A few market stories

So to move on from coronavirus, I thought I would write a few stories about major market moves.

GAB: The first is this interesting company, GAB, now called FLC Mining Investment and Asset Management JSC, that produces bricks, among other things. The other things are especially interesting, because they include selling paints and exporting cinnamon. Let’s just say the company is not super-focused.

Source: GAB (now FLC Mining Investment & Asset Management Stock)

Source; Vietstock.vn.com, chart by Vietecon.com

But this is normal for emerging countries and markets. Lots of companies get into businesses based on someone’s expertise or connection or just luck. And that can work really well. The market cap is small at just $32m (VND745bn), but it is way up from $8m (VND200bn) when the company went public back in July.

There are reasons for the massive stock increase. Both revenues and profits more than doubled in 2019, and the company announced that it would sell 55.2m shares at par value of VND10,000/share, to raise VND552bn, or $24m. That will almost double capital at the company. It will use the money to invest in new businesses, including renewable energy, real estate, and air transport. Of this, VND332bn is specifically set aside for investment in the Coastal Hill Hotel Project in Quy Nhon, an up-and-coming travel destination (or…if CNN is writing about it, it’s probably already come and gone).

I kind of don’t know how to think of this company. I mean, it is crazy that the stock has jumped so much, and it sounds like it is unsustainable. The business is fine, but not exciting. Bricks, while probably a growth business, is not something that is going to get investors so excited.

But looking deeper, the company is partially (8.9%) owned by FLC, which owns Bamboo Airlines and a number of resorts, including a number in Quy Nhon. Many of FLC’s businesses are similar and/or complementary to GAB. So I assume people are betting that GAB will benefit from FLC’s growth, and that is helped by the name and the announcement of three new board directors (at least one is from FLC, as far as I can tell) and three supervisory board members.

This just goes to show that analyzing stocks requires a very holistic view - you can’t just look at the numbers. It will be interesting to see if FLC increases its stake in GAB, or it instead uses capital invested in GAB to help support its investments in a number of its own businesses, like the hotel in Quy Nhon.

Other small cap stocks:

Stock price in VND. Source; Vietstock.com.vn chart by Vietecon.com

I don’t really want to dwell on these, because they are mostly unimportant. But I think it is illuminating to see how volatile smaller cap stocks are in Vietnam, so much more than the large cap ones (which can be pretty volatile on their own).

Two examples:

LMH: This is a company that started out a gas station operator and has moved into real estate and now into renewable energy, specifically storage and solar. This transition is going to be difficult, especially because both renewables and real estate can be capital intensive, plus real estate has very specific P&L implications, as we saw in LHM’s 2019 results. Revenues fell by almost 50%, and net profit was down 86%.

The market cap of LMH is less than $2m, and profits are just over $100,000. But they were almost $1m last year, so if they could just get some of that magic back, then the company should do fine - it is trading at just 2.3x or so 2018 earnings. That goes to 18x for 2019!

One other comment: the stock barely trades some days: less than 200 shares a day. So it’s hard to get into as a professional investor. And as a retail investor, I think I would need more info about the management team. Can they really make this transition happen? And why can’t the petrol stations do better? I mean, there is a massive increase in cars and motorbikes: don’t they need gas?

Stock price in VND. Source; Vietstock.com.vn chart by Vietecon.com

VRC: The other example is a pure-play real estate company, VRC Real Estate and Investment JSC. As discussed above, real estate earnings can be quite volatile, as we can see in 4Q earnings for VRC, when revenues fell 82% and profits 99%. It looks like it was due to few deliveries of real estate projects. Overall, 2019 was bad: revenues fell 71% and profit dropped 91%. The stock crashed in the past month and a half and is down 80% from its last high in December.

I don’t really know why the stock crashed. The company doesn’t seem to know, and in response to the crash, it says it will buy back shares.

It would take more investigation to find out what’s really happening, but it is interesting to see that SCIC increased its stake in VRC to above 11% at the end of November. SCIC is a state-owned investment company.

Conclusion: And the point I wanted to make is that in smaller companies, oftentimes there is not a reason why their stocks go up or down, or at least no transparent reason. I think for both of these stocks, it will be interesting to watch what happens. I actually could see both of them coming back very strong, because the underlying businesses seem alright. But, again, I don’t know too much about them.

More coronavirus

I really meant to write about anything but the coronavirus today, but it is just taking up a lot of space in my head. I think it is too big a deal, especially for a country like Vietnam, that is closely tied to China, for all the good and bad that entails.

A few news reports:

• Bloomberg is reporting that Vietnam will quarantine all people coming from China. As part of this, the Vietnamese military will quarantine 950 people coming back from China.

• Three people on a cruise from Guangzhou to Vietnam have the coronavirus. And two more are suspected to have it. There was at least risk that many more of the 4,000 people were exposed. Just remember that people can get symptoms up to 14 days after being exposed to the virus. This is why I find it difficult to go on a cruise, because I just know that my ship would be struck by some horrible disease.

• Vietnam is stopping all flights from China, including Hong Kong and Macau, but not Taiwan.

• All festivals are cancelled.

• A manager of a resort that I follow on twitter has seen significant cancellations and employees that aren’t coming to work because of fears of the coronavirus.

Source: Vietnamese customs, charts by Vietecon.com

In positive news, there are only 8 cases in Vietnam, which is probably due to luck more than anything else. These new preventative measures surely haven’t had any effect yet. Plus, the markets were actually up today.

It kind of shocks me to think that the market could be up. Vietnam has basically cut off China, and it is going to see a significant decrease in tourists and all types of visitors while the coronavirus is an event.

Just look at exports to China. They were over $40bn in 2019, second to the US. And if you include Hong Kong, that goes up to almost $50bn. This equates to 18% of all exports. Tourism accounted for almost 6.5% of GDP and exports in 2017 (see pg 43 in the PDF).

Remember that the government would like 7% growth this year. While many of the companies on the stock market are domestic focused (banks, real estate, consumer products, retail, etc.), they all will be impacted by less traffic (both foreign and domestic). And the general concern over coronavirus.

Let’s hope China can get a handle on this soon. Maybe a vaccine can be made and distributed, although that takes time.

Vinhome

The market was down again today. HCMC was -2.39% and Hanoi -1.68%. So not doing that well. It seems like large caps are getting hit more: VN30 was down 3.1% today.

But there were some bright spots, mostly driven by earnings. Let’s discuss Vinhomes today.

Source: Vinhomes, chart by Vietecon.com

Last year was a record for Vinhomes, with the company hitting almost every metric out of the park. Specifically, the company had more than VND91tr (almost $4bn) in new bookings. I used to cover Emaar back in the day, which was giant, but I don’t really remember them every booking so many sales. That was for 61,000 units at an average price of VND1.5bn ($65k).

The company has a backlog of VND91.4tr, in line with its new sales. This backlog will throw off profits next year, when they are delivered. For example, in 2018, the backlog was VND69.8tr, and the company recognized revenue of VND65.1bn in 2019. That actually was down 13% from 2018’s revenue of VND74.5bn. But even with the decline in revenues, gross profit and net profit were up 44% and 49%, respectively, in 2019. That’s because gross margin increased from 33% in 2018 to 55% in 2019! That’s crazy high.

Return on equity, because of the strong profits, was 37.5% (using average equity over 2019). The company is trading at 13.5x P/E or so, which seems pretty low, given that earnings are likely to be up a bit next year as it delivers more units. The balance sheet seems strong too, with net debt-to-equity of 0.3x, down from over 1.4x in 2017.

Source: Vinhomes, chart by Vietecon.com

I am sure there are things to worry about. The company is heavily dependent on bulk sales, although it’s trying to move to a direct sales approach. That can add volatility and additional expenses, although the overall cost should be better. And it will be hard to show strong growth from 2019, because deliveries will be up under 10%.

