Phuong My

Phuong My became Vietnam’s first designer to show at New York’s fashion week. This is very exciting to me, because 1) I love fashion and 2) I think it really says something important about a potential path for Vietnam, if it chooses to go this way.

About Phuong My: She is based in Ho Chi Minh City, born in 1988 (young!) and graduated from the Academy Of Art at the University San Francisco. She is known for impeccable tailoring, striking silhouettes and beautiful feminine details. She was invited to show at NY Fashion Week for the first time this year after opening the Vancouver fashion week last year. I couldn’t really find any reviews of the show, but I personally found it exciting. See the pics below that I took from Phuong My’s website.

More importantly, this is a Vietnamese company that is actively competing on the world stage, at the highest level (or second- or third-highest, depending on whether you think Paris, Milan and/or London are more important fashion shows - personally, I think NY Fashion Week is the edgiest and most open of the big four). The label already distributes in more than 20 countries,

If Vietnamese companies are going to grow, they need to start competing as aggressively as possible globally. And it is going to require skilled workers, something that Vietnam needs desperately, preferably by growing them “in-house.” Right now the textile market in Vietnam is basically unskilled, with a few innovations coming from foreigners (see my post dated January 17 and titled: “A quick break from hotels: environmental investments.”

So Phuong My is a great example of a local Vietnamese (with some training from abroad) able to grow a business that can compete internationally. What a story! The only thing that makes me hesitant us that Phuong My is not really upgrading local talents as much as she can, because she purchases her more luxurious fabrics from abroad, even though Vietnam has a very large textile business, as indicated in this article.

Rather than accepting the limitations of local fabrics available to other local designers in Vietnam, Phuong My established a very clear strategy for her own brand. PHUONG MY’s fabric production is entirely outsourced
to select partners in Paris, Milan and Hong Kong, thus providing the optimum blend of both materials and exclusivity that has proven to be successful for the brand.

Hopefully over time, Phuong My will source materials locally and then export all of these beautiful creations abroad. I can’t wait. This is what all Vietnamese companies should be shooting for.

All pictures from the Phuong My website.

Vietnam as an example for North Korea

As I wrote yesterday, there are a few articles that talk about Vietnam as an example of a path for North Korea and Kim Kim Jong-un.

The reasons are numerous:

• Vietnam was the winner of a war with the US. The Korean war was very different, but ultimately, North Korea was able to maintain a separate regime from the South and its allies.

• North Korea has been isolated from much of the Western world, much like Vietnam was after the war.

• The government of Kim Jong-un wants to maintain power, but would probably be amenable to greater living standards, especially for the elite.

• Vietnam has already gone through a transition like this and has generally succeeded. The Communist Party remains in control, people’s living standards are higher, and the elite are better off.

• Vietnam is one of the few countries in the world where America is seen positively and that number is growing. According to a Pew Research poll, in 2017 84% of Vietnamese have a favorable view of the US, up from 76% in 2014. From America’s perspective, if something like that happened with North Korea, it would be a major win.

Now we have the Trump-Kim summit coming up in the next few weeks in advance of which the Vietnamese foreign minister made a trip to N. Korea this week. So it looks like the magic could start to work soon!

My opinion is this: no f*ing way.

First, it’s great that Vietnam has opened up its economy, but it has a not great human rights record and that seems to be getting worse with recent crackdowns. The only area where it is improving is in its campaign against corruption, but most Vietnamese do not have the right of free expression, assembly, etc. It is not a great example of an open system.

Second, if Kim decides North Korea should be like Vietnam, does the world need another market-friendly dictatorship ? A system like that can raise living standards, but at the expense of opening up of the economy to real freedom. I believe that economic freedom is maybe necessary but by itself is insufficient to be true freedom. Sometimes its not freedom at all, if corporations just take the place of government in all aspects.

Many people believe that when countries open up their markets they will eventually be forced to open up their political systems as well. Exhibit A is China. Exhibit B is Vietnam! Both countries have pretty open markets, and yet, neither are democracies.

Now, is it better for North Korea to be tied to the world economically rather than isolated? Yes, I would say so. And it would likely decrease the chance that the government would actually launch one of their (non-existent, according to the US government) nuclear weapons. It could also help the world better understand North Korea and North Korea understand the world. That would all be good.

But going from here to there seems really difficult. North Korea’s won’t give up its nuclear weapons program. The rest of the world won’t allow a nuclear-powered North Korea. Until one side backs down, the regime will continue to be isolated.

In a dream world, Kim would go to Vietnam, see how advanced the country is, and decide that he needed to open his country. He would make a real deal to get rid of his nuclear weapons' program in exchange for aid and trade with the outside world. Eventually, the country would open up so much that the demilitarized zone could actually be demilitarized and the border with South Korea open. Let’s all hope that happens, but I sincerely doubt it.

PS By chance I just saw that the New York Times magazine published an article about North Korea and its opening up. Maybe Kim does want to open up, but what will Trump ask in exchange, if anything.

Sand in Vietnam

I feel like I didn’t really do justice to all of the aspects of land yesterday, so I will try to return to it at a later date. Specifically, I didn’t talk about how the revenues are calculated, how land is allocated, corruption surrounding land allocations, what that means for property developers, farmers, etc. Land is a big issue, and I really just skimmed the surface.

But, I found two interesting stories. The first was about hopes that North Korea would use Vietnam as a model for engagement with the world. I will try to write about this tomorrow, because I think it bears some reflection.

CEMENT PRODUCTION REACHED MORE THAN 90M TONNES IN 2018, WITH ABOUT 2/3RDS OF THAT FOR THE DOMESTIC MARKET SOURCE: CEMNET.COM, STOXPLUS, VIETECON

CEMENT PRODUCTION REACHED MORE THAN 90M TONNES IN 2018, WITH ABOUT 2/3RDS OF THAT FOR THE DOMESTIC MARKET SOURCE: CEMNET.COM, STOXPLUS, VIETECON

The second, which is definitely less thought about that North Korea is: sand. Turns out, if you didn’t know, we are running out of sand in the world. Or specifically, the right type of sand that is used in construction. And lots of sand is used in construction, in glass making, a molding material for metal works, landscaping, also, of course, sandpaper. In construction, it’s mainly used to make mortar and concrete and asphalt. Concrete is actually just cement mixed with sand, water and rock. And cement is made from sand too.

Just a quick calculation. To make concrete, you use 1 part cement, 2 parts sand and 3 parts gravel. So sand makes up a third of the volume of concrete. Based on this report, the world makes 10 bn tonnes of concrete each year, so that would require 2.8bn tonnes of sand. And it has to be a certain type of sand. The total consumption of sand is said to be 15bn tonnes. Cement production is about 4bn tonnes a year, with about half of that going to make concrete. And cement can use sand as well.

In Vietnam, total production was just over 90m tonnes in 2018, of which 60m were used domestically. If I assume about 50% is used to make concrete (which may be low but appears to be the usage world wide), that means almost 220m tonnes of concrete were made, using 60m tonnes of sand. That’s a lot of sand, around 30m cubic meters. Another source says that the country needs 50-60m cubic meters a year, almost double my calculations.

That’s a big amount of sand. About the size of Vancouver.

What I was surprised about is that Vietnam is actually cracking down on illegal sand exploitation. HCMC’s People’s Committee fined two companies for illegally extracting sand, and they also confiscated sand and some equipment. The fines were small (VN95m), but the confiscation was real, worth VN10bn for each company, according to the article.

