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* Jefferies Hoare Govett is corporate broker

to Vietnam Enterprise Inv. Ltd

Mark Ambrose, CFA

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Vietnam Closed-End Funds Key takeaways from our Ho Chi Minh City trip

We recently attended Dragon Capital’s Vietnam Access Conference in Ho Chi

Minh City, taking the opportunity to update our thoughts on the market and

economy and attend presentations by some of the portfolio companies of

Dragon Capital’s flagship fund, Vietnam Enterprise Investments * (VEIL LN).

While to us Vietnam’s secular growth story has never been in doubt, we were

keen to learn if the market still looks good from a cyclical standpoint.

Notwithstanding some areas where some caution is warranted (e.g. certain

areas of real estate) we left bullish, confident the market has further to run.

With foreign ownership limits still a major barrier to investing direct, and the

performance of the ETFs dire, there is still a powerful case for closed-end funds.

Grouping our main takeaways by subject:

Economy

Vietnam is growing strongly, with real GDP up 6.2% in 2016. Notwithstanding a

blip in Q1 2017, impacted by Samsung discontinuing its Galaxy Note 7

smartphone, Dragon Capital expects the economy to grow by 6.6% in real terms

in 2017.

Importantly, growth is built on more solid foundations than in earlier periods.

Inflation is under control at +3.2% YoY; the current account balance has been in

surplus since 2012; and the VND/USD exchange rate has been remarkably stable,

albeit managed to depreciate modestly each year and maintain competitiveness.

The period of bank restructuring/provisioning is coming to an end and, as a result,

banks have returned to profitability. Credit growth is at a level, seen as sustainable,

of 16-18%.

The budget deficit, at 5.5% of GDP, is higher than desirable and public debt-to-

GDP is close to a self-imposed ceiling of 65%. However, we note that only a

quarter is owed to foreigners and most of that is in the form of Overseas

Development Assistance, on concessional financial terms.

The fiscal situation could in fact work in investors’ favour by encouraging greater

divestment from listed SOEs and a larger privatisation pipeline, and the creation of

more favourable investment environment for foreigner investors to facilitate this.

Long-term drivers are still compelling, with a young, literate population with a

median age of 30 — young, but old enough to have disposable income; a highly

competitive workforce, with wages ~40% of those in China; and urbanisation that

is still around 16 years behind Thailand.

Equity market

Vietnamese equities have enjoyed a strong run since the beginning of 2013, up

over 95% in US$ TR terms, or +16% p.a., while the MSCI Emerging Market Index

was roughly flat (+1.2% p.a.), the MSCI Asia ex-Japan was up +5.1 % p.a. and the

MSCI Frontier Markets – of which Vietnam is a constituent – was up 6.8 % p.a..

This begs the question: are Vietnamese equities still attractive here? In our view,

the market remains reasonably priced relative to peers at 13x 2017e PE, in the

context of estimated EPS growth this year of 19% (Bloomberg).

Investment Companies

Desk Note

Company Profile 14 June 2017

14 June 2017

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analysis. This document is a marketing communication and is not and should not be construed as investment research

Desk Note

Company Profile

Chart 1: Vietnamese Equity Valuations vs. Regional Peers

China

India

IndonesiaSri Lanka

Pakistan

Malaysia

Philippines

Thailand Vietnam

0

5

10

15

20

25

0% 5% 10% 15% 20% 25% 30%

P

/

E

2017e EPS gth

Source: Bloomberg

Foreign ownership limits (FOLs) are still a major issue

FOLs were officially removed for all but ‘restricted’ sectors in 2016 with the responsibility for

enactment passed onto companies themselves. However, few have followed through and

implemented this in practice. Only nine members of the VN All-Share Index have removed

FOLs, we believe.

Being deemed to have ‘foreign status’ by virtue of having a predominantly foreign

shareholder register can still present problems for businesses. For example, Mobile World

Group (MWG), a leading and rapidly growing retailer, said it had no current intention to raise

its FOL. In doing so, it would run the risk of becoming predominantly owned by foreigners

and thus being classed as ‘foreign’, restricting its ability to open new retail stores.

Further relaxation is clearly needed. In the meantime, foreign premiums are still a common

occurrence. Taking the example of MWG again, we are aware of one block that was traded

between foreigners in Q1 2017 at a 20% premium to the reference market price.

FOLs mean there is still a powerful case for accessing Vietnam through CEFs. It also means

the ‘true’ NAVs on CEFs are higher than the published figures, and the discounts to NAV are

also larger.

