Trade and Beyond Meat

Just wanted to follow up on a few things:

GOODS TRADE SURPLUS (THIS REPRESENTS A DEFICIT FOR THE US), 2018. SOURCE: US CENSUS BUREAU BY WAY OF BLOOMBERG

First, US pressure on Vietnam is increasing, with the US Trade Representative, Robert Lighthizer, telling US lawmakers that “US businesses face a host of unfair trade barriers in Vietnam.” Through May the US had a trade deficit of more than $15bn with Vietnam. That’s a third of the total trade deficit with ASEAN. It’s the US’s sixth largest deficit in the world, similar to 2018 (see chart to the right). One of the problems, mentioned in the Politico story linked to above, is that the US has not been able to negotiate a trade deal with Vietnam, but Europe and the members of TPP have had trade deals implemented. That has allowed them to increase their exports to Vietnam, crowding out American goods. At the same time, more countries are moving production to Vietnam, mainly to export to the US, given the tariffs on Chinese goods and a few other products.

Second, just a quick update on Beyond Meat, which I wrote about on May 3, 2019 (scroll down to see that post).

• The stock is way up since the IPO, almost 700%. That’s a great return. I should have bought some rather than pooh-poohing it. But I still think my analysis was correct.

• The stock is way down: 17% from its high on July 26 and 12% today.

• Results (announced yesterday) were good, and they have raised their guidance for revenue in 2019 to $240m, that’s way better than I had forecast and up $30m from new guidance in 1Q. They now look for adjusted EBITDA profit (which excludes a fair amount of stock expenses and some restructuring costs), compared to just break even. So it is very likely that they will get to profitability faster than I expected.

• But the stock is down, because investors are selling stock. About 3.25m, compared to the initial IPO, where just 10m shares were sold. Of the new share sales, 250,000 are from the company directly. If it gets $200 per share, that would be $50m in additional cash for the company. I bet it will come in below that but still a good amount.

• It already has $277m in cash, but spent about $33m in 1H2019. Since sales are increasing so quickly, we should expect working capital and capital expenses to be high, so the cash burn will likely continue for the next year or two at least.

• One of the biggest cash expenses is Accounts Receivable, which grew to $34m at the end of 2Q2019. That’s a DSO of 76 days, up from 52 days at 2018 and 40 days at 2017. This means that it takes two and a half months for Beyond Meat to get paid for its sales. Tyson Food’s DSO is just 16.5 days.

• This is partially offset by an improvement in Inventory Days, which were 93 days at the end of 2Q, compared to 157 days at 2018 but up from 85 from 2017. While the figure in 2Q is an improvement, it is still crazy high, especially for a perishable item. For comparison, Tyson Food has a DSO of 38 days, which still seems high but maybe it has something to do with the chickens being counted as inventory. That could be the issue with Beyond as well, they have to count the raw materials that stay at the factory longer.

• So if DSOs and Inventory days fall, we should see some real improvement in the cash burn, and that seems like it will be pretty easy. That plus the cash balance they have now means that Beyond should be very well placed to grow, develop new products and get their name out there.

• But I would still be wary about buying the stock, because it is super expensive. It is trading at 200x 2019 sales! SALES!!! ! That’s even with the updated revenue figure. This multiple falls pretty quickly, but unless they have a revenue CAGR of more than 60% through 2024 and/or have an operating margin of above 20%, I don’t see them trading below 50x P/E or 23x Price/Sales. That’s crazy high. Remember, this is a vegetable burger with implied sales of $1.5bn.

• Right now the stock is in the dog house because of this extraordinary (in the sense of out of the ordinary) follow-on share sale so soon after the IPO. Once that is over, and if they beat estimates in 3Q, I bet we will see the stock start to perform well again.

• Remember, I am not saying that the company is in trouble. The company is doing great, and the additional share sale is probably fairly smart. All’s I’m saying is that the stock is too expensive, and it is not worth getting ahead of the share sale.

Vietnam wins and loses some in the trade war, but mostly wins

Just wanted to put a few pieces together about the US-China trade war and US tariffs. On the positive side for Vietnam:

• Apple is going to trial AirPod production in Vietnam, according to this story.

• More mattresses in the US are coming from Vietnam. “Vietnam’s mattress imports are running at a current annualized rate of 1.3 million units, a level far below the 6.2 million unit rate peak achieved by China earlier this year, Raymond James noted.” Still, that seems pretty good to me.

• Hasbro (a company I covered a really long time ago and the second largest toy company in the US/world) is moving manufacturing away from China to Vietnam and India. Still, there’s this: “Hasbro hopes to have only 50% of its products coming from China by the end of 2020.” So China is doing pretty well.

Here is an article that summarized the trends pretty well.

But some companies in Korea were too cute and tried to evade the trade war by sending production through Vietnam.

• Turns out, the US Commerce department doesn’t buy that the steel is actually being manufactured in Vietnam, so it is slapping enormous tariffs on it. “The Commerce Department responded by slapping tariffs as high as 456.23 percent on those imports.”

Just a point here. So many companies have said that it would be impossible to shift supply chains or that it would take a long time. Remember when everyone said that Apple couldn’t move out of China. Well, it turns out that, sure, it can be hard to move production, but give it time, and things can be moved. It’s like the difference between fixed and variable costs. Over a certain time period, everything is variable! Over time, everything can be moved.

Also, some of this shifting supply chain is “a long time coming.” That’s because labor costs are rising in China, as are regulatory requirements around environmental issues. That’s on top of the uncertainty around trade.

The IMF just lowered world economic growth to 3.2% (from 3.3%), including China (-0.1pp) and ASEAN (-0.1pp), mostly because of weaker Chinese growth. It kept its forecast for real GDP growth at 6.5% for the next few years, but I wonder if China really starts to slow what that will mean for Vietnam. Right now the shifting trade looks good for Vietnam, but if China ever went through a recession, then Vietnam is going to do the same. As the cliche does not go, when China catches a cold, Vietnam sneezes.

South China Sea

This week I went to the Ninth Annual South China Sea Conference at CSIS. In the link, you can listen to all the panels, and you might even hear better than some of us did in the room! Surprisingly (or maybe not), this conference was just packed. There were very few empty seats in a room that probably sat more than 300 people. Many were professionals that work in the area, along with students and embassy folk. It was interesting to see.

A few takeaways from the first panel

FROM TWITTER @RDMARTINSON88

• Indonesia: Probably won’t do much of anything, because Joko Widodo, the recently re-elected president, is really focused on domestic politics.

• Philippines: Duterte has decided not to make a big deal about Chinese encroachment of Filipino waters, and so we have seen more and more Chinese fishing boats in them. The military is not happy about this, nor are the Filipino people, especially given fairly significant environment destruction by Chinese clam fishing. See this article about Chinese warships moving through Filipino waters without the government knowing.

