AFC Travel Report - Vietnam, Myanmar, and Cambodia

In line with our process of being on the ground in the countries we invest in, Ruchir Desai, Senior Investment Analyst, travelled to Vietnam, Myanmar, and Cambodia last month to attend an investor conference as well as meet with companies. All photos are by Asia Frontier Capital.
 
I started my three-country investor tour in Ho Chi Minh City by attending an investor conference which we usually attend every year. This time the number of attendees was probably the highest it had ever been since we began attending this conference in 2014. This is no surprise given how the Vietnamese stock market has performed over the past 12 months and also due to the fact that the macro stability that Vietnam offers is superior to many of the countries in the region, with its stable current account, rising foreign direct investments, and high consumer confidence. Further, a slew of new company listings has also increased liquidity which has generated greater interest from foreign investors.
 
The positive sentiment is supported by changes on the ground, as on every visit to Vietnam I observe more cars, more foreign brands, more convenience stores, and yes, a lot more tourists. Zara and H&M entered the country in 2016, 7-11 began operations last year, and international visitor arrivals grew by 29% to 12.9 million in 2017 with China and Korea accounting for close to 50% of arrivals.

(Source: General Statistics Office of Vietnam)

I met a range of companies at the conference, but the banking sector seemed most confident on their growth outlook as the non-performing loan issues of the past have been settled and the strong economic growth has led to a big uptick in loans, while consumer and retail finance continue to be untapped. The latter seems to be the next big opportunity with a few of the banks such as VP Bank and HD Bank having developed a strong franchise and network to build a consumer and retail finance business. Having said that, a few state-run banks do not have a very strong capital base and will probably look to raise a large amount of capital going forward, which would most likely come via a strategic investor.
 
The other sectors which saw a lot of interest from investors at the conference were the retail and aviation sectors. Given the consumer confidence and a largely unorganised industry, there are a few listed companies such as Mobile World, FPT Retail, and Vincom Retail who are now looking to tap the organised retail market by entering into or expanding businesses such as convenience stores, pharma/beauty retail, and malls.
 
On the aviation front, besides rising international visitor arrivals, low cost carrier Vietjet has made flying both domestic and international routes more affordable for the average Vietnamese with expectations of doubling their passenger volumes in the next three years by 2020. Having said that, these numbers could be adjusted if there is a new player that enters the airline market, but lack of capacity at the airports currently makes this difficult to see happening. The growth of the aviation sector, as well as the increase in tourism has made the Airports Corporation of Vietnam one of the better longer-term stories in Vietnam as it looks to increase capacity, wield its pricing power, and increase its revenues from other sources such as retail, which are still very low compared to other larger airports in the region such as Hong Kong, Singapore, or Bangkok.
 
Besides growth in passenger numbers, the increase in trade from Vietnam, both export and import, due to the rise of Vietnam as a low-cost manufacturing hub should also be positive for businesses which provide ancillary services to support this trade. As such, Saigon Cargo Services, a cargo handler at Ho Chi Minh City airport, is expected to see robust volume growth over the next few years.
 
Besides meeting companies, conference participants also did a few site visits to various companies’ manufacturing facilities with the stand out being Masan Consumer’s research and development centre an hour or so outside of Ho Chi Minh City. This research centre looks to produce the next big selling product for the company and there was enough for everyone to sample.

At the Masan Consumer Research and Development Centre – White Lion Beer (Su Tu Trang)

Grab bike taxis are now common in Ho Chi Minh City

After spending a week in Ho Chi Minh City I flew to Yangon as part of an investor tour and our analyst Scott Osheroff joined me on this leg of the tour. Currently there is only one direct flight a day from Ho Chi Minh City to Yangon run by Vietnam Airlines. Vietjet used to run this route but stopped flying to Yangon a couple of months ago, though it continues to fly there from Hanoi. I arrived at the airport in Ho Chi Minh City well before my scheduled departure time, but as discussed earlier given the growth in tourist arrivals the international terminal at Tan Son Nhat airport is operating beyond its full capacity and this makes the entire immigration and security check process quite lengthy. No wonder a new terminal expansion at Tan Son Nhat was recently announced!
 