To illustrate, Vietnam Enterprise Investments Ltd (VEIL LN) currently trades on a c.14%

discount to NAV, but more than 25% of its NAV is in companies that are at their foreign limits.

Blocks of these names trade between foreigners at premiums of 15-20% to market price,

making the ‘true’ discount to NAV several percentage points wider.

MSCI EM inclusion

While Vietnam is not among this year’s MSCI 2017 Annual Market Classification Review, there

is hope that MSCI will recognise the direction of travel and this month place Vietnam on its

watch-list for MSCI Emerging Market inclusion. Failing that, local fund managers expect it

will be put on the watch-list in 2018.

From a quantitative perspective, we believe Vietnam meets the criteria. The country needs

three companies with more than $1.375bn market cap, $687m free float, and 15% annual

traded value ratio (ATVR). We estimate it potentially has eight today.

However, more work needs to be done to meet the qualitative criteria. Market Accessibility

Criteria require:

o “Significant” openness to foreign ownership, defined by the proportion of the market

accessible to non-domestic investors and/or the existence of a foreign board where

foreigners can trade with one another, as well as the availability of information in

English.

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Desk Note

Company Profile

o “Significant” ease of capital inflows/outflows, including the existence of a developed

onshore and offshore foreign exchange market.

An announcement of Pakistan’s upgrade by MSCI from ‘Frontier’ to ‘Emerging’ status in

2016 (effective June 2017) was a wake-up call for Vietnam—in many ways a more developed

economy and market—and has hopefully provided the impetus for the government to take

the necessary steps to make it happen.

Our conclusion from presentations and discussions on the trip is that the will is there and it is

a case of when, not if, Vietnam qualifies. While we would not advise buying Vietnam now

purely to front-run potential MSCI EM watch-list inclusion this month, we feel there are

enough other reasons to own it anyway, with 2-3 year MSCI EM inclusion to be seen as a

‘bonus’.

Privatisation/IPO opportunity

The current program of privatisations was launched in 2014, with 430 SOEs identified. So far,

165 have been done. The government recently identified 137 companies to be IPO’d in

2017-19.

In contrast to earlier waves, pricing has been far more reasonable, at 1 – 1.5x book value. In

addition, unlike previous programs, where companies sometimes languished as unlisted

companies indefinitely, companies must now list on UPCoM (Unlisted Public Company

Market), a transitional market, within a short space of time and then list on the HCMC or

Hanoi stock exchange within a further 270 days.

UPCoM has become a large market itself, larger in fact that Hanoi, with a market cap of c.

$18.5bn. Importantly for Vietnam closed-end fund investors, it is also a transparent one, with

trades printed on Bloomberg, enabling validation of marks in funds’ NAVs.

Private IPOs and SOE privatisations have historically been a good source of returns for VEIL.

Since 2014, VEIL has invested in 12 deals for a collective, total IRR of 53.6%. IPO-related deals

were said to have contributed 5 percentage points to VEIL’s NAV growth last year.

Pre-IPO investments will be constrained by the availability of suitably priced opportunities, as

many are likely to be turned down on pricing and/or quality grounds. VEIL also has a cap of

15-20% on pre-listed investments (inc. UPCoM stocks).

Property market

Vietnam’s physical infrastructure is taking form. Examples here include the HCMC Metro Line

which is in the process of being constructed. There are also infrastructure projects aimed at

tackling flooding as well as traffic congestion.

Vietnamese real estate continues to see strong capital inflows from Japanese, Korean and

Chinese buyers.

There were a few words of caution from Fraser Wilson (manager of Dragon Capital’s Vietnam

Property Fund) who warned of signs of oversupply in residential and retail property. Fraser

also warned that land prices have rocketed to unsustainable levels.

This view was somewhat echoed in a later meeting we had with Vinacapital who cited high

end residential property as one area that can be considered late-cycle.

Company presentations

The conference was a useful opportunity to hear from the underlying companies, all but one

of which is in VEIL’s portfolio. One of the highlights, for us, was a presentation by the

entrepreneur behind Mobile World Group – VEIL’s second largest position, at 7.5% of VEIL’s

NAV.

Described by Dragon Capital’s speaker as “the next Vinamilk”, Mobile World Group is

Vietnam’s largest retailer – both bricks & mortar and online. MWG began as a chain of

mobile phone stores but subsequently expanded into consumer electronics stores and is now

looking to move into minimarts and hypermarkets. MWG’s growth has been spectacular —

revenues +54% CAGR and net profit +85% CAGR. between 2012 and 2016. MWG’s valuation

is not expensive, however, at 14x 2017 budgeted earnings (~$95m, +35% yoy).

