A few more items on MWG

I just wanted to follow up on the MWG posts from last week and earlier this. Specifically, I want to look at capital efficiency and make sure that I’m not missing anything from the balance sheet side.

The funny thing is that I spent most of my professional life focused on the balance sheet, because I was looking at real estate, which is all about assets and how to fund those assets. Also leverage is super important. But when I look at consumer-facing companies, I look mostly at the income statement, like some sort of balance sheet-blindness.

Source: MWG, Vietecon.com

But as one investor told me, return on equity is the name of the game. If they have a high one, then it can justify a lot of sins.

So let’s look at MWG. There are a few things that I want to investigate.

First, is the company’s operations suffering from the massive growth that it is undertaking? Short answer no. Looking at the chart to the right, gross margins have improved, and so have operating margins. In 2016, operating margin was 4.5%, and in 2019 it was 4.9%. The trend is similar with net margins.

Source: MWG, Vietecon.com

Second, is MWG able to convert accounting profits to cash? The answer is mixed. For 2017 and 2018, the company’s net cash from operations was somewhat close to its operating profit, 95% and 60%, respectively. What that means is that it was able to produce a fair amount of cash, not just accounting profits. However, in 2016, the company actually had a negative figure for net cash from operations, and that was true in 2019 as well. In both cases, it was working capital that drove down cash. More about that below.

Third, how is MWG funding its stores expansion? Mostly from operations, but not always. This is very similar to above, in that for 2017 and 2018, the company had more than enough cash to fund its capex. For example, in 2018, the company threw off VND2.3tr operating cash, and it invested only VND1.5tr in new capex. It was similar in 2017, when operating cash was VND2.7tr, and the company only spent VND2.1tr on new stores. Of course, with negative operating cash in 2016 and 2019, cap ex needed to be funded. In both years, it was funded by debt.

Source: MWG, Vietecon.com

Fourth, how good is MWG at controlling working capital? Until 2019, alright. Let’s break it up into three main buckets: accounts receivable, accounts payable and inventory.

• Accounts receivable: Here the trend is MWG’s friend, in that days sales outstanding (DSOs) are actually falling from 7.5 days in 2016 to 6.0 in 2019. This means that the it only takes 6 days on average for the company to be paid for its sales.

• Accounts payables: Things are good here too. Days payable are rising, which is positive. You want to get paid on time (low DSOs) but then turn around and wait a bit to pay your suppliers. At MWG, the company pays its bills on average 45 days after receiving them. This is up from 33 days back in 2016. This may not be sustainable, and it is very unlikely that they will be able to increase it anymore. But if they just keep it at this level, they will be doing fine.

• Inventory: This is where it gets troublesome. Inventories are skyrocketing: from VND4.9tr in 2016 to VND25.7tr in 2019! That’s more than 5x, while sales are growing less than 4x in that same period [although growing that fast is crazy good]. Almost every category has gone up: electronic equipment, mobile phones. Plus the company added watches to the tune of VND573bn. The number of stores has increased a lot, and you have to fill them at the beginning, so it could be that initial stock. But it now takes 95 days for the inventory to turn over, or once a quarter. That’s way too high, especially for a company with 10% of its sales in very perishable groceries (although to be fair, most of the increase in inventory comes from nonperishables).

Source: MWG, Vietecon.com

This is my biggest concern over MWG: the increase in inventory is crazy. It grew VND8.4tr in 2019 alone, and all of that was in 4Q. There’s no real explanation in the financials, but maybe there will be something in the annual report.

Fifth, is debt climbing too quickly? Not really, but it’s complicated. Basically, the company’s debt to equity seems high at 1.2x debt-to-equity. Both equity and debt have been trending up, but debt really grew in 2019. However, when compared to EBITDA, it isn’t too bad. Debt-to-EBITDA is still 2.2x. But again, it comes back to that working capital. If working capital had been just a bit better, then the company wouldn’t have had to get so much new debt. But it did. This is a metric that I am going to watch closely, but I think that if working capital needs improve, then its very unlikely that the company will face stress around its debt. Let’s just hope COVID-19 doesn’t last too long!

Source: MWG, Vietecon.com

Finally, how does return on equity stack up? Very good. Basically, the company has amazing returns on equity (RoE): 36% for 2019. They have been falling, though. Back in 2016, RoE was 50%. That’s crazy high. Of course, a way to raise return on equity is to pay out dividends. Equity would fall, thereby raising RoE. Unfortunately, if you have cash needs, you can’t pay that dividend. And that gets us back to the increase in inventory.

The company is doing quite well at managing its growth, except for inventory. But I suspect that part of the increase in inventory was a one-time effect. I would have to do a bit more research to be sure. Unfortunately, while Tet sales were good, the company may end 1Q with high inventories as well, because of COVID-19. Ultimately, though, the company has the ability to get over this hiccup.

Bottom line, except for inventory, everything is going quite well. I haven’t changed my mind on MWG yet. Give me time!

Consensus holdings

One of the hardest things to learn about researching stocks is that a good stock call is against consensus. We talk about the wisdom of the crowds, but to make real money, you need to go against the crowd. Another hard thing to learn is that it doesn’t matter how good the company is, if it is too expensive, don’t buy it.

All of this is extremely hard if not impossible for the normal investor (like myself), that’s why I recommend just putting money in an index fund and forgetting it through the ups and downs. Twenty years later, you should have a nice nest egg.

Source; Vietstock.com.vn, Vietecon.com

It is actually kind of hard to find out the consensus. You can look at the list of companies by market cap, you can look at analyst recommendations, you could look at trading volume.

But I saw this article today on Vietstock, and I realized another good indication of consensus would be to look at what the “smart money” is holding, at least as of the end of February. So today we are analyzing the holdings of five funds with a collective investment of $2.9bn: Vietnam Holding, Tundra Vietnam, PYN Elite Fund, VOF (Vinacapital), VEIL (Dragon Capital).

