Baby's back!

So, I have been away, enjoying some time off from the blog, but surprisingly busy as well. Hope you haven’t missed me too much. I will be back to the regular daily schedule from now on.

Let’s get right into it. Here is a story that interested me over the past few days:

Retiring in Vietnam: I found this LA Times story extremely interesting from an economic perspective. Quick summary: lots of Americans are looking to retire to Vietnam. Many of these retirees are veterans of the US war with Vietnam, so they are “coming back.”

Added to that is this article about the 10 best places to retire. Vietnam is ranked #10, but what’s interesting is the company Vietnam keeps: France! Spain! Portugal! I feel there is a big difference between people retiring in Vietnam versus those retiring in Europe, with Vietnam being for more adventurous retirees. Although anyone looking to retire in a foreign country is pretty adventurous.

Based on the LA Times article, it appears that the retirees are mainly people (men) that had a very international career. Most of the people quoted had worked and lived abroad a fair amount. Also, many of them lived in Vietnam at one point, and/or married a Vietnamese person (woman).

What could the economic impact be of all these retirees? Well, there are a few:

1) Investment: Lots of retirees would be interested in buying a house, if possible, which would help the property market, especially the high end one. And they might actually invest money in other types of businesses as well.

2) Higher consumption than Vietnamese residents: The articles quote living expenses of around $1,500 to $2,000 for a family per month. As a reminder, GDP per capita was around $2,500 per year in 2018 in Vietnam. So they are spending between 6-10x as much as a local. That’s good for the economy.

3) Skills: Both of the two main people quoted in the article continue to work at least part-time. Rockhold is an investor and consultant. Gormalley teaches. Both bring experience and expertise in a region that doesn’t have enough of either.

Unfortunately, we don’t have a sense of how many retirees there are, but let’s take a shot.

The number of retirees claiming social security benefits by country, 2018. Source: US Social Security Administration

If there are 10,000 retirees spending $1,500 a month, that’s $15m in spending a month or $180m a year. That’s a good-sized market and one worth catering to. Plus, its probably extremely concentrated in HCMC, so a bit easier to service.

I did find some data that was insightful. The US Social Security Administration reported the number of Americans claiming benefits in foreign countries as of December 2018. Vietnam was pretty far down at 531 beneficiaries. But that definitely understates the number.

First, it’s a year old, so the numbers likely increased. It was only 504 in Dec. 2017, so the trend is positive (albeit from an extremely low base). Second, it makes sense for many people to delay their benefits until a later age (67 or beyond) in order to maximize their eventual benefits. So someone could be retired but not claiming benefits. Third, some may still keep their address in the US for some reason.

More importantly, the US is not the only source of retirees, there are also Australian or Europeans or Japanese that might want to retire in a cheaper locale. Here’s an article on Australians retiring abroad, for the same reasons as the US: costs.

Thailand had more than 70,000 people applying for a retirement visa in 2017, not all of them Americans. If Vietnam had that many, it would equate to consumption of between $1.26-1.68 billion a year.

The number of retirees in Asia is growing, at least US retirees. Again based on the social security data, there are 6,872 claiming benefits in Thailand. Philippines blows that out of the water at 32,366 beneficiaries, but that’s nothing to Japan at 85,989. All of these numbers increased from 2017 to 2018. Overall, the number of retirees abroad grew about 2%, while those retiring in Asia grew a bit more than 5%.

Interesting point: There aren’t many women quoted in the article. I wonder if women aren’t retiring in Vietnam. That’s something I will have to look into.

Merry Christmas

Source: Erwan Hersey (@erwanhersey)

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Source: Luu Quang Minh (@luuquangminh)

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Source: Andreea Popa (@elfcodobelf)

Weird environmental stories

Air pollution

I found this story extremely interesting. There are photos of air pollution at HCMC bus stops, funded by the German Embassy with the support of the Center of Public Transport under the HCMC Department of Transport.

I think it’s great to improve public understanding of air pollution, but public anger around the subject is already happening (see my post from late October, and this story). People know there’s an issue. Maybe more knowledge is better, but I want to see more action.

Floating solar panels

In that vein of viable actions, here is a story about floating solar panels on rivers and reservoirs. One thing I found enlightening is that it is actually quite easy to put floating panels in reservoirs of hydropower dams. These panels can take advantage of the already-existing power infrastructure.

Plus, these floating panels could provide electricity so that more dams won’t be needed. The issues around water in the Mekong are already severe. This year it looks like there is going to be a major drought.

The center's data shows that between June and October this year rainfall in the upper Mekong region was 35-40 percent less than normal. As a result the water level in the upper part of the Mekong is now about 0.4-0.7 meters lower than normal.

This will not only hurt crops this year, but it will also worsen saltwater incursion which will hurt future crops. Adding dams to this is just not going to be great. But you already know my feelings on this (see this post).

Smart grids

The HCMC Power Corporation has implemented a smart grid system for the city. It allows the company to quickly reroute electricity if there is an outage, which can cut down time from 2 hours to minutes. Also,

The System Average Interruption Frequency Index (SAIFI) in November 2019 was 0.72, a decrease of 51.3 percent compared to this time last year.

This is great, because over time it should allow for better energy management, including greater efficiency. Also, the company hopes that it will be better able to handle renewable power generation. .

Grass straws

A Vietnamese entrepreneur is now making grass straws that can last 6 months! Not sure if that is 6 months of use, or just 6 months total. Let’s hope it is the latter.

The story says that he is making $400 in profit a month, while making 3,000 straws a day. That equates to a profit of around VND120 per straw. I would assume each straw is priced at around $.01 and costs about half a cent to make. I assume plastic straws are even cheaper, given that the article talks about how labor intensive the process is. Maybe he can add some machinery, dominate the grass straw market, and then: riches!

There is limited grass in Vietnam, so maybe the riches are just a little bit more money. But good for him.

I am somewhat anti-plastic, so this sounds like a perfect business: jobs, profit, growth, sustainability. Too bad it is so small.

Retail boom

We have talked a bit about the foreign retail players coming into the Vietnamese market. The market is attractive, and Vietnamese consumers haven’t really had exposure to a lot of this retail yet. Plus, online ordering has not yet destroyed physical retail in Vietnam yet. So both the Vietnamese and the retailers get something out of it.

Looking a bit closer at the retail “boom”

To give a sense of what is happening in the market, I wanted to look at how big the retail “boom” is.

From 2013 to 2018, the retail sector in Vietnam recorded a compound annual growth rate, or CAGR, of 10.97%, according to Deloitte. Total retail revenue is expected to reach $180 billion by 2020, which would represent an increase of 26.6% from 2018.

There is also a shift from Mom and Pop stores to more organized retail, in malls and grocery stores. McKinsey says that only 8% of grocery share is in modern groceries.