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Desk Note

Company Profile

MWG was an IPO-related investment for VEIL. As of 30 April 2017, this initial investment had

generated an IRR of 46.7% and a multiple of 4.3x on invested capital.

An even more profitable IPO-related investment, at least in IRR terms, has been Airports Corp

of Vietnam (3.6% of VEIL’s NAV). ACV is the monopoly operator of 22 civilian airports in

Vietnam, including 9 international airports. The company has very limited free float and is still

95% owned by the Ministry of Transport, but is in the process of seeking a strategic buyer for

a c. 20% stake, with Aeroports de Paris (ADP FP) considered to be a likely candidate. ACV is

expecting earnings growth of 16% in 2017, off a ‘conservative’ estimate of 10% revenue

growth, which takes into account higher landing charges that come into effect in September.

ACV has been an incredibly profitable privatisation investment for VEIL, delivering an IRR of

165.6% and a multiple of 3.6x on the original investment as of 30 April 2017.

Novaland (NVL VN, est. 3.7% of VEIL’s NAV) is the largest real estate player in Ho Chi Minh

City (HCMC) with a focus on mid-high end residential property. For the next stage of its

development, however, the company is selectively reviewing opportunities outside of HCMC

as well as diversifying into commercial real estate.

NVL was a pre-IPO investment for VEIL, as well as Vinacapital’s Vietnam Opportunity Fund

(VOF), and the company IPO’d and listed on HCMC stock exchange in December 2016. VEIL

and VOF invested in convertible preference shares that paid a high coupon and which

converted into shares prior to the company’s IPO. As of 30 April the investment had delivered

an IRR of 43.0% to VEIL and a multiple of 1.5x

Other presentations included:

o Asia Commercial Bank (ACB VN, 5.9% of NAV), a retail bank and long-term holding of

VEIL’s. ACB went through a period of restructuring from 2012 to 2015, partly related to

its former Chairman’s arrest, but is emerging from this and aiming to resolve any

outstanding issues in 2017. Earlier in the day, ACB had been identified as one of the

better banks from a capital adequacy ratio and provisioning perspective, alongside

Military Bank (MBB VN) and Vietcombank (VCB VN).

o Cotecons (CTD VN, Est. 2.2% of NAV), a well-regarded construction company, focused

on residential property but also involved in commercial property and industrial, with a

healthy $1.2bn backlog of orders.

o Hoa Sen Group (HSC VN, Est. 1.8% of NAV), a manufacturer of construction materials

(e.g., coloured steel sheets for roofing) focused on the low-to-middle income segment,

selling direct via a network of 250 retail stores. HSG is currently trading at an attractive

valuation (5.8x PE) despite strong growth (profits +45% CAGR since 2001).

o Power Construction No. 1 (PC1 VN, Est. 1.8% of NAV), a former state-owned company

privatised in 2005 and now 100% privately owned. PC1 is the largest player in the

power grid construction space, with a market share of c. 40%, and a beneficiary of

growing demand for power, which is expected to grow twice as fast as GDP.

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Desk Note

Company Profile

How to play Vietnam

Given the barrier to entry that FOLs continue to represent, closed-end funds remain the best way of

investing in Vietnam in our view. Currently, these also have the added attraction of trading at

discounts to NAV – discounts that, relative to other emerging market funds in general, appear wide

in our view.

Excluding direct property plays like Vietnam Property Fund (VPF ID) and Vinaland (VNL LN), both of

which are in harvesting mode at the present time, and Vietnam Phoenix Fund (VTNPHXC KY), which

is now a concentrated end-game play looking to realise its portfolio of unlisted and/or illiquid

assets, there are three closed-ended funds focused on Vietnamese equities: Vietnam Enterprise

Investments (VEIL LN); Vietnam Opportunity Fund (VOF LN); and Vietnam Holding (VNH LN).

Name Vietnam Enterprise Investments Ltd Vietnam Opportunity Fund Vietnam Holding Ltd

Manager Dragon Capital Vinacapital Inv. Mgmt Vietnam Holding Asset Mgmt

Exchange London Stock Exchange London Stock Exchange London Stock Exchange (AIM)

Ticker VEIL LN VOF LN VNH LN

Quote currency GBp GBp USD

Price 366.75p 292.625p $2.2025

Est. NAV/sh 426p 365.8p $2.806

Prem. / Disc. -13.9% -20.0% -21.5%

1yr ave. prem./disc. -16.5% -22.3% -14.1%

Shares o/s 220,125,680 200,871,258 73,301,667

M/ cap ($- equiv) $1,030m $750m $161m

Total eNAV ($-equiv) $1,197m $938m $206m

ADTV ($-equiv, YTD) $1,033k $1,699k $305k

Management Fee 2% NAV p.a. 1.5% NAV p.a. 2% NAV p.a. for NAV <$100m

1.75% NAV p.a. for NAV $100-150m

1.5% NAV p.a. for NAV >$150m

Performance Fee n/a Direct real estate: 15% over 8% hurdle

All other: 15% over 8% hurdle

Each capped at 1.5% of pool’s NAV

15% over 5% hurdle.