Surprisingly, only five stocks that are really consensus among these five funds. For consensus, my cutoff is that at least three funds hold them. These are:

PNJ: Phu Nhuan, the jewelry company, which is owned by 4 funds. For Vietnam Holding, it is its largest asset.

MWG: Mobile World Group, which I like a lot and is also well held.

KDH: Khang Dien House, the real estate company focused mostly on HCMC.

HPG: Hoa Phat Group, which does steel and other pipes.

FPT: An IT company.

A few things that I found interesting:

Source: Vietecon.com

• There is very little that overlaps with the VNM ETF. For example, only Tundra holds Vingroup, which is the largest stock in the market, and VIC is just 3.9% of its overall fund. Tundra surprisingly owns Vinhomes, which is a subsidiary, so it is actually double investing in Vinhomes. It also owns Masan, which recently bought some of Vingroup’s assets. [I am on the record for liking Masan, but I am worried that my call might not work out.]

• For most funds, real estate is the biggest sector held. The only exception is PYN which holds 29% of its assets in financials, and only 6% in real estate.

• Industrials vary from 5% of holdings to 15%, with steal (Hoa Phat and Hoa Sen) well-represented.

• “Other” in the chart (above to the right) includes a fair amount of retail and self-manufacturing by retailers (like Phu Nhuan or Thien Long).

• I was also surprised by the love for a few ag companies: The Pan Group, Vinamilk, Quang Nai Sugar. Masan fits in here too.

I get flashbacks to my time in the Middle East, when there was pretty much the same mix. The only thing that it is really missing is telecoms, with the big three operators owned by the government.

Finally, I was really surprised by how small some of these companies are. Four of the companies that are held by at least 2 funds have a market cap of less than $1bn. That’s low. Vinhomes is the only company above $10bn held by at least 2 funds. More than 60% of the stocks held were below $2bn.

Owning stocks with smaller market cap isn’t that big a deal, but it gets harder as the fund gets larger. Say you have a $882m fund like VOF, then investing even 3.84% in QNS is riskier, because this equates to $34bn or 8% of the ownership of QNS. That’s a big bet and harder to get out of, if you wanted to.

I would say within a context of emerging markets overall, the holdings here would represent a clear bias to small cap stocks. Within the Vietnamese context, it still seems like fund managers (at least these 5) are willing to ignore the bigger stocks and go further down the market cap ladder to find value. Even for the biggest funds.

Some good news

The markets in Vietnam were mixed, while the US is up (it started out shaky but is now up almost 4% - yesterday was up and then way down, so I guess we don’t know until the market is closed).

But outside of the markets, there is some positive news coming out of Vietnam:

Source: General Statistics Office

First, the trade figures for the first two months of 2020 have come out, and exports are holding up pretty well. There is a bit of a trade deficit (almost $200m), but exports in February were actually up 26%, with the domestic sector up 30% and the FDI sector up 24%.

Out of the big items, these categories caught my eye:

• Crude oil was especially high at +30% yoy.

• Electronic goods rose 26.7%

• Phones were up only 2.3%, but were up 22% in February. The total number was especially high at almost $7bn.

• Textiles were disappointing, down 1.7% yoy.

• Agriculture was mixed, with most products down (aquatic products: -17.7%), but rice surprised up 20.5%

Second, there continues to be a big trade deficit with the US market, with exports of $9.8bn in the first two months of 2020, up 19.6%. Unfortunately imports were just $2.1bn, up a good 13.6%, but not closing the difference.

I say unfortunately, because the US is pressuring Vietnam to lower its trade deficit, as I have written about a few times (in November and September).

Now the Vietnamese government is taking more direct measures, promising to buy $3bn in farm goods. It doesn’t really solve the underlying trade deficit. It wouldn’t even close the $7.1bn trade deficit from the first two months of this year. Plus, these agricultural purchases are over 2 years. For all of 2019, the trade deficit was $55.8bn. That’s a big number to deal with.

But I still feel that this is a helpful step. I was talking to someone working on a deal between a US company and a Vietnamese company, and that person told me that the Vietnamese government is starting to allow more things like these purchases and potentially capital investments into the US, (I assume as long as these are tied to future imports).

I ultimately think that as long as Vietnam makes the right soothing sounds, the US government will be placated, as will Trump. Just give him something positive to take credit for.

Third, it looks like stimulus is real, with $1.16bn (VND27tr) pledged in the form of tax breaks, delayed tax payments, and reduction in land lease fees. As I have said before, this is good, but it would be better if the government directly gave cash to companies affected so that they can keep employing people and to stave off bankruptcy.

The situation continues to be difficult, especially for companies in tourism: “According to the Vietnam National Administration of Tourism, the total number of international visitors in February was 1.24 million, down 37.7 per cent compared to the previous month and 21.8 per cent year-on-year.”

Finally, it looks like COVID-19 is under control, at least according to the government. All 16 people that tested positive for the virus have recovered. If there are no new cases for a week, the government will no longer consider it an epidemic. It’s now an issue in the US, with more cases cropping up every day. I wonder if Vietnam will stop allowing Americans to visit.

Portfolio flows into Emerging Markets

Once again, I am surprised by the resilience of the markets to COVID-19. Of course there were some jitters last week: the S&P down 11%, Japan is down 12% since the outbreak started hurting stocks. Weirdly, the Shanghai index is only down 2% since Chinese New Year, while Vietnam is down 10% since Tet. [The Shanghai figure is crazy to me - the PMI is 37.5! Factories have been closed for over a month. I would think that the stock market would represent this somehow.] However, the central banks are stepping in, and there is hope that things will come back.

Source: IIF, chart by Vietecon.com

More importantly, we are still seeing pretty solid portfolio flows into emerging markets. On a net basis, inflows were positive $3.5bn in February, according to the IIF. That’s inflows. That’s in a time when everyone is scared of investing and the markets are crashing, yet February inflows weren’t that bad. The worst month was back in August, when equity flows fell $42bn. I can’t really remember why that was - general jitters over the US-Chinese trade war, probably.

