30 November 2009
VinaCapital Investment Management Limited today released an update on the recent performance of the Company and the Investment Manager's AIM-traded investment funds.
On November 25, 2009, the State Bank of Vietnam ("SBV") said it would raise base interest rates from 7 percent to 8 percent on December 1, 2009 and would devalue the currency from 17,032 VND/USD to 17,961 VND/USD as of November 26, 2009, a 5.2 percent depreciation on the official rate against the greenback. The trading band for the currency was also reduced from 5 percent to 3 percent; therefore, the maximum official rate the VND can be traded for USD will be 18,500, an effective official depreciation of 3.4 percent. Since the announcement the spread between the unofficial grey market and the top end of the official rate has declined to about 4 percent.
The timing has come as a surprise, but we regard it as a move in the right direction. Although we did expect interest rates to increase, it was thought that this would be announced early next year. We welcome the move, as the gap between the formal and informal foreign exchange rates had becometoo big (almost 10 percent), and the larger the gap, the harder it is for businesses to operate in Vietnam. Furthermore, inflation had started to be a concern, reaching 4.4 percent YoY November 2009 against 3.0 percent YoY last month. However, this move should help alleviate current concerns around inflation.
We believe the rapid depreciation of the VND is the result of excess liquidity being pumped into the economy due to the fiscal and monetary stimulus package. The excess liquidity has led to a higher than expected trade deficit without increasing support from USD inflow. Foreign Direct Investment disbursement is lower than in 2008 but commitments are significantly lower and foreign remittances have also declined, leaving the State Bank of Vietnam able to tap into its reserves to support the growing trade deficit.
With regards to the reserve, the latest assessments of leading economists is that Vietnam can support the current trade deficit. However, the trade deficit (around USD1.6 billion to USD1.8 billion per month as of late) does need to be reduced. The State has encouraged businesses to limit imports and we suspect that the State will begin to increase import tariffs on certain items and prevent SOEs from importing unnecessary capital intensive items. We estimate the current SBV reserve to be approximately USD20 billion.
We do expect the above actions to:
Increase bond yield - we have already seen bond yields increase between 50 to 100bps.
Lead to a decline of equity value - since the announcement, the VN-Index has fallen 9 percent but has stabilized around 480 points, representing what we believe is an average PE for 2010 of 10x to 11x.
Increase the lending cost to 12 percent from the previous level of 10.5 percent. This will certainly have a negative impact on businesses, but we believe it will be immaterial as banks have found ways to charge above and beyond the ceiling rate (currently 10.5 percent until December 1st, 2009) for commercial loans. It will also have a negative impact on repo transactions, where investors borrow against their current share holdings to invest more in the stock market. In addition, the State has been encouraging banks to stop further lending for equity purchases to slow down credit growth, which is 33 percent YTD October 2009.
We believe the State will have to consider raising the base rate even higher in 2010 to prevent any further signs of inflation and currency devaluation. As the Lunar New Year (February 2010) approaches, there will be seasonal inflationary pressures and thus a further set of rate increases may be required.
Credit growth is another area in which the State is likely to interfervene in order to decrease liquidity and control inflation. In the year to October 2009, credit growth was about 33 percent, still much lower than 1H2008, but beginning to cause concern as regards to its potential impact on inflation. We note that the loan subsidy program is progressively being curtailed. The interest subsidy will fall from 4 percent to 2 percent and loans under 1 year tenor will not qualify to renew. Thus, credit growth will progressively slow down as we approach year end.
In summary, the recent move is good news because it demonstrates that the State recognizes there is a problem and is beginning to provide smaller progressive measures to address these issues. In the medium to long term, this is good for all, especially if a major measure does not have to be implemented (such as that which took place in mid 2008).
Having said this, the State needs to keep an eye on the rising international price of gold against the USD. If gold prices continue to strengthen, and as physical gold is widely available and traded in Vietnam, with the VND effectively pegged against the USD this may put further pressure on the VND to weaken in the grey market.
Cash, especially in USD, is very important as the USD strengthens and opportunities to invest in Vietnam become more attractive. Valuations have declined to an average PE (estimated 2010 earnings) of 10x to 11x. Furthermore, the recent financial crisis has turned the market into an investors market and as such we are now able to negotiate much stronger minority protections such as profit guarantees tied with put options at a pre-determined IRR.
VinaCapital Vietnam Opportunity Fund
In the VOF portfolio, we have been recycling cash from the sales of shares in the listed market. VOF has been very fortunate to have enjoyed over 10 IPO's in its portfolio this year and has been able to recycle over USD100million into cash and into investments, the latest of which is Hoan My Hospital Group, the largest private hospital group in Vietnam.
As for VNL, we continue to develop existing projects whilst looking to exit mature assets. We have been able to solidly secure debt financing for major projects prior to this credit tightening event and thus are positioned to develop major VNL projects.
Vietnam Infrastructure Limited
The VNI portfolio, with over US$100 million in cash, is well positioned to deploy its cash aggressively over the next 6 to 18 months into what is a very attractive environment. Bank funds are getting tighter, minority protections are readily accepted and valuations are lower. As most infrastructure assets generate substantial USD base revenue, the FX risk is lower and thus makes investments in this sector even more attractive.
On the exit front, exits to international investors paying USD is preferred but the locals are paying significant premiums for projects. Potential cashflow is less important to domestic investors, which we saw in the Hilton and A&B Tower deals. In either case, VNL is well positioned as long as we can find exits for assets deemed mature and on which to make healthy returns.
For more information please contact:
Ms Chi Nguyen
VinaCapital Investment Management Limited
+84 8 821 9930
Grant Thornton Corporate Finance
+44 20 7383 5100
LCF Edmond de Rothschild Securities
+44 20 7845 5960
Financial Dynamics (Hong Kong)
+852 (3716) 9802
Financial Dynamics (London)
+44 20 7831 3113
Notes to Editors:
VinaCapital Group is a leading asset management, investment banking and real estate consulting firm with unrivalled experience in the Vietnamese market. VinaCapital Group was founded in 2003 and has grown from a single USD10 million fund to a diversified investment firm with over USD1.8 billion in assets under management as of October 2009.
VinaCapital Investment Management Ltd manages three closed-end funds trading on the AIM Market of the London Stock Exchange. These are:
VinaCapital also co-manages the USD32 million DFJ VinaCapital technology venture capital fund with Draper Fisher Jurvetson, and owns a dominant stake in VinaSecurities JSC, a brokerage. More information is available at www.vinacapital.com.
More information on VOF is available at www.vinacapital.com.