Of course, sand is related to climate change, since sand helps moderate the impacts of extreme weather, like flooding. And of course saltwater intrusion into rivers, like the Mekong, can be worsened by the lack of sand.

The construction industry is an important and growing part of the Vietnamese economy, so it will be difficult for the country to do with this, but better regulations plus potentially some incentives to use other materials rather than sand to make concrete would be helpful.

Land in Vietnam

I started thinking about land recently, probably because I have real estate on the brain, and I thought I would see what I could find about land in Vietnam. Basically, how does land work in Vietnam. I found out some interesting facts:

• Land is collectively owned. No surprise for a Socialist Republic. The government can assign land use rights to people, or lease them. These leases can be paid annually or in a chunk at the beginning. If you pay at the beginning, you have more rights, if I read things correctly.

• While land leases may be strange to some investors, they are actually quite normal in the UK. It works fine there (look at property prices in London!), although most leases run for 125 years or longer. I guess it helps to have royalty.

• Land fees are a big part of city budgets, according to this story about land fees. Last year, Ho Chi Minh City (HCMC) collected VND16.5tr for land-use purpose changes, VND5.38tr in leasing land and VND6.34tr in land-use fees. In total, it collected VND28.2tr in all types of land fees. This represents 11.5% of all domestic revenues and 7.5% of all revenues collected by the city. It was more than the city got in crude oil revenue, which is falling.

• This reminds me of stories (here, here, here, and here) about Chinese local governments’ addition to real estate sales. They can make up as much as 35% of government revenues. First, it is/was unsustainable (although these articles go back to 2012) because the sale can only happen once. Second, if there is a downturn, revenues from taxes and fees are probably already going to fall, and this is going to be a double whammy. Third, it really pushes cities to develop profitable real estate rather than parks, schools, government buildings, even if it is necessary.

• However, looking at Vietnam in comparison, the real estate market, and revenue from it to the government is much less of a worry. As mentioned above, it is only 7.5% of revenues in HCMC. In the US, it can be significantly more. Overall in 2015, it made up 30% of local government budgets, and 17% of total state and local budgets.

• Foreigners can only lease land, and that is for 50 years (70 years in certain exceptions) and renewable. And they still have the ability to sell the property. At least in late 2017, foreign sales were minimal, according to this article. But these numbers appear to be increasing.

Three things on my mind

Just a few things on my mind as we get back to work on this Monday post-Tet.

First, smoking. I read an interesting paper on smoking in Vietnam that indicated that a price increase of 2.8x (from VND22,000 to VND62,000) would cause 56% of smokers in Da Nang to quit. I love that the study put such an exact figure on the amount needed to stop smoking. It’s totally unrealistic. Heavy smokers will smoke no matter what, even if they can’t afford other things. And casual smokers will probably still buy, even at higher prices, because it is usually just an impulse purchase that ultimately is not a big part of their overall spending.

The big knock on cigarette taxes is that it falls disproportionately on the poor. For the poor that are addicted, they will still buy cigarettes and have much less money for other things. As a former smoker, I feel in my bones that this is true. Smokers will just find the money. But I still think it is worth it to stop people, especially young people, from smoking in the first place. If you never smoke, then you never need to quit. I know that sounds like a tautology, but it’s actually quite meaningful. Quitting is hard, really hard, but not smoking is easy. Quitters say that there is a part of them that always misses smoking. While a non-smoker, misses nothing.

I also found it interesting that there is room for the Vietnamese government to raise taxes without decreasing the volume of cigarettes, or at least not by much. Given what we know about the health affects of cigarettes, it makes sense to start raising taxes now to pay for the cancer coming in the future.

If you want to know what the most popular brands are in Vietnam, here’s your chart. Malboro is the most popular, like in the UK and the US, but lots of competition. And Australia has the most expensive prices for cigarettes, more than New York City.

Second, other types of tourism. The Guardian reviewed a new hotel in Vietnam. It is at the bottom of the Yen Tu mountain, the tallest mountain between Ha Noi and Ha Long Bay, so potentially a nice stop between the two destinations. The mountain itself has 6km of steps and paths up to the monastery. The hotel looks wonderful, and I can’t wait to go.

More important than my Vietnam bucket list is what this represents for tourism in the country. Vietnam actually has a lot of various tourist attractions, with cool urban centers, beach resorts, and history, both imperial and of the war. There has also been some adventure tourism, but mostly smaller groups organized by small companies. Now, I like these kinds of small groups, but I see the appeal of more mass market tourism. And something like Yen Tu can appeal to both. It allows some hiking, a religious experience, a cultural experience for foreigners, hopefully wrapped up in fancy hotels that result in more spending by tourists. It is quite difficult to add these types of experiences, especially in poor countries, but it really can drive tourism numbers.

The key is to not let these unique destinations be swamped, like we are seeing in Ha Long Bay. The government should start restricting numbers (and raising prices) for the most important destinations, but then funnel people to other, also interesting places. It’s extremely hard to do, but is essential.

Third, Brexit. I was listening to a Financial Times podcast on UK politics about Brexit, and the journalists were saying that Britain has been quite unsuccessful in signing new trade deals post-EU, or even signing up countries to roll over the EU deals to Britain. I started to wonder about Vietnam and their exports and imports to Britain. According to one source, UK exports to Vietnam are USD0.74bn, and Vietnam exports almost USD5bn to the UK. If I read these statistics correctly, merchandise trade was high as well, with GBP209m in exports from the UK and GBP1.2bn in imports from Vietnam in 2018. Vietnam was #11 in terms of exports from the UK, but only #5 in terms of imports. Again, these look to be only merchandise.

The issue is that Vietnam is currently in the final stages of negotiating a big deal with EU that should be signed in 2019. Now the UK has to ask for a separate deal post-Brexit. The UK government says that it will join the CPTPP, which is in place now, but that might take some time and depends on the UK’s status with the EU post-Brexit. If it is still part of the EU customs union, it might not possible or worthwhile, since the EU already has or is negotiating free trade agreements with 9 of the 11 countries in the CPTPP, like it is with Vietnam already. If not in the customs union, then Britain would probably like to join the CPTPP quickly, meaning it would have little leverage in negotiations, meaning it would get no say in the details.. But it would be able to show this success quickly while focusing on the much more important agreement with the EU.

It is hard to see how all of this is going to play out. I have always felt that the UK leaving the EU is not only bad for the UK, but also distracts it from doing anything else on other important issues. If you think about the real problems in the world (climate change, lack of faith in democracy, globalization leaving people jobless, inequality), Brexit addresses none of these. But it has taken up every iota of attention in the UK since the referendum back in June 2016. What a waste.

Corruption and firm size

I came across this recent paper (here) that looked at corruption/bribery in Vietnam and found that as firms grew larger, they faced less corruptions/had to pay smaller bribes. The paper is called “Firm Growth and Corruption: Empirical Evidence from Vietnam” by Jie Bai, Seema Jayachandran, Edmund J Malesky, and Benjamin A Olken.

We find that firm growth reduces bribes as a share of revenues. We propose a mechanism for this effect whereby government officials’ decisions about bribes are modulated by inter-jurisdictional competition. This mechanism also implies that growth reduces bribery more for more mobile firms; consistent with this prediction, we find a larger effect for firms with transferable rights to their land or operations in multiple provinces.