A few interesting things about the data:

• The average in this sample is an equity inflow of $3.2bn and a debt inflow of $17.5bn, since December 2018.

• The standard deviation is almost double for equity (16.8) as for debt (8.6). Debt flows are less volatile, and more consistent.

• Debt flows have not been negative over the whole period. Looking back a bit farther, there are some periods when they have been negative, but it seems much less than equity. At least in this period.

• Equity flows can very quickly reverse. For example, in 2019, cumulative equity inflows reached $68.2bn in July, but then fell to $26.2bn after the outflow, and then never recovered their peaks.

Source: Vietnam Ministry of Investment & Planning

Of course, these figure are for all emerging markets. I also wanted to look at foreign direct investment in Vietnam (some of which is in equity markets but also in companies). This data shows a surprisingly similar story, with February figures low but not crazy.

In February, total FDI was $850m, which was not the worst February since 2014 (that would be February 2018), and well within the standard deviation for Februaries. Although looking at the chart to the right, you can see that the trend has generally been positive, and this is a pretty weak reading. It is the greatest decline m-o-m and y-o-y in February.

Ultimately, I think the reason why FDI continues to be relatively solid, despite much of the country being closed is because FDI is sticky. Samsung just cancelled the groundbreaking for its new $220m R&D center in Vietnam. But it is still investing. It just isn’t throwing a party. If lots of companies are like that, and also want to move away from China, it isn’t surprising that February FDI is solid.

We will have to see how March does.

MWG valuation

Following up on my post the other day about Mobile World Group (MWG), I wanted today to do a quick survey of some international retailers and see if we can gain any insight into MWG’s business and valuation by looking at them.

It took a while to put together the comp table at the bottom of the page, but I think it is extremely interesting. There is more work to do, but I think we can gleam a few insights from it:

• On an operation margin basis, the company is doing better than most everyone, except for Best Buy. When I talked about Nguyen Kim last week, I mentioned Best Buy and the success of its strategy to increase services revenue. Those revenues are stickier (customers go to Best Buy to buy a computer but they go back to Best Buy to get it un-virused, or when they accidentally erase everything on it). It is helping with their margins.

• We can say the same about net margins and EBITDA margins. MWG is above the average, especially if we take out Conn’s, which is a bit of an outlier.

• Importantly, all margins are very low. Software companies have amazing margins - MSFT has a 37% operating margin. Real estate companies also have very strong margins, but very high capital costs. Retailers generally have low margins, but high volumes and hopefully good returns on equity.

• MWG is actually somewhat expensive on a P/S basis. There’s really no good reason for that, except to say that MWG is quite high here, except for in comparison to Casey’s.

• However, in terms of P/E, the stock is cheap! Again, Conn’s is an outlier. If we excluded it, the average would go up to 14.7x, and MWG would look even better.

Overall, it appears that MWG looks especially attractive given that it is also growing revenues about 20% a year. One stock that is somewhat similar is Jarir (4190:AB), an electronics retailers in Saudi Arabia. It trades at 18x P/E with a 6% dividend and a profit margin of around 13%. But even Jarir isn’t growing as quickly as MWG.

I still want to look at a few things: Return on Equity, Return on Invested Capital and other balance sheet metrics (debt, etc). I also want to separate results of the grocery from the electronics stores (if possible) to see if that provides any insight.

Finally, I think it is so important to get a sense of how the store is seen on the ground. If there is buzz around it, do people want to go into stores, is it a fun experiences. These are things that are impossible to quantify but make a big difference. More on that later.

Source: Bloomberg, Company data, Yahoo Finance, Vietecon.com

MWG

Following up on my post yesterday, I wanted to look at MWG and see if the stock is worth investing in.

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

The stock hasn’t done all that well. It had a good run in 2016 and then a massive drop in May 2017 (but this is related to a dividend payment of 15% and a bonus share). It’s come back a bit, but never really advanced beyond (it has paid dividends throughout, although at relatively low yields - 1.5% for the latest).

The stock reached a high of VND128,000 back in late September and has fallen 15% since then. Not really due to COVID-19. In fact, today it was up 2%.

In contrast to the stock, operating trends have been very strong. Sales have been massive, mostly driven by large increase in stores.

Source: Company data, chart by Vietecon.com

Sales have increased 2.3x since 2016, and the company’s plan is for another 20% growth in 2020. Sales were up 21% in January, which is the busiest time of the year because of Tet.

Gross margin has also been increasing, despite an increased number of stores (which usually hurt margins as sales are weakest at opening). Margin has gone from 16.2% in 2016 to 19.1% in 2019, and the company expects it to increase again in 2020. Net margins also have grown, from 3.5% to 3.8%. In January they were as high as 4.4%, in line with what we saw in January 2019.

Source: Company data, chart by Vietecon.com

This revenue growth has been driven by opening more stores. You can see in the chart to the right that overall stores have increased 2.5x since 2016, despite a flat or falling number of TGDD stores, which sell only mobile phones. Many of these TGDD stores have been converted to DMX, the consumer electronics stores.

Basically, management has decided that it makes sense to have a much wider selection of products within the consumer electronics segment. It doesn’t seem to have hurt phone sales, which were up 10% in January 2020 (although for the year 2019, they were only up 2%). Remember that phones are very cyclical. New models really drive people to make purchases.

Source: company data, chart by vietecon.com

Of course, it could be that the company is just investing in a lot of stores, but that on a per-store basis, things aren’t doing that well. That odesn’t seem to be the place. It is a bit difficult to calculate real (meaning normalized) sales per store, but overall, it has been around VND33.8bn per store, or $1.5m. That has been all over the place - from VND39.6bn in 2018 (when the increase in sales wasn’t too great) to VND33.2bn in 2017, because of the big increase in DMX and BHX stores. Generally, BHX stores have lower sales, even those that have been around a while. But, looking at the chart to the left, it is generally trending up on an individual store basis.

