Despite losing some of its “darling” status among frontier equity market investors in recent years, Vietnam still provides valuation-oriented investors with fertile hunting ground. Portfolio manager Rory Kutisker-Jacobson discusses some of the opportunities in the market.
Georgian shares, namely TBC Bank, Lion Finance Group (historically called Bank of Georgia) and Georgia Capital, as well as Kazakhstan’s Halyk Bank, remain major contributors to the Allan Gray Frontier Equity Markets Fund’s overall year-to-date performance. Over one year, each of the Georgian stocks is up over 90% in US dollars, including dividends, while Halyk’s GDR (global depositary receipt) has returned north of 40%. We continue to see significant value in these counters as they continue to trade at low multiples, but we have been trimming our positions into this share strength. Over the last year, we have reduced our holdings in the Georgian names by over 20%. With Halyk, we have received dividends greater than 12% of the share price, which we have invested elsewhere, and we have actively reduced our position by over 7%.
Much of the proceeds from the sale of these assets and dividends received have been invested in Vietnam. A long time darling of frontier investors, Vietnam has a lot of attractive qualities. It has a large, young, productive population of over 100 million people, is one of the fastest-growing countries over the last decade, is strategically located near a major market like China, and has a rapidly expanding middle class. This is, however, not a secret, and for much of the history of the Frontier Markets Equity Fund, this “potential” was more than reflected in share prices, with Vietnamese stocks trading at a significant premium to frontier market peers.
In recent years, this “darling” tag has been somewhat tarnished, as the country has grappled with emerging from COVID-19, multiple corruption scandals (notably in the banking and real estate sectors), a potential middle-income trap and getting caught in the crosshairs of US-China trade relations. As a result, valuations in Vietnam are now much more reasonable than when we first launched the Frontier Markets Equity Fund in April 2017, and while we are still materially underweight, we are capitalising on the reduced investor sentiment to build positions in high-quality domestic businesses at reasonable prices.
Two such companies we are finding attractive are Mobile World and Masan Group.
Mobile World
Mobile World is a domestic, consumer-focused retail business. The original business specialised in the modernisation of retailing computers, phones, electronics, related accessories and household appliances, where they had incredible success in their early years, and has grown to become the dominant domestic retailer of such items. In 2015, they expanded into formal grocery retail with the launch of Bach Hoa Xanh (BHX), looking to capitalise on Vietnam’s underdeveloped modern grocery market, as wet markets still dominate.
While BHX has expanded rapidly and grown topline revenue, it has struggled to achieve consistent profitability. Combined with a slowdown and greater competition in the original electronics and appliances businesses, the share has derated materially. Over three years, the share price is down 18% in US dollars. The recent headwinds and reduced sentiment have created an opportunity for us to build a position at a reasonable price.
At less than 15%, modern grocery retail penetration in Vietnam remains incredibly low. Of the major competitors in the market, with over 2 100 stores, BHX has established itself as one of the larger competitors in the market with an attractive offering, particularly in the fresh product space. If Vietnam follows a similar trajectory to other Southeast Asian markets and BHX maintains or grows its market share in modern grocery retail, the upside could be huge. Notably, at today’s share price, one is no longer paying a high multiple for this upside optionality.
Masan Group
One of the other major competitors in modern grocery retail is WinCommerce (WinMart, WinMart+ and WiN stores), now owned by Masan Group. Where BHX has chosen to focus on their fresh offering, WinCommerce stores are typically smaller and more similar to traditional convenience stores (think 7-Eleven). WinCommerce has a nationwide presence, whereas BHX is more focused on the south of the country. Despite WinCommerce having over 4 000 stores, the absolute revenue compared to BHX is lower. Predicting winners at such an early stage of the retail modernisation journey is difficult, but we believe both WinCommerce and BHX are well placed to emerge as potential victors, and there is ample space for more than one market participant to succeed.
For Masan Group, it is also important to note that WinCommerce is just one of its businesses. It also has a 20% stake in Techcombank, one of Vietnam’s largest privately owned banks; a considerable fast-moving consumer goods business, with popular domestic fish sauce and instant noodle brands; a domestic meat-processing and packaging company; Phuc Long Heritage, a nationwide modern coffee retail chain that is similar in style to Starbucks; and a legacy tungsten business. The share price of Masan Group is down almost 40% in US dollars over the past three years, and we believe it now trades at a substantial discount to the sum of its parts.
We remain focused on the fundamentals
The current environment, characterised by geopolitical uncertainty and fluctuating sentiment, reinforces the importance of our investment philosophy and long-term approach. Rather than being swayed by short-term noise, we remain focused on identifying high-quality businesses trading at a material discount to our estimate of intrinsic value. We believe this approach gives us the best chance of delivering superior returns over time, even if it occasionally leads us to swim against the tide.