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Asian Insights Buy Vietnam - the Emerging Frontier of ASEAN PACIFIC RIM 2 February 2006 Asian Insights Buy Vietnam - The Emerging Frontier Of ASEAN Equity Strategy Vietnam Is Beginning To Deliver On A Decade of Promise Spencer White, CFA>> Strategist, Merrill Lynch (Hong Kong) The pace of economic growth, policy reform and development in Vietnam’s (852) 2536 3093 [email protected] capital markets now demand attention. One of the last frontier markets to emerge in Asia, we see Vietnam as a ten-year buy. It now represents 3% of our regional model portfolio. Stephen Corry>> Strategist, Merrill Lynch (Hong Kong) The Economy Is Vibrant, And Rapidly Growing (852) 2536 3403 The Vietnamese economy is now one of the fastest growing in the region, [email protected] trending above 7% since 2002, under pinned by proactive government policy, annual FDI of US$5bn and US$4bn of inward remittances. Willie Chan>> Strategist, Merrill Lynch (Hong Kong) Consumption Is Turning Conspicuous (852) 2536-3960 The population of 82m is amongst the youngest in Asia, literacy rates are [email protected] above 96% and consumption is growing at 20% p.a. This is an economy that is communist in name only. Asia Pac Financial Institutions Embryonic Stock Market, Developing Through Privatisation Alistair Scarff>> Research Analyst, Merrill Lynch Market capitalization to GDP is only 4%, the government is targeting 15% - (Hong Kong) the regional average is closer to 130%. A slew of privatizations over the next (852) 2536 3966 twenty four months should dramatically expand this and bring Vietnam closer [email protected] to inclusion in regional benchmarks. Bring On The Banks The bank sector is one of the most interesting ways to play the growth of Vietnam Inc as the consumer gains appetite for credit, infrastructure needs are addressed and the private sector looks to fund its capital expenditure. We liked ACB and Sacom Bank. Other meetings included Vinamilk, BT6 and GemAdept. >>Employed by a non-US affiliate of MLPF&S and is not registered/qualified as a research analyst under the NYSE/NASD rules. Merrill Lynch does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Refer to important disclosures on page 52. Analyst Certification on page 51. Global Securities Research & Economics Group RC#60403301 Global Fundamental Equity Research Department Asian Insights – 2 February 2006 CONTENTS Section Page Insight Focus : Vietnam Investment Summary: From Bicycles to BMWs ? It’s A Buy 3 - 5 Capital Markets – Equity, Debt & FX 6 - 9 Government Policy And Politics 10 - 14 Economic Drivers – Investment & Consumption 15 - 17 The Bank Sector In-Depth 18 - 24 Company Themes & Visit Highlights 25 - 29 Risks For Vietnam 30 Trading Vital Statistics 31 – 32 Regular Sections The Big Picture - Current Equity Strategy for Asia ex-Japan 33 – 37 Asset Allocation & Thematic Model Portfolio 38 – 40 Foreign Net Buying & Selling, Market Turnover, PE & PB, EY &DY 41 – 48 Correlation Table & Pair Trade Charts 49- 50 2 Refer to important disclosures on page 52. Asian Insights – 2 February 2006 From Bicycles to BMWs ? It’s A Buy Vietnam should not be dismissed as more interesting than investible. It is one of the last frontier emerging economies in the region that will demand investor attention over the next decade. In the last four years we have seen rapid changes in both the economy and in government policy that are Valuations For The VN-Index generating consistent 8% GDP growth. 2005F 2006F PE (x) 11.6 9.7 Wealth is being created at a turbo-charged rate, and the young, newly EPS Growth (%) 27.5 20.2 affluent population is engaging in a startling wave of (largely un-financed) PB (x) 3.1 2.6 conspicuous consumption. Accelerating foreign direct investment, the DY (%) 3.6 3.6 prospects of WTO-entry by 2007, opportunities to develop tourism much RoE (%) 29.7 29.8 more significantly and a wide ranging infrastructure program are all Source: IBES important drivers of sustainable long term growth. The privatization program that is underway has the potential to meaningfully expand the breadth and depth of this market over the next five years. Why Vietnam And Why Now Vietnam is one of the last frontier emerging economies in the region that will This Year Vietnam Has The Second demand serious investor attention over the next decade. Buy equity exposure now. Highest Growth Rate In Asia For your fund, for yourself or for your children. Buy now and tuck the investment (%) 9.0 away for ten years. In 2016 we can come back to discuss compound returns, the 8.0 toys that you can buy or the college that they will go to. 7.0 None of this promise is new, of course. Vietnam looked