Obviously, corruption is a big issue in Vietnam. It was tied at 117 by Transparency International’s 2018 Corruption Perceptions Index 2016, with a score mostly unchanged since 2012. Also, Vietnam is unique in that much of business and bribery is done on the provincial level, which allowed the researchers to test inter-provincial competition.

Reading through, it does seem like companies with good property rights, large employment and the ability to move (so competition between provinces is a real possibility) can face lower corruption/bribery.

One thing that I would have liked examined is whether there is a limit to bribery in absolute dollar amounts. What I mean is that as firms get larger and larger, to have the same percentage in bribery would mean that they are paying out big sums . So a company that had revenue of $100m could face something like $2m in bribes, which might be reasonable, but a company with $10bn in revenues would have to give away $200m in bribes. Maybe the officials would be wary about accepting that much in bribes. How would they “launder” it? They might be concerned that their national bosses would be jealous of their new wealth, especially if it was spread among a small number of officials.

Having said that, my experience in Saudi shows that bribes/corruption can be very high. The government said they recovered more than $100bn in assets.

Anyway, the paper is extremely interesting and well worth a read.

Hotels: A market-sizing exercise (part 10 of ???)

So for my final part on HCMC hospitality, I wanted to see how spending is needed to construct the number of hotel rooms anticipated for our tourist estimates in 2025. I went through the details of my estimate of additional hotel rooms yesterday and came to a conclusion of something like 250,000, but up to 300,000 total hotel rooms needed in 2025. That’s up from about 190,000 or so now. That means an additional 60,000 all the way up to 110,000 new rooms in the next 7 years.

I’m not going to re-estimate the cost per hotel room. I did that earlier (scroll down to part 6), when I looked at the cost of adding hotel rooms for the country as a whole. I estimated that it would cost around $175,000 per 5-star room, $125,000 for 4-star, down to $85,000 for 3-star and the remainder, which is really the bulk of the additions, at $20,000 (all US dollars).

Total cost of more than $2.5bn: That results in a total cost of between $2.5bn to $4.7bn. Within this estimate, I believe the biggest risk is really the cost of the smaller hotels, because the range is likely very high (with some rooms costing very little and those close to the 3-star costing much more), but it is hidden in the average. Also, the range is quite high, mainly because the range of the hotel rooms needed is high. My gut is that hospitality investment will be at least $3bn in HCMC, some portion of which, will be foreign investment. That’s something that I might look at later.

SOURCE: VIETECON.COM

SOURCE: VIETECON.COM

Conclusions: My main conclusions to the HCMC hospitality exercise are these:

• There are likely going to be more than 12m visitors to HCMC in 2025, unless something drastic happens. And I could easily see this reaching close to 15m.

• Domestic tourists/travelers could be as high as 50m, although not all of these will stay overnight.

• The city needs to build at least 60,000 hotel rooms, and probably more. That’s a big jump over the 190,000 we estimate currently (which might be a bit high).

• The cost of building all of these hotel rooms will be more than $2.5bn, and could reach as high as $4.7bn.

• If all the building happens, but the tourists don’t come because of bottlenecks at the airport (which I see as a real possibility), then occupancy rates are going to fall drastically. That would mean lower returns for investors and a slowdown in construction.

Please tell me where I’m wrong!

Hotels: A market-sizing exercise (part 8 of ???)

Ok, yesterday I did a bunch of estimates of hotel rooms to get a sense of where the Ho Chi Minh City (HCMC) hospitality market is right now. Based on my estimates, it was around 125,000 rooms in 2015 and 145,000 in 2017. Let’s go forward from there and see what future needs are using the same methodology.

SOURCE: VIETNAMESE DEPARTMENT OF TOURISM, VIETECON.COM

But first, we need to make some estimates on visits to HCMC in the future. The government has a target of 8.5m foreign and 32.77m domestic visitors in 2019, a 14% and 13% growth rate, respectively. The figures we already came up for the country as a whole for foreign visitors were 13.6% growth in 2020 and then 8.4% a year after that until 2025. For domestic, it was 7% annual growth the whole period through 2025. If we do that, then HCMC would see 14.5m foreign tourists in 2025, or just under half of all visitors to Vietnam. And domestic travelers of just under 50m, or 38% of all domestic travelers in the country.

For reference, Bangkok had 21.47 foreign overnight visitors in 2016. Based on that, HCMC’s 14.5m seems very doable, especially as the country builds up capacity. But one reason for Bangkok’s success is that the airport funnels so many more people through the city. The Suvarnabhumi Airport has a capacity of 45m passengers, which it is currently exceeding by as many as 15-20m a year. It is expanding now, and the first expansion should be completed by 2020 and increase the 45m capacity to 60m (see this article for details, sub req’d). Then a future expansion will increase capacity to 90m by 2022. The second airport in Bangkok, Don Mueang, has a capacity of 30m passengers, but did more than 38m back in 2017, and is expanding to a capacity of 53m by 2020. In total, Bangkok has a capacity of 75m passengers through its’ two airports, and both are already exceeding that capacity.

HCMC’s airport is significantly smaller. The Tan Son Nhat airport handled 36m passengers a year, and is looking at expansions to raise this to 51m by 2025. It is the only airport serving HCMC, so this could be a real bottleneck for travel.

Having said that, I think that sticking with our estimates for the country seem reasonable for HCMC. Even at 65m visitors in 2025, if we assume that a large portion of the domestic ones come by car, train or motorbike (!) and only half of them stay overnight, the capacity at the airport should be enough.

The main risk to our estimate, in my view, is that the government tries to funnel more people to specific resort destinations, like Pho Quoc, or Ha Long Bay, or a central Vietnam destination like Nha Trang or Da Nang, both of which have seen significant hotel construction.

I am running out of time today, so more on the HCMC hospitality market tomorrow in this never-ending series on Vietnam’s hotels.

Hotels: A market-sizing exercise (part 7 of ???) [Updated 5 Feb*]

Eventually, I have gotten back to looking at the hotel business in Vietnam. I wanted to focus on Ho Chi Minh City and Hanoi over the next few posts, because I think we are going to see lots of investment in these two cities. Then there are a few others that are tourist hubs, like Pho Quoc, Da Nang, Nha Trang, and Hoi An which may also be worth looking into, at least cursorily.

I started with Ho Chi Minh City (HCMC) because it has the largest number of tourists, almost 7.5m foreign tourists in 2018 and 29m domestic travelers. There are no good stats on how many hotel rooms there are in HCMC, so my first step is to try to come up with a figure of hotel rooms. I have a few statistics around the figure. First, in 2016, the Vietnamese Department of Tourism said there were 2,200 hotels in HCMC. We also know how many hotels there were in 2015 in all of Vietnam: 355,000, also according to the D of T. And we have the number of upscale and luxury hotel rooms in the city, 10,174 in 2014, according to HVS, a hospitality consultancy.

This is an important point to make - when doing market sizing, most of the time you don’t have the number you actually want, but you have a bunch of numbers that allow you to make some calculations and test them out.

SOURCE: VIETNAMESE DEPARTMENT OF TOURISM, VIETECON.COM

Calculation 1: Using hotels to estimate rooms: For the country as a whole, based on figures I have from 2000 to 2015, there were on average 20 rooms per hotel. If I use this and multiply by the 2,200 hotels, then I get 44,000 rooms, which is way too low, even for 2014 (as you will see in a minute).