Capped at 3% of NAV

Continuation/

Wind-Up vote

2020 2018 2018

Source: Jefferies, Bloomberg, Company data

Chart 2, below, compares the one, three, five and seven-year NAV performance of the three funds

against each other as well as against the New York and London-listed Vietnam ETFs. As this shows,

ETFs are not yet a viable alternative. The ETFs each track their respective benchmarks well, but these

benchmarks are constrained by foreign investability criteria that exclude those companies at or

close to the FOLs – by definition the companies that foreign institutional investors want to hold –

and includes those that may be shunned by offshore funds on corporate governance or valuation

grounds. The effect this can have on performance is significant as the performance comparison

shows. Remarkably, these ETFs have more than $500m of assets under management between

them.

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Desk Note

Company Profile

Chart 2: NAV/Share Performance (US$, total returns, annualised)

Source: Bloomberg, Jefferies, Company data. As of 31 May 2017.

The universe of Vietnamese closed end funds has shrunk significantly over the past several years as

previous constituents reached the end of their lives, open-ended, or restructured in some other

way, either voluntarily or under pressure from shareholders.

There are also, it should be noted, a number of open-ended funds focussed on Vietnam, including

several that have their roots in former closed-end funds. Indeed, three previously closed-ended

funds managed by PXP Asset Management now live on today in open-ended form through PXP

Vietnam Emerging Equity Fund; Vinacapital offers a UCITS-compliant open-ended fund, Forum One

— VCG Partners Vietnam Fund (UCITS), the creation and seeding of which coincided with the

restructuring of Vietnam Infrastructure Fund; and Duxton Asset Management manages an open-

ended vehicle Vietnam Phoenix Fund – Class B, which was formed from the restructuring of its

portfolio into three parts: illiquid assets, liquid assets to be liquidated, and a continuing fund. We

also note Dragon Capital has a UCITS fund, Vietnam Equity (UCITS) Fund, which on strong

performance has seen good inflows over the past year. This fund is now at $115m and likely to

restrict subscriptions at $150-200m.

We believe each of the three closed-end funds selected has a place and offers something different.

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Desk Note

Company Profile

Vietnam Enterprise Investments Limited (VEIL LN) Managed by Dragon Capital and launched in 1995, VEIL has for some time been, and remains, our

‘go-to’ fund for Vietnam equity exposure. The fund is the largest and longest established and offers

100% exposure to listed and pre-listed equity, with a focus on the domestic themes of

consumption, urbanisation and the banking sector. These are played through some of Vietnam’s

leading blue-chip companies, in which Dragon Capital has been a large, strategic investor for many

years. Pre-listed equity, a material driver of recent returns, is currently 13.7% of NAV and capped at

15-20%. However, with stricter timeframes now governing companies’ listing on UPCoM and their

later move up to HCMC or Hanoi Stock Exchanges this is less of an issue than in the past.

Previously Irish Stock Exchange traded and OTC traded, VEIL was admitted to the Premium List on

the London Stock Exchange in July 2016 and qualified for FTSE All-Share inclusion in September

2016. The fund is currently also on the reserve list for inclusion in the FTSE 250 Index.

Dragon Capital is headquartered in Ho Chi Minh City and manages more than $2bn in equity,

property, fixed income and clean renewable investments and has a team of 97 employees across

several offices.

Table 1: VEIL – Top 10 Holdings

Name Ticker % NAV

Vinamilk VNM VN 12.7%

Mobile World MWG VN 7.5%

Military Bank MBB VN 6.2%

Asia Commercial Bank ACB VN 5.9%

FPT Corp FPT VN 5.7%

Vietjet Air VJC VN 4.7%

PV Gas GAS VN 3.9%

Khang Dien Hous KDH VN 3.8%

Hoa Phat Group HPG VN 3.7%

Airports Corp of Vietnam ACV VN 3.6%

Source: Company Data

Chart 3: VEIL - Historical Premium / Discount (3 years)

Source: Jefferies, Bloomberg

14 June 2017

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Desk Note

Company Profile

Vietnam Opportunity Fund (VOF LN) Managed by Vinacapital and launched in 2003, VOF is a multi-asset class fund providing exposure

to a portfolio of listed equity, pre-listed equity and private equity, the latter being an area where the

manager has done well historically. The fund also has exposure to legacy real estate investments—

something that has given us reservations about VOF in the past—however this is now significantly

reduced and represents just 5.1% of NAV.