Plus, while P/E is low at 13.5x (or at least not crazy high), P/B is 4.4x, which is high. Probably the land on the balance sheet needs to be marked up to fair value (it is usually kept at cost), which would raise the book value, lowering P/B. But still, this ain’t no value stock. For example, Emaar is trading at 0.55x P/B and 1.09x P/Sales (Vinhomes is at 4.4x P/Sales, although 3.2x P/Bookings).

Overall, these are very good earnings, but they might be getting close to a peak. Can the company sell more than 61,000 units in a year? Can a 10% increase in deliveries (expected in 2020) result in more than double digit growth in revenues? Can gross margin every get above 55%? Both seem hard. While 2020 earnings will likely be higher (just given the backlog), we might be close to the peak. In that case, the stock, which was up 12% over the past year, may be pricing in a lot of this and not be that attractive. I would have to dig in more here, but I can see why some concerns.

Estimates of the impact of the coronavirus on tourism

So the coronavirus is now a global health emergency, according to the WHO. I assume for the next little while, all anyone will talk about in Vietnam is the coronavirus (even with the Australian Open, the Oscars, the Superbowl, and Brexit all happening elsewhere).

Source: Moody’s Credit Outlook (Hawaii Department of Business, Economic Development & Tourism)

As I suspected, the market fell when it opened today. HCMC was down 3.22% and Hanoi fell 2.04%. Not that I am so smart - it was obvious. In fact, I am surprised the market didn’t fall more than that.

As I mentioned yesterday, there are a number of direct effects that could befall Vietnam. Following up on one - Chinese tourists - I found this chart that looked at the change in tourists to Hawaii during the SARS crisis. Interestingly, the hit to Chinese visitors to Hawaii was severe: -34.6%.

I don’t want to extrapolate this figure directly to Vietnam, but let’s just say it would be extremely bad if the magnitude of the decline in visitors was close to this.

As luck would have it, 2019 figures for foreign visitors to Vietnam are out. There were a total of 18m, up 16.2%. So a great year! And Asia was a big part of this, 80% of all visitors and up 19.1% over 2018. Visitors from Oceana (Oz, NZ) actually declined, while growth from European and American visitors was actually kind of low at 6.4% and 7.7%, respectively. Of course, this would be good growth everywhere else, but not in Vietnam. For example, Thailand only saw a 4% increase to 39.8m, a much slower growth (albeit from a higher base) than Vietnam.

If Chinese tourists drop off like they did in Hawaii (and who knows what the actual figure would be), and visitors to every other country were unchanged, then Vietnam would see a decline of 11.7%. And it is very likely that people are going to be spooked and that visitors from other countries will also fall. Let’s say the number of visitors from all other countries fell 10%, and China fell that 34.6%, then overall visitors would decline 18.5%.

Hospitality building for extremely strong growth

If the number of visitors fall anything like this, it is going to really hurt the hospitality industry. Even if it is just flat, which could be great news if the coronavirus continues through the year. The hospitality industry in Vietnam is built for massive growth every year, so any hiccup is going to drive down income significantly. For example, in 9M2019, 1,114 rooms were added to HCMC, according to JLL. That made total supply 20,200. There are another 1,800 rooms to be added by the end of 2021. All of these new rooms need people to occupy them.

To maintain the current 69% occupancy rate in the new rooms added in 9M2019, you need 350,000 visitor nights (365 x 1,114 x 69% x 1.25 - this assumes 1.25 people per room). By visitor nights, I mean the number of nights all visitors stay. The next 1,800 rooms need 550,000 visitor nights. That’s just HCMC.

Source: JLL

Hanoi has about 2,500 new rooms coming by YE2021. The current occupancy is extremely high at 81.2%, but this is definitely going to fall, even if visitors grew quickly. The city would need more than 900,000 new visitor nights (365 x 2,500 x 81.2% x 1.25) to maintain that occupancy.

Let’s do the same for Da Nang. If everything is actually added, there would be 9,479 new rooms. Currently occupancy is 70.5%. If it was maintained, the city would need 3m new visitor nights! Let’s work backwards (which I love to do). Say you want 60% occupancy in 2022 (assuming no new hotels), then you need to 6m room nights out of a total of 10m possible (based on 28,000 total rooms). To fill 6m rooms, you need 7.7m visitor nights, or a 29% growth from 2019 figures. That’s a lot.

Added together, you need about 4.2m visitor nights just for these three cities. That doesn’t include other tourist attractions like Hoi An, Hue or Nha Trang. These probably add another 2m or so. In total, the country needs something like 6m visitor nights. If each visitor stay 4 nights, that means 1.5 million new visitors, and that’s probably pretty conservative. That was easy in 2019 (+2.5m visitors), but is going to be harder if coronavirus sticks around.

Basically, the Vietnamese hospitality business is being built for massive growth, and if we see even slight impact from the coronavirus, it is very unlikely that these rooms are going to be filled. It is probable that many of these hotel projects will be delayed, especially those that are still in the planning stages (those coming in the latter half of 2021).

This will have a knock-on effect to construction, retail, restaurants, tour companies, among a whole range of others. Let’s hope that the Chinese and the world can get all of this worked out shortly.

Update on Casper, Coronavirus

Before I get to more of my thoughts on the coronavirus, I wanted to highlight this article on the pricing of Casper’s IPO. It is coming in at around $770m, which puts it at 1.7x 2019e revenue, or about in line with Tempur-Pedic and below Purple.

Just to follow up on my early post. I want to say that Purple has a very weird shareholding structure that I don’t really understand, so I caution that some of the valuation metrics (including the P/Sales) might be off. But its multiples would likely be too low at worst (not too high), therefore implying a lower valuation for Casper. In terms of margins and profits, though, the figures are comparable and really highlight how much worse Casper is doing. And remember that Purple is by far the worst of the currently publicly-traded companies: TPX, LZB and SNBR all have an operating margin of between 7-10%, compared to Casper’s -23% (yes, negative) and Purple’s 2% (all TTM).

Two final comments: 1) this is a downround for those that invested in Casper less than a year ago, and that’s gotta be disappointing. But remember that some of those investors had invested in multiple rounds, so they probably did alright. 2) The market, despite being very strong (at least until the coronavirus started freaking out people), is unwilling to give massive valuations to companies that lose money. Especially if growth is not extraordinary, and it really isn’t at Casper. One more thing: I was right!

Stock market and the coronavirus

Source: Bloomberg, chart by Vietecon.com

Everyone is waiting to see what will happen with the stock market post-Lunar New Year given the impact of the coronavirus on markets globally.

As you can see in the chart at the right, the stock market was moving higher at the beginning of January. It was up over 3% since the end of 2019, and it seemed like sentiment was improving, helped by growth in banking assets in 2019 (although remember, it is almost impossible to tell why the market was up on a particular period except to say that there were more buyers than sellers).

The market has been closed since the 22nd, and won’t be open until tomorrow morning. If the market was off on its own, that might mean we wouldn’t have any idea how the market has been trending. But actually, with the VNM ETF, we have a somewhat good idea of what will happen with some of the stocks in the market.

Source: Yahoo.com, chart by Vietecon.com

The chart on the left shows what’s happening with the VNM ETF. From Dec. 31 to Jan. 23, it was up just 0.6%, so it wasn’t exactly tracking the VN Index (which is just stocks that trade on the HCMC exchange).

But since the high on Jan. 23, it has fallen more than 3%. The currency has barely changed, so that’s not the reason for the fall.

As we have discussed, many of the stocks in the VNM ETF are not Vietnamese, and generally these have not done that well since the beginning of the year, although it is really a mixed bag. The stock with the largest weighting, BH Inc. (090460 KS) is up 7% and it has almost a 5% weighting in the ETF.

Since 30 Jan. 2019Source: Vietecon.com, Van Eck

But lots of stocks have performed poorly, although their weighting is much less. Both Pharos (an energy company) and Hansae (textiles) were down 11% so far this year. But overall, this can only explain about 0.6% of the decline since the end of the year. Since Jan. 23, they have fallen 0.9%, so we should expect the rest of the index has fallen about 240bps (on a weighted basis).

