8 February 2023

Vietnam Enterprise Investments Limited

("VEIL" or the "Company")

Annual and Fourth Quarter 2022 Update

-10.7% in Q4 2022

Vietnam Enterprise Investments Limited is a closed-end fund investing primarily in listed equity in Vietnam, and a FTSE 250 constituent.  The Company's unaudited NAV performance for Q4 2022 and FYE 2022 is set out in this notice.

Company Highlights

·    In Q4 2022, VEIL's NAV decreased 10.7% over the previous quarter against a fall of 9.8% for its reference index, the Vietnam Index, both in US dollar terms.

·    The Company's NAV per share was US$7.85 as of 31 December (-35.7% YTD) and its total NAV was US$1.6bn. In USD terms, the Company's share price fell 0.4% for the quarter and 31.9% for the year

·    VEIL's NAV per share performance in US dollar terms is +16.1% over three years and +11.2% over five years. Over the same time periods, the performance of the Vietnam Index was +7.6% and +7.0%, respectively.

·    In GBP terms, the Company's NAV per share was £6.53 as of 31 December (-17.0% for the quarter and -27.5% YTD) and its total NAV was £1.3bn. The Company's share price fell 8.3% for the quarter and 23.9% for the year

·    The Company's discount to NAV averaged 12.8% for the quarter and ended it at 10.7%, compared with 19.2% as of 30 September 2022.

·    The Company repurchased 70,000 shares in Q4 2022, to be held in treasury, compared with 1,831,001 shares repurchased Q3 2022. As of 31 December 2022, 3.1% of issued shares on 1 January 2022 were repurchased throughout the year.

·    In 2022, US$61.1mn was spent repurchasing 6,808,169 shares, this is more than the total number of shares bought back in the previous three years combined (5,971,892 shares over 2019, 2020 and 2021).

Dien Vu, the Portfolio Manager of VEIL commented:

"Last year's precipitous market decline largely tracked increased global risk aversion as the Federal Reserve aggressively raised rates. Domestic pressures on the economy that emerged due to a weaker currency, imported inflation, and local rate hikes pushed money from the market onto the sidelines. Vietnamese sentiment however soured more than the global trend and arguably reached peak fear in Q4 2022 due to unintended consequences from policy decisions aimed, ironically, at improving the robustness of the capital markets.

"Despite this, the economy saw impressive GDP growth of 8.0%, the highest in ten years. We have reason to believe the worst is behind us and that a repeat of the events that plagued market sentiment in 2022 is unlikely. Local political events that caused the market to decouple from major global indices have been addressed, and new Government initiatives are currently helping to reverse both cause and effect of these homegrown themes, and at serious pace.

"Amendments to Decree 65 are aimed at reopening the bond market to ease corporate restructurings. More recently, Decree 26, which addresses the loan-to-deposit ratio in the banking system, previously expected to remain unchanged, now seems to be showing signs of loosening. This is intended to support system liquidity and create a calmer environment within the banking sector. For now, we can see the Government's trepanning of the 2022 liquidity headaches is working, this will help the real estate and banking sectors avert crisis to slowly gain momentum, which together make up over half the Vietnam Index.

"The Vietnam Bond Market Association has stated US$9.0bn of corporate bonds were bought back before maturity in 2022, spiking in December at US$1.7bn. Major corporates redeeming bonds early, and at an accelerated rate, disabuses the wider consensus of an inherent systemic risk that companies are well positioned to service their debt. This can easily be interpreted as good news, however there are c.US$13bn of corporate bonds maturing in 2023, the majority in H2, meaning default risk is still a concern in a high-rate environment.

"Whilst aggregate earnings may not necessarily excite at first glance, it is worth noting these figures are skewed towards sectors such as real estate, which have been heavily sold and are underperforming due to a high interest rate environment and sector-wide liquidity problems, yet still represent 15.5% of the market's earnings.

"The top 80 stocks under the Investment Manager's coverage have a trailing P/E of 11.8x, which is one standard deviation below the three-year mean, a significant recovery from the low base of 9.4x in 2022, and with healthy balance sheets and a modest debt-to-equity ratio.