This was my second trip to Myanmar within a month as I also visited during the Chinese New Year break to visit Bagan. Though Myanmar has only recently opened up to foreign investment and more tourists have discovered the place, Yangon airport is a much better airport than some of the airports in the rest of our fund universe which I will not name but other frontier investors can figure out! However, getting through immigration can take a while even though there is not much of a line, but then again the country is going through a learning curve. Once getting out of immigration is when the hustle begins, i.e. bargaining the fare for a taxi at the “official” taxi counter outside the terminal. Getting a taxi doesn’t take time, it is just unorganised – but that was the case for many emerging markets not less than a decade ago so this will improve in time. Grab and Uber are all over the place in Yangon so one can avoid the trouble at the airport.
 
Traffic in Yangon is like any large developing city. Getting around does take time as the number of vehicles has increased while two-wheelers are surprisingly not allowed in the city. Also, Myanmar changed to driving on the right hand side of the road a few years ago but most of the cars at that time were designed for driving on the left hand side of the road so you will probably see many vehicles with the steering still on the right side and also driving on the right side! What is noticeable in Yangon though is the mix of a lot of cultures (i.e. South Asian, Chinese and the local Burmese culture). This is noticeable in the way people dress as well as in the food. Another South Asian influence is that almost every taxi driver is chewing tobacco wrapped in betel leaf and besides the health effects of this it is a sore sight on the pavements/road (red stains) while walking in Yangon.

Yangon traffic – like any other developing city

Given that the country is only slowly opening up and has lot of catching up to do with other countries in the region such as Thailand and Vietnam, things appear to be progressing with modern retail, though nascent, making itself seen in many parts of the city. There are now a number of malls with well established brands operating in Yangon. Two of the malls we checked out were Junction City and City Mall which were equally modern to the ones in Vietnam and had many of the well established brands such as Adidas, Nike, Pizza Hut, Lotteria (a South Korean fast food brand which is also popular in Vietnam) and CGV Cinemas (a multiplex cinema chain from South Korea which is also popular in Vietnam).

At the Junction City mall in Yangon

It is not surprising to see modern retail picking up in Myanmar as it is expected to have one of the fastest growing middle and affluent class populations in Asia after Vietnam and Bangladesh. There is no direct way to invest in a company on the Yangon Stock Exchange as firstly foreigners cannot invest in listed companies and secondly there are only five listings on the newly created exchange, none of which are consumer/retail plays. However, this is expected to change with the new Companies Law expected to be implemented on 1^st August which will be one important step closer towards allowing foreigners to own locally listed companies, as well as allow foreigners to own up to 35% of a Myanmar-domiciled company. Currently, one of the ways to invest into Myanmar is through listings in London, Singapore, or Thailand and this is what the AFC Asia Frontier Fund is currently doing to get exposure to Myanmar.
 
Being on the ground in the country gave us a chance to meet with a company in which the AFC Asia Frontier Fund has invested into. This company is listed in London and has investments in businesses with a lot of growth potential, namely, telecom towers, micro finance and pharmaceutical & beauty retailing. The wireless telecom market in Myanmar only opened up recently which is seeing very high growth and this is making telecom companies expand their coverage rapidly which is leading to more demand for telecom towers. Financial services in general is a very untapped opportunity in the country with microfinance being one of them, while the majority of healthcare and beauty products are sold by the informal sector making this segment ripe for consolidation with a clean, modern format with helpful staff. 

Medicare – an early mover in the organised pharmaceutical and beauty retail space in Myanmar

One of the interesting companies we met is listed in Singapore and gives exposure to the rising middle class in Myanmar with investments in travel and fashion retail, as well as in food & beverage brands. This company has brought in various fashion brands into Myanmar and has the franchising rights for well-established food & beverage brands such as Crystal Jade, Ippudo and The Coffee Bean and Tea Leaf with all three brands already operating in Yangon. The “eating out” trend is only just picking up in the country so food & beverage related businesses should be able to scale up going forward. This company has also won the concession for ten years to operate and manage the duty-free stores at Terminal 1 of Yangon International Airport.
 