That’s not that bad, to be honest. The S&P fell 2.5% from Thursday to the close of Monday (Jan. 27). It has since rebounded more than half of that and is now down just 1%, but still the VNM ETF isn’t that far off, given how close China is to Vietnam, both geographically and economically.

I expect the market is going to correct much more when it opens. There are a number of ways that China will affect Vietnam and its economy, which I believe will drive the stock market down:

• Coronavirus spreading: So far, there are few cases in Vietnam, but there is now a case of someone that has not even been to China getting the virus. That’s not great because it means that so many more people are now at risk.

• Tourism: Chinese made up about a third of tourists in Vietnam in 2019. If they can’t come, and it seems like China is trying to stop travel, then hotels, flights, restaurants, retail stores are all going to suffer. Vietnam has already banned some travel (flights from Wuhan have already stopped, some border crossings are closed, etc.).

• Cross-border trade: This directly affects people on the border (as the Nikkei article linked to above talks about). Trade in the border regions is going to come to a halt.

• Inputs into Vietnamese goods: Manufacturing has moved to Vietnam from China, but Chinese inputs are still essential to a number of factories in Vietnam. If these inputs can’t be brought across the border, things are going to be hard.

In the past 20 years, China has become a central node on the global economic highway, and everyone is going to suffer if the threat of the coronavirus continues to grow.

More catching up and Happy Tet!

More catching up on stories that I missed. Of course, I hope everyone is enjoying their Tet festivities. And not worrying too much about the coronavirus.

Vietnamese cities have lots of forward momentum

For comparability, the CMI ranks for the period 2014-2018 represent the short-term momentum indices. Source: JLL, 2020

JLL puts out an index that tracks the momentum of major cities every year. It turns out that Asia is over-represented every year, for good reason (lots of growth, young, etc.). In 2020, for the first time in a while, there are two US cities in the index: Austin and Silicon Valley. There is one for Africa (Nairobi) and two for the Middle East (Dubai and Riyadh, which actually are in Asia, but are sometimes not counted that way).

Big news for Vietnam: HCMC and Hanoi are high up on the list!

These two cities are highly ranked by JLL because:

• Strong growth: 8%+.

• Infrastructure investment: Both Hanoi and HCMC are putting in metros, although they are very delayed…

• Smart cities: I still don’t really get what this is. Basically having more parts of the city connected and using data more to make decisions.

• New downtowns: They also mention building up Thu Thiem in HCMC to take pressure off the historic downtown.

• Young pop: And HCMC is higher than Hanoi because it has a greater “engine room” population (people aged 20-40), and that demographic is growing, while it is likely to shrink in Hanoi (according to JLL) and in most other global cities.

Not much new here, but it is interesting to see consensus forming around Vietnam’s strong potential.

More solar

The Asian Development Bank (ADB) is financing a 50MW solar project near HCMC. This equates to $0.76m per MW, which seems pretty good, I think. There was an announcement a while ago of two plants to be built for about $740m with about 740MW of capacity, so about $1m per MW. (Unfortunately, I can’t find the source right now for this older story.)

This is just part of the push at the big development banks to fund more climate-friendly projects. The IFC is putting $212m into VPBank to lend to SMEs:

The funds are expected to help VPBank expand lending to micro, small-, and medium-sized enterprises (SMEs), especially those owned by women, as well as import and export firms.

About a third is to be earmarked for climate-friendly projects.

At least the development banks are stepping in to help promote renewables. Good for the country and the world.

Update on 5G

2020 is the year of 5G. Or at least that is what Viettel is saying. It will launch its 5G service in June, although very few people will be able to use, unless they get one of the new phones that can use 5G. Here is a list of phones that work with 5G for the US market: Samsung, OnePlus, LG, Moto are all in there. Huawei also has a 5G phone, and Vinsmart says it will have one in July.

The interesting thing about 5G in Vietnam is that Viettel is building its own 5G equipment. It really looks like Vietnam doesn’t want to buy equipment from Huawei, which probably makes the US happy. Unfortunately, it will be hard for Viettel to compete. Ericsson spends $4bn on R&D, that’s 50% of Viettel’s revenue!

Vietnam’s airline market is rough

This is a bit old now, but I thought it was interesting to see that Vinpearl never got off the ground. Warren Buffet famously said that he would never invest in airlines. They had been very bad bets for investors for a century, basically, with almost 100 bankruptcies. He now owns them because consolidation in the US has made them much better investments.

Unfortunately for investors but fortunately for consumers, the airlines in Vietnam are still competing heavily. Vingroup decided to forego an entry into a market that it sees as oversupplied, despite super strong growth:

“Quang [Deputy Chairman and CEO] stated that the aviation market in Vietnam is still growing, and that there is still potential there. But he also warned that it is reaching the point of oversupply.”

Vinpearl would have been the 6th airline. The last to launch was Bamboo, which started flights last January and has 25 planes in service. It flies mostly domestically.

It really seems like Vingroup is trying to focus a bit more, rather than be a conglomerate to own all conglomerates. It has cars, telephones (see above for Vinfast), real estate, hospitality, and a university, among others! It got out of the retail business, and now airlines. That’s some progress. I have a bias here: I think companies should focus on just one thing, rather than trying to do everything. But, what do I know. I’ve never built a multi-billion dollar business.

Catch up posts

Just a few posts to 1) tell you what is running through my mind right now and 2) get through my tabs.

First, the coronavirus comes to Vietnam: Two Chinese citizens have brought the coronavirus to Vietnam. I don’t have to tell you, but the timing on this couldn’t be worse with Tet starting tomorrow. There have been too many virus disaster movies over the past 20 years for me not to be scared that this is going to lead to something much worse. The WHO still says it is not a global health emergency. Let’s hope it doesn’t become a regional emergency.

It doesn’t help Vietnam that the two Chinese traveled to Hanoi, Nha Trang and HCMC. Hopefully not everyone they came in contact with them got the virus. Vietnam has stopped travel to/from Wuhan, which is good but maybe too late.

China now has blocked travel for 35 million people. That’s just 2.4% of China’s population, but it’s still a lot. That would be the 41st largest country in the world, just behind Morocco and bigger than Saudi Arabia.

The virus kills almost 3% of the people who get it, based on the official numbers of 26 deaths in 900 cases. Who knows what the actual figure is, because it is very likely that both the numerator and denominator are higher.

Source: Asia Briefing LTD

Second, the minimum wage has been raised. (Thanks to Vietnam Briefing for the information in this post.) I think this is great, but I am a bit worried that Vietnam will soon be pricing itself out of the market for low-wage labor. Given the push to manufacture in Vietnam and a limited labor supply, this might be a good thing.

The wage is up more than 5% yoy, but the exact amount varies by regions. Region 1, which is the urban and suburban districts of Hanoi, Hai Phong and HCMC all now have a minimum of $190 per month, or $6.25 a day. The rural areas have a minimum wage of $132 per month or $4.34 per day.

Source: Asia Briefing LTD

Compared to other Asian countries, Vietnam doesn’t look so bad, especially given the infrastructure and its location. The only place that really gives Vietnam a run for its money is the Philippines. If wages continue to go up in Vietnam, I wouldn’t be surprised to see Philippines and Cambodia benefit.

I am less worried about Laos (land-locked, poor infrastructure), Indonesia (the low wages are likely for areas with poor infrastructure) and India (bureaucracy is tough there).

Source: WHO

Traffic acciddents and beer sales falling: In good news for public health, there is a tough new drunk-driving law in Vietnam. According to the WHO, 26 people for every 100,000 died from a road accident in 2016 (the last year for which data is available). That’s high, second only to Thailand in ASEAN. Singapore is at 2.6.

The police fined thousands of people in the first two weeks after the new law went into effect, and “fatal accidents dropped by 13% compared to the previous fortnight.” If this continued, then Vietnam would only be third (!) in terms of traffic accidents, all else being equal.

There is a downside to the new law: beer sales are cratering. In the article linked to above, the number of customers at one place dropped 80%, and another said revenues were down 50%. Real stats seem to point to a 25% decline in beer sales.