Companies from all over are trying to take a share of the growing market:

• Locals: We have talked about the massive growth in VinGroup stores (which are now being sold to Masan). There are also Mobile world stores with 2,800+ locations in the country.

• Korean stores: Lotte now has 14 Lotte Mart supermarkets and 1 department store in Vietnam. E-Mart has a hypermarket in HCMC. GS Retail partnered with Vietnam’s Son Kim Group to open 54 convenience stores.

• European stores: Zara was the first big European brand to come into the market, and it now has multiple starts. H&M is now in Vietnam, and Ikea is opening a store in Hanoi.

• Japanese stores: Uniqlo opened its first store this month. Aeon and Takashimaya are department stores in the country. Plus there are Japanese-owned 7-11 stores all over.

• US stores: There aren’t that many US stores in Vietnam. Circle K is the biggest player that I could see.

The Deloitte report has a good list of domestic and foreign retailers.

Source: JLL

This has meant a pretty buoyant retail real estate market.

• Occupancy rates are around 90% and have been trending around this.

• This is despite about 150,000 in new supply in HCMC (more than 10% in additions), and about 60,000 in Hanoi (6%).

• Rents have been trending steadily, also despite the additions.

Basically, lots of supply is being added, but it hasn’t affected rents or occupancies.

Logistics firms benefit too

The knock-on effect is that logistics firms are also benefiting. We’ve talked a bit about investments in logistics companies and warehouses. Now there’s more support for the boom in logistics. FM Logistic said that it doubled its revenue this year with just 10 customers. It is opening a new $30m, 52,000 sqm warehouse near Hanoi in March 2020. Interestingly, the company said it hopes to “provide both B2B and B2C deliveries from the same distribution centre.”

It will have a lot of competition there, but for its current customers, it should be attractive.

Bonus: Not all retail investments in South Asia works out. See this story on Tesco selling its Thailand and Malaysian subsidiaries. In Thailand, it had 1,967 stores, but just 74 in Malaysia. It would be funny if Masan bought those as well. Probably they should learn to run stores in Vietnam first!

Trade concessions

Source: IMF, Vietecon.com calculations

As we have talked about many times, the US and China are in a trade war. Now, we hear rumors all the time that a deal is close (I want to see it first, though). And one of the key items is that China will buy lots of US agriculture exports.

Why agriculture? Well, really, it’s because it is super easy to track and to monitor. While the other changes the US wants are much harder to monitor. Those include removing non-tariff barriers, which are generally amorphous.

Well it turns out that US wants a similar thing from Vietnam. They are going to start lowering tariffs on US agricultural goods, hopefully boosting exports.

The ministry proposes reducing tariffs on chicken to 18% from 20%; the U.S. is asking for the duties to be cut to 14.5% next year and eliminated in 2028, the ministry said. The finance ministry proposes cutting pork duties to 22% from 25%, and reducing the tariff on fresh apples and grapes to 8% in 2020 from 10%. Wheat duties could be cut to 3% next year from 5%.

This is in line with my long time view (see this post from June) that the Vietnamese authorities will try to placate the US on trade. For two main reasons. First, Vietnam and the US are now allies in confronting Chinese expansion, especially in the South China sea. Second, the ability of Vietnam to export manufactured goods that employ lots of people in the country. There are probably other reasons, but these are the first two to come to mind.

As you can see in the chart up to the right, Vietnam’s agriculture exports are still very positive, but they haven’t been growing like clothing and telecom.

Now, the US is actually asking for bigger reductions in tariffs (18.9% tariff on pork in 2020 and 0% by 2027). Plus, no tariffs on apples, grapes and wheat next year.

I wonder if Vietnam will hold the line. It’s not like, at least for apples, grapes and wheat, that Vietnam really competes there. And right this moment, it could probably use some cheaper pork imports, given problems around swine flu.

Where tariffs are now

Source: Vietnamese customs

I looked up a few of the Vietnamese tariffs (here, which is surprisingly easy to use) to get a sense of current levels. Tariffs on pork products can be as high as 30%, although if you are in certain ASEAN trade agreements, it could be much less.

In general, tariffs are very weird. In every country, not just Vietnam. As you look at the poultry tariffs there are some perverse incentives. Tariffs on live chickens could be as high as 10% (depending on the type of chicken and the trading partner). But tariffs on whole bird carcasses (fresh or frozen) are as high as 40%. But then again if you cut up that chicken and sell the parts, the tariff on fresh cuts are still 40% but frozen goes down to 20% for thighs, wings, livers, among other cuts. Same for turkey meat and other poultry.

So it is weird to look at these tables of tariffs and try to figure out what you should import. Like if you are going to bring in frozen chickens, probably best to cut them up, because the tariff would drop by half!

There might be very good reasons for the tariffs to be this way, but there is also a good chance that the frozen poultry lobby is less effective than the fresh chicken lobby. Et cetera. Et cetera.

Bonus tip: Duck tariffs are as high as 40%, but fatty duck livers (foie gras, in other words) is only 15%. So don’t tell me there’s not still a French influence in Vietnam!

Why Vietnam is resisting tariff changes

There are two main reasons why countries don’t want to lower tariffs:

Source: World bank data, chart by vietecon.com

First, they want to protect their own producers/farmers’ jobs and profits. Right now, the vast majority of people, even farmers, would likely benefit from a flood of pork imports, given the impact of swine flu. But a year or two from now, the farmers might be less happy about having to compete with these imports. And if they can’t compete, they lose their jobs.

This is a big demographic - according to the World Bank (see chart to the right), employment in agriculture is still around 40% of all employment. That’s down from 60% in 1991, but still a lot of people. (We talked about this in late July and early September when we looked at a recent ILO report - see this post and this post)

Second, the government may want to lower its import bill. If imports ratchet up, that will put pressure on the exchange rate, especially if these products are wildly desired. All fixed/managed exchange rates suffer from this problem. This is similar to China’s focus on savings. If they have tariffs and keep the exchange rate tilted towards exports, then consumption is curtailed and savings increase. Basically, Vietnamese consumers are funding exports. That’s good for the world, but not always great for the Vietnamese.

These are important issues, not something that can just be waived away. I think the West, and the US in particular, is realizing that it benefited greatly on the consumer side (significantly lower inflation, more investment) because of globalization and the lack of tariffs. But large numbers of people lost their jobs and were not compensated in any real way. It’s nice to have a 20% discount on a new shirt from Wal-Mart, but if you don’t have a job, then you can’t buy the shirt, no matter the cost.

The benefits of trade are diffuse, but the costs are highly concentrated. The solution is to distribute some of the gains through government spending on programs that address the people hurt. The US has been very bad at that, as has much of the Western world. And we are seeing a political response to that now with the election of Trump and Brexit.

