5 November 2021

Vietnam Enterprise Investments Limited

("VEIL" or the "Fund")

Quarterly Update

Ongoing Outperformance

+38.1% Return for the First 9 Months of 2021

Highlights

·    For the first nine months of 2021 VEIL's NAV was up 38.1% versus 24.5% for the VNI index.  Against the backdrop of the fourth wave of COVID in Vietnam, VEIL only reduced 2.8% in Q3,  outperforming the VNI's loss of 3.3%.

·    VEIL's primary strategic concentration is in the important banking, property and steel sectors. We believe this triad of sectors is best positioned to be the main beneficiary of the trends currently driving Vietnam's development.  Secondary sectors for the Fund are retail, technology and more recently brokers.

·    During Q3, the Fund repositioned some company holdings but kept the same weighting for its primary and secondary sectors.

·    This reshuffling was executed in conjunction with a $205m "buy" pipeline for property and brokerage firms that was set up at the end of Q2 and financed by divesting stocks which had surpassed their immediate fundamentals and relative upside potential was perceived to be greater elsewhere.

Figure 1: Selected Active Returns (Bloomberg Basis)

Dien Huu Vu, the Portfolio Manager of VEIL commented:

"It was a challenging third quarter in Vietnam, with lockdown starting a week into July and ending the day after the quarter finished. The Vietnam Index hit record highs earlier in the quarter before declining sharply and recovering throughout the following months. The Fund used this as an opportunity to acquire stakes in companies we believed to be oversold, including attractively priced block trades discounted to their market price. One of the reasons VEIL is able to execute such deals is due to its size - as the largest investment fund in Vietnam, the Fund is sometimes the only buyer capable of taking entire blocks from larger investors.

Due to the lockdown, the economic statistics for the quarter were at their lowest ever recorded. However, a mass inoculation programme was strategically rolled out across parts of the country where GDP is the highest in order to get the economy back on track for Q4, and with Hanoi, Ho Chi Minh City and neighbouring industrial hubs now fully open again, we are optimistic for the outlook going forward. We expect the worst of the pandemic is now behind Vietnam (and - by global standards - in a relatively short timeframe) and look forward to the rest of the country returning to the economy bouncing back strongly from pent-up demand and a potential stimulus package from the Government in 4Q21 and into 2022-2023."

Sector Commentary

·   Banks suffered in Q3, but the decline was worst among State-owned banks, in which the Fund was underweight. Corrections were driven by concern about pandemic non-performing loans and Government warnings against "excess" profits amid COVID - which are mutually exclusive factors.

·    Banks currently trade on compelling ratings: for 2022, the stocks trade at 9.4x PER on EPS growth of 28.7%, with a PBR of 1.7x on ROE of 19.6%. VEIL positions itself in banks that the Fund believes are qualitatively superior and positioned to outperform within the sector.

·    VEIL has a large position in VP Bank, which outperformed the benchmark on the sale of a 49% stake in its microfinance affiliate, FE Credit, to Sumitomo.  Sentiment was also boosted by the bank's announcement of a very generous 80% stock dividend.

·    The property sector was hit in Q3, but VEIL benefitted from holdings in midcap developers which - like with smaller-cap names across the market - were still rising.

·    With steel, the Fund's top holding of HPG delivered stellar results as volume sales continued to expand and the commodity theme moved into focus.

·    There was strong support from the Fund's secondary sectors of retail and tech, i.e., MobileWorld, Phu Nhuan Jewelry and FPT Corporation, helped by expectations of the country's re-opening.

·   The brokerage sector has seen a vast uplift with daily market turnover in Vietnam increasing from $200-300m in 1H2020 to a routine $1.0-1.5bn today.  In Q3 VEIL was able to arrange a large structured deal in a leading broker at a favourable entry price.

·    VEIL had minimal exposure to heavyweights PV Gas (which followed the oil price higher) and Masan Group (which surged on deals), but this was offset by other holdings. 

·    The Fund was therefore able to deliver a modest lead over the Index for the quarter, a positive achievement under the circumstances.

Figure 3:  Alpha Attributions for VEIL by Sector, 2020 (DC Basis)

Outlook

·    COVID is being tackled as vaccinations accelerate, and the latest lockdown is easing

·    The growth/value equation in our favorite sectors remains very compelling, especially in banks

·    Uncertainly lingers about how global supply-chain disruptions are ultimately going to impact Vietnam, in terms of logistical pressures and cost/price effects

·    Vietnam seems to be in resilient shape now, with a recovery boom on the way, although it could still be affected by external inflationary forces not of its own making

·    Against this, the Government is considering a fiscal stimulus package equal to 10% of GDP, which is expected to help counter any backlash from supply-chain problems

·    Foreign investors nonetheless seem to be nervous, as shown by increased net selling of $487m on the Ho Chi Minh City Stock Exchange in Q3, though this has been a regional trend of late

·    Local investors still like equities and their increasing participation has been more than able to offset the foreign outflow. Given the 3Q21 market condition during the lock-down, rotational trading into sectors has been popular with retail but as the economy resumption gets underway, flow is expected to return to sectors that are pillars to the economy, as well as the likelihood that foreign investors will start returning to the market

Notable Q3 Company Performances

Hoa Phat Group (HPG) - 14.6% of NAV

The largest and only fully-integrated steel producer in Vietnam. The company's organically funded expansion has enabled it to continually gain market share.  The Manager expects HPG will benefit from re-opening of the economy and from the infrastructure play created by the government's fiscal spending programme.