So in terms of operations, MWG is killing it, especially compared to Nguyen Kim which has seen flat/falling sales and falling sales per store. MWG is very worried about online competitors, but 12.4% of its sales were online in 2019 or VND12.7tr, which MWG says makes it the biggest online retailer. Interestingly, at certain times (like before Tet), they actually pushed people into the stores. This is smart, if you have the sales people to upsell and form a relationship with people. It’s the Best Buy way, and it has been really successful.

Tomorrow, I want to look at valuations and how MWG compares to other retailers. The stock is trading at about 10.2x P/E for 2020, which seems quite low, especially given 26% growth in earnings. But more on that tomorrow.

The course of electronics retail in Vietnam

First, some good news. Schools will open again around March 15! Yay for the parents!

Second and the topic of the blog today: I saw some news today that Central Group had finally bought the final part of its share in Nguyen Kim (although it’s a little confusing - it has 100% of the retail subsidiary and only 81.53% of the parent). Oh, and it turns out that this is pretty old news - it happened back in June, but the story is from today, timed with Central Retail Group’s IPO.

Source: GSO, Deloitte, Statista

Anyway, I didn’t know the history of Nguyen Kim, the electronics store. It turns out that the company has not been able to keep up with its competition or the retail market as a whole, despite the massive growth in retail sales in Vietnam..

Usually, companies have to spend a fair amount of their time stealing market share to grow their revenues. But in Vietnam, with a fecund retail environment, just running in line with overall retail sales can be an effective model. You would still grow in the double digits.

Unfortunately for Nguyen Kim, it has not been able to do that. In fact, it barely seems to have grown at all. Back in 2014, it did about VND8.4tr ($420m) in sales. This is one of the last real figures we have. According to this report, the company averaged sales of VND9.3tr ($411m, less than previous because of a depreciating dong) on average from 2014-2016. Although this report says it had sales of just VND6.6tr ($292m) in 2015.

Then for 9M2019, the company revenue was approximately VND5.1bn ($220). If we assume that 30% of sales happen in 4Q (which might be a bit off, but is a good guess), the company probably will do only something like VND7.3tr ($315m) for the year.

Source: Company data. Note margins for DMX reflect overall MWG margins. Margin for Nguyen Kim is an estimate based on overall Central Retail Group margins.

To make a long story short: The company has seen declining sales over a long period, despite a massive increase in retail sales in the country. The company has around 60 stores (it’s actually kind of hard to get a specific number), while its main competitor, Dien May Xahn (DMX, like the rapper) has more than a 1,000, and it is only 9 years old.

DMX, which is owned by Mobile World Group (MWG) is killing Nguyen Kim. DMX had revenues of VND44tr in 9M2019. In January alone, it had VND7.9bn. MWG had a net margin of 3.9% in 9M, while Nguyen Kim was probably around 4% (my estimate based on overall margins for Central Retail Group).

Often, companies have lower margins as they grow, and higher margins when they stop investing. But that doesn’t seem to be the case for Nguyen Kim.

Consumer electronics and appliances is a tough business. Vingroup closed its Vinpro stores after investing a lot of money, including the acquisition of 200 Vien Thong A stores in 2018.

It will be interesting to see what Central Retail Group does now. They already had a lot of management control, but they might be willing to invest more, because they would reap all of the rewards. It’s hard to say.

Long term, I don’t see the sector getting any easier. Online will be increasingly important, and new online retailers usually have lots of venture capital money to spend on marketing incentives, making price competition extremely difficult. Both Nguyen Kim and DMX have online strategies, and it seems like DMX is doing alright (it’s hard to say for Nguyen Kim without have more data). Looking at BestBuy, it made a massive shift from selling goods to upselling services. That has really kept them in business and thriving.

COVID-19 Costs and potential bank impact

Vietnam continues to have the COVID-19 epidemic well in hand, with just 16 cases, all cured. This appears to have been helped by quarantines, school closures, not allowing cruise ships to dock, and flight cancellations. It is hard to prove, but it appears to have worked so far.

Interestingly, the virus appears to be popping up all over the world.

So while Vietnam has got a handle on it, we are starting to really get a sense of the economic impacts:

• The tourism sector is going to lose something like $7.7bn from the lack of tourists, according to state media.

• The timber sector exported $1bn to China alone in 2019 and imported almost $400 million (some of which were likely inputs into other products).

• Overall exports to China were $41bn in 2019, with another $7.2bn to Hong Kong. That’s almost $50bn, some of which are just not going to happen.

• Imports from China were $75bn, with another $1.3bn from Hong Kong.

• Exports to Japan and Korea were about $20bn each. Now Vietnam has stopped all flights to South Korea, and has decided to quarantine all people coming from Japan and South Korea.

• We talked about agriculture as well.

Overall, a former government official said that GDP growth could be 1 percentage point less. I haven’t done the full math, but I would say that was impressive. So many sectors of the economy are going to be impacted, and there is little that people or businesses can do about it.

Because of this, the government is starting to look at stimulus (we talked about the potential for stimulus for the tourism sector last Friday).

Source: World Bank, SBV, chart by Vietecon.com

Now the central bank has ordered banks to cut interest rates for firms in suffering from COVID-19. This story offers a bit more color and says it could also include deferred payments and keeping the companies in the “current debts” group. It will be interesting to see how this works. Questions:

• By my estimation, almost every company is at risk, so are interest rates everywhere going to decrease and all payments deferred?

• Will the government or the SBV compensate the banks for this, or will they have to take the cost on?

• What if companies can’t pay these lower interest payments? What if deferral of payments are still unlikely to make the debt viable in the long term? At what point do they then move them out of “current debts”? Right now, NPLs are similar to other ASEAN countries, but are much higher than developed countries.

Ultimately, unless the government steps in, this is bad news for the banks if they do offer better terms. At least the official statistics will be

The market is mostly shrugging the announcement off. It was up today, and banks are still up for the year, in many cases.

Textile companies (or anything but COVID-19)

Markets around the world are falling, 50,000 have been quarantined in Italy, Turkey shut its border to Iran, Trump forced the State department to repatriate Americans off the cruise ship stuck in Japan, which doubled the number of cases in the US. Basically, it’s the end of times!