The Vietnamese government is keenly attuned to political protests and undoubtedly doesn’t want to go down that road. That’s why I think there will be some concessions to the US, but there will still be a fair amount of tariffs left in place, in order to protect Vietnamese farmers.

Netflix, or the importance of copyright

Source: Netflix, Vietecon.com calculations

Back in 1999 or so, a friend told me about a new service called Netflix that would send you DVDs. You could watch them at your leisure and send them back whenever. No late fees. I think I signed up for the 3-dvd service, which for $10 a month or something. (It’s now about $15, which is still a great deal).

I loved the service, but when I got a job on Wall Street and later moved abroad, I wasn’t able to keep up. Until they introduced streaming. Which was wonderful. I am again a Netflix subscriber, one of 158m as of the end of 9M.

Source: Netflix, chart by Vietecon.com

Netflix is all over the world. Key exception is China. But it is in Vietnam. Subscriber growth in Asia has actually been quite strong, reaching 14.5m by 3Q2019, and delivering more than $1bn in revenue in 9M2019 and should reach just under $1.5bn for the full year.

At the beginning of 2017, the company had 4.7m members in Asia, so it has tripled that figure in less than 2 years. And it is still is growing, with more than 1 million net new subscriptions every quarter.

Very little of this is coming from Vietnam, though. There had been media reports that 300,000 people had accounts, which would actually be impressive given language and payment barriers. But a spokesperson said that the actual subscriber number was much less than 300,000 as of October 2019.

Why has Netflix failed so far in Vietnam?

There are a number of reasons:

• Payments - for a while Netflix required an internationally-accepted credit or debit card. Vietnam is a cash county - 90% of daily transactions are in cash. This is a problem, but one that can easily be fixed. At some point, people will be able to buy Netflix top ups at the corner store, or pay by phone/bank, I assume.

• Language - Until October of this year, the company did not have a Vietnamese-language interface. Now it does, which will likely help increase viewers.

• Government regulation - In September, “broadcasting watchdog asked TV manufacturers to disable access to Netflix on their smart TVs, accusing the streaming service of failing to comply with regulations on content management.” It sounds like the company is going to work with the government on this. Probably will mean some sort of censorship…

• Tax - The company is also working with the government on the company’s “tax responsibilities” in SE Asia. If Netflix is getting revenue in Vietnam, I bet the Vietnamese tax authorities are going to want to tax that revenue.

I think that Netflix is working on resolving a lot of these issues to increase subscribers in Vietnam. It will be a struggle though. And a lot of these issues are Netflix specific, meaning that Vietnamese companies may not face them. But, I would say that one of the bigger hurdles for all services is that most Vietnamese do not pay for content.

According to data published at the latest workshop on protecting the copyright of television content, the total number of visitors of illegal movie streaming websites in 2017’s first half was 236 million, 29-times higher than the total visitor number of authenticated websites.

The US Trade Representative has a report out every year that looks at the worst offenders of IP piracy. Vietnam has been up there for a while. It’s not just media content, but also fake copyright goods and counterfeit pharmaceuticals.

I actually have some issues with how aggressive the US is in enforcing copyright on pharmaceuticals, because it raises the prices of necessary drugs in poor countries. But again, the US consumer is paying very high pharmaceutical prices to incentivize companies to do R&D, and maybe it could pay less, if the rest of the world was paying its share. [This whole issue would take a longer post to go through, so let’s just say that there are lots to discuss around pharma pricing.]

But I have fewer issues with enforcement of copyright around content. At one point, the most popular illegal streaming movie site was hosted in Vietnam, although it appears to have been moved to Ukraine.

Why should we care?

I know that it is seems not that important whether Netflix is able to compete in Vietnam, and ultimately it probably isn’t. But I actually think its a bigger deal for Vietnamese content creators. They need to be paid as well, and it is already hard to be an artist out there.

All of the over-the-top (OTT) companies, locals too, face competition from streaming sites. That has really limited signups:

“Kagan estimates OTT video paid subscriptions in Vietnam reached 4.1% of broadband households in 2018 and should grow at an approximate 21% CAGR over the next five years.”

Pay TV penetration is almost at 50% of households, according to the Asian Video Industry Association. But over-the-top services have just a 3% penetration rate. So there is room to grow, but fixing the competitive landscape is going to be key.

I think as Vietnam signs up for these trade deals, we could see a lot more pressure to fix this by blocking illegal streaming sites. And it shouldn’t be difficult - the government already focuses on certain types of content and blocks that. It should be able to do the same with illegal streaming.

If it was much harder to stream illegally, then we should start to see a pick up. However, Netflix, while it might be the aspirational play, is about 3x more expensive than iFlix ($3 vs $10 per month).

Ultimately, if Vietnam cracks down on illegal streaming, and the Vietnamese actually start to pay for content, this will trickle down to the artists that are making the content. That’s personally what I care about.

VinFast wants to export cars

There is a report out that VinFast wants to make cars for export, which we knew and I had written about previously. The weirder thing is that they want to jump straight to the US market, which is already pretty competitive and, I would say, saturated. The market is not doing that well - it fell 3% yoy this year through November. Plus, we are starting to see more articles like this: Owning a car will soon be as quaint as owning a horse.

Source: Marklines

Source: Marklines

Moreover, the competitive structure of the US market is pretty static. There are 22 players, with the newest being the Koreans, and they came in the 1980s. I have occasionally seen some of the new Chinese cars on the roads, but very rarely. The only two new entrants that have done well are smart cars and Tesla. Both of which brought something new to the market: tiny cars and EVs.

And really, only Tesla has been successful. Even with the skepticism around its guidance and its new cybertruck, it has reached a 1% share, above Volvo, Mitsubishi, Porshe and many others that have been competing for much longer.

Because of this, I just think that VinFast will face a long, tough slog to sell in the US, especially for a company without any name recognition. While I personally find that the VinFast cars look quite cool, they are somewhat generic (pics here).

Why go into the US?

Vehicle sales in VN. Source: VAMA and OICA

My first question was why go into the US? First, let’s back up and look at the Vietnamese market. I wrote about the market back on June 17, 2019, and what I said then stands: the market is just small. Only about 275,000 cars are sold a year, compared to the US market of around 15m in a bad year, and as high as 17.6m in 2016.

For VinFast to sell 100,000 cars in Vietnam, the market would have to grew 36% and Vinfast would have to take all of that. And VinFast has built up a really big manufacturing capacity - 250,000. That’s almost the whole market!

Source: OICA

So VinFast does have to export. But I think it makes more sense for the company to start competing in markets closer geographically. For example, it could spend on the Philippines, where about 400,000 vehicles will be sold. Plus there is a lot of growth in emerging markets, as people get richer. See the chart to the left, which shows how vehicle sales trend with income. So get in early on these markets and ride up with them.

