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AFC Asia Frontier Fund - Vietnam - In a sweet spot

Dear Investors and Newsletter Readers, As part of our continuing on the ground research, please find below our travel report for Vietnam.


Dear Investors and Newsletter Readers,

As part of our continuing on the ground research, please find below our travel report for Vietnam.


Ruchir Desai, Co-Manager of the AFC Asia Frontier Fund, traveled to Ho Chi Minh City last month to attend an investor conference. All photos are by Asia Frontier Capital.

Vietnam – In a sweet spot

It was that time of the year again when we visit Ho Chi Minh City for an annual investor conference which we have been attending since 2014. Last year, I wrote that participation at the investor conference was the highest it has ever been. However, given the correction in the Vietnamese stock market since its high in April 2018 there was less exuberance this time around. That is not necessarily a bad thing for us – the lesser the crowd the better.

Having said that, Vietnam is still one of the most favoured markets amongst frontier investors given its robust economic growth, stable macroeconomic outlook, ability to attract foreign direct investments and now an increasing consensus that the country is expected to benefit from the trade tensions between China and the U.S. There is already some anecdotal evidence that Vietnam is benefiting from this trade tension as most industrial park companies we have met with have spoken of more inquiries from manufacturers looking to relocate from China into Vietnam. This trend is also evident from the Hong Kong-based garment and textile companies we meet with who have moved a majority of their production base from China to Vietnam and other lower cost locations over the past few years.


(Source: IMF)



(Source: Dream International, Yue Yuen Industrial, Orient Securities)

Even if a trade deal does materialise between China and the U.S., it most likely will not stop the trend of manufacturing companies looking to relocate to lower cost locations like Vietnam given the wage differential advantage that Vietnam offers in addition to a disciplined workforce.


(Source: Asia Frontier Capital)


Besides evolving into a manufacturing hub, the country is also transitioning into a tourist hotspot as international passenger arrivals have almost doubled in the last five years to 15.5 mln as of the end of 2018. The hotel I was staying at was packed to capacity mostly with tourists from North/East Asia, Western Europe and the U.S. Ho Chi Minh City and Hanoi have traditionally been the main spots of attraction for tourists due to their history but we are now seeing other destinations such as Da Nang, Nha Trang and Phu Quoc gain more traction in attracting tourists due to their seaside locations. There are now direct flights to all three of these locations from China, South Korea, Thailand, Malaysia and Hong Kong while Qatar Airways is now flying from Doha to Da Nang.


(Source: General Statistics Office of Vietnam)


With the rise of low cost carriers in the region and a flying time of a few hours from most North Asian and South East Asian cities, the growth of tourism in Vietnam is here to stay. Though international arrivals have been soft for the last few months due to slower growth from China, which accounts for more than 30% of total arrivals, we are very positive on the structural growth story of the Vietnamese tourism industry – attractive destinations, economical to get to, and affordable to spend time as a tourist.

One of the ways the AFC Asia Frontier Fund is gaining exposure to this industry is via the Airports Corporation of Vietnam (ACV), which is the monopoly airport operator in the country and which has plans to expand existing capacity in Ho Chi Minh City while also running the airport in upcoming tourist destinations like Phu Quoc. Furthermore, unlike its regional peers, it gets a much lower share of revenues from non-aeronautical services (mostly duty free and food & beverage) which have much higher margins and we expect this will change in the longer run as ACV looks to utilise its assets more effectively.


(Source: Vietcapital Securities, AFC, Bloomberg)
ACV (Airports Corp. of Vietnam), AOT (Airports of Thailand), MAHB (Malaysia Airports Holdings)


The other major trend that one can observe on the ground is the growth of consumer discretionary spending on automobiles, consumer appliances, fashion as well as the penetration of modern retail (malls, supermarkets, convenience stores, pharmacies) and during my trip I got a chance to visit the stores of some of the well-established names in these segments. We like the consumer discretionary theme in Vietnam as disposable incomes are rising and there is greater urbanisation. The AFC Asia Frontier Fund is invested in VEAM Corp. (VEA) which is an automotive holding company having equity stakes in the local operations of Toyota, Honda and Ford. Passenger car ownership in Vietnam is still very low relative to the region with industry sales growing by 28% in 2018. In 2019 industry volumes are expected to grow by more than 20%.

Bach Hoa Xanh – a new retail concept trying to attract customers from the wet market to purchase their fresh food


Within the consumer discretionary theme, the AFC Asia Frontier Fund also owns Vincom Retail (VRE), the largest mall developer and operator in the country. Modern retail penetration in Vietnam lags regional peers like Thailand and Philippines and as modern retail penetration increases, VRE is well positioned to capture this growth due to its wide reach across the country as well as due to its access to key anchor tenants.

The Landmark 81 Tower at Vinhomes Central Park in Binh Thanh District – the tower also hosts the Vincom Landmark 81 mall


Staff in action at a modern pharmacy store – another upcoming concept in Vietnam


Another trend that is quite noticeable when on the ground is the spread of consumer finance – all major mobile phone, consumer appliance and jewellery stores allow customers to purchase products on credit as many of these retail outlets have tied up with consumer finance companies and banks to offer financing plans to potential customers. No surprise then that the State Bank of Vietnam is trying to slow down credit growth in this segment as it has boomed in recent years.

Consumer credit plans freely available at most mobile phone/consumer appliance/jewellery stores


Though Vietnam continues to stand out amongst frontier markets, there are also concerns amongst investors due to the country’s very high dependence on trade. The possible slowdown of the U.S. economy and the ongoing slowdown of the Chinese economy could soften export growth going forward and this is already evident in mobile phone exports (21% of total exports) which have declined by 4% so far in 2019. However, other segments of exports are holding up well, with textiles, footwear and electronic goods growing by 13%, 15% and 9% respectively so far in 2019. These three segments together account for 31% of total exports.

Furthermore, Vietnam is expected to benefit from upcoming free trade agreements with the European Union as well as the CPTPP (Comprehensive and Progressive Agreement for Trans-Pacific Partnership) which should support export growth. As the country continues to attract manufacturing led foreign investment which is primarily going into setting up export capacity, overall export growth should remain in the single digits despite a tougher global environment – a relatively much better performance compared to regional peers who are so far showing flat to negative export growth in 2019.


(Source: General Statistics Office of Vietnam, Bloomberg)

(Malaysia, Philippines and Thailand export growth for 2 months of 2019)

Vietnam remains our top market amongst our country universe and the best way to experience the opportunity that the country offers is to spend some time on the ground!


Ho Chi Minh City skyline on an evening out


For information about the AFC Asia Frontier Fund click one of the below links:
 Factsheet AFC Asia Frontier Fund
 Factsheet AFC Asia Frontier Fund (non-US)
 Presentation AFC Asia Frontier Fund (English)



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I hope you have enjoyed reading this travel report. If you would like any further information about AFC Asia Frontier Fund, please get in touch with me or my colleagues.

With kind regards,
Thomas Hugger
Fund Manager

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