Source: World Bank

But let’s talk about textiles. Actually, let’s talk about anything else besides COVID-19, and today that something is textiles.

See, I started thinking about textiles after writing about Cambodia (last Wednesday) and Vietnam’s textile exports. Textiles and garments are a big part of the economy, making up 16% of total merchandise exports. They disproportionately employee people, so probably more than 16% of the population works in or with textiles. A bigreason why people move from the countryside to urban areas is to get a job in a place like a textile factory.

But looking at the stock market, there really aren’t many large companies in the textile sector. Looking at the major companies listed in Vietnam, the largest is Vietnam National Textile & Garment Group (VGT), with a market cap of less than $200m. That’s one reason why there aren’t any Vietnamese companies in the VNM ETF that make textiles. There are three foreign companies, and they are definitely larger, but they aren’t that large. Eclat is the largest at $1.7bn market cap.

Beyond just side, the companies trade at very low P/E multiples. The average P/E multiple for the largest Vietnamese companies is just 5.9x, and that’s based on trailing earnings. The foreign companies trade much higher. But then again, they have much higher margins.

Source: Vietecon.com. Share prices and market cap are as of 24 Feb. 2020. *Market cap figures for the foreign companies are in billions of local currency (under Mkt Cap VNDbn). These three figures hadn’t published 2019 full results, so P/E and revenue growth reflect TTM for 2019.

More surprises: revenue growth is not that impressive. For the Vietnamese companies, average growth (2016-19) is just 12%, but the variation is wide from 1% to 35%. And operating margins are very low at 4%.

Source: WTO

My supposition is that the companies are ultimately too small to compete well. That means that they have to take what they can get, which means very low sales prices. They may also struggle to recruit workers, hurting their profits. This will likely only get worse as more companies compete for unskilled laborers.

Gross margins are oftentimes not above 10%, which means that they haven’t really vertically integrated, which would allow them to capture some of that margin from upstream. The export-import data seems to show this as well. Imports of textiles have increased basically in line with the increase in exports. Meaning that the raw materials needed to make cloths are being imported.

If this is true, a roll-up strategy might be interesting. As these companies gain scale, they would be better equipped to invest in more productive machinery, get bigger and better contracts and increase margins. And hopefully they could move up and down the value chain - meaning taking raw materials to make thread and cloth and therefore getting some of that margin. Vietnam really doesn’t have the raw material, so there might be a limit to how much profit they can eventually garner.

Source: WTO

Ultimately, it is hard to say if scale would be enough to fix weak margins in the sector. There aren’t that many large textile manufacturers globally. It may be that there isn’t much benefit to scale, and that the retailers will always go with the lowest cost producer. If so, then scale might not be that great, but it sure couldn’t hurt.

Overall, Vietnam depends heavily on textiles, but it is really not a great business. Exports in the sector are growing at the level of overall exports. So it will probably continue to be an important sector, but not one that will drive future export growth.

Metro, coronavirus, and

It’s Friday, and I am tired! It really hasn’t been that long of a week, but I’ve been careening from one end to the other, and I am ready for the weekend. But before, I wanted to update you on a few stories:

Source; Justin Main, @photified

Shrimp: An industry publication seconds my opinion that shrimp farmers should greatly benefit from the new EU-Vietnam trade deal. This is some positive news for Minh Phu (see yesterday’s post).

Saigon metro: The metro is progressing! I am very excited about this, because I think it is important for:

• Traffic: HCMC traffic is already bad. This should help. Also, it should lower traffic accidents, which improves health outcomes.

• Environment: Getting people out of cars and off mopeds is a good thing for pollution and climate change.

• Energy conservation: Again, getting people out of cars and mopeds helps reduce petrol use. That’s a good thing for a country that needs to massively increase power generation (see my final story below).

We still have more than a year to wait - it isn’t expected to be operational until year end 2021, but at least there is something to see.

COVID-19, tourism and stimulus: As I have talked about a fair amount, COVID-19 is hurting tourism in Vietnam. Flights have been cancelled, cruise ships have been turned away, and tourists are generally shunning Asia. This has resulted in a drastic drop off in bookings:

The number of bookings at three- to five-star hotels in HCMC has fallen by 50 percent after Tet (Lunar New Year) in late January, according to its Department of Tourism. Hotels serving Chinese-speaking tourists saw a drop of 70 percent, it said.

The government, at least in HCMC, is finally committing to stimulus. It’s hard to say what form the stimulus will take. It looks like it might just be marketing promotions, but I would prefer if the government just gave out cash payments in exchange for keeping people employed. That would probably be the most efficient stimulus, rather than tax abatements or whatever.

Lower airline fares (which have already happened) will probably help boost bookings, once (if) COVID-19 starts to dissipate. But until people no longer fear getting sick, there’s very little the government can do. If people are scared for their lives, they just aren’t going to make the trip. It’s not worth it. I was in Egypt after terrorist attacks, and the dearth of visitors at the pyramids was shocking.

Investments in energy needed: This is now a few days old, but since I write about energy a fair amount, I thought I should highlight it. The Politburo has committed to more than double power generation capacity this decade.

The Southeast Asian nation aims to boost capacity to 125-130 gigawatts (GW) by 2030, from about 54 GW now, the Communist Party’s powerful decision-making politburo said in a document this month.

In mixed news, it wants to increase renewables to 15-20% of total generation by 2030. I view this as mixed, because it is just so low. Renewables are arguably less expensive than other types of electricity generation, and they will only get better. Natural gas is inexpensive now, but Vietnam doesn’t have enough, so it will have to import lots of LNG, which ultimately may be more expensive than renewables.

Coal accounts for 38% of capacity now, and the government wants that percentage to fall.

Let’s hope that ultimately the government chooses to focus on renewables.

No matter which direction it goes in, the country will need massive investments in power generation over the next 10 years. If policy is calibrated correctly, the investment should be there. And by correct calibration, I mean reasonable feed-in tariffs!