Like VEIL, VOF has a Premium Listing on the London Stock Exchange and is a FTSE All Share

constituent.

Chart 4: VOF – Asset Allocation

Listed Equity, 53.70%

Cash, 13.80%

OTC Stocks, 12.40%

Private Equity, 8.20%

Real Estate Projects, 5.10%

Net receivables & Other, 4.80%

Operating Assets, 1.30%

Overseas Equity, 0.70%

Source: Company data. As of 30 April 2017.

One potential concern for those bullish on Vietnam and seeking immediate exposure may be VOF’s

large cash & net receivables balance of c. 19% of NAV (~$170m, as of 30 April 2017) which

includes $100m tied up in proceeds to be received over two annual payments from the sale of the

Sofitel Legend Metropole Hotel. Vinacapital reportedly has a $200m pipeline to put some of this

cash to work, in private equity, PIPEs, and IPOs. As its CIO Andy Ho concedes, however, it is

currently a ‘seller’s market’ for private equity making the deployment of cash difficult. Allaying

some of our concerns, we note the fund has what is recognised as a strong, shareholder-friendly

board and is an active ongoing buyer of its own shares with surplus cash. In an effort to cap the

discount on which VOF trades, the company has repurchased more than 86.5m shares since 2013

and c. 6.9m shares so far this year.

Vinacapital was founded in 2003 and manages over $1.3bn in listed and unlisted equity and real

estate. The company is headquartered in HCMC.

Table 2: VOF – Top 10 Holdings (Estimated)

Name Ticker Est. % NAV



Quang Ngai Sugar QNS VN 5.9%

Khang Dien House KDH VN 5.3%

Airports Corp of Vietnam ACV VN 4.9%

Phu Nhuan Jewellery PNJ VN 4.6%

Novaland NVL VN 4.0%

International Dairy Products n/a 3.9%

Eximbank EIB VN 3.3%

Coteccons CTB VN 3.2%

Source: Company data, Jefferies estimates

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Desk Note

Company Profile

Chart 5: VOF - Historical Premium / Discount (3 years)

Source: Jefferies, Bloomberg, Company data

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Desk Note

Company Profile

Vietnam Holding (VNH LN) VNH is managed by Vietnam Holding Asset Management, a Cayman Islands-domiciled manager

with representative offices in HCMC where the investment team sit. VNH has a strong

Environmental, Social and Governance (ESG) focus – though other funds would argue similarly—

and is differentiated from VEIL and VOF by its skew towards mid-cap companies which turns a

negative – its small size – to its advantage. VNH’s portfolio is based on the three long-term growth

drivers of urbanisation, consumption, and agriculture, with investments selected on the expectation

that these companies can deliver earnings growth in excess of 20% p.a. for the next few years, and

sized according to conviction levels.

We note a performance comparison of VNH vs. other funds and indeed the index is muddied by

two bonus issues of warrants that have diluted NAV/share returns over the past 5 years. Supported

by shareholders, these warrant issues have been used to help the company grow with the goal of

increasing liquidity in the shares and enhancing the fund’s appeal with investors, at a time when

the fund has traded at a discount to NAV. Investors’ actual experience will naturally depend on

whether they were on the register at the time of the bonus warrant issues and have been in a

position to avoid this dilution. VNH currently has no warrants outstanding and we are told there is

no intention to do any further issues.

Table 3: VNH – Top 10 Holdings

Name Ticker % NAV

Traphaco TRA VN 12.9%

Phu Nhuan Jewellery PNJ VN 8.5%

FPT Corp FPT VN 7.0%

Binh Minh Plastic BMP VN 6.2%

Viconship VSC VN 6.1%

Thien Long Group Corp TLG VN 5.0%


Petrovietnam Transportation PVT VN 3.6%


Transimex-Saigon TMS VN 3.3%

Source: Company data

Chart 6: VNH - Historical Premium / Discount (3 years)

Source: Jefferies, Bloomberg

For any further details, or to trade, please contact a member of the Jefferies Investment

Companies team or email [email protected]

14 June 2017

Desk Note

Company Profile

page 11 of 14

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14 June 2017

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Desk Note

Company Profile

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Desk Note

Company Profile

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14 June 2017

page 14 of 14



Desk Note

Company Profile

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