SOURCE: VIETNAMESE DEPARTMENT OF TOURISM, VIETECON.COM

Calculation 2: Using the number of hotel rooms in the country as a whole (355,000), let’s assume that HCMC has a portion based on the percentage of foreign and domestic tourists it garners. So in 2015, there were 7.9m foreign visits in Vietnam of which 4.6 came to HCMC, or 58%. Domestic tourists to HCMC were only 30% of the total of all in the country. If I weight foreign and domestic tourists equally, then the percentage would be 33%, but if we double the weight of foreigners, because they generally stay 2x as long, then we get 35%. That would equate to 124.250 rooms, which may be more accurate.

SOURCE: VIETNAMESE DEPARTMENT OF TOURISM, HVS, VIETECON.COM

Calculation 3: Using the figure for upscale & luxury hotel rooms in HCMC of 10,174 in 2014, let’s use the same percentages reported for the full market to reach a figure for total hotel rooms in HCMC. In 2014, 5-star hotel rooms were 5.3% of the total, 4-star were 6.8%, and 3-star were 8.0%. HVS doesn’t tell us what they mean by “upscale & luxury” but I would assume 4- and 5-star. Of all rooms in Vietnam, 12.1% were of this grade. Taking that would imply that there were 84,000 hotel rooms in Vietnam. We also have a figure for 4-star and 5-star rooms in 2018. According to the HCMC Tourism Department, there are 6,257 5-star and 3,500 4-star hotel rooms, or 9,757 in total. That would mean only 80,500 hotel rooms.

BLUE = ESTIMATES. SOURCE; VIETNAMESE DEPARTMENT OF TOURISM, VIETECON.COM

Calculation 4: Work from the number of guests and occupancy rates to come up with the number of hotel rooms. First, we take the number of foreign guests, of 7.5m in 2018. Then assume they stay 5.21 nights per stay (this is based on this story, it’s for 2017, but let’s assume it is the same for this year). And then I assume there are 1.5 guests per room. That means the 7.5m foreign tourists stay 38.9m nights but take up 25.9m room nights.

Let’s do the same for domestic travelers. There were 29m of them in 2018, and I assume only 50% stay overnight. Based on the same survey as for foreign tourists, they reportedly stay 3.6 nights per visit (which seems high to me). And again, 1.5 of them stay per hotel room. That means of the 29m domestic travelers, only 14.5m stay overnight, but they stay a total of 52.2m nights, equating to 34.8m rooms used.

Let’s combine these two figures to reach 60.7 room nights, and assume that hotels had an occupancy of 70%, that means there needs to be 238,000 hotel rooms to accommodate all of these visitors. This figure is so much higher than the results of my other caulciatons, I am a bit worried.

If I make some changes here, say that foreigners only stay 5 nights, and that domestic travelers only stay 2.5, plus assume that the hotels are at 80% occupancy, we reach a total of 168,000 rooms needed. This is also much higher, but more realistic.

SOURCE: VIETECON.COM

Conclusion: We have four different estimates of total hotel rooms. The estimates go from a low of 44,000 to a high of 238,000. Some of these are different years, but even so, the range is extremely high. Out of the four calculations that seem most logical to me are calculations 2 (124,250 hotel rooms in 2015) and 4 (144,007 in 2017). Those are close to each other and use assumptions (e.g., 35% of all hotel rooms are in HCMC) that are reasonable.

Tomorrow, I will use these two calculations to come up with estimates throughout the time period and get to a figure of what were the total number of hotel rooms since 2000. Then on Wednesday, I’ll take you dear readers into the future.

*Updated to add calculation tables and final chart.

Welcome to the month of LOVE!

That’s right, we are in February. One month down, 11 to go in 2019. The year seems to be moving pretty quickly to me, not sure why. Of course, February is the month of love. I am quite disappointed in the Vietnamese for getting suckered into this greeting card “fake” holiday. I guess I should be happy that people are celebrating love, but the consumption aspect of it all maddens me. I’m married, and I don’t think I am getting crap from my partner. And I’m sure as hell not buying anything. [Reader, I do love chocolate, so feel free to send some.]

Anyway, we have a much more important holiday coming up, Tet! There are a lot of stories out about prices in the run up to Tet, like this one about how petrol prices are unchanged.

The retail prices of oil and petrol will be kept unchanged for the next 15 days, the ministries of Finance and Industry and Trade announced on Thursday…The two ministries review fuel prices every 15 days to keep domestic prices in line with swings in the global market…The two ministries decided to maintain the petrol prices to support production of domestic firms and control inflation prior to 2019’s Lunar New Year.

Or this article about how shipping fees are increasing wildly ahead of Tet. Bus passengers have to pay extra surcharges, and the fees for shipping motorbikes have doubled.

But stores are actually lowering prices. Co.opmart and Co.opXtra are discounting goods to get shoppers in the store.

From now until February 4, the 30th of the last lunar month, many fresh and ready-to-eat foods like green-skin pomelo, American red apple, round watermelon, pickled vegetables, shrimp, uncooked pork paste, and braised pork and eggs in caramel sauce are being sold at 12 – 25 per cent discounts.

Of course, the difference between prices for shipping and prices for goods at stores is due to two main reasons: 1) the difference in fixed costs and 2) that there is more of a limit on volumes in shipping.

First, on fixed costs: Trucks/buses have high fixed costs and minimal variable costs, especially for each trip. So a bus with 50 passengers and a bus with 100 passengers will cost the company about the same (minus a bit of a lower fuel bill). For stores, the fixed costs are just being open but their cost of goods are variable, depending on how many goods are sold. So shipping companies have an incentive to raise prices to maximize every space in their vehicle, because they will never get the chance to sell that space again. Airlines face the same issue. They try to sell every seat on every plane, even at discounts, because once that plane takes off, they can never recoup any empty seat’s revenue. It’s gone for all time. They may make some more money on the next flight, but the flight with empty seats will not be maximized.

Second, when we think of volume for shipping and stores, stores have so much more flexibility. They can stock up for weeks ahead of time and drive more and more volume. Of course, there is risk that inventory won’t be sold (and therefore some cash is tied up for some time or lost entirely), but stores can just increase discounts even more to move product. Plus, for goods with a long shelf life, stores can just not order new ones as they sell out their excess inventory, minimizing the impact. Shipping, in contrast, depends on space in the bus or truck or whatever. And for most companies, they can’t increase their bus/truck trips without limit. Store have more room to build up inventory - they could just fill every available space with goods.

As for fuel, well, no government wants to see higher petrol prices, especially at sensitive times. And gas prices aren’t facing a lot of pressure from higher oil prices (although there is likely some).

It is interesting to see the trends around Tet. I wonder if some of these discounts that we see in the stores will continue post-Tet if stores have excess inventory. That’s a good indication of how good their purchasing is.

Anyway, not sure that I have explained all of these perfectly, but I think it is interesting to think of prices ahead of holidays in these terms. If there is scarcity (such as in shipping) and high demand, we should see higher prices. But for goods that are easily supplied, high demand can result in a focus on volume than pricing.

Things that caught my eye in the news

A few things that caught my eyes in the news recently were:

Mangrove forests: Here is a large article on mangrove forests and the impact they have on combating floods and rising seas causes by climate change. Vietnam appears to be a bright spot in South East Asia (another country that surprised me was Abu Dhabi in the UAE, where mangrove forests are being preserved). One of the reasons is that the country has provided electricity to 99% of the population, so there is little need to gather mangrove wood for fuel. Also,

“Several years ago, Vietnam began carrying out several programs for the rehabilitation of mangroves for coastal protection, while at the same time improving awareness among local people,” Pham Trong Thinh, director of the Southern Sub-Forest Inventory and Planning Institute in Ho Chi Minh City, said in an email. “Illegal logging in mangrove forests and wetlands is not a big problem in Vietnam at the moment.”