Airport retailing is still at a nascent stage in Myanmar as the country receives only about a million tourists annually, significantly below Thailand and Vietnam which saw tourist arrivals of more than 35 million and 12 million respectively in 2017. Tourist arrivals for Myanmar should increase going forward as the infrastructure improves since travelling by air within Myanmar is still not cheap and also because there is no lack of tourism assets in the country, Bagan and Inle Lake being the main attractions. 

Duty Free Retail – Yangon International Airport Terminal 1

Another interesting company we met is, besides having other ventures, investing in building up the Wall Street English training franchise in Myanmar with two centres already under operation. Having English speaking skills has become quite a big deal in this region with similar training institutes running in Vietnam and Thailand.
 
A visit to Myanmar would not be complete without meeting the country’s largest listed conglomerate, Yoma Strategic Holdings, which is listed in Singapore and has investments across businesses with the main sectors being real estate, automobile distribution and leasing, and food & beverages. Yoma is the largest private real estate developer in Myanmar with all of its projects currently in Yangon with the major project going forward being the Landmark mixed-use development in central Yangon consisting of office, retail, residential, and hotel space. The company has also recently invested into a mobile banking platform which is the largest mobile banking platform in the country, but with 20,000 agents and 1.2 million customers it has a lot of room to grow when compared to peers such as Bkash of Bangladesh and M-Pesa of Kenya.
 
Politically, the situation remains fluid with the current government finding its feet with respect to bringing in reform and with the elections expected in 2020 there could be some amount of political uncertainty, but overall Myanmar remains untapped from a consumption, infrastructure and investment perspective compared to other countries in the region and offers an attractive demographic with a population of 54 million, a median age of only 28 and per capita incomes rising from a low base of ~USD 1,200.
 
The next leg of my tour was to Phnom Penh, Cambodia and surprisingly there is only one flight a day from Yangon to Phnom Penh run by Emirates. Upon arriving in Phnom Penh, it is quite clear that there is a lot of construction activity ongoing, this is for both infrastructure as well as residential/commercial development. A lot of Chinese investments are coming into the country in the real estate sector and this should not be a surprise as China accounts for the largest and fastest growing number of tourists to the country. Tourism is a key revenue generator for the country with Siem Reap being the most well-known destination due to the historic Angkor Wat temples.

Phnom Penh is seeing a lot of construction activity

The NagaCorp casino is also a major tourist attraction, especially for Chinese tourists, and I checked out the new Naga 2 and Naga City Walk development both of which opened recently. Naga 2 has helped increase visitor volumes for the company while Naga City Walk is a duty-free retail area which is one of the few modern high-end retail formats in Phnom Penh.
 
I also had a chance to meet with ACLEDA Bank and Phnom Penh Special Economic Zone (PPSEZ). ACLEDA Bank is unlisted but is the largest bank in Cambodia in terms of assets and with the economy being completely dollarized a majority of the banks’ loans and deposits are in USD and there is not much value for the local currency, the Riel. PPSEZ is an industrial park operating close to the Phnom Penh airport and has a diverse client base including Coca-Cola and Vinamilk, both of whom have their production facilities here and the company is looking to open another industrial park in Poipet, a city on the border with Thailand.

The Coca Cola bottling plant in the Phnom Penh Special Economic Zone

However, the Cambodia stock market is still small with only a few listings but the government is trying to get more companies to list. The government also appears to be more investor friendly than Myanmar with less bureaucratic hurdles to overcome. The recent wage increases for the garment sector though could be viewed negatively as the country looks to attract more manufacturing jobs from higher cost locations.
 
The last leg of my trip was to Hanoi in Vietnam to meet some of our portfolio companies and I also took the chance to check out Vincom Retail’s Vincom Plaza format which is being developed in city suburbs and smaller cities and will be one of the key formats being used to expand Vincom Retail’s mall capacity.

Vincom Plaza – Bac Tu Liem district - Hanoi

Vincom Plaza – same location as above

Overall it was a very productive trip with meetings with 36 companies, as well as site visits. Vietnam continues to be in a sweet spot due to its stable macroeconomic outlook backed by foreign investments into the manufacturing sector and very strong consumer spending. There is a lot of untapped potential in Myanmar as the country is still to be discovered by investors but there is still work to be done with respect to opening up the stock market to foreigners and getting more listings. Cambodia is also looking to bring in more manufacturing jobs but uncertainty over wage growth won’t help its cause.