• Vietnam: Hanoi is pushing back against Chinese “survey” ships that are watching the Rosneft exploratory oil rig. It has continued operating despite the Chinese survey ship (see pics on right). The US is backing Vietnam in a way that it hasn’t before. Back in 2014, there was a similar dispute that resulted in first peaceful protests then violent protests in industrial zones against China. That hasn’t happened yet, and the government doesn’t really want it to.

• China: According to the ex-Chinese Naval officers, China really just wants what the US has: freedom of navigation. It is not trying to militarize the South China Sea but every time that it is provoked by the US (he sited B-52 fly overs), it reacts by speeding up its deployment.

One thing that I found interesting was an answer to a question by Gregory Poling, who directs the Asia Maritime Transparency Initiative, which uses satellite imagery to show Chinese incursion in the South China Sea. He said that China controls the South China Sea more than it did 5 years ago, and that in 5 more years, unless someone does something, we just will have to all agree that it is theirs.

For Vietnam this has meant that oil & gas exploration has been limited by the Chinese activity. Vietnamese fishermen have also been harassed by the Chinese. This will likely get worse, unless Vietnam reaches some agreement with China (unlikely).

The second panel was about the history of the dispute. The best speaker was Bill Hayton, who was extremely clear and quite funny. He pointed out that a Chinese general recently said that “China had never invaded another country or taken land”. Of course, that seems to be countered by a number of times when China invaded islands or had border disputes. But in China’s eyes, all of these disputes were others encroaching on its sovereignty. It owned the land, so by definition it couldn’t be an invasion or seizure of land.

Hayton went through the history of China’s claims, and it sure seems like most of them are not serious/invented, mostly in 1948 (officially). Most of these claims won’t hold up in court (as we saw with the Philippines winning in the Permanent Court of Arbitration). Also, Taiwan has all of the records and could easily use them to discredit China’s claims. But that would result in repercussions against Taiwan, and it was unwilling to do that, unless there was support from the other claimants.

Stein Tonnesson had a slightly different timeline with a similar takeaway. Namely that China can’t really make a good case for most of these islands, but neither can anyone else. So they should just negotiate a solution with Vietnam taking some of the Spratleys, some of the Paracels, maybe Philippines and other players get different islands. China gets some too.

The ASEAN guy, who was a bit hard to follow, seemed the most optimistic about disputes with China. Maybe because he is Thai and has less of a dog in this fight.

Finally, Hayton made the point that these islands (in some cases, just features – not sure what that means, exactly), are small and meaningless. Who cares! Just divide them and move on! But I think the concerns the first panel had over fishing rights and oil & gas exploration means that these disputes are really not meaningless .

I do wonder why it matters so much for the US? It is a major seaway for a lot of trade, including to the US and Europe. Plus, it could be a spark that sets off conflict between China and its neighbors that could draw in the US.

“China is now capable of controlling the South China Sea in all scenarios short of war with the United States,” U.S. Admiral Philip S. Davidson said last year.

Minh Phu - Buy Case

So today, I wanted to present a buy case for Minh Phu. There are a few reasons why I like the company:

Solid revenue growth: They seem very likely to get to at least exports of USD800m, which would boost sales by almost 9%. Guidance is for USD850m, but I am a bit worried about the second half, because the company is a bit behind what they did last year.

Long-term growth from Mitsui relationship: Overall, I think sales will benefit from the Mitsui relationship. Exports to Japan fell 6% last year and 17% through May of this year but has started to pick up (up 5% in June). The company did have a joint venture with Mitsui previously. In 2013, it invested in Minh Phu Hau Giang JSC (MPHG), a processing plant affiliated with Minh Phu.

New initiative could boost prices for Vietnamese shrimp: We talked about this two days ago, but the push towards inspections and sustainability may be able to push prices for Vietnamese. It will take a while, but in the long run could have a very big payoff. It helps that the company has $100m in additional powder from the Mitsui share sale. This is being invested in expanded farms, refrigeration in export markets and a breaded shrimp factory. All of which should help boost sales in the long term.

Shrimp consumption will continue to grow: One research report forecasts a 6.3% CAGR through 2024 for shrimp consumption. That’s seems fairly reasonable, given the push away from meat and towards more seafood in the West. I expect Vietnam will continue to be a big player in the market, and, especially if it can improve its reputation through these sustainability inspections, will be able to take share. MPC should also be able to take some share from smaller, less equipped exporters.

The change in ownership of MPHG boosts profits. MPC bought out Mitsui’s stake of 31% in MPHG which means that all earnings from the subsidiary will go to the parent now. Overall profits should improve by about VND50bn or 6% in 2019 and another VND50bn in 2020. This is based on 2018 minority interest of VND100bn. Let’s say that VND100bn represented the 31% ownership in MPHG, so that the subsidiary made around VND320bn. Based on this, the purchase of these shares was a good deal for MPC. It purchased the stake for VND872bn, or about 8.7x, in line with their 2018 P/E, so it wasn’t expensive. If revenue grows around 9% this year at the subsidiary, likely profits there will grow about 10%, so that the VND100bn is more like VND110bn. That makes the forward P/E just 8x, which is a good deal.

Valuation is very reasonable: We estimate the company is trading at a forward P/E of 7.6x. This would be 7.1x forward P/E if the company reaches guidance. Forward EV/EBITDA is 8.2x on our numbers. Those are extremely low, and much lower than any of the companies in the sector worldwide. We have 13 comps, with the cheapest one trading at 9.9x forward P/E. Clearwater and Huon Ag are a bit cheaper in terms of EV/EBITDA, but the rest are well above that, and the average is much higher.

Dividend helps provide floor: The company paid a dividend of VND5,000 per share in 2019 (off 2018 earnings. That is almost a 14% yield on today’s share price. They may not be able to keep this level, but even at half of that level, the yield would be good. The owners may be having cash flow issues of their own, which would like push them to keep making dividend payments at these levels. That helps other shareholders as well.

Upside from ETF: If MPC is added to the VNM ETF, there would be an underlying buyer at size (especially at the beginning), which should push the stock up.

Risks: I feel like the biggest risks are around revenues - prices for shrimp are falling, and MPC may not be able to offset that. Lower prices are likely to translate into lower margins as well, for a double hit. There is already the risk that MPC will not meet its guidance, which would likely hurt shares in the near term. But the longer term risk is that shrimp from Vietnam continues to be devalued in export markets. That’s why the sustainability initiatives are so important.