Some bad news about Minh Phu

It doesn’t look good for Minh Phu, which just put out very disappointing earnings for the fourth quarter and full year of 2019.

Source: Minh Phu, chart by Vietecon.com

Revenues were flat for the year, but gross profit fell 24%. A big portion of that came in 4Q, when gross margin fell to 6.5%, down from 10.8% from 4Q2018. Overall gross margin in 2018 was 13%, which was already down from 17% in 2017. For 2019, it fell further to 9.9%.

The results aren’t really a surprise, since the company publishes a monthly export report that has shown pretty weak exports through the year. The reason is because of 1) disease in the fish farms and 2) higher raw material costs.

Source: Minh Phu, chart by Vietecon.com

It doesn’t help that the US government is investigating whether Minh Phu tried to evade anti-dumping taxes. Maybe Trump could tweet about it if they lose! That would be…bad.

Looking at the export data, the only destination where exports grew was Europe. I expect the company will be able to capitalize on that progress with the new EU-Vietnam trade treaty. Tariffs on non-processed shrimp will go to zero at the start.

Source: Minh Phu, chart by Vietecon.com

That could be a really big boost for Minh Phu, if it can gets its farms back to working. But even if the farms start to be more productive, the company will still face those higher input costs.

The good news is that other costs are under control: SG&A was VND1.06tr, down from VND1.09tr. Finance costs were also lower, because the company paid down debt. Ultimately, while EBITDA fell to VND795bn, that was almost double 2017, albeit down 38% from 2018.

Interestingly, the company’s ROE isn’t that much worse than it was in 2017 and is better than 2016 or 2015. That’s despite a massive decline in profits. While equity grew more than a third, earnings are still much higher than they were previously.

Stepping back, Minh Phu’s stock has cratered over the past year. But it looks kind of attractive, trading at just 5.1x P/E. And cash flow is solid as shown by an EV/EBITDA of 6.5x.

Three things need to happen for the stock to really work, in order of what’s in management’s control:

1. The company needs to get a hold on disease. That should help both revenues and costs.

2. Lower cost of goods. This is mostly out of the company’s hands and will probably be an issue that they just have to work through.

3. Avoid being subject to US tariffs! Not much they can do about this. Exports to the US fell in value and as a percentage of Minh Phu’s exports from 41% to 38% of total export value. But that’s still a lot to replace. It seems unlikely that exports to the EU would overtake this - it would have to increase more than 3x. Ouch.

The stock looks cheap. It has good backers. If it can avoid problems with the US authorities, I think it is worth looking at. Let’s see what happens.

Labor costs and Cambodia

Labor costs and scarcity of labor in Vietnam

I have written about this a bunch of times so far over the past year (and yes, I have been doing this for a year now - Happy Birthday to me!): labor costs in Vietnam are higher than people expect and could very well hurt its ability to compete for certain types of low-cost manufacturing.

The reason I bring this up again is because there are a few articles out talking about higher labor costs. This is a long term trend and doesn’t count labor issues around COVID-19, which has had factories stop work, Chinese workers quarantined, and supply issues with materials coming from China).

The first article is from Furniture Today and talks about minimum order quantities (MOQ) being raised. The reason the author gives is because of higher labor costs and turnover. So the manufacturers are trying to be much more efficient with their labor. It looks like MOQs have doubled or more: container orders form 6 to 12, chairs from 250 to 600.

Sources say the situation has gotten more noticeable in the past several months as Vietnam factories not only face worker turnover, but also have to pay more to recruit and to keep the workers they already have…a host of industries are competing for skilled — and even unskilled — workers.

The second article is from a Vietnamese newspaper that reports higher wages and easier criteria for works in Dong Nai Province (northeast of HCMC). In one case, the basic salary is VND4.7m ($204) per month, with bonuses, travel, annual salary increases. The only requirement is literacy. And there are 90-100,000 people that need to be employed in the province, potentially at this level.

SOURCE: WORLD BANK. (PG 22)

This is good news! It is great that more people are getting paid. This puts the salary well above the minimum (VND4.18m for HCMC and Hanoi, lower for other areas). The only concern is that manufacturers will decide that the prices are too high, especially if productivity isn’t there.

But, so far, it is. At least according to World Bank data (we talked about this here). It isn’t as good as China, but among its competitors ex-China, it is doing pretty well. Of course, Malaysia is up there, but the population just isn’t that great. Philippines are a bigger risk, but the government isn’t as attractive (read: stable) as Vietnam.

I think Vietnam will be safe for a while, especially given COVID-19 and my expectation that manufacturers will be trying to move some production out of China. The US-China trade war still at the hot truce level probably helps too.

Source: Vietnam Customs, chart by Vietecon.com

Cambodia

This article from Moody’s about Cambodia’s problems with the EU caught my eye, and I think it will have a ripple effect on Vietnam.

Basic info, the EU isn’t happy about Cambodia’s government. It currently allows the country to export mostly tariff free under its status as a “least developed” country. This status will be partially suspended, so higher tariffs (averaging 12% for garments and 16% for footware) will return in August 2020, if ratified by the EU Parliament and Council.

Just some stats here:

• Vietnam exports $4.4bn to Cambodia in 2019.

• Total Vietnamese exports were $264bn, so it is fairly small.

• 20% of exports were textiles, garments and raw materials for textiles.

• Garments and textiles account for 11% of Cambodia’s GDP in 2018.

• 45% of Cambodia’s exports are to the EU, and of these, 87% are garments and footwear, also 2018. This represents more than $5bn in exports from Cambodia.

Luckily, not all tariffs will be imposed, so it looks like it will only hit $1.3bn-worth of goods. That’s not too bad. But it will probably hurt some exports, and the government, because of international and domestic pressure, is also raising minimum wages to $250 per month by 2023, up from $190 in late 2019. As Moody’s reports, it will likely make some foreign investors shy away from investing.