Like Brett Kavanaugh, I love beer. But the trade off seems fairly good to me. Plus, beer sales are probably going to pick up once people figure out how to get home.

An alternative to the WHO: This isn’t an article about Vietnam, but it is about trade and it very well could become a Vietnam story. The EU, China and 15 other countries have signed an agreement to set up an alternative to the WTO. Vietnam might want to join this, or they could be pressured to join it once they have an approved FTA with the EU.

If you haven’t been following the WTO closely (and why would you), it is unable to resolve disputes because of American/Trump intransigence. The WTO has an Appellate Body with 7 members, and to decide anything it needs a quorum of 3. Right now it only has 1 member! That’s because it the US blocked all nominees.

Just to be clear, the WTO can still resolve disputes that are not appealed (although now everyone will likely just appeal), and countries can resolve things on their own. But there will not be an official resolution.

There are a lot of reasons why the US administration has done so:

• It hasn’t liked the rulings (not just Trump, but also Obama).

• It disagrees over what the appellate body should do: Rule on the contracts (trade agreements) signed or create rules to deal with new issues. The EU favors the latter, the US the former.

• It doesn’t like how China has been able to take advantage of the WTO process.

• It believes that the US would get more of what it wants without the WTO.

• It doesn’t like how long disputes take to be resolved: 1,267 days or 3.5 years.

These are all fine reasons, some of which I agree with. My issue is that now there is going to be an alternative body, which the US has no role in. It will not be able to shape it at all, and it could allow these countries to run around the US deciding things that will affect the US. That’s not great for the US.

The Trump Administration came into office promising to blow up the world. It is breaking the WTO, NATO, the UN, the International Criminal Court, and NAFTA. Oh, and the World Bank and the IMF. There are a lot of problems with all of these institutions, some of which have been led by the US for years (so America deserves some of the blame here), but I don’t think it is great to just get rid of them and leave a vacuum in their wake. A vacuum will be filled, and it will probably be filled by others, those without US values in mind.

Casper detour

Source: Casper, chart by Vietecon.com

A quick detour today to look at Casper, the mostly on-line mattress company, which filed its S-1 to go public a few weeks ago. I love looking at these internet companies and seeing if they really are as revolutionary as they say they are.

Let’s say right off the bat that Casper has been wildly successful. They have somehow convinced people to buy a piece of foam over the internet and use it as their mattress! To be fair - people really love the mattresses, and the company has the sales to show it - more than $400m in the past year.

The company was started in 2014, and it closed its Series D round in March of 2019 with a valuation of $1.1 billion. It was one of the first movers in the on-line mattress space. It turns out that being on-line only isn’t that exciting, so the company now has 60 stores, and management expects there to be room for 200 stores in North America. It also is offered in another 2,000 retail stores like Target.

Sales have been very strong (see chart up to the right), and gross margin is quite high at almost 50%. The issue is that the company is spending a lot of money to get those customers. This is a pattern we have seen with a lot of these on-line companies. For example, Blue Apron is a good example of a company that spent tons to attract customers. When they stopped spending, the customers stayed away, and the stock cratered.

But the list of competitors to Casper is long: Emma, Leesa, Tuft & Needle, Eve Sleep, Bear, Purple, Helix, something called Pangeabed. Those are only some of the on-line ones. There is also Sealy, Sleep Number, Simmons, along with a number of others. So it’s a highly competitive market, and what once differentiated Casper (foam, online, great customer service), no longer is so different.

Casper is small compared to its major competitors, but growing: One of the largest mattress companies out there, Sealy, has sales of $2.9bn in the trailing twelve months (end Sept 2019), while Sleep Number had $1.7bn. Purple, the only publicly-traded online company, had $383m in sales (end Sept 2019). Casper is much closer to Purple than to the big ones, in terms of both sales and growth. Although growth at Purple is actually quite a bit higher at 46%, compared to Casper at just 20%.

Source: Vietecon.com

The company is looking to raise money, but it also wants to show a good return for its investors. In its Series D in March 2019, investors valued the company at $1.1bn. If they demand a 25% return, the company needs to be valued at $1.375bn. A 25% return is not great, but is somewhat appropriate for a late state investment and a year-long holding period. But reaching that $1.375 will be tough.

I did a quick DCF of the company (see table to the right). I find it difficult to get above $900m. Let me just go through a few of my assumptions:

• Revenue goes from $410m in the trailing twelve months (end 3Q19) to almost $1bn in 2026, for a CAGR of 11.5%. This is pretty impressive, especially as the company gets bigger. Through the first nine months of 2019, the company’s revenue only grew 20%, which is quite low. I expect 4Q2019 will be big, but it will be hard for the company to get above 25% growth in 2019. Then I have it falling off to a terminal growth of 3%.

• I keep gross margin high at 50%, and I have sales and marketing costs grow just 5.2% through the forecast period. I am even more generous with “General and admin expenses” (basically all the other overhead, including R&D), with just a 2.2% growth rate.

• Ultimately, I get to an EBITDA margin of just under 9% and with losses through 2022.

• I assume minimal working capital needs (0.5% of revenue), falling capex needs, plus no tax (given large tax loss carryforwards). Again, these are pretty optimistic.

• I use a WACC of 9.5%, which is based on a beta of 1.5, risk-free rate of 2%, equity risk premium of 5%, debt rate of 5% and a 20% debt weighting. All of which are probably pretty conservative.

Source: Yahoo, company disclosure, calculations and chart by Vietecon.com

Another way to look at it is to see comparable valuations. Looking at peers, it will be hard to get to the $1.375 figure. Let’s say that the company reaches my 2019 revenue forecast of $448m. To get to our value, investors need to use a multiple of 3.1x. That’s pretty tough. Right now, none of its publicly-traded competitors are trading at that value. Purple is trading just below at 3.0x, but that company is growing much faster (revenue up 40% TTM). Plus the company actually made money in 9M2019.

Purple actually has lower gross margins, and spends less on sales and marketing. Moreover it spends significantly less on G&A. I think it would be hard for Casper to match these in the short term. For example, Purple spent just $28m on G&A in TTM versus Casper at $141m. That’s 5x as much!

Basically, if Casper could keep its margin and lower its operating expenses to Purple levels, it would have earnings of $43m in 2019, by my estimate.

If I were Casper, and I wanted to keep revenue flowing, I wouldn’t cut sales & marketing, but I would drastically cut other overhead. It is way too high at 34.5% of sales. This needs to come down by half, and more quickly than I have it coming down (in 2026 I have it at 18%, still double Purple’s spending). Even if this is a lot of R&D for new products, it seems way too high.

Conclusion: My view is that Casper is going to struggle to get the valuation that its most recent investors probably wanted. If it goes at the Purple valuation, then it should be able to get almost $1.3bn, but that depends on strong growth in 4Q2019 plus expectations of much faster growth in profits than I have built in my model.

In some ways, if Casper can get by with the cash it has ($55m as of Sept. 2019), it should probably get its house in order and then go for an IPO showing both growth and profit. This may be difficult because there are some debt instruments they need to pay off, and it is likely that growth will slow down again in 2020, which will make the company less attractive. Investors aren’t going to like a slow-growing company desperate for cash.

Overall, it will be really interesting to see how the market views the Casper’s IPO. I think something like $1.2bn is doable, but that gives just a 9% return. In a normal year that would be great, but it is low compared to how the S&P has done over the past year: +26%.

EU Trade Deal

SOURCE: VIETNAMESE CUSTOMS, EU, VIETECON.COM CALCULATIONS

The EU finally passed the EU-Vietnam free trade agreement (FTA) out of committee. Yesterday, the trade committee approved the FTA and a separate investor protection agreement. It now has to go through the full European parliament. Debate will start there on February 11, and I don’t know how long it will take.

There is some criticism of the deal, mostly around human rights, and labor and environmental issues. Human Rights Watch asked MEPs to force reforms through, specifically to penal legislation and to release political prisoners. But that hasn’t happened.