Over the past few years there have been significant flooding in Ho Chi Minh City (HCMC), and it seems like the government may be trying to deal with some of those issues. One way would be to continue to preserve and expand mangrove forests.

Positive news for Vietnamese airlines: The US Federal Aviation Administration (FAA) is expected to grant a category 1 rating to Vietnam soon, according to US officials (lots of stories say the same thing, here is one). This would allow direct flights between the US and Vietnam - there are none currently. It also should help boost the Vietnamese airline industry as it is seen as safer. We could also see things like corporate jets increase as well. There are only 4 corporate jets registered in Vietnam currently! Although, there is this study, which I love, because I hate fat cats, that says: “For firms that have disclosed this managerial benefit, average shareholder returns underperform market benchmarks by more than 4 percent annually.” That’s a crazy high number. So maybe this is not the best news to come out!

Gas-to-power with Exxon: Siapem, a JV between Exxon and Production Vietnam Limited, won a front-end engineering design (FEED) for a gas-to-power project, according to Saipem. This usually takes about a year, and the end result is used as the basis for bidding to execute the project.

Should the “Blue Whale” project advance beyond the FEED stage, ExxonMobil will lead its construction and operation, the supermajor noted.

Exxon is saying that it could produce up to USD20bn to the Vietnamese government. The gas would be used for power generation, which is severely needed in Vietnam. One issue is that lots of the gas and oil are found in the north or central parts of Vietnam (mostly offshore), but lots of demand comes from HCMC in the south. Somehow that power needs to be sent to the south. It will be interesting how Vietnam deals with that, either through better investments in the grid or through investment in power generation in the south.

Corruption trial ends: Two big police ministers and a business tycoon were jailed by a Vietnamese court Wednesday, according to Reuters. This is one of a string of convictions, including earlier convictions of the tycoon, “Aluminum Vu.” The ministers will be jailed for 30 and 36 months as they were found guilty of “lack of responsibility.”

A lot of government watchers have been skeptical of the corruption crackdown, seeing it potentially as a consolidation of power by the new president (who was previously and still is the Communist party chairman). But there have been quite a few ministers, important officials and business men that have gone to jail. Many of them quite high up, at least from my outsider’s perspective. I need to start tracking this more. As I do, I will try to put it together for readers what’s happening.

A break for China…

I will get back to hospitality, but I am all hospitality-ied out , and I thought I would look at smaller issues that are also important. An article in the WSJ last week, which I can’t find, piqued my interest. I can’t remember what the whole column was about, but the author was talking about correlations between China and the rest of the world and said it had been increasing.

THE TRENDS ARE SIMILAR, BUT NOT TOO SIMILAR… SOURCE: YAHOO FINANCE, VIETECON.COM

Of course, many publicly-traded companies around the world depend on China, and I am pretty sure that Vietnam as a country depends a lot on China, given its historic ties (both positive and negative) and because of trade, tourism and investment that flows between the two countries. So I thought I would look at the correlation of the stock markets to see if I could see something.

Spoiler: I did, but it isn’t too significant. First, I just looked at the chart of the Vietnamese index and the Shanghai index since 2014. As you can see to the right, there are times when they seem to track each other quite closely, but not too much.

I then just did a quick test, how often do the indexes trend in the same direction, positive or negative. Surprisingly, about 55% of the time, they trade the same (meaning the Chinese index goes up when the Shanghai index does or vice versa).

THE PATTERN IS PRETTY MINOR, AT LEAST BY MY EYES. SOURCE: VIETECON.COM

I just did a quick check to see if there has been a big difference by year and there was little difference except in 2014. In 2018, 54% of the time, the indices moved in the same direction. In 2017, it was 55%, then 59% in 2016 and 56% in 2015. The big change was in 2014, when they moved together only 48% of the time.

I also did a regression on these trends, and it was found to be significant (the p-value was below 1%), but the effect is small (the adjusted R-squared was .005. Basically, I took a dummy value, with 1 being positive and 0 as negative. If China is positive, then you can put it in this formula, Vietnam = 0.51 + 0.08 x 1 = 0.59. If China is negative, then Vietnam = 0.51 + 0.08 x 0 = 0.51. If China is positive, then the expected value of the Vietnamese index performance is positive about 59% of the time (if I am reading this correctly, and I am not sure that I am entirely). And if China is negative, then there is about a 51% chance that Vietnam will be positive.

I also did a regression of the change in the index values as well and found a similar story. The p value again was significant (well below 1%), so the performance of the Chinese index did explain the performance of the Vietnam index, but only with an adjusted R-squared of 0.03.

Overall it appears that there is some movement together, but it isn’t as great as I would think. The actual correlation between the change in each index is less than 0.2, so positive but not massive and basically in line with what the regression says. (Can you tell that I am not always sure of my statistical acumen?)

The fact that correlation is so low is kind of surprising to me. But maybe the ties between the two countries aren’t as great as I thought they were. If we look at exports/imports, the US is actually the largest destination of Vietnamese exports (in 2016) at 21% compared to 13% to China. Imports are different, with Chinese imports making up 31% of the total (again from 2016). The figures were similar in 2017.

And FDI shows similar trends - there are countries more important than China. According to the Vietnamese Ministry of Planning and Investment Hong Kong and China ranked 4th and 5th, but even combined were well behind the first two (Japan and Korea) and just a bit more than #3 (Singapore). This might change over time if the Chinese economy slows and/or the trade war with the US continues. But as of now, investment flows from China are much less than Japan and South Korea.

In conclusion, correlation between China and Vietnam may not be as strong as people assume.

A break for demographics

Two demographic stories caught my eye today:

The first was about child trafficking, or actually, trafficking of expectant mothers to China to sell the children. And the price was so low, at least to my Western eyes – a child is worth just $1,750 to $3,500 or so! So sad.

One of the reasons for this is the Chinese demographic imbalance, with a significantly higher number of boys than girls. Normally, the sex ratio of most species is 1:1, or 1 boy for every girl. According to the World Health Organization (WHO), the human sex ratio is actually 105:100 or 5 more boys born for every girl. As the WHO explains:

Nature provides that the number of newborn males slightly outnumber newborn females because as they grow up, men are at a higher risk of dying than women not only due to sex differentials in natural death rates, but also due to higher risk from external causes (accidents, injuries, violence, war casualties).

The number of men and women should normalize to something like 1:1 in a population, as men die of stupidity, among other causes.

In some countries, the figure never normalizes because of a preference for girls, sadly. In China, there are around 105.5 men for every 100 women. And this will likely rise to a high of 106.3 to 100 in 2020 before it slowly starts to fall. Because every number in China is a big number, that means there are more than 40m more men than women. That means there are 40 million men that are unable to marry or start a family because there aren’t enough women for them.

THE DIFFERENCE BETWEEN MALES AND FEMALES IN CHINA HAS BEEN GROWING FOR THE PAST 55+ YEARS. SOURCE: WORLDBANK; CALCULATION BY VIETECON.COM

AND IT APPEARS TO BE NORMALIZING AT THESE HIGH LEVELS. SOURCE: WORLD BANK; CALCULATION BY VIETECON.COM

Vietnam is the opposite, with a larger number of females than males, by a small, albeit growing, number.