It is not only a function of a small market. Or at least that is just one part of it. The other issue is that building a car plant is super expensive. There are a lot of fixed costs. And the only way to bear those fixed costs is to have a lot of volume. That’s why VinFast wants to go abroad.

But it will not be able to do what companies like Toyota and Hyundai were able to do in the States when they entered: sell very cheap but quality cars. The Japanese companies had inexpensive production and built a lot of the technology themselves. VinFast cars are based on Opel and BWM parts. This means the cars will probably be pretty high quality, but they won’t be differentiated. They also won’t be super cheap, or I doubt they will be.

Source: Vingroup

As of 9M2019, VinFast had revenues of VND4.3 trillion in its manufacturing segment. This is cars, scooters and phones. On this revenue, it had a negative gross profit of VND1.7 trillion. Not counting marketing, etc. It’s very likely they lost more than VND2 trillion. Manufacturing assets are 24% of VinGroup’s assets, or VND84 trillion. So it seems like Pham Nhat Vuong is betting the company on the success of cars and phones and really needs to get it working.

I hope it works out, because it would be good for the company and Vietnam, but I can’t say that I’m not worried.

Digger deaper into earnings and returns

An interesting point is that t

Source: Vietecon.com calculations

Following up on my posts yesterday, I found a few other interesting things. One was that net income is not correlated to revenue all that much. This is something that we should always keep in mind: you can spend a lot of money to sell lots of something but at the end of the day, have very little profit. The last few years has tons of examples of companies growing revenues but still loosing millions/billions!. Here’s looking at you, Uber, WeWork, DoorDash, Lyft, etc.

I put together this small comp table to give a sense of the bigger companies. These are the 20 stocks that I used for my calculations.

A few points here:

VCB was cheap! The reason I say that is the company is trading at a 17.9x trailing P/E despite being up 51%,. That means at the beginning of the year, it was trading on just a 11.8x forward P/E. But net income did increase 51%, so I guess it is in line.

VinGroup is so expensive. Net income growth was good, and it probably will continue to show good growth. But it is trading at a trailing P/E of 77.5x. Ouch. If the price stayed the same, net income would have to grow a bit under 4x to be 20x P/E. It is making some big bets: phones, cars, etc. So it’s possible.

VHM and NVL are both developers and therefore hard to quickly size up. VHM had massive growth in revenues (+69%) and income (+41%), and the share price was up just 15%. NVL saw revenues up 42%, but net income down (!) 23%. The stock crashed 18%. Now the important thing to know is that accounting for real estate is not straightforward. You might recognize lots of expenses for a project (like overhead, etc) but then only recognize the revenue at time of delivery, 2-3 years down the road. And revenues can be heavily weighted to one year: if you are delivering a big project, you might recognize the revenue of 1,000 homes in one year, and none the next year. So it is hard to say much looking at just revenues and net income. Better to look at the land bank and the pipeline.

Banks are all over the place. There are 6 banks in the data. Three (VCB, BID, and MBB) saw great performance, average return of 21%. The three others (TCB, CTG, VPB) were down 16%! I thought this was mainly because state-owned banks did better, and that might be partly true, but doesn’t explain all of it.

Gotta go now, but may do a bit more on this on Monday. Hope the weekend is starting well.

Stocks prices and earnings

Source: Yahoo Finance

Oh how rare to have your expectations upset! To be genuinely surprised!

Let’s back up. I read this article from Axios where they talk about the outstanding performance of the S&P500 (up 25%), despite almost no growth in earnings.

I thought there would be an easy blog to write. I could look at the poor performance of the Vietnamese stock market and see if stocks actually track their earnings. And the result would be: No, they don’t. The theory would be that the actual increase or decrease in earnings is only a small part that drives share prices. Expectations, demand, market structure, all have a more important impact.

So I spent a long time gathering the information (I miss Bloomberg so much, or hell, even Factset - I could do so much more than I already do!). I tracked twenty of the biggest stocks in the market (by market cap), and looked at their share price return and the change in net income for 9M2019 versus 9M2018 (I chose this period because it was relatively easy to get the data).

Source: Vietecon.com calculations

It turns out that there is a trend. Stocks go up when earnings go up, and go down when earnings go down. Or to be more clear, there is a correlation between the change in net income and share price return. You can even do a simple regression and come up with an R-squared of 0.25, which is not bad.

Net income was actually up a fair amount. It rose 15% on average, and 20% if you weight by market cap. This is probably in line with about a 6-7% GDP growth rate

. Stocks did not rise as much overall, just 1% (weighted by market cap +9%). In the aggregate, net income growth doesn’t seem to explain much.

That’s why it was interesting to see that the individual stocks showed a bigger trend, as can be seen in the chart up to the left.

In some ways, this is logical. The value of a company is, theoretically, the value of all of its cash flows discounted. But there is another aspect of this - its not the actual earnings but expectations of future earnings that drive share prices. When you discount future cash flows, those flows are estimates. Let’s say something happens: a company’s product has to be recalled because of safety issues, then earnings expectations will fall. And therefore the stock price will fall. Or a company comes out with a new great product (iPhone 27.0 or some such). Then the estimate of cash flows increase, and so does the stock price.

Maybe the other way to read this is that the increase in net income was not expected. It wasn’t perfectly known by the market, and so when it happened, the stock responded positively. But that it only explains around 25% of the stock price rise (if the regression is correct, and that’s a big “if”). The rest were what I mentioned before: expectations, market structure, demand for Vietnamese stocks as an asset class, etc.

Oil, Green Homes and Europe

Vietnam importing oil

Source: Vietnamese customs

Vietnam is producing less oil than it did previously. We talked about its import bill on Sept. 19 (see here), where I basically said rising oil prices don’t matter that much, because it doesn’t import that much overall (every $10 increase in oil prices increases the import bill by about $85m). But for specific refineries, it matters a lot. That’s why Vietnam has recently signed an agreement to import 5m barrels in 1H2020 from Azerbeijan for the Binh Son Refining and Petrochemical JSC, an SEO.

The important thing to note here is that the refiner needs light (low specific density) sweet (low sulphur) crude, which is not available everywhere. For example, many US refiners are used to medium and heavy crude, so when the US sanctioned Venezuela, they had to scramble to find other crude that was also medium or heavy. The reverse is true in this Vietnamese refiner. My point is that people talk about the oil market as if all oil is interchangeable, and it probably is in the long run. That’s because refineries can make adjustments over time, if it makes economic sense.. But in the short run, the type of fuel for which refineries are optimized is very important.

Recently, Vietnam abolished its import duty on oil, I guess because the state would probably have to eat most of it, so what’s the point. That’s what helped allow the refinery to start these imports.

Also, as I mentioned in my last post on oil, Vietnam imports something like 8m barrels a year. Well, it is almost doubling that with just this deal.