very promising ten years 6.0 ago in 1994-1995. But then the Asia Crisis came, investors pulled cash out of high 5.0 risk and peripheral markets, cash was swept out of the Vietnamese economy and 4.0 momentum was lost. Most importantly, there was no stock market at that time, and 3.0 g e a an i ea t on s the capital extraction process was painful for many. However, in the last five years hina nam por or ralia C t India kis K K nesia t ie a alay V ng Taiwan do us P inga M Thailand In A Ho S Philippines 2006 GDP Growth (%) there have seen rapid changes in both the economy and in government policy that Source: Merrill Lynch, Asian Development Bank are generating consistent 7%- 8% GDP growth. More startling for us has been to observe this pace of positive change accelerate quite dramatically in the past twelve months. GDP growth has exceeded 7% Wealth is being created at a turbo-charged rate, and the young, newly affluent for each of the last four years population is engaging in a startling wave of (largely un-financed) conspicuous consumption. In the last eight months bicycles have been swapped for BMW’s in the streets of Hanoi and Ho Chi Minh. McDonald’s may be conspicuous by its absence but there is no shortage of high-end electronics retail outlets, mobile phone distributors and auto dealers challenging the spaces previously dominated by art and lacquer ware. Accelerating foreign direct investment, the prospects of And consumption is becoming WTO-entry by 2007, opportunities to develop tourism much more significantly and a wide ranging infrastructure program are all important drivers of sustainable very conspicuous long term growth. The disconnect has always been the nascent state of development of the capital markets. With a total market capitalization of just over US$1.1bn, consisting of 35 listed stocks and one fund, the VN-Index remains niche, to say the least. However, we do believe that the privatization program that is underway has the potential to meaningfully expand the breadth and depth of this market over the next five years. The privatization program is Opportunities for the direct accumulation of equities exist in both the OTC as well the driving force behind the as the listed market. The increasing number of domestically-run funds offer a expansion of the equity market more diversified play on the longer term prospects. Refer to important disclosures on page 52. 3 Asian Insights – 2 February 2006 Asset Classes For Expressing A View On Vietnam Equities (Direct) No lock up periods for equities Accounts take a couple of weeks to set up. For details see the section titled ‘Vital Trading Statistics’. There are no lock-up periods for secondary market purchases but volumes remain but here is a 49% foreign ownership limit for all stocks except banks which are challenging, for now currently 30%. Liquidity is tight, however. The largest market cap stock, Vinamilk, currently trades US$300,000 per day. Equities (Indirect) A small but growing number of funds are now established, ranging from pure venture capital to OTC and listed equities. Some include other asset classes such as property as well. From our discussions it seems likely that several will be offering additional capacity over the coming months. The only other choice is to buy the listed units (where relevant). These closed end funds tend to trade at close to a 10% premium to NAV. Selection Of Vietnam Funds Company Name Contact Fund Name NAV (US$mn) Listed Type Dragon Capital www.dragoncapital.com Vietnam Enterprise Investment 185 Dublin Listed and pre-IPO equity, Fund (VEIL) debt and property Vietnam Growth Fund (VGF) 115 Dublin Listed and pre-IPO equity, debt Vietnam Dragon Fund (VGF)^ 35^ Dublin Listed and pre-IPO equity, debt Mekong Capital www.mekongcapital.com Mekong Enterprise Fund 19 N/A Private equity Mekong Enterprise Fund II 40 N/A Private equity PXP Asset Management www.pxpam.com PXP Vietnam Fund Ltd 25 Dublin Listed and pre-IPO equity PXP Vietnam Emerging Equity 14* Dublin Listed and pre-IPO equity Fund* Vietnam Pioneer Partners [email protected] Vietnam Pioneer Fund Raising US$50mn N/A Pre-IPO equity Vina Capital www.vinacapital.com Vietnam Opportunities Fund 170 London Stock Exchange Listed equity, pre-IPO (AIM) equity, debt and property Source: Merrill Lynch Asia Pacific Equity Strategy Group, *PXP has just raised US$14m for the Vietnam Emerging Equity Fund, it has capacity for another US$36m, same listing and closed end structure as the existing Vietnam Fund, ^second fund raising for VDF due in 2Q06 Bonds The US$750m sovereign bond issue in October 2005 was the first issue since the Brady bonds in the late 1990’s.
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