VIETNAM IS THE OPPOSITE - MORE FEMALES THAN MALES. SOURCE: WORLD BANK, CALCULATIONS BY VIETECON.COM

It appears that Vietnamese children may be seen as a way to fill in the imbalance in China by some unscrupulous people.

The second piece of news I saw was about the risk that Vietnam will “get old before it gets rich,” according to an article in Asia Times. In positive news, the Vietnamese life expectancy is quite high at 76 years, and it should grow over the next few years. We are seeing slowing population growth rates in Vietnam at the same time, meaning that the average age of the population will climb (it is currently one of the fastest aging populations in Asia, according to the article).

The ratio that is important here is the dependency ratio or the ratio of people dependent on working adults. This will increase to 62.4 by 2050, with more than half of this (35) from the elderly. This is up from a low of around 42 in 2013. That was the peak and it will get steadily worse as we move forward in time.

GOOD AND BAD NEWS IN THESE NUMBERS. SOURCE: WORLD BANK

There are multiple ways to fix this. Vietnam could increases its population growth rate by getting people to have more children. Given the trends in the rest of the world, this seems unlikely. Trends in other countries show lower and lower fertility rates, driven partially by choice and partially not. Higher living costs don’t help.

Or there could be more immigration to Vietnam. It’s a poor country, though, so probably only people from even poorer countries would think about immigrating, like Cambodians or Laotians, both of which have lower incomes. Neither are large countries, which means that Vietnam is unlikely to see a big wave of immigrants from either. Plus, both could go to richer countries that are also close, like Thailand. Language issues, at least for Laotians, would be much lower there. Immigration has its own challenges, as most of the Western world has seen. It can result in some very strong reactions. See: Brexit, Trump, the rise of right-wing governments in Europe.

We will have to see what happens, but these two paragraphs from the article scared me:

An International Monetary Fund (IMF) report last year argued that “Vietnam is at risk of growing old before it grows rich.” Indeed, when Vietnam’s working age population, or the number of people aged 15 to 64, reached its demographic peak in 2013, annual gross domestic product (GDP) per capita was just over US$5,000.

South Korea and Japan, by comparison, reached this peak demographic when their average incomes were $32,000 and $31,000, respectively. Vietnam is not even close to that income growth trajectory: the government projects GDP-per-capita won’t reach $10,000 until 2035.

I need to do more work on this, but I found these two stories interesting today…

Hotels: A market-sizing exercise (part 6 of ???)

Over the past few days (weeks?!?!), I have been estimated potential hotel needs in Vietnam. The goal was to get a few estimates: Guests, hotel rooms needed for those guests, and now, the subject of today’s post, how much will it cost to build these hotels?

The first step is to take my estimates for new hotel rooms, between 350,000 to 500,000, and figure out how many are going to be in each class. Now this is hard and involves some strong assumptions. Based on data that we have from 2013-15, 5-star hotel rooms made up 5.9% of all hotel rooms, 4-star 7.3% and 3-star 8.7%. This leaves the remainder at 78.1%. If we apply this to our figures, we get the numbers in the table below.

Now, I need to figure out how much these are going to cost. I would say this has been some of the harder data to find. I did find an old CBRE presentation from 2011 (CBRE is a real estate advisory company) that says that upscale hotels in Vietnam cost about $10m for a 100-room hotel and that midscale hotels costs about $5m for the same size hotel. If I take these figures, that works out to $100,000 and $50,000, respectively for hotel rooms. But we need to account for inflation, so I used a 7% CAGR (reflecting growth and inflation) to come to around $175,000 per upscale room and $85,000 for the midscale room. These figures don’t include land or FFE (furniture, fixtures, and equipment), just the construction itself.

I also saw a news report from early 2017 about a Japanese company building a large upscale hotel that worked out to about $160,000 per room, which jives with our estimate for upscale hotels.

Another story said that:

The thirst for land in central business districts and the escalation of the land price in HCMC have led to a higher investment rate in the hotel sector. Twenty years ago, the rate was $120,000 per room, but the figure now is $150,000.

It is unclear if this is including the land price or now, but seems like it has to not include the land, based on our other estimates.

VIETECON.COM ESTIMATES

So, at the high end, let’s assume $175,000 per 5-star room, $125,000 for 4-star, $85,000 for 3-star and just make a wild guess at the rest at $40,000 per room. That would still mean that a low end hotel with 50 rooms could cost $2,000,000, quite a lot for Vietnamese entrepreneurs. But that average can hide a lot of variation – rooms could cost $20,000 or $60,000. Here I think it makes sense to do a sensitivity around the non-starred hotels, so see how high or low the estimates could go.

Putting this all together, I get between $20 billion to $30 billion in hotel investment (not counting land or FFE) over the next 7 years. And if lower-end hotel rooms cost just $20,000, then the overall spend would be $15-21bn, quite a bit difference from our current estimate but still a large number.

Either way, it’s a lot of investment and spread all around the country (although lots in HCMC and Ha Noi). Some of it is already in the works. This investment would buy us 350,000 to 500,000 rooms, more than sufficient supply for all the visitors to Vietnam. Remember, our assumptions included an occupancy rate of 70%. If it was 80%, then hotel needs would be about 50,000 less.

Next, we will look at specific hotel markets in Ha Noi and HCMC.

Hotels: A market-sizing exercise (part 5 of ???)

Now that we have both domestic and foreign travelers nights (see yesterday’s post), I can combine them into one estimate for needed hotel rooms. At the low end of my estimate I have 310m guests in 2025, up from around 180m in 2018. At the high end, I have 370m. This implies either around 210m or 250m hotel rooms are occupied in a year (this assumes 1.5 guests per room).

Now to translate these into hotels, we need to take into account occupancy rates. Generally, hotels like to target at least 80% occupancy rate – that’s really good. It takes into account weak periods and down times. It also means that the hotel is fully occupied or close to fully occupied a good portion of the time. It is very hard to a hotel to get above 90% occupied, because that means that even in down times, the hotel is basically close to full.

HOW I CAME UP WITH MY CALCULATIONS. ALL ESTIMATES IN BLUE. BLACK FIGURES ARE EITHER ACTUALS OR FORMULAS. SOURCE: VIETECON.COM

VIETNAM COULD NEED AS MANY AS 950,000 HOTEL ROOMS IN 2025. SOURCE: VIETECON.COM

Vietnam has been averaging well below that 80%. The government reported hotel occupancy from 2006 to 2012, and the average occupancy rate was 58%. Only in one year was it above 60%, and that was 60.7%. In 2006 it was as low as 50%. In more recent years, it appears to have improved, at least at the higher-end hotels. Grant Thornton reported that 4-star hotels showed a 72% occupancy rate in 2017 and 5-star’s a 75% rate. This is well above from the 62-63% rates seen in 2015. So let’s assume that the figure increases to 70% for the market as a whole, that rate would imply that the country needs almost 1 million hotel rooms at the high end of our forecast, up from something like 460,000 in 2018 or an 11.1% CAGR. At the low end, the country would need a bit over 800,000 hotel rooms (8.3% CAGR).

Let’s say all of these estimates are correct. Then the country would need to build between 350,000 to 500,000 hotel rooms over the next seven years, or between 50,000 and 70,000 new hotel rooms a year. On Monday, we will use these figures to see how much investment will be needed over the next few years.

Hotels: A market-sizing exercise (part 4 of ???)