Target price: I don’t have a strong opinion on this. I would say if they were able to trade at 15x P/E, they would still be well below the average for comps, and it would be almost double from current levels, so I am setting my target is VND70,000 per share.

Continue to follow Vietecon.com to see how I do.

SOURCE: COMPANY DATA, BLOOMBERG, VIETSTOCK.COM, VIETECON.COM CALCULATIONS

Minh Phu

SOURCE: COMPANY DATA

Yesterday, we talked a little about Minh Phu (MPC), one of the largest (if not largest) shrimp producers in Vietnam. They have about a 20% share, or did in 2018. It looks like it will be about the same this year or a bit more. That is despite a slightly worsening market for shrimp prices (and volumes). In the first half of 2019, prices fell again (2.4% yoy compared to 1H2018), although were up 2.3% versus 2H2018.

Revenues for the company have been all over the place, as you can see in the chart on the right. In fact, I am a bit worried that the figures for 2016 are incorrect, but they come straight from the horse’s mouth, as it were. What we can see is that generally revenues are trending up, but also more importantly, the gross profit is increasingly somewhat steadily.

SOURCE: COMPANY DATA, VIETECON.COM CALCULATIONS

That’s resulted in a much improved return on equity, which was negative in 2015 (the company had a net loss of VND19bn) to 22% in 2018. That’s a gigantic jump. At the same time, leverage is falling, as net debt fell from VND5.5tr to VND4.1tr in the same period.

As operations improve, the company has attractive interest from investors abroad. As I talked about yesterday, the company recently received a cash infusion from Mitsui, a large Japanese trading company. Minh Phu sold it 60m shares at a price of VND50,630 for a total of VND3.0 trillion, or $132m. That’s 30% of the company. The current market cap is VND7 trillion, or just over $300m. Unfortunately, this is still a fairly small cap stock, so many big investors can’t really invest in it. The reasoning is this: if you have $300m in assets to invest in Vietnam, you probably don’t want to put even one-twentieth of your fund in a stock that trades less than $500,000 a day. With 5% of your assets, you would need to buy $15m worth of stock, which would take more than 15 days to buy, and potentially more than that to sell, especially if things don’t work out and shares were falling.

However, MPC isn’t too far off from the lower end of market cap for stocks in the VNM ETF. A few stocks (NT2 VN, TCH VN) are just slightly bigger than MPC. The company could be a candidate for inclusions if the stock continues to rise.

Tomorrow I am going to look at valuation and what could drive the stock higher.

Shrimp from Vietnam

PHOTO BY AM FL @AMFL

People in the West are having more and more concerns about where their food is coming from. This is especially true for seafood. Look at this list from EcoWatch, which is a list of all the seafood that I like to eat - the advice is to not! Then there is this article about shrimp from Consumer Reports (on EcoWatch’s website) - 60% of raw shrimp bought at US supermarkets tested positive for bacteria. Vietnam was on the list at 58% of the samples tainted, but even for Argentina and US wild caught shrimp, bacteria levels in samples were high (33% and 20%, respectively). Many samples also had antibiotic residue, which likely means that the shrimp were fed antibiotics, something that is not great for antibiotic resistance globally and should have stopped these from entering the US.

Seafood Watch by the Monterey Bay Aquarium is the main organization that makes recommendations in the US. In the UK, one organization is the Marine Conservation Society. I am sure other countries have the same thing. And they are sounding alarms about the source of most seafood.

Because of this background, I was happy to see this article about the Minh Phu Seafood company partnering with Seafood Watch to improve the sustainability of the Vietnamese shrimp business. The plan is to have self audits and independent audits in every province so that buyers can be assured that what they are buying is safe to eat. It will be interesting to see how they implement this.

The goal is to increase the sustainability and health of shrimp supplies in Vietnam. And of course to help exports, which are a big business. Shrimp exports are expected to exceed $4bn in 2019, up after a weak 2018 ($3.55bn, down 7.8% from 2017). See the chart on the left below with food exports from Vietnam.

Minh Phu actually bucked the overall trend, with the value of total exports up 8% in 2018, mostly due to volume (prices fell slightly). However, they did miss their guidance of $800m, but did $751m for the year. This equated to 21% market share, compared to 18% in 2017.

Year-to-date (through June), Minh Phu’s total export value was up just 1% ($286m), but signed contract value is for $425m, exactly half of their 2019 guidance of $850m. (See chart below on the right). The second half is always a bigger season. Again volumes are up more (3%) than value (1%), because of lower prices. This new initiative is clearly supposed to help the company’s and Vietnam’s competitive positioning, which should help volumes and potentially prices, if Vietnam can actually due sustainable aquaculture.

I am going to spend a few days on Minh Phu, because I find it an interesting case study. The stock is actually trading at a fairly reasonable valuation (8.8x trailing P/E, 8.7x trailing EV/EBITDA). It recently sold a big chunk of shares (60m, or 30%) to Mitsui, a Japanese conglomerate. And interestingly their exports to Japan in the first half of this year were down 15%, so hopefully this investment will allow Minh Phu better access to the Japanese market. More tomorrow.

FOOD EXPORTS LARGE AND STILL GROWING. SOURCE: WORLD BANK

MINH PHU EXPORTS, 2017-1H2019. SOURCE: COMPANY DATA

Go-Viet and the gig economy

PHOTO BY RENE DE ANDA (@RENEDEANDA)

All over the world, gig workers are finding that the companies that “employ” them are cutting their pay rates. That’s just the way it works in the life cycle of these startups. A gig service starts, it spends a lot of money finding customers (with lots of discounts, low prices, specials) who order a lot of cars/food/handymen, and the company then needs to spend a lot of money getting workers to sign up.

This goes on for a while with venture capital money funding both the discounts to customers and bonuses for the workers. Hopefully the company becomes a quasi-monopoly, with little competition, and it slowly can start to peel back those customer discounts and employee bonuses, because both sides are committed to the model. As long as it is only a little bit more expensive, or a little worse pay, then people are fine with this. They understand that a business needs to make money.

From a worker’s perspective, ratcheting down pay is annoying, but one can make it up through a bit longer hours. After a few rounds of that, and before the realize it, people are working 12 hours and making much less than minimum wage. Read this article in the New York Times about a guy who tries to be a food delivery man, and ends up making less than $10 an hour (it sounds high, but is actually $5 below New York City’s $15 minimum wage). It also sounds extremely strenuous and dangerous. Even good delivery people make about $15 an hour.

SOURCE: VNEXPRESS

In Vietnam, we are seeing these trends play out with Go-Viet. It has changed its bonus system (which was fairly straightforward and is now more complicated - see to the right). Basically, to get the biggest bonus of 180,000, a driver had to do between 14 and 28 rides a day. That was already hard. Now they have to do between 20 and 40 rides a day to get a bit more (VND240k). If a driver got 5 rides during rush hour, it would still have do to 30 more rides during the rest of the time, which is probably impossible and definitely impossible in a regular 8 hour workday.

