by the state, the kind of development which Scriven said would typically frighten off international investors.

‘Much of the way that we approach investing is in working our way through issues like that, in terms of how to understand it and whether markets reflect things the right way or not,’ he said.

Other recent developments have included the sale of a stake in a chemical company to a Korean strategic investor on ‘very good’ exit terms. 

The next major investment is likely to be a share placing of one of the large state-owned banks, which has a very limited free float currently. That could result in a $100m investment for Dragon Capital, which has about $3bn of assets under management, according to Scriven.

Scriven affirmed that Vietnam remained on a China-like growth trajectory, but the next step in its evolution would be the development of major domestic franchises.

‘Vietnam has the scale in terms of population and muscle and energy to have an influence beyond its shores,’ he said.

‘It’s picking up some role in the manufacturing space. Definitely, Vietnamese exports are growing and taking market share. But what we haven’t yet seen is the Vietnamese brands.’

Over five years, VEIL’s shareholders have seen total returns of 153% versus 129% for VOF’s shareholders and 104% for the Vietnam Stock index. The shares stand on a 13.5% discount to their underlying net asset value.

Investment company news brought to you by Citywire Financial Publishers Limited.

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