I am not expert on the EU Parliament, but now that it has passed through committee, it seems unlikely that there will be changes to the legislation. Within the bill, there are some requirements that Vietnam make legislative changes:

“there are legally-binding rules on climate, labour and human rights. The agreement commits Vietnam to apply the Paris Agreement. Vietnam scheduled the ratification of two remaining bills on the abolition of forced labour and on freedom of association by 2020 and 2023, respectively. If there are human rights breaches, the trade deal can be suspended.”

But we know from past trade deals, very little is done after the agreement is signed and it is extremely hard to enforce even the trade-related parts of FTAs, so trying to reach into the country and change legislation on human rights or political prisoners is difficult.

As an aside, I remember when Obama visited Egypt, and there was a spate of political prisoner releases, presumably because the US Ambassador said something like: “it sure would be annoying for Obama to have to talk about these prisoners of conscience when visiting your country. It would look bad for him and for you.” Whatever she said, it worked, and Egypt released

Source: Wine Australia

Signing the agreement should give a big boost to both sides. To give a sense of the size, total trade in goods and services is over EUR50bn, and the trade deficit was EUR27bn in 2018. It looks like through November, the deficit was down, but we will have to see the full year figures. The EU sees the FTA as a way to reduce that deficit more over time. Specifically, Vietnamese tariffs on 65% of all European goods will fall to zero when ratified. The rest will be eliminated over a 7-year period. This is especially important for motorcycles (75% current tariff) and cars (78%). Wines and spirits’ tariffs will fall over 7 years, down from 48-50% currently.

These will be major changes and will very likely help boost exports. Look at what happened with Australian wine exports to China as tariffs fell (chart up to the right). It’s not a perfect parallel, because wine consumption was already trending up, but it can’t have hurt. .

Generally, we are going to see faster exports to Vietnam from the EU, and also growing exports to the EU from Vietnam. Textiles and telephones are what’s sent to the EU, and these will no longer have tariffs (textiles are currently at 8%, as far as I can tell [quick aside: reading the duty schedule is impossible! There are so many codes and so many types of goods.]). These should fall as long as the textiles are mostly made in Vietnam or with parts from other free trade partners with the EU (like S. Korea).

My forecast is that the trade deficit will likely fall over time, as Vietnam grows up the income curve and buys more high-end products from the EU. But in the very short term, the cut in tariffs on Vietnamese goods will goose exports to the EU.

Of course, free trade with Britain will only last for a few months (if this is passed) before it needs to be renegotiated. Just another example of Brexit genius. It only took 7 years to negotiate this agreement, so a UK-Vietnam agreement should happen quickly!

Motor vehicles

As we watch Davos and the contradictory signals on climate change, we are seeing similarly contradictory signals in Vietnam. Specifically, we are seeing a push to increase the number of vehicles sold in the country, while at the same time, there are new regulations to make sure that it is well-serviced by ride-hailing apps.

Source: VAMA, chart by Vietecon.com

First, the cars. I saw this story about Ford investing $82m more in Vietnam to increase production. Ford’s growth was very strong in Vietnam in 2019 - up 30.6% to 32,000 vehicles. The market as a whole was up 11.7%, with passenger cars made by VAMA members were up 19.6% (about 5% of the market is made up of imports and non-VAMA members).

Ford will upgrade its facilities and hire about 500 people, doubling its workforce. It is competing against the Japanese companies, which have the greatest share (Toyota had almost a quarter of the market in 2019) and are also growing quickly.

Source: ASEANstats

There is good reason for Ford and others to invest. Vietnam has very few cars per person compared to its other ASEAN neighbors. Vietnam has the lowest number of vehicles per population of any ASEAN country except for Cambodia and Laos. Both are at 0.028 vehicles per person, compared to Vietnam at 0.031. So not too far off. [These are from 2017, and since then about 611,000 vehicles have been added in Vietnam, growing this figure to around 0.035 vehicles per person.]

Ultimately, the number of vehicles in Vietnam will increase as the country gets richer, because people like cars. The problem is that Vietnam does not have the infrastructure for more cars. The big cities are already overcrowded with scooters, bikes and the cars that are already there.

So, that leads me to the second news item I saw that was interesting: new rules around ride-hailing apps. Let me get this off my chest: I love and hate ride-sharing.

• Love: When these ride-sharing apps work well, they can obviate the need for people to have their own cars.

• Hate: They increase congestion in cities, because more people ride cars than walk/bike/use public transportation. And they can decrease usage of public transportation, which deprives it of revenue.

• Love: They can provide short-term employment that is extremely flexible.

• Hate: Many “employees” barely make a living wage. Taxi drivers in many of these cities used to make so much more.

• Love: They can make the roads safer because people don’t drink and drive. Vietnam just changed its drunk driving laws (there are some now), and so more people will need to find a safe way home.

Well, Vietnam has a new set of regulations for taxi and ride-hailing services. It doesn’t seem to be too onerous. Apps need to make sure their cars have “contracted car” on them. While taxis need either light boxes or decals.

Grab is the biggest player, with a 73% (!!) market share in 2019, according to ABI Research. It bought Uber’s Southeast Asian business and competes in ride-hailing, food delivery payments, logistics, hotel bookings and GrabKitchen.

On one side, Ford is making a big bet on new car manufacturing, while Vietnam is making ride-sharing more regulated and legitimate. Probably it would be better if the country focused on public infrastructure, with part of that allowing ride-sharing. But that may be asking too much.

There is room for both to succeed: I think Ford will have a good business, and since so few Vietnamese have cars, so will Grab, if it can get the unit economics worked out.

Happy Tet!

Source: Markus Winkler (@markuswinkler)

Updated draft on solar FiTs

I wrote about the new draft solar feed-in tariffs (FiTs) in Vietnam (Sept. 23, 2019), and that draft was updated with a few new details, some of which aren’t great:

• Rooftop solar – the new FiT of 8.38 US cents is now only good for projects finished by end 2020 (rather that end 2021). In good news, there is a lot of solar already installed: “By the end of November 2019, nearly 19,400 rooftop panels were installed across Việt Nam with total production of 318MW. Seventy-three per cent of which is located in the South.”

• Floating solar farms - VND 1,758 per kWh (equivalent to 7.69 US cent per kWh).

• Ground-mounted solar - VND 1,620 per kWh (equivalent to 7.09 US cent per kWh).

And for these last two, it is only if they have signed a power purchase agreement (PPA) as of Nov 23, 2019 and “achieve their commercial operation date” between July 1, 2019 and the end of 2020.

Source; Vietecon.com

As a reminder the old PPA ended in June, and a number of projects were left hanging. This new PPA cleans up some of that, but doesn’t really give any forward assurances around pricing. And because only things done by Nov. 23 are covered, we know exactly how many this is: 7 farms with combined capacity of 320MW. This is a tiny portion of the number of projects that are in the works. The chart on the right shows the capacity of plants in three categories: 1) those that are explicitly covered, 2) those that have a PPA but didn’t “commence construction” in time and 3) those that do not have a PPA and haven’t started construction. These are 52 projects in total, and there are another 7 that have been sent to the prime minister for approval (have already gone through the Ministry of Industry & Trade in Vietnam).

Bottom line: The vast majority of projects in the works, including ones approved by the Ministry and the PM, are not part of these FiTs. And future projects have little certainty.

My view is that the government really needs to lay out sensible rates for projects for the next few years. The rates should be compelling enough to incentivize developers. And there should be different rates for different parts of the country. Remember that the country had 48.6 gigawatts (GWs) of total power generation capacity in mid-2019 but needs 60GWs in 2020 and 129.5GW by 2030. This is from the Ministry of Industry and Trade. It needs to get people to build, and my view is that they should build renewables.

The reason why rates should differ by geography is to attract developers to the north. This article points out that much of the solar added in the first half of 2019 was very concentrated: “nearly half of those 4.5 GW have been installed in just two provinces: Ninh Thuan and Binh Thuan, on the sun-baked south-central coast.” One of the main reasons for this is simple: the sun. Everyone wants to be south, because solar irradiation is much higher there. The north has much less sun. So it makes sense to adapt tariffs to the province.