The drivers are protesting, which is unsurprising and fits in with this larger discussion about worker’s rights that we talked about last week (see post below from July 17). Go-Viet says that it offering surge pricing for drivers, which should offset somewhat the lower bonuses, but the workers aren’t buying it. The strike continued into the second day at least (see this article from Nguoi Lao Dong). I don’t know if it is still going on.

Unfortunately, Go-Viet has around 100,000 drivers in Vietnam (according to the company), and 300 protesters are just not going to make a big enough ruckus to make management change its mind, For exampe, we saw a much bigger protest in in the US, with LA drivers for Uber striking after a big pay cut (see here), but the strike was unsuccessful. It’s my view that these gig economy jobs depend on these new drivers not really understanding unit economics. Hopefully as they get smarter, they can put pressure on companies, or if that doesn’t work, regulators. In New York City, pressure led to a minimum wage for drivers of a bit over $17 after expenses.

I doubt that we will see that in Vietnam. But with low unemployment, and a big search for workers by all of this foreign investment coming in, the gig economy companies may have to raise pay at some point, to retain drivers/workers. We can only hope.

Huawei

Vietnam made the front page of the New York times (or at least the front of my web version of the New York Times). The title of the article is great: “Is Huawei a Security Threat? Vietnam Isn’t Taking any Chances.”

SOURCE: SOUTH CHINA MORNING POST

The basic gist is that Vietnam is not using Huawei tech for 5G (we have talked about this before - see the post on May 20, 2019). The Vietnamese carriers have chosen to go with other providers (see table to the right). Vietnam says it is not because of their fear of China (no, not at all), but because they have just decided to go a different way.

Vietnam is in a tricky position. China has always been the dominant force in the neighborhood. And the Vietnam war was, in a way, a war over Chinese and Soviet control of Vietnam, at least according to the US participants. It turns out that Vietnam has a complicated and sometimes antagonistic relationship with China, and maybe the US didn’t have many reasons to be worried about Chinese control. And that complicated relationship continues, with a brewing brouhaha in the South China Sea, where Vietnam is forcefully defending its territory. But the government is also worried that people will protest Chinese encroachment of the sea, as they did last summer, and so it is not being bellicose about its military actions.

Like every other country in the world, Vietnam needs China’s investment and market, but it also wants to safeguard its own sovereignty. Of course, Vietnam is much smaller (but still quite big) and poorer (but growing, and a place for Chinese investment). Both need each other, but ultimately Vietnam needs China more than China needs Vietnam. Because of this, the Vietnamese government will have to make a lot of tough decisions, like this 5G technology issue, that prioritize certain things (national security, technology) but don’t piss off the Chinese too much.

Ultimately, looking at the US, it has been unable to force countries to go along with them, even with lots of money (see Pakistan). China may start to see it is running into the same problem, especially as people in these countries protest.

Vietnam is not alone in walking a tight line as it deals with China’s rise in South East Asia. Cambodia has a big resort that everyone is worried will be taken over by the Chinese. And Sri Lanka already lost a big port to China. Vietnam is trying to ensure it doesn’t run into the same problems, but it is going to be difficult.

Trash

Everyone’s favorite topic: garbage. Turns out Vietnamese cities have a fair amount of it, and they (like everyone else) are having problems figuring out what to do with it. A few points:

SOURCE: UN

• People don’t like to live near landfills, especially if they are smelly. That’s a real problem in the Phu My Hung area in District 7. People are protesting, and truly does sound like the smells are noxious.

• Ho Chi Minh City is not the only place. The government was going to invest in Da Nang’s landfill to add a waste-to-energy plant, but neighbors protested at the site to stop it. They believe there is going to be more pollution because of it, which is probably true. Reducing pollution from plants like these cost money, and it is probable that the city government won’t spend it.

• Hanoi residents protested at a landfill after not receiving promised compensation to move, resulting in trash piling up around the city.

• According to the UN, Vietnam will produce more than 0.8 kg of urban waste per capita, (or 22m tons). Most of this waste is not sorted, and therefore is just dumped into open landfills. There is little waste-to-energy, little incineration, few sanitary landfills, and while program in place, there is little follow-through on implementation of projects.

• This is basically the same as in most of ASEAN, except for Singapore. Less than 50% of all waste is sorted at the source for almost every country except the Philippines. Most of the waste is food or organic waste, which may be compostable. However, the same UN study said that most farmers don’t want to use compost in Vietnam, so maybe the end market is just not there.

SOURCE: UN

This is a real quality of life issue, and it is probably going to get worse as Vietnam gets richer. There is a movement to reduce single-use plastic (I wrote about it on June 25, 2019 - scroll down to read), but ultimately there is going to be more waste, and the government should start investing in this now. It will improve quality of life, it will reduce pollution, and it will make the air smell better for these poor people.

Just to add another hitch, I saw this article today about containers filled with plastic in the port in Sihanoukville, Cambodia. The government is trying to find out who is responsible (which doesn’t seem like it would be too hard). This is just one more in a line of poor countries refusing to take trash from wealthier countries. Malaysia, Thailand and Vietnam have done the same.

This means that wealthier countries need to find a solution in their own countries, which is going to be hard. The problem is exemplified by this story in the US (read it here) about a train filled with treated New York poop was stopped in Alabama, because communities didn’t want it transported through their town. At some point, wealthy parts of the US (and other rich countries) will have to start figuring out what to do with all of this waste.

Maybe there will be some technological solution. If not, everyone is going to have to drastically reduce waste.

Labor news

Vietnam ratified the International Labor Organization’s fundamental convention on collective bargaining in mid June (convention 98). This is convention 98, which protects against anti-union discrimination. There is another Convention (87) that allows for independent trade unions., and Vietnam plans to ratify that by 2023.

Right now there is just one union, the Vietnam General Confederation of Labour (VGCL) which is part of the communist party. And this brings up an interesting (but naive) question: why does Vietnam need labor unions, if it is a socialist republic led by the Communist Party of Vietnam? Surely worker rights should be protected as a matter of course. But it doesn’t seem to be the case.

There are a number of strikes in Vietnam, around 300-500 strikes a year, based on government figures that are somewhat suspect. The majority are in Ho Chi Minh City and its neighboring provinces - 60-80%. These are mainly against foreign companies, but increasingly private domestic companies as well. While strikes are legal (since 1994), for all intents and purposes it is impossible to have a legal strike. So all of these wildcat strikes are illegal. And they get results! (You can read about details of a strike at a shoe company here).