Today, I am going to combine everything I’ve done so far to get estimates of future guests. I will estimate the foreign and domestic guest nights and use those to come up with a total guests nights. As a reminder, guest nights is how many nights do all guests stay in a hotel. A Japanese couple that stays for 4 night would have 8 guest nights. I take this number and divide it by 1.5 to get to hotel nights. The 1.5 is how many guests stay in one room on average. Basically, the Japanese couple would (probably?) share a room. A single traveler wouldn’t. After reaching the hotel rooms occupied every night, I can use it to make assumptions about occupancy to get the needed hotel rooms and what that would mean for new builds.

First, the foreign visitors. I have already made two different assumptions on growth. The first was to 30m international tourists by 2025, and the second was to 35m. If we use these, and the same assumptions on stay duration (5 nights) then that gets us to between 150m and 175m guest nights for foreign visitors by 2025.

FOREIGN GUEST NIGHTS COULD REACH 175M BY 2025. SOURCE: VIETECON.COM

Second, I did not actually make any forward-looking estimates for domestic travelers, so I need to do that first. The latest stats show that domestic tourists reached 80m in 2018. However, there is greater volatility in domestic travelers, as we have already seen. Some years, the figures rise only a small amount, while in others they rise 48%. The CAGR from 1995 to 2018 is 11.2%, but if I take the figures from 2014 to 2018 (after the big spike in 2014), this falls to 8.8%. Domestic travelers reached 80m in 2018, which is almost 85% of the population. If I assume 7% annual growth, that means by 2025 there will be about 130m travelers, and if I take 10% growth that gets me almost to 160m. These points seem reasonable to me, given the growth in the country overall and the population.

SCENARIO ONE - DOMESTIC TRAVELERS REACH 130M BY 2025. SOURCE: VIETNAMESE GOVERNMENT, VIETECON.COM

SCENARIO TWO - DOMESTIC TRAVELERS REACH 160M BY 2025. SOURCE: VIETNAMESE GOVERNMENT, VIETECON.COM

Tomorrow we will move on to combining these and seeing what it means for foreign growth.

Hotels: A market-sizing exercise (part 3 of ???)

Now back from the break, I continue my ongoing analysis of the hospitality market in Vietnam. Now where were we? I had put together estimates for international visitors. And I had backed into estimates for domestic tourists and hotel nights. Now I wanted to do two things, which will probably mean that the posts will be split over two days. First, I wanted to check and see what happens if I take my estimates and apply them to historical numbers. Do they make sense? Are they at least close enough that I can feel comfortable that they are correct?

So, how do we test our estimates? First, we go backwards in time. I had assumed the following: that only 50% of domestic travelers stay overnight; that foreigners stay 5 nights but domestic overnights are for only 2.5 nights on average; that there are on average 1.5 guests per hotel room. I then calculated the total guest nights, which is rooms x 365 x guests per room x occupancy rates. That gets me the “estimated guest nights” in the chart to the right. I then used actual figures for foreign and domestic travelers to come up with estimated foreign and domestic guest nights, again using 5 nights for foreigners and 2.5 nights for locals.

As you can see in the chart, the line fits actually pretty well. It is a bit of an underestimate in some periods, which is my bent – I would rather underestimate than overestimate long term forecasts. But overall, I am pretty happy with this.

Tomorrow, we will use these figures to get future estimates for hotel guests and hotel rooms needed.

BLUE FIGURES ARE ESTIMATES SOURCE: VIETECON.COM ESTIMATES

USING OUR ESTIMATES FOR NIGHTS AND GUESTS, WE HAVE A PRETTY CLOSE FIT SOURCE: VIETECON.COM ESTIMATES

Martin Luther King, Jr. and Vietnam

On the occasion of Martin Luther King, Jr. Day in the United States, I thought I would take this opportunity to remember what King thought about Vietnam and the Vietnam War. As a proponent of non-violent action, he was generally against war. He gave a speech in April 1967 where he publicly came out against the war, and was excoriated for it. But his reasons, reading it now, seem especially prescient. He had seven main reasons, from taking attention and resources from the poor in America to a need for solidarity with oppressed people around the world.

One portion that spoke to me, because it really points out how the US mis-read the situation in Vietnam from the start, was this:

[The Vietnamese] must see Americans as strange liberators. The Vietnamese people proclaimed their own independence in 1954—in 1945 rather—after a combined French and Japanese occupation and before the communist revolution in China. They were led by Ho Chi Minh. Even though they quoted the American Declaration of Independence in their own document of freedom, we refused to recognize them. Instead, we decided to support France in its reconquest of her former colony. Our government felt then that the Vietnamese people were not ready for independence, and we again fell victim to the deadly Western arrogance that has poisoned the international atmosphere for so long. With that tragic decision we rejected a revolutionary government seeking self-determination and a government that had been established not by China—for whom the Vietnamese have no great love—but by clearly indigenous forces that included some communists. For the peasants this new government meant real land reform, one of the most important needs in their lives.

As usual, King was ahead of this time. A majority of Americans supported the war when he gave the speech. And King himself was assassinated a year after the speech, and well before Americans turned on the war “Not until August 1968, according to Gallup surveys at the time, did a majority -- barely, at 53% -- call it an error.” It took another 7 years before the US fully pulled out of Vietnam.

I like that in the speech King talks about the impact of the war on the US, but spends a greater amount of time talking about the poor Vietnamese and how they have suffered, and how the Southern government wasn’t the party of the peasantry and therefore cannot build their support. Yet, he starts saying that the speech is not “an attempt to make North Vietnam or the National Liberation Front paragons of virtue.” And he makes a statement which speaks to me now, in a period where the US has seemed to decide to pull back from promoting democracy and justice around the world, but is pushing in the opposite direction.

We must not engage in a negative anticommunism, but rather in a positive thrust for democracy [applause], realizing that our greatest defense against communism is to take offensive action in behalf of justice. We must with positive action seek to remove those conditions of poverty, insecurity, and injustice, which are the fertile soil in which the seed of communism grows and develops.

That is what is missing in US foreign policy today, especially in the time of Trump. The US president has sided more often with dictators and autocrats than with elected officials in our closest allies. Rather than trying to be an example of how great democracy is leaders in countries like China point to the US (and the UK with the fiasco that is Brexit) as a reason to avoid the chaos of democracy. Rather than trying to make conditions inhospitable for terrorism by improving the lives of people that live under threat, the US bombs them with un-manned drones.

But if anything, the tragedy of Vietnam shows that the US and the world have been in bad situations and yet were able to move forward. There has been a great deal of progress since 1967, with the number of people in dire poverty falling drastically, life expectancy growing and major diseases like measles and polio almost wiped out. Democracy reigns and human rights are protected in many more countries than ever. The key is to keep continuing on this path.

Let’s all try to look at Martin Luther King, Jr. as an example of what we should strive for. As George Orwell said: “To see what is in front of one's nose needs a constant struggle.” Happy belated MLK day!

PS A good reading of the speech by Viet Thanh Nguyen is here.

Hotels: A market-sizing exercise (part 2 of ???)

NUMBERS OF DOMESTIC TRAVELERS IN VIETNAM HAVE JUMPED STARTING IN 2014 AND THEN LEVELED OFF. SOURCE: VIETNAMESE GOVERNMENT

Two days ago, we looked at the size of international visitors and came up with two potential paths, one to 30m visitors in 2025 and the second to 35m in 2025. I have a conservative bent, so I would lean to the 30m figures, but I’ll use both in future calculations.