Also, the government needs to look into upgrading the power grid. That same Saigoneer article mentioned: “At one point in June, Ninh Thuan's high-voltage central power line was reportedly operating at up to 360% over its safe capacity.”

More on 2H2019 in stocks

A few more things that I found when diving deep into 2H2019 returns of the stock market.

Currencies had very little impact on performance. The VND, KWN and JPN barely moved at all (+/-0.4% at most). The only “big” move was the GBP, which appreciated almost 5%. But only one stock, Pharos energy (PHAR LN, previously SIA LN), is traded in GDP, and it made up 3.15% of the fund at the end of June, compared to 2.26% in January.

Source: Vietecon.com, returns in local currency - no adjustment for currencies.

Five stocks had the biggest impact, based on on their weighting. First, the ones that helped the index:

• Vietcombank (VCB) - It raised the index 166bp on its own because of its strong performance. The bank recently reported very strong earning ($1bn in profit). It’s profit has grown 37% annually since 2015. So it makes sense.

• Mani (7730 JP) - It was responsible for 160bps of return. Since 2014, the stock has been on a tear. Since Jan. 2018, it is almost up 2.5x. For a boring medical instruments’ manufacturer. The make the instruments used to sew people up. But it seems to have a good management team that is focused on good capital allocation.

• MCNEX (097520) - The impact of this mobile phone camera maker was a positive 111 bps. It mostly supplies Samsung. Samsung was up a lot (around 17%), so it kind of makes sense that MCNEX would be as well. Remember, that MCNEX actually grew 122% in 1H2019. For the year, it was up 192%! That’s crazy.

Now for the ones that hurt the index:

• Masan Group (MSN) - Despite my believe that MSN’s acquisition of Vingroup’s retail business was good, the market sure as hell didn’t think so. The stock was down and contributed -149bps to the index. Although, just to be clear, a lot of the decline happened before the acquisition was announced.

• FLC Faros Construction (ROS) - Faros continues its long decline and contributed negative 108bps to the index. At first, I thought it would drop off the index in the next six months or so, but it actually has very high liquidity ($16m/day, the limit is at least $1m) and a market cap of $258m (if it falls below $150m, it is out). If it falls another 41% from today’s (Jan 15) close, then we could see it move out, but that seems unlikely.

Those are only the stocks that had more than 100bps impact on the index. There were a number of other companies that had an impact between 50-100 bps, mostly on the downside. That’s what kind of surprised me: the volatility of returns. Out of 25 stocks, only 9 moved less than +/-10%. Everything else moved much more. This compares to 14 out of 27 in 1H2019 that met the same criteria.

And generally the big losers were Vietnamese. If the index only included Vietnamese stocks, it would be down by almost 5% (not counting currency issues). [This is an estimate and doesn’t take into account changes in holdings.]

Source: Vietecon.com

Source: Vietecon.com

Source: Viietecon.com

The halves rhymed: It turns out that many of the stocks that did really well in 1H were also the stocks that did well in 2H. In fact, if you just invested in the stocks that grew more than 10% in 1H (except for Eclat, which was taken out of the index), your return would be 21% (if they were equally weighted). You wouldn’t miss out on any of the stocks that did well. So much for an efficient market!

Because of the relative poor performance of the market, the overall ETF has fewer assets under management at $441m (as of Jan 14) than it did at the end of June, when it had $467m. That’s not great. Of course, if a market is underperforming, and you think it will continue, then you should pull out your money. But most people just see bad results and pull their money out. It could have bottomed! It could be on an upswing! I am NOT saying that the Vietnamese market is headed for a bull market! All’s I’m saying is that people often sell low and buy high, when they should really hold out through the cycle.

Looking at 2H2019 in the stock market

Source: Van Eck, chart by Vietecon.com

I wanted to go back today (and probably the next few days) and look at what really drove the market over the past six months. I did this at the end of 1H2019 (see here) as well.

Performance in 1H wasn’t too bad (+9%), while the second half was completely flat (using the VNM index - which has its own issues, more below). The market disappointed, especially in comparison to the S&P 500, which killed it in 2H19 (+11%), and considering strong growth in Vietnam (7%, according to the government) and strong exports.

At certain points, it looked like we would see some movement, especially during July and at the beginning of November. But the energy dissipated by the end of the year.

Source: Vietecon.com calculations. All returns in local currency.

The surprising thing is that there are very few Vietnamese companies that had a great second half. The chart to the right shows returns - stock’s weighting in the index as you move right, so VIC has the greatest weighting at almost 8%. Note that these are all based on local currency returns; it doesn’t take into account currency differences or changes in weightings.

The only Vietnamese stocks that did well were:

• VCB: A bank, up 27% and a 8.2% weighting at the beginning of the period.

• SBT: A bank, up 7% and a 2.6% weighting.

• TCH: A truck dealer, up 50% with a 2.1% weighting.

• HPG and VHM both rose in low- to mid-single digits. But it wasn’t too impressive. Alhtough VHM (Vinhomes) has a high weighting at 6.4% at the beginning of the period, going to 7.3% at end December.

The foreign companies were generally better, although not all of them. Mcnex (097520 KS) really outperformed, up 31%. And BH Co. LTD (090460 KS) also did well (+18%). Mani (7730 JP) was the best of the foreigners, up 36%. All had weightings between 3.5% and 4.75%.

In addition there were some changes in the constituents themselves. Four stocks left (although only two were noticable):

• Petrovietnam Nhon Trach 2 Power: 1.13% weighting and fell 20%.

• Regina Miracle (2199 HK): Intimate apparel manufacturer. 1.69% weighting, fell 1%.

• Two other stocks (VCG and STB) were barely in the index but were listed at the close of June but with less than 0.01% of assets.

These two stocks came in to replace Petrovietnam and Regina Miracle:

• Vietjet (VJC): The low cost carrier was actually down 13%, despite a massive increase in tourists. Probably not helped by lots of competition.

• Seojin Systems (178320 KS): This is a Samsung supplier that did well - up 12%. It ended the period with a 3.88% weighting

The index now has 25 constituents.

Tomorrow I will look at some other interesting trends I saw in the data.

Currency manipulation

I don’t really want to talk about trade every day, but I feel I have to write something about this report from the US Treasury on currency manipulation for a few reasons:

First, it’s good news for Vietnam. The country is still in the report, but it only meets one of three criteria for currency manipulation (this is down from the May 2019 report). Progress!

Second, it is still in the report because: “By rule, the Treasury retains countries on the monitoring list for at least two consecutive reports when they are first cited, hence it kept Singapore, Malaysia and Vietnam on the list.”

Source: US Treasury report on currency manipulation

Third, I wrote about the risks to Vietnam (here) back in May when the first report mentioning Vietnam came out. I feel I should follow up, for you, my dear readers.

As a reminder, the US Treasury looks at three criteria to determine currency manipulation: 1) a large trade surplus, 2) a large current account surplus, and 3) heavy one-sided foreign exchange intervention. More about these three criteria and Vietnam:

1) Vietnam’s trade surplus actually grew over the period. In 2018, the surplus was $40bn, and in the four quarters ending in 2Q2019, it rose to $47bn. This is likely to get worse, given the growth in its trade surplus.

2) The current account balance in the period fell to 1.7% GDP, down from 5.4%. My concern is that it will likely go up again in the next report. Well, we know it will, if the Ministry’s figures are correct (as we talked about yesterday). It will likely be around 4% of GDP, which is considered “material” (anything over 2% is).

3) Vietnam is intervening in the foreign exchange market, but less than previously. It’s net purchases were only about $2bn, or less than 1% of GDP, down from $4bn (1.7%) in the last report. It also hasn’t been consistent, which is defined as intervention in 6 of the last 12 months.

But the currency is undervalued by most estimates:

“The most recent IMF assessment indicated that the dong was 8.4 percent undervalued on a real effective basis as of 2018.”