But back to joining the ILO. This article in Jacobin, my favorite socialist periodical/blog, talks about how the new ILO ratification comes for two reasons. First, new international treaties require more worker rights than previously given by the government. And second, because the government wants to reduce strikes and wants them to move into a formal negotiation between workers and employers.

What we may see is some sort of short-term union that is formed just to negotiate with the employer. But that these unions will not be able to grow beyond negotiating basic wages and conditions because the government doesn’t want them to. The government has increasingly been uninterested in civil action and has cracked down on protests or anti-government speech. I doubt this will change. I think that will limit unions ability to play a bigger role in society and politics. But for the small (but very important) role of negotiating between company and workers, it could be helpful (this article is much more optimistic). Unfortunately if workers demands push wages too high, we will likely just see a shift of manufacturing to the next cheapest place on the list (Bangladesh? Cambodia?).

Minimum salary: In other labor news, the government will raise the minimum salary by 5.5% in 2020. It will be VND4.42m ($191) per month in urban areas (HCMC, Hanoi), and VND3.92 for Region II, rural areas of the two big cities and smaller cities like Da Nang, Can Tho, Hai Phong). Region III will not be at VND3.43m, and the rest of the country at VND3.07m. The difference between cities and the rural areas are 44%.

This increase is basically in line with what the country has done recently: “Vietnam increased regional minimum salary by 7.3 percent, 6.5 percent and 5.3 percent in 2017, 2018 and 2019, respectively.”

Finally, workers needed! Ho Chi Minh City will need 155,000 new workers in the second half of 2019, according to the municipal government.

Flooding in Ho Chi Minh City

SOURCE: CLIMATE-DATA.ORG

Ho Chi Minh City sometimes reminds me of New Orleans, mainly because it sits in a delta and is always flooding. New Orleans is actually below sea level, or some of it is. HCMC is at an average of 0.5-1.0m, so a little bit better, but not by much. Of course, climate change is also not helping, and the rainy season is long with high precipitation throughout.

The city has started to make some changes. The first is to do remote sensing in the short term, in order to help redirect traffic. If the water level gets above a certain level, the sensor will send out an alert to everyone on the alert, telling them to find another round. This seems like basically unhelpful in the long term (it doesn’t solve the flooding problem), but it will be nice in the short term. Also, the more sensors out there, the better the response to flooding, because the city will have data about what is flooding and where it is worst. Second, the government is implementing some infrastructure solutions that should help the problem on a key street (where the sensor is being placed), but this won’t be ready until after the 2020 rainy season!

SOURCE: WORLD BANK

Another idea is to for consumers and businesses to do more rainwater harvesting, with the idea that if every home collects a little rainwater, then millions of cubic meters of rainwater can be diverted from streets. This seems very unlikely to have much of an impact, but if enough people do it, maybe something could happen. Plus, it would be good to recycle this water. It would help offset the load on the system a bit.

In terms of real responses to flooding and climate change, this study suggests that increased elevation (build new buildings on top of sand in order to raise their elevation a bit) and dryproofing buildings can really help against future flooding.

Climate change and this flooding are quite difficult to deal with, but at the same time, other countries would love to have this amount of rain. For example, Vietnam gets 1,821 mm of rainfall a year, while Egypt gets 51! Jordan just 111. Iran 228. These are dry countries that face drought conditions on a daily basis. Vietnam, if it could just direct some of that rain away from the streets and store it for the dry season, would never be thirsty. But that’s hard to do.

Eclat Textiles

SOURCE: YAHOO FINANCE

So some big news out about Eclat Textile. This is a Taiwanese textile company. For a long time it had operations in China (starting in 1998), and then it moved into Vietnam back in 2004 (with the factory starting production in 2006). So it has been in Vietnam for a long time. It is especially important because Eclat makes up 4.5% of the Vietnam ETF (VNM). We discussed Eclat a bit two weeks ago, when we talked about the performance of the index.

Eclat was actually up 14% in the first half of 2019, but the TWD was down slightly (1.4%), so some of this positive performance was offset. Overall, it probably increased the ETF price by about 0.6%, all included.

This stock was helped by good revenue growth in 2018 (13.8%), with an improved operating margin of 28.8% (it had been averaging around 28.0% and was just 27.5% in 2017), so operating profit was up a monster 19% in the year.

But of course, as Trump’s rhetoric against Vietnam heats up, the company is looking to diversify away from Vietnam (where most of its garments are sewn). It looks like Cambodia is the next frontier, with a garment factory already there. It also is looking at Indonesia, Bangladesh, India and Mexico.

Although, the headlines seem much worse than they actually are: the company is just not expanding in Vietnam over the next 3 years. I think one of the real reasons is that Vietnam is actually at capacity. A fellow CEO hints at this:

But the rush to nearby Asian nations is also reaching a saturation point. “Vietnam, for example, is full, completely full,” Spencer Fung, chief executive officer of Li & Fung Ltd., the world’s largest supplier of consumer goods, told Bloomberg earlier this month.

I am not sure if Fung is saying that there’s not room for more production because of real estate, logistics or staff. Maybe it’s all those things. Vietnam has not been completely underutilized - the unemployment rates aren’t crazy high, there’s not a ton of commercial inventory just sitting empty. We have talked before about productivity-weighted wages in Vietnam: they actually aren’t as low as people expect. So I can see why some are looking to other countries for production. It has the added effect of diversifying their manufacturing, in case the trade war consumes more countries.

It will be interesting to see what other companies do, particularly those that can divide their production easily.

Finally, the VNM index may need to change as well. Eclat was already 4.5% of the index in early July. It may make sense for this weighting to fall over time, although it will take years - until Eclat really moves production elsewhere.

Ports and investments

Japanese companies bought into Gemadept, a Vietnamese port operator and logistics operator.

Sumitomo teamed up with compatriot logistics company Suzuyo and a Japanese public-private fund specializing in infrastructure investment to take a 10% interest in Ho Chi Minh-based Gemadept. The trading house provided more than half of the roughly 4 billion yen ($37 million) the team paid to a local fund for the stake.

Total market cap of Gemadept is just $350m, which is less than I expected, given the number of ports that it owns (7 in total, with varying ownership levels). I estimate that it has capacity of more than 5m TEUs (ton equivalent units, an metric to judge how many containers can come into the port. It is adding at least 1.5m or almost 30% more in the next year or so.

Gemadept has more than 10% share of the market, or 1.7m a year. About 14 million container equivalents of goods are shipped in and out of Vietnam annually. If we assume similar to GDP growth, that would be 22.5 million by 2025. I personally think that could increase even more, given that exports have growth 13.8% annually over the past 5 years. It seems like 10% growth would be reasonable, which would mean that by 2025 Vietnam could see 27m container equivalents. That’s almost double.