·    Q3 revenue $1.7bn, +56% YoY and PAT of $450m, +173% YoY

·    The Manager forecasts NPAT for 2021 will rise 165% to $1.6bn, by far the market's biggest bottom line

·   On this basis it is highly under-valued for 2022 at 6.3x PER with +20% EPS growth, the Fund remains comfortable with our triple-overweight position of 14.6%

Vietnam Prosperity Bank (VPB) - 11.7% of NAV

The first real mover in the previously untapped mass retail banking market, the bank now dominates this segment, which makes up 60% of the banking system. With rapid economic growth, coupled with severe underbanked population of Vietnam, the potential growth of retail banking is extremely attractive to both financial & strategic investors alike.

·    9M Earning rose 25% YoY; this result is achieved despite a 32% surge in provision expense due to COVID lockdown

·    Asset quality slightly deteriorated as NPL increased to 4%; however, as lockdown was lifted, it is expected asset quality will soon recover to pre-lockdown levels

·    There are multiple upcoming catalysts for VPB, including an exclusive and potentially large bancassurance distribution contract and a 15% strategic placement

MobileWorld Group (MWG) - 9.5% of NAV

The Fund invests in MWG because of its top management team with proven track record who have led and inspired Vietnam's transition to modern trade. The pandemic presents a big opportunity for MWG with accelerating trade modernization speed, cheaper rental costs and increased economies of scale combined with their exceptional execution and customer-centric ethos.

·    9M2021 NPAT rose 12%. As lockdowns eased, this has underscored the company as a top re-opening play

·   The Manager has increased the 2021 earnings forecast to $210m (+23% YoY) and our 2022 forecast to $400m based on pent-up demand for handsets and consumer electronics

·    As the price soared in Q3 the Fund took some profit, but still maintain a major overweight position at 9.5% of NAV vs. 1.8% in the Vietnam index and view the PER for next year of 13.5x as an undervaluation

FPT Corporation (FPT) 5.3% of NAV

FPT is a technology and telecoms conglomerate with high levels of growth and ROE, stable dividends generated from strong cashflow and the business remains undervalued. These results are achieved from segments such as IT services, telecom services and education. With the surge of Technology adoption & Cloud migration globally, FPT seems well positioned to benefit.

·    9M2021 revenue of $1.1bn (+18% YoY) and NPAT-MI of $131m (+19%) driven by their IT Services, Telecom Services and Education segments

·    Software outsourcing revenue from the US, APAC, EU and Japan saw a YoY increase of 49%, 22%, 12% and 5%, respectively. Japan saw a deacceleration growth due to most recent COVID-19 lockdown, but a recovery is expected soon

·    Education segment recorded 40% YoY growth; PBT margin increased to 35% thanks to online model. The education sector in Vietnam is growing at a 40% CAGR and offers high margins of around 30%. FPT University is often seen as one of the best options for Vietnamese wanting to study overseas but unable to do so, and as FPT Education increases its offering there is a large potential for growth.

Novaland (NVL) - 4% of NAV

One of the largest real estate developers in Vietnam. After many successful projects across HCMC, the Company's ambitious management has expanded aggressively into new tier 2 cities, achieving excellent results.

·      NVL are positioning themselves to grow strongly in 2021-2023 with large unbilled pre-sales of $5.4bn and on-going projects

·      Q3 revenue was $142m, +52% YoY and NPATMI of $23m, -75% YoY due to last year's high base from one-off income

·    Operationally NVL is accelerating sales launches to compensate for nationwide lockdown in Q3 and anticipate strong sales momentum in Q4 and 2022

·      After a 127% rally YTD, stock price is trading at 25.7x P/E and 4.4x P/B 2021

SSI - <4% of NAV

The biggest broker by market share in Vietnam, SII offer high beta exposure to Vietnam's equity market.

·    As capital markets in Vietnam continue to deepen - meaning higher level of account penetration and liquidity - the brokerage sector should benefit greatly

·    As one of the top brokers in Vietnam, SSI are well placed to gain from this new wave of investors, earnings currently reflect this, as SSI recorded 9M PBT growth of 93%

·    YoY earning trend continue to be solid, the Manager forecast >80% growth until year end

For further information, please contact:

Vietnam Enterprise Investments Limited

Rachel Hill

Phone: +44 122 561 8150

Mobile: +44 797 121 4852

[email protected]         

Jefferies International Limited

Stuart Klein                                                                                                                        

Phone: +44 207 029 8703

[email protected] 

Buchanan

Charles Ryland / Henry Wilson / George Beale

Phone: +44 20 7466 5111

[email protected] 

LEI: 213800SYT3T4AGEVW864