See the chart below that looks at undervaluation of exchange rates for the US’s major partners. In fact, it is second to only Thailand in being undervalued, according to the IMF. This means that it is cheaper to export and more expensive to import than what would be the case.

The Vietnamese government is intervening (meaning buying USD and selling VND, which pushes down the currency). It has a floating exchange rate with the US dollar, but it only floats in a small band (+/-3%). But not all the intervention is to keep the currency undervalued. Some of it actually makes sense, given that Vietnam has inadequate reserves.

“The IMF continues to assess that Vietnam’s reserves remain below adequate levels, standing at 76 percent of the IMF’s reserve adequacy metric (for fixed exchange rate regimes) as of end-2018.”

While Vietnam doesn’t meet two of the the technical criteria, it also benefits from the US Treasury understanding of some of its intervention.

Vietnam has a reprieve for the moment, but in the next report (Treasury has 6 months), it will likely back to hitting 2 of the 3 criteria. I assume that the government will make sure not to hit the third one, which is the one most easily under its control.

hSource: IMF by way of US Treasury Report on Currency Manipulation

Trade balance and growth

Vietnamese Customs reported preliminary figures for exports and imports in 2019 today (Monday). Total exports in 2019 were $264bn, compared to imports of $253bn. This resulted in a surplus of $11.12bn.

Source: Vietnamese customs, chart by Vietecon.com

Exports grew 8.4%, which was faster than the growth of imports at 6.8%. Surprisingly though, December exports fell 1% m-o-m, while imports were up 4.5%, with a trade surplus of just $259m. This may have something to do with the wind-down of exports in December (Christmas presents have to be on a plane in November, and on a boat in August or September). So I wouldn’t read too much into it.

What continues to blow my mind is that smartphones and spare parts made up almost 20% of exports at $51.38 (+4.4%). And almost all of these are from Samsung! That’s one company that makes up almost a fifth of a country’s exports.

SOURCE: US INTERNATIONAL TRADE COMMISSION DATA, CHARTS BY VIETECON.COM

Rice: In mixed news, rice exports increased to 6.4m tonnes, up 4.2% yoy, in 2019. Unfortunately, revenue dropped 8.3% to $2.8bn, as rice prices . I have detailed data on exports to the US, and this is definitely in line with what we have seen in this trade relationship. Since 2014, cereal exports (most of which are probably rice) to the US have fallen every year. For 9M2019 they were down 16%.

Source: USDA, World Bank, via Indexmundi.com

The funny thing is that prices of rice overall don’t seem to be trending down as much as they have been for Vietnam. The chart on the right has the price of rice according to the US Department of Agriculture. Funnily enough, it is based on Bangkok white rice, which is at least geographically close. Anyway, you can see that the price of rice has not fallen all that much. This data only goes through November, but the average price of rice in 2019 was down less than 1%.

So Vietnam is able to export more, but it is getting less for each ton of rice. That’s not great. At least Vietnam is self sufficient in rice, as long as the delta remains the delta.

Source: World Bank, 2019 is Vietecon.com estimate based on government statistics.

Trade to GDP: We could spend days looking at the specific products/commodities that Vietnam exported in 2019, but I want to step back a second. The big picture is that the overall trade surplus grew quite impressively this year.

It is now back to its heights at above 4% of GDP. By my estimate, based on government reported statistics, GDP grew something like $24.5bn in 2019. Of which, $4.4bn was solely the current account surplus (going from $6.8bn to $11.1bn, or 17.8% of the total. So export growth was a major driver of Vietnam’s ability to meet its GDP growth targets. But a big part of the growth in exports was due to something that Vietnam had no part in, the US-Chinese trade war.

What I am getting at is that the growth we have seen in 2019, while quite impressive, isn’t on the solidest of ground. Not that it could easily reverse; companies are setting up manufacturing in Vietnam and that investment should be sticky. But future growth may be more difficult and continue to depend on externalities.

Notably, and this is what I will get into when I discuss productivity later this week, high wages and a shortage of workers are making Vietnam less attractive. See this article on furniture manufacturers looking at Cambodia because it doesn’t make economic sense to invest more in Vietnam. Of course, human capital is even less skilled in Cambodia, but at least there are inexpensive workers.

Ultimately, for Vietnam to retain this manufacturing base, it would be great if it could boost productivity, so that companies’ cost-benefit calculations would continue to make sense.

I have gotten a bit off base. Back to the main story here: exports were a killer in 2019. And that helped Vietnam drive very good GDP growth.

The State Budget

Apropos of my post yesterday about debt, I saw this article about state budget collections in Vietnam for 2019. They were good!

Source: Ministry of Finance

Total collections were VND1,549.5 trillion or USD67.4bn. That was up 8.7%, or well above the economic growth rate of 6.8% (if you believe the World Bank) or 7.0% (if you believe the government). This means that collection has become more efficient.

This revenue resulted in a budget deficit of 3.4% of GDP, which is better than the target of 3.7%. If this continues, we will likely see a decline in the government debt/GDP figure, which would probably be appreciated by the market.

GDP indexed to 2018 = 100. Assumes 6.5% real GDP growth plus 3% inflation. Source: VIetecon.com

As I always have to remind myself, it isn’t important how much debt is added, but rather how the ratio of debt to GDP trends. For example, if GDP grows at 6.5%, inflation is 3.0%, and the deficit is no more than 3.5% of GDP, then the debt/GDP ratio will fall (see chart to the left, which shows this exact scenario). Also, inflation is generally good for borrowers - it is a transfer of wealth from lenders.

But back to collections. It is good that Vietnam was able to collect more than it expected. And it is mostly from domestic sources, so it isn’t heavily dependent on tariffs, which is probably good (they are more volatile, and we are likely to see falling tariffs collections as Vietnam signs more trade deals with Europe and TPP comes into effect).

Given strong growth, it is better for the government to collect revenues now and pay down some of its debt, so that when a crisis comes (and there is always a crisis ahead), it will have flexibility.

External debt stock for Vietnam. Source: World Bank

As I have written about a fair amount, I do not think that debt is all that bad. But I am worried about external debt, which has increased dramatically (see chart to the right). It stood at USD108bn at the end of 2018. I wish the government would source more debt locally, because if there is capital flight for any reason, the risks would be much lower.

Overall, with these budget figures, I am less worried about Vietnam’s debt. Although, as the World Bank said in its report, government debt is just part of the issue. We should also be monitoring private debt. The reason is that if private debts are high, companies may not be able to service these debts in a downturn. That could result in bankruptcies and layoffs. Lower debt levels means that companies can wait out the bad times.

Also, private debts can become public debts very quickly, especially within the banking system. Remember what happened in the Great Financial Crisis - large private debts were ultimately taken over by governments. A great example is Ireland, which took on all the debts of its banks, stupidly in my opinion.

Vietnam’s banking system is unlikely to face a crisis like that anytime soon, because it is heavily funded by deposits. But it is still important to think about the risks.

Next week, I hope to get back to productivity but also look at the big winners and losers of the 2019 stock market. Have a great weekend.

World Bank lowers global growth forecasts

The World Bank has its updated forecasts for global growth out today (yesterday). There are some interesting things in here, about the world and about Vietnam.

For the world: The World Bank expects total global growth to be 2.5% in 2020, reflecting a slight increase from 2.4% in 2019e. The forecast is actually lower than the World Bank’s previous forecast of 2.7%.

What is driving the more pessimistic forecast:

Source: World Bank

• Advanced economies are slow but steady (US, EU, Japan) - they are growing below 2%, with Japan barely growing. The World Bank slightly raised the forecast for the US by 0.1pp, but made no other changes for these three economies.

• Emerging markets are dragging down the forecast - 2019 came in half a percentage point lower than expected at 3.5%. This year looks to recover a bit to 4.1%, but the World Bank was expected 4.6%. The recovery should continue in 2021 (4.3%) and 2022 (4.4%) but these reflect an expected slowdown.

• Among emerging markets, forecasts were raised for Europe & Central Asia only. Expectations for every other region got worse.