GEMADEPT STOCK PRICE. SOURCE: VIETSTOCK

Given this backdrop, Gemadept’s stock has not performed that well, despite the strong positive tailwinds from exports, the China-US trade war or this purchase. You would think people would be excited about potential for better utilization and greater ability to invest in new ports. But they aren’t.

I will have to look into this more, but I am surprised that it is trading so low. The stock is trading just 4.4x trailing P/E, but 11.5x forward P/E. There was a big divestment in 2018 which boosted profits, so the 2019 figure is more realistic to describe its ordinary operations. Isn’t too low - DP World (a UAE ports operator and the world’s largest) is trading at just 10x - but still surprisingly given the growth in the market.

I am going to do more work on ports and Gemadept, but I thought I would just finish here on this summer Friday! Happy Weekend!

The health of swine – swine flu outbreak

Just an update on the swine flu. Good news on at least one front: the government says it is close to producing a vaccine against swine flu. That’s great news.

Just to give you a sense of what has already happened:

SOURCE: UN FAO

• The flu has spread to 61 of 63 counties. Let’s just assume it is everywhere now; I don’t see how it could not be. 

• Over 2.9 million pigs have been culled.

• This is more than the number of pigs culled in China (1.1 million).

• But the Chinese figures for how many pigs are infected are probably too low.

• This is likely the worst animal epidemic the world has ever seen.

That 2.9 million figure is likely to go up and represents about 10% of all pigs. That is going to mean a big decline in pork products in the market. As a reminder, pork represents about 70% of meat consumption in Vietnam. (Previously I said 75%, but it is hard to get a real number - let’s say it is somewhere between 2/3rds and 3/4ths).

Trade effects:

• Imports of pork products have risen 6.7x to $24m, and this has helped keep prices reasonable. The article says that imports are around $3-5 per pound.

• Funnily enough, pork exports have risen 1.8x in the first four months of the year to $25m, just slightly above imports. This is a fairly small amount, given that total agricultural exports are around $30bn, but I assume that these exports are mainly to China and Hong Kong, which have suffered from the flu.

Farmers are really being hurt, and families, because there are tons of families that raise their own pigs. Of course, not all of these will cull their pigs, meaning that the disease is more likely to spread and continue.

I first wrote about the swine flu back in March 7 when I said the government is taking it seriously. I think they are, but they clearly aren’t doing enough to stop it. Maybe it will start to subside, like China says it has, but I bet eradication won’t happen until there is a vaccine. Hopefully, this government vaccine is real, but scientists don’t think so.

Final thought: I bet if this keeps up, there is going to be significant changes in diets and trade because of the flu. It will take Vietnam some time to recover, and in the meantime imports will continue to flood in and people will look to other sources of protein.

The health of humans - Dengue outbreak

DAT FOR 2004. DALY = DISABILITY-ADJUSTED LIFE YEAR, OR THE NUMBER OF YEARS LOST DUE TO ILL-HEALTH, DISABILITY OR EARLY DEATH. SOURCE: WHO

Something you should know about me: mosquitoes love me (maybe you shouldn’t know that, but it is what it is). My mamma always said that it was because my blood was sweeter than others. Well, it turns out this is a real thing, some people are sweeter to mosquitoes than others.

All of this to say that I follow closely any news of mosquito-borne diseases, and it looks like Vietnam is having an outbreak of dengue fever. In the first six months, 81,132 people have been hit, (representing a 310% increase for the country as a whole. Of these cases, more than 24,000 are in Saigon, or a 176% increase over last year. From 2004-10, the average number of dengue fever cases in Vietnam was 91,321.

Not to make it all about me, but I know I’m going to get dengue.

A few stats about the disease:

DATA FOR 2004. SOURCE: WHO

• 1 in four people infected with dengue will get sick, with symptoms either mild or severe.

• 1 in 20 people who get sick with dengue will develop severe dengue. Severe dengue can be life-threatening within a few hours and often requires hospitalization.

• There is no cure for dengue.

• A recent vaccine in the Philippines actually made people worse (we talked about this when talking about measles in the Philippines, scroll down to May 24, 2019). It is still approved for use in the EU and the US, but only with pretty severe restrictions.

• Four people have died in Vietnam so far this year.

• “According to the World Health Organization, there are approximately 50 million infections worldwide each year and 2.5 billion people are at risk of contracting dengue.”

Vietnam has actually been much better than other countries in ASEAN in terms of cases and deaths from dengue. It was lower than Thailand and many other countries. This is for both deaths and DALY (or disability-adjusted life year), which calculates the number of years lost to sickness, disability and death. (See charts above to the right) This year will probably change these statistics a lot.

What can countries do to stop dengue?

It doesn’t seem like a vaccine is going to come along anytime soon, so countries are trying for other solutions. Interestingly, only female mosquitoes bite, and only Aedes aegypti and Aedes albopictus spread dengue, yellow fever, zika among other bad diseases. Mosquitoes of the Anopheles genus spread malaria.

Singapore and Indonesia are trying novel ways of limiting dengue. The main way is by distributing mosquitoes infected by the Wolbachia bacteria, which does allow males to fertilize females and also protects females from dengue and Zika. It looks like it is working so far in Singapore and in Indonesia. According to these reports, Vietnam is also trying it, but obviously it hasn’t started working.

In that New York Times article, the kicker is that eventually, effectiveness will drop off, and we will have to find some new way to fight mosquitoes and mosquito-borne illnesses. Maybe a vaccine will come through at some point that will limit the negative effects. Of course, then we have to worry about anti-vaxxers, which are already a problem in Vietnam.

Electricity use - surprising cost of generating GDP

ELECTRICITY CONSUMPTION BY COUNTRY SOURCE: CIA

I saw this story yesterday about the use of electricity by bitcoin. It turns out that bitcoin uses a lot of electricity. More than Switzerland, or 64.15 TwH per year.

This got me started thinking about electricity usage in Vietnam as well, and I realized I had no idea how Vietnam stacked up. It turns out, Vietnam is the 15th largest country in the world by population, but it is ranked #25 according to how much electricity it consumes. That’s based on 2016 figures.

China and the US are numbers #1 and #2, although I was a little surprised that China was already so much further ahead than the US. That’s mainly because it has just so many people. India, despite having a similar number of people, still hasn’t surprised the USA and remains the third largest consumer of electricity.