"We believe the ability to see through the short-term fog of volatility is crucial for accumulating high-quality stocks for the medium-long term as the market moves from a beta to an alpha one. This means picking stocks with strong balance sheets, solid fundamentals, and excellent corporate governance. These select companies will generally have more of a margin of safety against internal and external factors, reducing downside risk and leading to favourable EPS growth in 2023."

Active Returns

Source: Bloomberg, Dragon Capital

Macroeconomic Commentary

·    GDP growth in Q4 2022 was registered at 5.9% year-on-year and 8.0% for 2022. The services sector was the main driver, rising 8.1% in Q4 2022 and 10.0% for the full year.

·    Q4 2022 exports were US$89.2bn with imports at US$85.2bn, down 6.8% and 3.6% year-on-year, respectively, which has been attributed to a high-base effect from Q4 2021 and the global slowdown. The trade balance for the quarter was US$3.96bn compared to US$6.5bn in Q4 2021.

·    For the whole of 2022, Vietnam's exports and imports amounted to US$371.9bn and US$360.2bn, increases of 10.6% and 8.4% year-on-year, respectively. The annual trade surplus was recorded at US$11.2bn, the second highest ever in Vietnam following the US$19.9bn that was posted in 2020.

·    FDI disbursement finished 2022 at US$22.4bn, having recorded US$7.0bn of disbursements in Q4 2022, an increase of 13.5% and 7.9% year-on-year, respectively.

·    Registered FDI was recorded at US$27.7bn, a fall of 11.0% year-on-year. The overall decline is thought to be due to disrupted feasibility studies for new projects. The manufacturing sector attracted the highest registered FDI of US$16.8bn, contributing 60.6% of the total.

·    The Vietnamese dong appreciated 1.0% against the USD in Q4 2022, putting the total depreciation at 3.4% YTD as of 31 December. The Vietnamese dong depreciated 6.9% against the pound sterling in Q4 2022 and its total appreciation was 8.1% YTD as of 31 December.

·    Vietnam's CPI stayed under control in 2022, averaging 3.2% for the year. This was below the Government's target of a 4% maximum rise and due in part due to their effective control over prices including petrol, healthcare and education.

Q4 2022 Company Performances

Vietnam Prosperity Bank ("VPB"): 12.9% of NAV; up 0.4% over the quarter

First invested in by VEIL in 1996, VPB is a commercial bank with an asset management division, and owns 50% of a large microfinance company, FE Credit (52% market share in Vietnam). VPB has put significant resources into digitalisation, using modern technologies to maximise customer acquisition and retention at a low cost.

·    Consolidated revenue for 2022 was US$2.6bn with NPAT of US$775mn, +18% and +55% year-on-year, respectively. Q4 2022 revenue was US$544mn and NPAT was US$97mn, +32% and +15% year-on-year, respectively.

·    Q4 2022 profits were mainly hit by interest rate rises, for which the heavy cost of funding for borrowers flowed through into debt servicing problems, raising non-performing loans (NPL) for both VPB and its microfinance subsidiary, FE Credit to 5.7% by the end of Q4 2022. Provisions rose 23% year-on-year and this expense dampened the bottom line.

·    Q4 2022 saw a significant rise VPB's customer deposits, +28.5% and +11.1% year-on-year and quarter-on-quarter, respectively. This was driven by a 47.2% increase from retail and SME customers and was supported by the 200 basis point hike in deposit rates, VPB's favourable rates compared to peers, and the bank's efficient use of digitalisation to attract customers.

Mobile World Group ("MWG"): 8.0% of NAV; down 32.3% over the quarter

VEIL has held MWG since its IPO in 2014. The Investment Manager likes MWG because of its excellent management team with proven track record who have led and inspired Vietnam's transition to modern trade, displaying exceptional execution and customer-centric ethos. MWG has more than 5,300 stores nationwide covering mobile phones and accessories, consumer electronics and groceries.