• China growth is slowing, which we knew, but still kind of surprises. It was 6.8% in 2017 and will be 5.7% in 2022. Remember that many people have issues with Chinese government economic statistics.

• Only Argentina is expected to be in a recession in 2020 (-1.3%). After declining growth in 2018 (-2.5%) and 2019 (-3.1%). Poor Argentinians. They really need to get their economy to work. If they can’t grow when the rest of the world does, how will they grow when the rest of the world isn’t.

• Vietnam is looking good. Forecasts are unchanged, but 2019 came in 0.2pp better than expected by the World Bank at 6.8%. Overally, nothing really unexpected here. Just to be clear, though, the government says the economy grew 7.02% in 2019, about 2pp higher than what the World Bank says.

• Bangladesh also caught my eye with 8.1% growth in 2019 and 7.2% in 2020f, 7.3% in both 2021f and 2022f. There are likely other countries also growing quickly, but few big ones are growing as fast as Vietnam and Bangladesh.

EMBI spreads. Source: Haver Analytics, World bank, chart by World bank. Note: J.P. Moran Emerging Market Bond Index (EMBI) spread. Last observation is December 2019.

Some other interesting things found in the data:

Vietnamese bond spreads are low and have declined. The latest spread was 101.9bp, and has fallen 73.9bps since June 2018. This tells us that bond investors, at least, have gotten more comfortable buying the debt. This is true across the major ASEAN markets (and China).

I was surprised to find that Vietnam’s bonds are priced better than China, Indonesia or Malaysia. Also, spreads are generally low, all below 2pp. This just speaks to the general compression in rates globally.

Nominal rates are low at 4%, and have fallen by 1.2pp since January 2019. This refers to Vietnam’s discount rate. As we talked about yesterday, inflation has been low (2.0% for core, 2.8% for CPI), and that’s why the discount rate can remain so low despite strong growth. It doesn’t seem like Vietnam is overheating, helped by excess capacity (lots of people entering the labor market every year) and low inflation globally.

The research report also looked at debt and productivity:

Nominal policy rates and change in inflation-adjusted policy rates. source: Haver analytics, World bank, chart by world bank. Note: Latest rate refers to Malaysia’s overnight policy rate, Indonesia’s 7-day reverse repo rate, China’s loan prime rate, Thailand’s one-day repurchase rate, Vietnam’s discount rate and Philippines’ overnight reverse repo rate. Change refers to the difference in real interest rate between November 2019 and January 2019. Last observation is November 2019.

• On debt, it sees worries about high government debt in emerging markets (like in Vietnam), that would be exacerbated by and exacerbate a new economic crisis. Especially with lower growth.

• Productivity is a real problem globally, but again, Vietnam is well placed. It was specifically mentioned as a country with particularly fast productivity growth (pg 70).

More about these last two items over the next few days.

The future of Vietnam's economy

My initial view on Vietnam is that it is moving from a rural, agriculture-led economy to an urban, manufacturing-led economy. But I wanted to see if the data really held up to that.

Source: World Bank, chart by Vietecon.com

There were a couple of surprises, plus I am still shocked by how quickly the economy has changed.

You can see in the chart on the right that cumulative growth in manufacturing value added has vastly surpassed both real GDP growth. Services are mostly in line with real GDP, which is already quite high (7.5x 1985 figures). Agriculture has lagged at just 3x 1985 figures. But this doesn’t show the whole story.

Source: Vietnamese GSO, chart by Vietecon.com

The General Statistics Office of Vietnam also has data on GDP by sector, but instead of growth it is based on nominal GDP (meaning in current VNDbn). The VND figures are kind of meaningless, because there has been massive devaluation (in 1986 $1 was worth VND23; now it’s worth VND23,192). But you can see how the mix has changed.

Oh, and yeah, that was a surprise: the massive devaluation. to go from 23 to 23,000 in less than 30 years. But we have seen it in other countries as well. This is mostly due to inflation of the currency, but the government has that in hand for now (helped by moderate inflation world-wide). Core inflation was just 2.01%, while the CPI rose just 2.79% in 2019.

Source: Vietnamese GSO, World Bank, calculation and chart by Vietecon.com

Back to GDP: if we switch over to USD, then it is a bit clearer, potentially. Or at least, the numbers will be smaller. Total GDP is almost $250bn, of which 41% is services, 34% is manufacturing and 15% is agriculture (this includes aquaculture and forestry).

Source: Vietnamese GSP, chart by Vietecon.com

The breakdown is a bit clearer in the pie chart to the right. If we look back at 1986, the first year of figures, total GDP was $26bn, of which $10bn came from agriculture, $8bn from industry and $9bn from services. Basically an almost even split.

That isn’t the case anymore.

Source: World Bank, chart by Vietecon.com

I was most surprised by the jump in services. I thought for sure that industry & construction would be much greater than services. These are 2018 figures, and I am sure these figures changed a bit in 2019, but services continued to rise. Retail sales were up 11.8% in 2019 (based on preliminary figures from the GSO), while the industrial production index was only up 9.1%. Plus international visitors grew 16%. That’s a big jump and adds to the growth in services (tourists not only shop but they also stay in hotels, take tours, eat in restaurants etc.).

The last chart I want to leave you with is the one to the right. This shows the change in daily lifefrom having an evenly split economy to one where agriculture is much less important.

Employment in agriculture has fallen 30pp from almost 70% of total employment to less than 40%! In 27 years! Remember that the average age of the population is 30.5 years, which means that the majority of people have come to age in a period when agriculture is no longer the default job. But their parents and grandparents were almost certainly farmers and rural.

All of this means massive changes and restructuring. One of the major risks is that the people making decisions (many of whom are in their 50s or 60s or older). The president is 75. These leaders have lived through a massive change, but also, they grew up in a period when the economy was just completely different. Now this is true all over the world, but the change in Vietnam has been spectacular. It will be interesting if they can continue to make the right decisions, because the success so far has been tremendous.

Consumption by segment

I started to write something today, which I will probably come back to at some point, but I found some World Bank data that is extremely interesting.

Back in a prior life, when I was looking at Egypt, it was extremely hard to find out how much people were actually spending on goods and services. The only thing we had was a consumer survey that broke out the population by segment and how much they were spending on different things. It was commissioned by a mobile phone company, and it seemed legit, but I just wasn’t sure.

But now I found a real source: World Bank Global Consumption Database. The figures are estimates based on sample surveys. They do note that the higher segment may be based on a small sample size. But still, it

Some interesting charts:

Source: World Bank

Source; World Bank

Below, a couple of interesting points from this:

First, a caveat: this data is from 2010. GDP per capita has more than doubled in that time period. And the urban population had fallen more than 5pp by 2017 (and definitely more since then).

• As you can see in the chart above on the left, 53% of consumption is food and beverages (F&B). We’ve talked about this before: poor countries spend more on essentials like F&B than rich countries. It turns out that as countries get richer, they spend more on housing.

• We see this looking at the cross tabs. Rich people spend just 15% on F&B, and 58% on housing. This reverses for the lowest segment: 61% on F&B and 2% on housing.

• Based on this, most of the "higher” consumption segment is spending too much on housing. It should be something like a third of income.

• Consumption on education is 4%, and 3% on health. Transport is 7%, while energy is 6%. These seem low to me.

• The number of people in the ‘higher’ consumption segment is basically a rounding error. There are less than 40,000 of them, and they spend something like $223m in total ($5,636 on average).

• The average spending per person is low. GDP per capita was $1,318 in 2010. Consumption is less than that - just $359 for the lowest segment, $856 for the next, $2,154 for the middle, and $5,636 for the higher segment, as mentioned above.

• If I were a consumer good company, I would target the “low” consumption segment. It’s almost as big in total dollar terms as the lowest, despite being less than half as big in population. Also, they are easier to target, since more than half are in urban areas

• In 2020, the rural population made up 70% of the total at 60.5m people, while the urban was 26.4m. And urban people consume much more. The rural aspect probably explains more of housing spending. It’s rare that rural people would be paying for housing.

• Below, you can see the difference in spending by consumption segment.

Source: World Bank