ELECTRICITY CONSUMPTION PER CAPITA BY SELECT COUNTRIES IN 2016. SOURCE: CIA (ELECTRICITY DATA), WORLD BANK FOR POPULATION

Of course, this is sort of a mix of countries ranked by population but also by how many natural resources the countries have. That’s why a country like the UAE is the 31st largest consumer of electricity, despite being the 92nd largest country in the world. Saudi Arabia is the 41st largest country but consumes more electricity than Italy, which has almost twice the population.

Because of these anomalies, I also looked at KwHs consumed per capita. This is also pretty interesting. Surprisingly, the US is not as bad as I thought they would be. They are 9th in terms of electricity usage per capita. The largest is Iceland, with over 50,000 KwH annually, but that turns out to be mostly aluminum (75% of electricity goes to aluminum manufacturing). Electricity is very cheap and sourced from renewables (86%) in the country, so the fact that the country consumes so much isn’t too problematic. In contrast, the oil- and gas-producing countries are also high on this list, and that is not great for climate change.

GDP (IN CONSTANT US$) PER KWH, 2016. SOURCE: WORLD BANK, CIA

Finally, I looked at the efficiency of electricity to generate GDP. This was interesting, because the countries that do well on this metric are the poorest ones. Chad is number #1 on the list (not on the chart to the right) with $48 in GDP generated from every KwH.

Vietnam is way down on this metric at 179th with $1.43 of GDP generated for every KwH. Nigeria is much higher, as is the UK, Singapore, among others. In fact, of all of ASEAN, Vietnam is the worst. Not really sure why this is. Maybe productivity (but then lots of countries in ASEAN have worse productivity than Vietnam). Maybe the fact that Vietnam is actually pretty electrified, but GDP production in these smaller villages is relatively minimal. Something to look into.

The problem is that Vietnamese electricity prices aren’t especially low, meaning that GDP is being generated at a pretty high cost. Or another way to think of it, more of GDP is going to electricity generation/purchase than in most other countries.

Korea and Japan trade spat: could it affect Vietnam?

There is a political-historical dispute between Korea and Japan that moved into a trade spat earlier this month. Quick recap: the Korean courts allowed individuals to sue Japanese companies for their treatment during the Japanese invasion and occupation of Korea. About 14 individuals won their cases and were awarded some money (around $90,000 each). This is not much money, but there are a flood of cases coming through that could result in much bigger payments.

The Japanese refused to pay, so the courts said that the individuals could seize assets in Korea. Then the Japanese retaliated by putting export controls on certain high tech products (list here). Specifically, these export controls are targeted at Samsung Electronics, SK hynix and LG Display.

So basically, this is a big mess, and who knows how it will be resolved. The Koreans are trying diplomatic tools, but don’t appear to be willing to force the courts to change judgments. So, it could persist for a while. Some Korean analysts think it might help domestic suppliers:

While the reliance on Japanese exports of these products makes these new restrictions a cause for concern, industry experts seem optimistic about South Korean companies’ ability to survive on reserves in the short term and then begin to shift supply chains to accommodate the change. Some even expected manufacturers to shift more toward domestic Korean suppliers, which would make Japan’s harsh policies more of a boon for the South Korean economy in the long run.

What does this have to do with Vietnam? The following are important to remember:

• From our most recent series on the VNM ETF, Korean tech companies make up about 16% of the index. These appear to be highly dependent on Samsung and other big companies.

• Samsung by itself is responsible for about a quarter of Vietnam’s exports. For the whole country! That’s a lot. If Samsung’s supply chain has difficulties, it could mean weaker exports for Vietnam.

• LG decided to move its phone production from South Korea to Vietnam earlier this year, so they also are at risk.

Global trade is great until there is a hitch in the system. And since supply chains seem to be getting more and more complex, we could see even more areas where a bottleneck hurts everyone down the line, including countries.

It is unclear at this point if 1) Japanese companies could export these products directly to Vietnam (not sure if this is possible or feasible) or 2) that the Vietnamese plants even need these materials, because they may not need these inputs (although it seems likely that they do).

I can’t see any reports on these plants, but it will be interesting to see what happens. I would expect that the VNM ETF is probably not going to do well over the next few weeks.

Happy Fourth of July (or Fifth of July) to all of my American readers! (all 3 of you).

VIETNAMESE REAL GDP PER CAPITAL (IN 2011 USD). SOURCE: MADDISON PROJECT DATABASE*

Today, I thought I would look at some good news about Vietnam and the world. I found this project, the Maddison Project, that tries to get a very long historical series of economic data. For a few countries, there is data that goes back to the year 1! In France at year 1, per capita GDP was $1,050 (using 2011 dollars). Egypt was $1,225. After that, a lot of years are skipped, but for France the data goes back mostly to annual data in 1280 ($1,053 - no real growth for 1200 years!). Data starts for Sweden at 1300 ($955), Poland at 1400 ($1,050), then Portugal in 1530 ($985). Mexican data starts at 1595 ($562). At 1700, we get yearly data for the United Kingdom - real GDP of $1,591 compared to France at $1,350.

Interesting point: data for South Africa starts at 1700 with GDP of $3,546, which is double the next highest (Spain at $1,730). That must be from all the gold and diamonds. The per capita GDP fluctuates a fair amount but then from 1773 to 1781, it falls 51%. With just a cursory look at timelines, it’s hard to say what drove this. There were some conflicts between colonizers and natives, plus smallpox, but it could be gold and mining prices as well. Real GDP rises again later, but it doesn’t get back to those high levels until 1906 ($3,871). That’s post Boer war and before WWI.

DIFFERENCE IN REAL GDP PER CAPITA - 1950-2016. (USD2011). SOURCE: MADDISON PROJECT DATABASE*

The first piece of data for Vietnam is in 1820 with GDP per capita of $713. This is pretty low, but still higher than Thailand ($692) and the same as the Philippines ($715). Malaysia was well ahead at $1,031. This is the last time that Vietnam is richer than Thailand (according to this data).

Per capita GDP in Vietnam was basically unchanged from 1913 until the 60s, when it started to improve, reaching $1,210 in 1964. But it fell during the later years of the year and didn’t return to that level until 1988. That was momentary before it fell again until 1991. This was after the initial reforms of the Doi Moi, including the Law on Private Enterprises. From then on, it just rose and rose and rose.

We can really see that the war had a very negative impact on the country. Communism didn’t help. Once Doi Moi started and the country opened up, real GDP per capita jumped five times. This is the fourth best among all the countries in the world. And given its strong growth, it probably continued to be up there if we extended it to 2018.

But looking at the overall trend from 1950, Vietnam did not perform as well as many other countries, including its ASEAN neighbors of Thailand and Singapore. Almost 60% of the best performers over this time period are in Asia. Vietnam grew a respectable 6.8x from 1950 to 2016, but again, almost all of that comes from after 1990, when it grew 5.0x to 2016.