·    Consolidated revenue for Q4 2022 was US$1.3bn (-15.0% year-on-year) and NPAT of US$26m (-60% year-on-year) and for FYE 2022 reached US$5.7bn (+9.0% year-on-year) with NPAT of US$174m (-16.0% year-on-year).

·    Total online sales totalled US$810mn in 2022, an annual increase of 32%, from which US$753mn came from MWG's mobile phones and consumer electronics segments, an increase of 32% year-on-year.

·    In Q4 2022, MWG's mobile phone and consumer electronics chains saw an aggregate year-on-year drop in revenue of 26.0% driven by the high base of Q4 2021, abnormally high inventory across the supply chain and rapidly deteriorating consumer spending from October. Revenue for MWG's grocery store chain reached US$289mn in Q4 and US$1.2bn for FY 2022, up 25.5% and down 4.0%, respectively. Total Q4 earnings dropped 60% YoY and 32% quarter-on-quarter as average selling prices were cut across the board to stimulate demand and clear excessive inventory. 

FPT Corporation ("FPT"): 4.7% of NAV; down 3.5% over the quarter

A portfolio holding since 2008, FPT is a technology and telecoms conglomerate with high levels of growth and ROE, stable dividends generated from strong cashflow. FPT's results are achieved from segments such as IT services, telecom services and education. With the surge of technology adoption & cloud migration globally, the Investment Manager believes FPT is well positioned to benefit.

·    FPT reported total revenue for 2022 of US$1.9bn and NPAT US$226mn, increases of +23% and +22%, respectively. 4Q 2022 revenue was up 22% year-on-year at US$556mn but NPAT increased just 4% to US$58mn due to FPT's recognition of discretionary expenses at year end.

·    Revenue from software outsourcing reached US$806mn in 2022, an increase of 30% year-on-year.  Among markets, revenue from the US posted the fastest growth of 50% thanks to resilient IT demand and new technology adoption. In 2022, digital transformation (DX) revenue was US$313mn (+33% year-on-year) due to high growth rates in Low Code, Cloud, and AI. In terms of new contracts - a proxy for future revenue, FPT signed a total value of $905mn, +39% year-on-year. Pre-tax margins, however, softened to 15.8% from 16.7% in FY21 partly following the weakness of the Japanese Yen as Japan accounted for 40% of FPT's global IT revenue and higher year-end discretionary labor expenses.

·    FPT Education's revenue grew 53% year-on-year highlighting both strong demand for private education, especially IT, in Vietnam and FPT's rising reputation. FPT University had more than 100,000 full-time equivalent students in 2022, an 40% year-over-year increase. In order to maintain growth, FPT is expanding its education network outside Hanoi and Ho Chi Minh City into new provinces across the country.

Phu Nhuan Jewelry ("PNJ"): 3.5% of NAV; up 14.0% over the quarter

The leading jewellery retail chain in Vietnam which is favoured by the portfolio management team due to the excellent opportunities for growth in its US$35bn industry. This is seen as a highly fragmented market and PNJ continues to take business from traditional 'mom and pop' stores, which make up 73% of all shops. PNJ's store count was 364 as of 31 December 2022 versus 341 at the end of 2021.

·    For 2022, PNJ's net revenue was US$1.4bn with NPAT of US$77mn, +73% and +76% year-on-year, respectively. Preliminary Q4 2022 results reported net revenue of US$ 352mn and NPAT of US$20mn, +18% and +3% year-on-year, respectively.

·    Retail revenue rose 80% year-on-year and made up 61% of total sales, gold bar sales (25% of total sales) rose 75% and wholesale revenues increased 56%. Diamonds also became a more popular item in 2022 with uncertainty from Vietnamese investors on the stock market, USD deposits, property prices and cryptocurrency.

·    In 2022, PNJ opened 33 new gold stores and upgraded 31 others. The company also closed nine gold stores and six silver stores, and toward the end of 2022 was recording month-on-month gross margin expansions following the economies of scale achieved by increasing store count. Gross profit margins inched up 70 basis points quarter-on-quarter to 17.7% in Q4 2022.

Top Ten Holdings (66.3% of NAV)

Source: Bloomberg, Dragon Capital

NB: All returns are given in USD terms

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