A New Effort to Green Vietnamese Homes

So while Vietnam is increasingly importing oil, it is also increasing the amount of electricity produced by solar. This Million Green Homes initiative aims to bring solar and/or green efficiency to a million homes by 2030. It’s basically a platform that connects financiers, business, NGOs and consumers all together.

One end result would be to get a bunch of small homes outfitted with solar, and then sell whatever resulting product to the financiers. I think of it like this: lots of consumers band together to get their solar arrays financed and then pay into one big pot. The financier would get the cash flows in exchange for paying for solar installations. And it could be done at small scales, and the financiers could then bundle them. A securitization of green homes, if you will.

More details here.

Europe and Vietnam

Source: Vietnamese Customs, EU, Vietecon.com calculations

The trade agreement between Europe and Vietnam still has not been ratified, probably because the EU has other more important concerns (read: Brexit). According to this article, it should be done in January 2020.

I found this article interesting. A jailed journalist is asking the EU not to sign the deal until Vietnam fixes its human rights issues. He appeals to the EU’s values but also he talks about the trade deficit with Vietnam. Basically, he is appealing to the EU by saying: “your trade will suffer from this.” I kind of thought this was a weird way to think of it, because the EU obviously knows it has a trade deficit. See the chart to the right, which is built on EU data.

The EU negotiators hope this trade deal will help reduce the EU’s trade deficit by promoting exports. I don’t know, it seems like a weird appeal for a Vietnamese person to make: don’t do this deal, because it will be good for me and bad for you!

Anyway, the VOA article linked to above talked about the importance of British trade to Vietnam. I had talked about this back on July 30. Boris Johnson and the conservatives look to win the parliamentary elections. If they do, then some sort of Brexit will happen. After that, I assume Britain will try to sign a new trade deal with Vietnam, although it may continue to have all of the EU trade deals. If not, maybe they will join TPP, if possible. It will be interesting to see what happens.

Just to give you a sense of the impact, Vietnam exported $5.4bn worth of merchandise to the UK through November, while importing just $783m from the UK, for a surplus of $4.6bn!

Quick takes

I don’t know if you are like me, but the way I organize my life is through tabs. I see an article that I want to read and/or write about it, so I open it up. At some point, I try to get back to it and once done with it I close it. And so every so often, I need to clear out my tabs by writing about a few interesting articles. That’s the post today:

Quick hits

Fake “Made in Vietnam” goods are a real problem. This is mostly Chinese manufacturers trying to pass of “Made in China” goods as Vietnamese for the US market. It is hard to monitor, and it really isn’t in the interest of Vietnam to care too much. Until the US gets mad enough that they start going after Vietnamese exporters. Then they will start to care.

Source: World Bank

Coconut producer going gang-busters. Or as the article states: there is “a groundswell for plant-based diets in the West.” As an avid cook, I do think that people are using more plant-based oils and milks than previously. So good for Ben Tre Import & Export JSC for taking advantage of it. Although remember: coconut oil is “pure poison.” [Just a note here: I have written about the weirdest things, but it’s nice to reference my old posts. Saves me time.]

Vietnam is suffering from low birth rates, just like the rest of the world. A replacement level is 2.1 births per woman. Vietnam is below that at 2.04, although that’s up slightly from 1.89 in 2004. In HCMC, it is even worse at 1.33. And more people are moving in to HCMC, which will likely mean lower fertility going forward. Fertility is falling for a lot of reasons: women’s greater autonomy, the high cost of raising children, mothers working, later marriage. These are all trends not specific to Vietnam, and also trends that Vietnam will not sidestep. And government efforts worldwide have been mostly unsuccessful in raising fertility rates.

Vietnam may move away from the 48-hour work week. It couldn’t happen sooner. Microsoft moved to a 4-day work week, and it boosted productivity by 40%! Of course, I doubt this would be the same result for a factory, but it still would be better for the workers’ lives to move to at least a 40-hour work week. Plus, it may help fertility!

PetroVietnam is building a dam on the Mekong. This is a reversal from what had previously been Vietnamese policy on the Mekong. For a long time, the government has been actively fighting dams on the river. There is a good reason for this. If less water flows into the delta, lots of Vietnamese farmers will be hurt, plus you will see more saltwater encroachment. It could be that Vietnam decided that if they own one of the dams (and this is a particularly big one) then at least they would be in the driver seat. Hard to know. I like hydropower, but this doesn’t seem like a good idea.

Interesting point. Vietnam wants power, and so it makes sense that PetroVietnam, SEO, is a part of this, given that their whole reason for being is to fuel Vietnam. But the Vietnamese government is not monolithic. In this article, a government official in fisheries has some doubts on the dam.

Finally, is Vietnam the next China? Spoiler: no.

Follow up on liquidity

One thing I found interesting when I was looking into liquidity issues in Vietnam is that there has been a bit of work done on it. Specifically, I found this paper that looked at how asset managers manage liquidity.

The takeaway from the paper is that portfolio managers actually do a pretty good job of forecasting liquidity. As we talked about on Friday, asset managers care a lot about liquidity, because it can matter whether they sell at a profit or a loss (or usually they can sell for a small loss or an even bigger loss). They need to take a position on liquidity in their portfolio and in specific stocks. If a stock is illiquid, then they will only buy it if it is exceptionally cheap.

This paper says that portfolio managers in Thailand, Malaysia and Indonesia, as in developed markets, are good at forecasting liquidity. When you go a bit deeper into the data, though, the insight actually becomes a bit less interesting. Actually, portfolio managers that have good returns are also good at judging liquidity.

“Our finding here is consistence with the prior literature in that the good performance funds can generate the positive abnormal return [from liquidity], while the poor performance funds cannot generate abnormal return to the investor.”

And:

“The result […] shows that the best performance portfolios successfully time the market liquidity, while the worst performing portfolio fail to do so in all markets. Furthermore, the best performing portfolios demonstrates a positive abnormal return in all panels as we found in previous section.”

So, get this: if you are a good portfolio manager, one of the things you do well, is to judge liquidity of your stocks. And if you are a bad portfolio manager, one of the things you do bad, is to not understand the importance of liquidity for your stocks.

Not sure what you can learn from this, except if you are a portfolio manager, be better at your job.

Liquidity in Vietnam

Source: Vietstock.com, chart and calculations by Vietecon.com

Also, I wanted to add a little more to what I said about Vietnam on Friday. Specifically, I said that there are no stocks that big fund managers would buy. I was looking at some old data, so I wanted to update a little. So I took today’s trades and put together a chart that shows trading value per stock.

As you can see, a large portion of stocks (53 in total) didn’t trade at all. Then another 274 stocks didn’t trade more than $0.5m. In total, 19 stocks trade more than $1m today, 3 more than $5m, and just two (ROS and VRE) over $10m. ROS traded almost $30m worth of stock, or almost 5% of its market cap. That’s crazy and is not a positive thing, in my view. It means that there are a lot of retail traders. Actually, scratch that, that could very well mean that there is an opportunity there.