This is bad for Cambodia, and somewhat bad for Vietnam, at least its textile business. My assumption here is that Vietnam provides some raw materials to the Cambodian producers, given the trade statistics.

So, while it isn’t a big deal, it is still something that Vietnam should watch out for. Ultimately, a growing Cambodia is good for Vietnam. And Cambodia will still grow, even with these tariffs. But maybe not as much.

Agricultural issues

My eye was caught by three stories that are confusing to me:

1) This story about dragon fruit prices moving from VND5,000/kg to VND40,000 in just a few days. It seems to be something to do with some Chinese warehouses. The key is that this just returns dragon fruit prices back to pre-COVID-19 levels.

2) Chicken prices have fallen to VND9-10,000 per kg, with reports of farmers losing VND30,000 per head.

3) Durian prices have fallen significantly wholesale, but because transport is difficult, retail prices are still high.

4) Lobsters and king crab prices have fallen. Again, because of COVID-19.

Maybe it’s not so confusing. Basically, COVID-19 is causing all sorts of distortion in the market, with prices falling hurting farmers, but retail prices sometimes sticky because of transportation issues.

I am worried, particularly about chicken prices, given another outbreak of avian flu in Tra Vinh province.

The number of poultry died or culled has risen to more than 55,000, the agency reported quoting the country's Department of Animal Health under the Ministry of Agriculture and Rural Development. In 2019, bird flu outbreak was detected in 41 districts of 24 provinces and cities nationwide with a total of more than 133,000 culled, according to the country's Ministry of Agriculture and Rural Development.

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

This is a regular occurrence, and so far it isn’t as bad as last year, but it is very early. Plus, there weren’t other health issues out there last year. We have COVID-19, swine flu, avian flu, plus all of the regular problems.

Agriculture is always difficult. I believe that it is important that countries are somewhat self-sufficient. But that comes at a cost to productivity, to prices and to farmers. It doesn’t help that volatility is high, and the goods are generally perishable, meaning there is little wiggle room - it has to go right as planned. Finally, even if farmers are continuously increasing productivity, profits can fall.

For example, the Vietnam Food Association expects rice exports to grow again this year to 6.75m tons, up 6%. This would be another year of greater productity: exports were up 4% in tonnage terms in 2019. But prices were down so much more than that, and revenue dropped 8%+. I am worried about that again this year, given that the article linked to above mentions that "Vietnamese rice is more competitive in terms of prices.” That’s code for “our prices are going to fall again.” Let’s hope the productivity means better margins, which can help offset the price decline.

China is having problems, but I really think that Vietnam is going to have its own problems. It probably won’t be manufacturing, which is getting a boost from China being out of the game. But for farming, for tourism, for other services, the country might face a lot of challenges. It will be interesting to see how the government steps in, as there has been talk of stimulus.

Vietnam takes place on National Security Council

This article reminded me that Vietnam took its rotating place on the UN National Security Council this year. It’s going to be a busy diplomatic year for Vietnam, with this and the ASEAN summit in the summer.

Vietnam has been trying to raise its diplomatic profile for a while now, so these two events will help further along the cause.

Source: Frederic Koeberl (@internetztube)

The risk that Vietnam faces is that it will now have to take sides on a number of positions that it was able to skirt previously. If the US wants something but China doesn’t, it has to now make a decision to side with one or the other. It had to do this with Iran, as this article talks about.

Ultimately, though, this sort of diplomacy are just what countries have to do as they get more important.

Surprisingly, the UN hasn’t said much about COVID-19, which is probably the biggest national security issue happening right now. It has basically left it up to the WHO, which has mostly left it to the Chinese authorities, as far as I can see.

Not to get too off-track, but the weird thing about the market in Vietnam is that it hasn’t performed that poorly. The HCMC Exchange Index (VNINDEX) is down 5%, but all of that decline happened in the first two days the market was open. The Hanoi Exchange Index (VHINDEX) is actually up 3%. I am sure that is partially due to the different mix of companies on the exchanges, but it still seems crazy to me.

Vietecon.com will be off on Monday but will be back to its normal updates on Tuesday.

EU Trade Deal Signed; Town Quarantined

Two quick stories today:

The EU ratified the free trade agreement with Vietnam (EVFTA).

This leaves just one last hurdle - ratification by the Vietnam Assembly. A few things about this:

SOURCE: VIETNAMESE CUSTOMS, CHARTS BY VIETECON.COM

• Tariffs will start to trend down, with 65% of all products becoming tariff free this year. The rest over a 10 year time frame. Unfortunately, wine won’t come down for a while!

• “As per the Ministry of Planning and Investment, the FTA is expected to help increase Vietnam’s GDP by 4.6 percent and its exports to the EU by 42.7 percent by 2025. While the European Commission has forecast the EU’s GDP to increase by US$29.5 billion by 2035.”

• These economic gains are fairly minimal (remember that the country is growing almost 7% a year, so adding 4.6% growth to that over 5 years isn’t that exciting), but the export gains are sizeable. I do wonder if imports will eat into that, as the Vietnamese get richer and are interested in buying high quality goods from Europe.

• The UK is currently included in this FTA, I assume, but by the end of the year, it will be out. This deal took forever to do, and while the UK-VFTA will probably go faster, it won’t be immediate. The UK is the 9th largest export market for Vietnam (2019) at $5.8bn. This is more a missed opportunity than anything else, for both Vietnam and the UK.

• As part of the FTA, there is an investment protection agreement, which was also passed by the EU parliament. But it actually has to be passed by all the EU member states before it can ratified. So we are unlikely to see that go into effect for a while.

• The Deputy Minister of Industry and Trade says that the agreement can take effect as soon as July 1.

Vietnam locks down a whole village over COVID-19

The authorities have quarantined a whole village (Son Loi commune) in Vinh Phuc province. It’s close to Hanoi, but also not that far from the Chinese border. Six cases of COVID-19 were found in the village, and so the government just shut it down.

The quarantine will be in place for 20 days.

I don’t have much to say about this except that I feel for the 10,000 people stuck in a town with COVID-19 floating around.