But now that we have an idea of international visitors, we need to think of domestic hotel guests, both tourists, businessmen and any other visitors (say people visiting family). I have found a fair amount of data on domestic tourists and two things surprised me.

First, domestic tourists have grown from 28m in 2010 to 80m in 2018, according to the Vietnamese government. I am somewhat suspect about these numbers, because they go up so quickly, especially 2014 when the numbers jumped from 38.5m to 57m (48%). No other period saw growth like this.

I want to focus attention on this for a second. Just remember, when looking at data on emerging markets, I find that it is worth really looking into the numbers and see if they are realistic. I don’t think this jump is realistic. But figures for 2015-2018 show a much slower growth rate. One interpretation is that the government started counting domestic tourists differently in 2014. And then after that used this new counting method. The second is that the numbers overstate all domestic figures.

HOW WE REACH GUEST NIGHTS FROM HOTEL ROOM DATA. SOURCE: GRANT THORNTON, VIETNAMESE GOVERNMENT, VIETECON.COM ESTIMATES

One thing to look at would be hotel guests, if possible. I found a few things. First, 48% of all domestic travelers stayed overnight in the first two months of 2016. This is the only data that I was able to find [if I find more, I will update this]. So, let’s say this is true for all periods and make it 50% to make the math easier. That means in 2015, with total domestic tourists of 64.6m, only 32.3m stayed in hotels. And I found another stat from 2017 that says domestic travelers to HCMC stayed 3.6 days on average. For the country as a whole, let’s say 3 nights (to account for less popular destinations). That gets us to 32.3 x 3 = 96.9m nights. Foreign visitors in 2015 were 7.9m and the same 2017 stats said the average duration of stay was 5.2 nights, so let’s round down to 5. That gets us to 39.5m. But let’s say on average 1.2 foreign guests stay in one room, but 1.5 domestic guests stay in a room. That results in 47.4 foreign room nights and 145.35 domestic room nights for a total of 192.8m nights occupied. In 2015, there were only 355,000 rooms in the country making for just 130m hotel nights.

This is too high. Sometimes this happens. You do all the work, and it just doesn’t look right. I would say what seems wrong is the average nights stayed. I bet this is less than we suspect, for both foreign visitors and locals.

HOW TO REACH GUESTS NIGHTS FROM TOURIST FIGURES. SOURCE: GRANT THORNTON, VIETNAMESE GOVERNMENT, VIETECON.COM ESTIMATES

Back to certain ground

HOW TO REACH GUESTS NIGHTS FROM TOURIST FIGURES. SOURCE: GRANT THORNTON, VIETNAMESE GOVERNMENT, VIETECON.COM ESTIMATES

What I like to do when this happens, I like to go back to what we actually know and strip out all the assumptions. So what do we know? We know foreign visitors. That number seems pretty certain. I also think that 5 nights is probably pretty realistic, although it is hard to say. That gets us to basically 40m guest nights, out of a total of 122m. That leaves 82m for domestic travelers. I am concerned that the 50% figure and the nights stayed of 3.5 could be too long. If 50% is correct, then duration of stay needs to be 2.5 nights. That seems long to me, but is conceivable.

Just one more check, we have a bit of data on guests at 4- and 5-star hotels: 80% of them are foreign. Now there were 51,591 rooms at 4- and 5-star hotels in 2015. If occupancy is 62% (based on Grant Thornton figures), that means 11.7m hotel nights. Now if there are 1.2 guests in a room, that is 17.5m guest nights or almost half of the total international guest nights. That means the majority of foreigners were staying at 3-star rooms and below. As a reference there were 30,734 3-star hotel rooms in 2015, adding another 8.4m guest nights (at the 63% occupancy rate, 80% foreign and 1.5 guests per room). Some people came on cruises, or stayed with families, or in hostels. I guess. It’s plausible but does raise some issues.

So, in conclusion, we have some key estimates that seem relatively true now:

• Foreign visitors were 7.9m and they stayed on average 5 nights per stay and there were 1.5 of them in each room.

• Domestic travelers were 65.6m, half of which stayed overnight (the rest were day trippers), they stayed 2.5 nights on average and there 1.5 of them in each room.

• These figures get to our 122m guest nights, which is based on 355k rooms, occupancy of 63% and 1.5 guests per room.

Well, it took longer than I expected to get to this point, but that’s fine. That’s why it’s my blog! I don’t have to cut it down. Sometimes it is just helpful to show the work.

Anyway, next week, let’s take these number and run them backwards to check them and then forwards with our estimates through 2025. Then we can see how many hotel rooms we will need.

A quick break from hotels: environmental investments

I will continue my hotel market-sizing series tomorrow, but I saw a really interesting article in Bloomberg about an environmentally-conscious jeans maker in Vietnam. You can read it here.

A few things I found interesting:

• “Saitex invested $2 million in the water system alone to prove it’s not only possible to make environmentally safe blue jeans, but you can turn a profit doing it.” Later in the article, the company says it cut its water bill by half from $700,000 to $350,000. Based on a 10-year life for the water system, which is pretty long, the IRR is 11.7%. This falls to just 5.3% for a seven-year life and rises to 13.8% with a 12-year life. Not bad, but I thought it would be better. Obviously there are externalities that aren’t being accounted for here: 1) the public benefits from having less “blue toxic sludge” and 2) the company can sell themselves as an environmentally-conscious denim maker.

• My first thought is that someone should just go in to all of these factories and offer this technology for a percentage of the savings. Assume that over time the $2m in initial investments can be done more efficiently, say $1.5m, and the life of the investment/contract is 10 years, then the IRR is 19.4%. Now if the company keeps 25% of the savings then the IRR for the firm providing the funding falls back to 11.7%. If the costs can fall a bit more and the efficiency increases by 10% or more, then it would be a great business model. The big risk is if something happens to the company (bankruptcy, closure) within the 10 years. It takes 6 years, in our $1.5m/25% example, to just make back the money.

• Overall Bahl says that he saves $1.7m a year vs his similarly-sized competitors. It cost $2m for the water system, and he also put in solar and biomass generators, plus a system for air-drying the denim and new washers. There is no figure on the total amount of costs, but if I had to make a wild guess, I would say $10m for everything. If so, that gets us an 11% IRR, going up to 13.6% if the investment was just $9m, and 16.7% return at $8m. Then it really starts to get interesting.

• Textiles and clothing made up 16% of Vietnamese exports ($34bn) in 2017. That’s a lot. And that means there are a lot of factories that could take advantage of this. Scale likely matters, but even smaller ones could probably benefit from some of the efficiency.

• Energy and water management businesses could be very big business, but they are hard to manage. The Smartest Guys in the Room really opened my eyes to how very smart people could go wrong in a business if they are unable to manage the details (scroll down for more info on that on Enron).

• The World Bank and Vietnam’s Ministry of Industry and Trade jointly launched a $102 million project to support the efforts of industrial enterprises to adopt energy-efficiency technologies and practices in late 2018. This is funding that goes through financial institutions. The details aren’t totally clear, but seem positive. More here. The Green Climate Fund is also involved in projects in Vietnam.

My conclusions are that Saitex seems like a real leader in this sort of change in the textile industry. That energy efficiency can be quite profitable, but the upfront costs are hard to fund. The investments need to be carefully considered, because changes in assumptions mean a big difference in returns. And that these are very long-term investments. A commitment under 6 years really makes no sense.

I’ve reached out to the CEO of Saitex to see if he has any comments. I will let you know if I hear anything.