Source: Vietstock.com, chart and calculations by VIETECON.com

And today is not out of the ordinary. I looked at the top 20 traded stocks (by value) over the past year. The chart to the left shows the top 15 (since I didn’t look at all stocks, I am pretty sure this is the top 15, but one or two may have escaped me).

You can see that ROS is well above there rest. On average, it has traded $15m worth of stock, equating to 2.5% of its current market cap. It’s been on a continuous downtrend and has lost about a third of its value over the past year, so it wouldn’t look as bad if we looked at start of period market cap.

Anyway, the funny thing is that VIC, VinGroup, the largest stock in the market by market cap ($16.8bn) trades just $2.5m a day on average. Only HPG and the aforementioned ROS hit my $5m mark, although VNM is very close. Outside of the top 15, there are only 3 more that trade more than $1m a day (again there may be a few more that do that I didn’t catch).

Tying it all up

I don’t have the time to look at value traded in the three markets, Malaysia, Indonesia and Thailand, that are referenced in the research linked to at the top, but it is more than Vietnam. So investors in Vietnam need to focus even more on liquidity, since they can’t take it for granted. And the liquidity premium should be great for Vietnam than for other ASEAN markets. Put in simple terms, Vietnamese shares must be cheaper than other ASEAN stocks because they are more illiquid.

Again this points to the need to make reforms around ownership (both foreign and free float). Why? Well, if this liquidity premium goes away, then share prices will rise, and companies will be able to raise more money than they can currently. That means more investment, both foreign and domestic. Which is a good thing.

Stock market - bad results and illiquid

Source: Yahoo finance

CORRECTION: Below I quoted a figure from Dr. Oliver Massmann. I incorrectly spelled his name and also didn’t mention that he has a PHD from European Global School. I regret the error.

The market has been crappy for the past month. Basically right after I wrote my post on contrarianism (here) the market started to fall. The Vietnam ETF was moving up in line with the S&P500, but that has diverged completely. The S&P rose 5.9% since Oct 1, compared to VNM’s fall of 2.1%.

Now there are a few articles (here, here and here) look at the market where it is now. Luckily, they don’t try to give a fake reason why the market when up or down: articles like that are dumb. These articles actually focused on liquidity issues, which is more interesting.

Liquidity in the Vietnamese markets is not good. To give you a sense of scale: in a randomly chosen week in November, only $218m shares were traded on the Ho Chi Minh Stock Exchange. And I have looked at Vingroup, the largest stock, previously and found that it trades less than $3m a day. When I was an equity analyst, most of my clients, who were looking at emerging markets only, would only invest in stocks that traded $5m a day. No Vietnamese stock meets this regularly!

Why is there low liquidity?

• FOL: Lots of stocks are at the foreign ownership limits (FOL) or are close to those limits. Many companies have a limit of 49%, even thought they don’t have to. According to David Harrison of Mayer Brown: “By April last year, two years after the passing of Decree 60 [which allows higher FOLs], only 20 out of 700 firms trading on the two bourses had abandoned the 49 per cent FOL.” Some sectors (I’m looking at you, banks and aviators), the limits are 30%, which is extremely low.

  There has been talk about this changing, but I am just not sure. For example, the central bank just issued a new rule about payment systems, putting the limit at 49% (previously there was no limit), so it’s not like things are loosening daily.

• Free float: Free float is also limited for many companies, which is a legacy of having lots of closely-held or government enterprises.

• ETF and foreign owners: The main ETF for Vietnam (VNM ETF), which isn’t that large but is meaningful at $443m in assets, barely changes its holdings, providing zero liquidity. The articles linked to above also talk about how lots of the foreign owners are long-term holders, which isn’t great for liquidity either.

• Privatization: There have been big hopes that the government would follow through on its privatization plans ($2.6bn or VND60tr from 2017-2020). This year only $147m has been completed, and last year less than $500m., according to Bloomberg. Every year, the state has fallen short on the number of companies privatized: 17 out of 135 in 2017 and 51 out of 181 in 2018. The market expected more privatizations/listings, especially of big companies, that could be players in the stock markets. This hasn’t happened.

What could change?

• First, privatization is ongoing, albeit slowly. We could see a pick up in pace here, especially if the government decides it needs more money to invest in infrastructure while keeping its debt levels down.

• Second, there is a draft law (published earlier this year) that would allow 100% FOL. There is a discussion of it here and here. My reading is that the FOL would default to 100% if there were no other restriction. Much of this is due to the treaties signed by Vietnam (CPTPP, EVIPA). So it is very possible we will see a change in FOL sometime soon as these treaties take effect.

Why does liquidity matter?

Investors are concerned about stocks with low liquidity because it means they can’t easily get their money out. This is not an issue for retail investors, but let’s say you are a fund manager that wants to invest in Vingroup and you manage $500m in emerging market assets. You want to have a sizable position in the company, let’s say $10m, which still equates to just 2% of your total portfolio. But it would take you 3 full days of trading to get out of your position, if something bad happened. That’s a long time. And it would actually take much longer, because if everyone knew you were trading that much, it would drive down the stock.

Whereas if Vingroup traded $100m a day, you could slowly pull out a few million every day and the price impact would be minimal.

If FOL is raised, then we could also see Vietnam become more competitive for MSCI’s Emerging Market index, attracting all of the fund managers who are investing in emerging markets. Right now Vietnam is in MSCI’s Frontier Market index

Emerging markets index or frontier - what’s better?

A bit of background here. Lots of money follows indexes. Index funds do - it’s right there in the name. And mutual funds are benchmarked against an index. Hedge funds too, many times. The main player in indices is MSCI, and its emerging market (EM) indices are the most popular among EM indices. When MSCI adds something to the market (like China), then all the firms that track the index have to go buy those stocks.

For example, recently, Saudi was added to the MSCI Emerging Markets index, and it saw massive infows of foreign investment. The estimate of potential investment for Vietnam is $15bn, according to Dr. Oliver Massmann from Duane Morris.

I would say two things:

1) Right now the MSCI Frontier Markets index weights Vietnam 17%. However, Kuwait, which makes up 37% of the index, is moving to the Emerging Markets index. If no other changes were make, Vietnam’s weight would move to 27% automatically. No matter what, we are going to see inflows into Vietnam next year when Kuwait moves out of the index. However, ETFs that follow this MSCI Frontier Index have assets of just around $1bn, and what I hear from market participants is that there are very few funds that follow frontier. It is just out of style right now, unfortunately.

2) Emerging market funds are a magnitude larger, so it makes more sense to be in the emerging markets index. There is more than $150bn in money following the MSCI emerging market index in ETFs alone, not counting the emerging market mutual funds.