If we thought about this in terms of population, things would be more striking, mainly because of the growth of China (16.3x). This is very impressive. India rose just 4.2x (it actually grew more from 1990 to 2016: 4.6x). The US just 3.5x. So China really stands out for its rate of growth for a very large country.

However, Vietnam’s growth is also quite impressive, especially in such a short time period. Let’s hope the country can keep it up, because real GDP per capita was still quite low at $6,031 in 2016.

* Maddison Project Database, version 2018. Bolt, Jutta, Robert Inklaar, Herman de Jong and Jan Luiten van Zanden (2018), “Rebasing ‘Maddison’: new income comparisons and the shape of long-run economic development.” Maddison Project Working Paper, nr. 10, available for download at www.ggdc.net/maddison. Please refer to www.ggdc.net/maddison for documentation and explanation of the data series.

ETF Returns broken down…part 3 and final

For a final post on the ETF returns, I wanted to see if I could summarize what really drove the changes. Remember, the index rose around 9.1%.

VNM ETF. PRICE IS IN USD. SOURCE: YAHOO FINANCE

• VinGroup raised the index by 2.5pp.

• All other Vietnamese companies were effectively neutral.

• The Koreans added about 4.5pp to 9.0pp (not counting currency). The big difference here is that Uti Inc./Korea was added sometime during the half (I was unable to find out when). That makes a big difference.

• All other foreign companies added 3.3pp (not counting currency).

• Currency had an impact, but I am having some problems calculating this. It is between -0.1% to -1.0%, which is basically not helpful. I will have to think more about this, but I am pretty sure it is somewhere in this range.

• Cash was 1.2% of holdings at the beginning of the period and 0.41% at the end.

• VNM the ETF was trading at a slight discount (-0.65%) to the NAV value of the fund. It was a similar discount (-64%) at the beginning of the period.

Ultimately, I think if you were right about 1) the foreign companies and 2) Vingroup, you would be fine. And maybe hedge the currencies.

It’s weird to think that the only ETF for Vietnam is ony 2/3rds Vietnamese-traded companies and that so much of the returns in this go around were driven by the 1/3rd not traded in Vietnam.

ETF Returns broken down…continued

Yesterday we went through the returns of the Vietnamese index in 1H2019. Key insights: foreign companies are important to the index, and these actually did quite well. But depreciation of the Korean Won (-4%) was negative Other than that, additions/changes to the index were somewhat important (6.6%).

Today I want to delve into the Vietnamese companies and their results. Within the Vietnam companies, there are five that really stand out for their outstanding performance:

VNM ETF COMPONENTS BY 1H2019 RETURN AND WEIGHTING. WEIGHTINGS ARE FOR THE BEGINNING OF THE PERIOD EXCEPT FOR THOSE WITH A * WHICH ARE END OF PERIOD. SOURCE: VAN ECK, VIETECON.COM

• Vingroup (VIC) - this is the biggest weight in the index (8%) and the largest in the market. The launch of the phone and the car are probably driving the solid 1H return, but its valuation is expensive at 92x P/E (even though of course P/E is not a good guide to future performance).

• Vietcombank (VCB) - VCB is the largest bank with a weighting of 6%. The bank is growing quickly. Pre-tax profits were almost $800m in 2018, and the bank is guiding to $1bn by 2020, or 12% annual growth rate. The stock was up 32% in 1H, so it might be moving ahead of its growth trajectory. It is now trading at 4.1x P/B with an ROE of 21.9%.

• Vincom Retail (VRE) - Right below VCB is Vincom Retail, which is 5% of the weighting and rose 19% in 1H2019. It is owned by Vingroup, as is VHM, which is also part of the index. Revenue was up 65% in 2018.

• Hoang Huy Investment Financial Services (TCH) - We are starting to get to the smaller components of the index. TCH has just 1.8% weighting but was up 18% in 1H. The company is a conglomerate - it does financials, real estate, and trucks. In 2018, trucks made up about 87% of all revenue, but that’s changing as some real estate projects start to be delivered.

• Vietnam Construction and Import-Export (VCG) - With a weighting of 1.6%, VCBG was up 21% in 1H. VINACONEX is a construction and real estate company. It looks like most of the stock’s rise is due to more property investment.

Looking at the ones that dragged down the results, it was mainly three companies:

VNM ETF WEIGHTED SECTOR RESULTS 1H2019. WEIGHTING BY YE2018 WEIGHTINGS FOR ALL BUT 2 STOCKS THAT WERE WEIGHTED BY JUNE 28 WEIGHTINGS. SOURCE: VAN ECK, VIETSTOCK, VIETECON.COM

VNM ETF COMPONENTS BY 1H2019 RETURN AND WEIGHTING. WEIGHTINGS ARE FOR THE BEGINNING OF THE PERIOD EXCEPT FOR THOSE WITH A * WHICH ARE END OF PERIOD. SOURCE: VAN ECK, VIETECON.COM

• FLC Faros Construction (ROS) - While the weighting of Faros is not in the top 10 (3.8%), it fell 19%. That had a significant impact on the index. The P/E is still very high (48x). Since November 2017, the stock has just fallen and fallen and fallen. The stock price back then was VND176k and is now VND23k. People have seen this stock as a risk to the index for quite some time: see this article in Barron’s and this article.

• Bao Viet Holdings (BVH) - With a weighting of 4.6% and a decline of 12.5%, BVH also drive returns down. P/E continues to be high at 52x and a P/B of 3.8x. It’s an insurance company. Maybe the growth is not as attractive right now.

• Thanh Thanh Cong (SBT) - SBT is a sugar company. Weighting is at 2.7% and the stock lost 13% in the half. It is part of a larger conglomerate. It’s not particularly expensive (15x P/E) and there is lots of growth on the revenue side (less on the profit side). But it is hard to find information on the company. I will have to look harder.

By sector, tech (the Korean companies) and health care (the Japanese company) and banks were the most impactful. In the chart above, we take the weighted returns of each sector to show the effect on the index.

Just a note here: Vincom Group makes up about 20% of the index. While the three companies are in different sectors, they clearly are important to each others (not to mention that Vincom conglomerates the other two). If Vincom starts to perform badly, then the index is probably going to underperform as well.

Correction: Finally, I said yesterday that the stock market was only up 8.8% compared to economic growth of c7%, but this is not like-for-like. It should be annualized, and on that basis the stock market is growing much faster than the economy. I do wonder, though, if economic growth and the stock market are correlated as much as people think. I would say no, but it’s something to look at. Some studies (pointed to here) have observed a negative correlation. Also, the impact of multinationals (which would be significant for VNM) is also a consideration.