The Philippines currently have a 1% weighting, which is tiny. It’s the smallest weighting that is still broken out. If Vietnam got just that 1%, it would attract $1.5bn in new inflows, and likely much more. That’s more than in all of the frontier ETFs.

To be fair, sometimes investor focus is helpful, and there would be a much bigger focus on Vietnam in the Frontier Index than in the EM Index.

Overall, though, Vietnam should shoot for MSCI Emerging status. To do that, it should increase liquidity in the market by a) privatizing SEOs, b) raising FOLs, and c) trying to free up float. If the market was able to do all that, it would attract billions in new investment, a good part of which would be long term.

VinCommerce & Masan Tie Up

Sometimes I just don’t understand Vingroup. Less than three months ago (here), I wrote about a $500m investment from GIC that the group got in its VinCommerce (VC) group.

So I was surprised that earlier this week, the company said it was merging with Masan Consumer Holdings, which is 86% owned by the parent, Masan Group (I’m not sure who owns the other part). That will create the largest retail chain in Vietnam.

As a reminder: VC has supermarkets and convenience stores, 2,649 of them. It launched 602 in the first nine months of this year, and almost 400 in 3Q. It is growing extremely fast - revenues in 9M2019 were equal to all of 2018. And operations are improving. But the division is not yet at breakeven (it’s still losing money, even with scale).

Masan has lots of consumer goods (seasonings, noodles, beverages), and it also has a large meat (pork, poultry and aqua) division that has 45 stores.

Source: Company data, Vietecon.com

Some thoughts about the merger:

• Masan gets better distribution for its products almost immediately. It can more prominently place all of its products in VinFast stores. This will likely boost sales.

• This is also means that Masan doesn’t have to spend a great deal of time and money to build up retail operations. It was looking to partner with shops to put in a store-within-a-store with Masan products, according to the 2018 annual report. Now this can be done through VinMart and VinMart+ stores as well, and quickly.

• VinGroup will no longer have to invest in the stores, which have been a drag. In the press release, it talks about investing more in technology and manufacturing (phones and cars, I assume).

• Competitors should be unhappy. A big player in the consumer market has become more vertically integrated. It will have a lot of scale to push down prices from suppliers, and it will also be able to prominently position its own products. Although this brings me to my next point…

• The new company will have to tread lightly in its relations with its wholesale customers, which are now competitors. It currently sells products in 300,000 stores - these are now competitors to the combined entity. These stores might start to be wary, and could look to highlight competitor products to hurt Masan. The best way to mitigate this is to build up its own brands. Masan already talks about how its brands are much loved. This better be true in order for them to demand good placement in their competitors’ stores. Think of it this way: you are a retailer, and lots of customers come in to buy coke, you sure as hell are going to carry coke. even if you don’t like the company.

• There are also VinEco assets, which should go well with Masan’s current farm operations.

I can only assume that all of this was in the works for a while, which means that GIC knew that it was buying a stake in a company that would soon merge. (I estimate GIC bought a stake somewhere around 10-14% of VC).

In 9M2019, revenues of Masan’s MeatLife and Consumer divisions were VND22.7tr, while VC had revenues of VND19.3bn, so not that far off. And growth is much faster at VC. However, in terms of gross profit, they were VND7bn at Masan and just VND3.2bn at VC. And VC hadn’t even broken even.

The specific details of how much VinGroup will get for these assets have not been disclosed. It will be interesting to see the split. If it is based on revenues, VinCommerce should get just below half. If profits, Masan could get much more.

Ultimately, Masan Group is a somewhat unwieldy conglomerate with FMCGs (fast-moving consumer goods), retail stores, farms, metal mining/trading and a bank. My bet is they hive off the FMCG, retail and farms into one vertically-integrated consumer-facing retail operation. Then separately, they will have metals and the bank.

Or we could see the FMCG assets and the stores together, but MeatLife separate. But before the separation, Masan would convert all of the MeatLife stores into VinFast stores (or whatever they are going to call it).

No matter how they split it up, it will be a big company, and will likely attract lots of investor interest.

Looking at current account balances

We’ve talked about current account balances before, but they are back in the news given concerns about China’s falling current account surplus.

As a reminder, the current account balance is one part of a larger balance of payments: current account + financial account + capital account + balancing item = 0. This is just the definition - it has to equal zero. And we basically can ignore the balancing item. That is really just a errors term. (This is using the IMF definition)

The current account is the trade goods and services, while the financial account is the change in international ownership of assets, while the capital account is capital transfers and the change in non-tangible assets (very roughly). But really, the balance of payments means that a current account surplus (meaning more exports than imports) funds a capital account deficit (more capital is coming in than leaving). More simply, if a country is earnings a lot from goods/services, it needs to do something with this excess money - mainly by exporting capital. And that’s just how the formula works.

Source: World Bank, chart by Vietecon.com

The funny thing is that like any equation, it can be expressed in different ways. For example, the current account can also be thought of as the country earning lots (through exports) but spending less (on imports). And this can be expressed as CA = NS - NI or current account = national savings (private and government) - national investment. That’s because if it is spending less than its earning, the difference goes into savings.

In China, we think of the current account deficit as being one of lots of exports. And the trade war has resulted in a decline in those exports. But we could also think of it as Chinese savings lots, and investing less than that (at least domestically). The recent decline in savings is generally attributed to the big government deficits (remember savings are from the private sector or the government) as part of a stimulus package.

Source: World Bank, chart by Vietecon.com

If the Chinese government pulls back some of that spending, it will mean savings go up, and the current account balance will also grow. A lot of this is taken from Brad Setser’s post here. His view is that China is very unlikely to see a current account deficit because of its high savings rate.

As you can see in the chart, China has an extremely high saving rate: 45% in 2017 (no data for 2018).

This has been a criticism of China. That is forces people to save at very low rates, then it uses those savings to build up its infrastructure/exports. Low-income Chinese, through their saving, have underwritten inexpensive consumer goods for developed countries. And allowed it to make investments in its Belt and Road Initiatives and build up a massive USD dollar reserve balance.

And it is very unlikely to change in the short- to medium-term, because the Chinese is very unlikely to liberalize capital outflows (which are likely to be high) and/or its currency (which will likely depreciate, making its trade balance with the US even more positive). That means that the country will still have to buy lots of dollars and/or invest abroad in these big infrastructure projects.

Looking at Vietnam through this lens

Vietnam has a good sized current account balance of 2.4% in 2018 and 2.3% in 2017. That was better than China and only less than Malaysia and Japan.

At the same time, it’s savings aren’t as large as the rest of ASEAN, at 24%, just a bit better than the US (which has a low savings rate) and almost 20pp below the Philippines. And it is falling a bit, at least from its earlier highs.

So while exports are likely to grow as Vietnam benefits from the US-China trade war (with no end in sight), a low savings rate may hamper mean a the current account deficit. That could put pressure on the exchange rate, which we have talked about a lot.

We will have to see what happens over the next few years, as FDI in Vietnam grows. It will be interesting to see what that will do to the balance of payments.

Tourism: Where does Vietnam stack up?

I have seen so many articles about travel to Vietnam over the past year, including this noodle soup guide in the New York times. There are beaches, cities, sites, history, food. Really everything.

Source: Euromonitor

Well, it turns out that Vietnam is still not in the upper echelon in terms of attracting tourists, at least according to Euromonitor. Turns out that not one city in Vietnam was in the top 10. Ho Chi Minh City was the first listed at #31.

Even within Asia, no Vietnamese city was in the top 10. Surprisingly, Kuala Lumpur was #5. The other top 4 didn’t really surprise me, although Singapore punches above its weight, especially because it is tiny!

Source; Euromonitor

Delhi and Mumbai also did well, which is maybe not too weird. But I don’t think there is a groundswell of visitors there. But maybe I am thinking about Western/US visitors too much. Lots of people come from all over the world to India, and they have for centuries. Look at Alexander the Great!

Asia, overall, though is the leading region, helped, of course, by a very large population. As the crossword clue goes, it’s where most of us live. [Us = humans]

Source: Euromonitor

Vietnam is still a relatively new market, so maybe I shouldn’t be too surprised that HCMC wasn’t higher in the rankings. Euromonitor forecasts 8.2m visitors in HCMC for 2019, up 14% yoy. However, that only moved it up one rank.

Ha Long was second at 6.2m (#48), then Hanoi at 5.1m (#52) and finally Da Nang (#90). All except Hanoi with double digit growth. Hanoi was not too shabby at 9.5%.

I sometimes have doubts about Euromonitor figures, but these seem to line up with official statements. In 9M2019, HCMC said it had 6.2m visitors.

Most visitors are Asian (which we see in most Asian markets). According to the General Statistics Office:

Asian visitors accounted for 79.6 percent of the total foreign arrivals in Vietnam in 11 months, an increase of 18.2 percent year on year. Upturn was seen in the majority of tourism markets, including China (15.1 percent), the Republic of Korea (22.3 percent), Japan (15.4 percent), Taiwan (30.2 percent), Malaysia (12.9 percent), and Thailand (47.1 percent).

Anyway, some interesting stats here. My view is that we will likely see very strong growth in tourism over the next few years, and it will continue trickle into the second tier cities. This should lead to lots of investment in tourism infrastructure, from hotels to airlines and airports. From golf course to adventure tours. And a good portion will likely be foreign investment, employing locals. With a few foreigners in the mix too.

My concern is that over time, Vietnam will be overtouristed. But that hasn’t happened with Bangkok yet. So there is room to grow, if the infrastructure is there.

Hanoi and HCMC drive the growth of Vietnam

Before I jump into the meat of it, I wanted to point to this kickstarter for the families of the 39 trafficked Vietnamese that died in the UK. The money goes to the families, who likely face money issues after losing a breadwinner and potentially having to pay off the debt owed to the traffickers. Support has been forthcoming: the organizers have already upped the goal from $16,000 to $40,000 to $60,000.

In other news, the Ho Chi Minh City party executive committee estimates that growth for the city will be 8.32% in 2019. To put this in perspective, the IMF said in July that the country would grow around 6.5%. If so, if it does reach this 8.3%, that means the rest of the country is growing just 6%.

Added to that, HCMC is currently contributing 27% of the national budget. It’s GDP makes up just 21% or so of the country. And this stat is crazy:

Source: Vietecon.com

For this year, its [HCMC’s] target of VND400 trillion ($17.29 billion) was 1.1 times higher than those of the remaining four federal municipalities, Hanoi, Hai Phong, Da Nang and Can Tho, put together, which is only VND365.9 trillion..

Hanoi is also growing quickly. The government aimed for 7.4-7.6% growth in 2019, and as of 9M2019, it had grown 7.35%.

If Hanoi grows 7.5% and HCMC 8.3%, then the rest of the country will grow 5.7%. The difference between HCMC’s 8.3% and the rest of the country’s 5.7% growth speaks to the continued divergence between the city and the countryside.

The difference is already quite wide. These two cities officially account for about 18% of Vietnam’s population (although true population figures are likely higher than this), yet they make up 35% of GDP. By my calculations (and they very well could be wrong but are probably in the magnitude), GDP per capita in HCMC will be over $6,000, while Hanoi is at $4,400 and the rest of the country at $2,600.

We are increasingly seeing a rural/urban economic divide. While it has always been there, I am worried that it is getting worse. It will ultimately mean that more people flood into the cities, but that will likely leave rural areas even poorer.

Quick bites

Ok, to be honest, I’m not feeling great now. I’m not a young man anymore, and let’s just say that yesterday saw lots of imbibing! Getting old sucks. Anyway, it’s post-Turkey, current-pie eating, and I want to get through a few small items that have been hogging my browser:

Coal use in electric production has declined for the first time. I saw this story, which included a great chart showing the amount of electricity produced from coal. It fell 3% so far this year! I don’t have a ton to say about this except it’s good news. The article does mention that coal use in Southeast Asia is growing, but it is a small part of world usage.

It just doesn’t make sense to invest in coal production when renewables are mostly cheaper, and that’s not counting the externalities from air pollution and other environment disadvantages of coal.

Ho Chi Minh City is the #3 real estate market to watch in Asia Paciifc in 2020. This is according to pwc, and the report points to manufacturing companies setting up in Vietnam. It does say risk is high and “good investment opportunities are hard to pin down.” Seems about par for the case. What is exciting is that HCMC beat out all of China, Korea, Australia, and the rest of ASEAN, except for Singapore. Tokyo was second.

Viettel set up 1,000 NB-IoT stations and 5G stations in HCMC. Narrow-band Internet-of-Things is a frequency that cell phone operators are setting up to connect things like sensors that are meant to last for many years and need little to no service. I didn’t know what this was before googling it, so I am not entirely clear. It’s basically a network that allows lots of devices to connect, doesn’t drain their batteries and is always on. So maybe something like sensor on on doors or windows, or to make sure that something is still in place. As more and more devices need to connect to the internet, this should help.

And of course, Viettel is pushing 5G hard. It will be nice to have, but not sure that it will change my world. Although my podcasts take forever to download.

Tata Steel sells Vietnamese unit. Since we talked about steel earlier this month, I thought I would follow up with this news. The factory sold makes about 200,000 tons a year, which is tiny. It takes steel and produces things like rebar and wire rod. This isn’t really a view on Vietnam: Tata is trying to clean up its operations - it has too many subsidiaries. This has been in the works for a while: here’s an article from 2017 that talks about restructuring.

Have a great weekend!