Also comment: the stock markets are doing fine, despite the virus outbreak. This seems crazy to me. I just think that the impact is going to be much more severe than the markets are pricing in.

Take China: Consensus is for 5.8% real GDP growth this year, down from the previous estimate of 5.9% last month. Only a 10bp decrease, despite the country basically being closed for a month. You would think it would be at least 1/12th of the growth figure. And the government still vows to meet its about 6% goal for the year. This seems highly unlikely, unless there is a massive stimulus when the virus is contained.

Sure, the long term impact will likely be minimal, but in the short term, lots of companies and consumers are going to be stressed. There is this stat that 60% of American millennials don’t have enough money to cover a $1,000 emergency. Sure, the Chinese are better at saving than American kids, but some of them must really be hurting now. How do they pay for food? Rent? Buy things? If no one is buying anything, then there can’t be GDP.

To be fair, SARS didn’t really affect the Chinese economy, at all. You can’t even see it in the chart of Chinese economic growth. Maybe COVID-19 will have the same non-impact.

Anyway, I hope that Vietnam is able to contain the virus. And if it does, then in the medium-term it might get a pop from manufacturers diversifying away from China.

Update on LMH, a look at ACM

I guess this is just a market blog at this point, which I don’t really want it to be. But I thought I should follow up on my early post from last week (Feb. 5).

LMH: It turns out that was the day that big shareholders in LMH sold their shares. In total, they sold more than 17% of the total shareholding. No wonder the stock is down more than 70% over the past year. When I wrote about it on Feb. 5th, the stock was down 25 sessions in a row, and it seems like the company’s transition from petrol station owner to real estate and renewables wasn’t really working.

Now, it seems like management has given up on the transition, at least given their holdings. Not counted in those shares below is another 1.6m shares sold by the Chairman and two board members. So in total, it’s probably more like 24% of all stocks were sold.

Source: Vietstock.com.vn

It’s hard to touch this stock unless you could come in and buy out the company entirely.

However, there are a few catalysts that could move the stock:

• Sale of Manhattan Tower project - this is a project in Hanoi that has had lots of issues because of a not great partner. It looks like the partner stopped paying the contractor, and so the contractor stopped working.

• Some announcement on progress at the other land plots the company has.

• Better results from its petrol stations or progress on the renewables side.

In the near term, it looks like the sale of the Manhattan project is the one that could happen soon-ish. Let’s hope it does. But I am still worried that investors have lost total confidence in management at this point. Hell, management appears to have lost total confidence in management.

It would be better if someone came in and bought the whole company. I would recommend them to do the following: refocus on the assets the company already has, stop the transition to renewables, grow sales at the petrol stations, sell the Manhattan project (although I am worried that the partner might have already spent all of the customer deposits), and either invest in the new land projects or just sell them. Then we might get a real price for the stock.

It actually isn’t that expensive at VND66bn, or $2.9m. I am surprised competitors don’t start sniffing around at it.

ACM: Another stock I am looking at because it just seems crazy to me is A Cuong Mineral Group (ACM). It reported net profit of VND7bn in 4Q2019, on no revenue. The profit was from the reversal of some bad debts - so it looks like it is getting some payment.

The bigger issue is that the company didn’t have revenue because it wasn’t able to mine, which is basically its sole reason for existing.

For the year, despite falling revenues (VND15bn, down 22%) and weak gross margin (10%, compared to 33% in 2018), the company barely squeaked by with a profit of VND0.2bn. Last year, the company had a big loss of VND4.3bn.

So that all seems pretty straightforward. Company can’t mine, so it got no minerals to sell (copper mostly in this case). But it looks like now it has approval to start mining again, although the market doesn’t buy it.

What it does have is very high equity: VND429bn ($18.6m) with assets of VND580bn, and liabilities of VND151bn. The stock has a market cap of just VND31bn, which means that it is trading at 0.07x P/B.

Source: Vietecon.com

Clearly, the company has issues. But it has assets. If you could just sell some of those assets, you could probably make some good money. Let’s say you were able to sell all of the assets for 50% of their value. That would give you cash of VND290bn. Then you close out all of the liabilites of VND151bn. That leaves you with VND139bn. Let’s say you also have to pay for laid off workers, set aside money for environmental issues, and other things like that to the tune of VND70bn (half of your cash). You would still have a profit of VND38bn or so. That would be a nice return on an investment of VND31bn.

Plus, the company has already written down a fair amount of receivables (VND122bn) that are never going to be collected (provisions for bad debts: VND81bn). And hey, you might get some of those back - the company did get VND7.9bn in 2019.

This is another stock that I am going to watch. If you could get a sense of when mining would come back and how real those bad debt provisions are, you could make so much money. Well, work to do…

A close look at VRE

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

VRE reported a few days ago, and I wanted to take a second and look at the company. It is in my old sector (I covered real estate for years, so I feel like I have a sense of how the companies should look), and the stock has had weird moves.

Over the past two years, it fell a lot: -39%. Although over the past year, it was up a little: +6%. Basically it has been around VND32,000 with moves around that for the past year. It’s just not been an exciting stock despite the excitement around Vietnam’s retail sector.

Source: VRE, chart by Vietecon.com.

But as a company, it’s pretty exciting. Just in 2019, revenues from leasing grew 27% with a CAGR of 29% since 2014. It’s been amazing. Just in the past two years, leasing revenues have grown 57%. Leasing net operating income (NOI - which is basically operational earnings from leasing, not counting depreciation) has been growing. NOI margin was 70.6% in 2019, up from 68% in 2014. And it’s been a pretty steady trend up.

The balance sheet isn’t too bad either with net debt-to-equity of 4.9% as of YE2019 (the company had net cash at YE2018, which is generally negative for a real estate company - some leverage can help goose equity returns).

Equity fell and net cash turned into net debt in 2019 because of two things: 1) a VND2.45tr dividend, and 2) a buyback of 56.5m, or VND1.95bn. So in total, the company returned VND4.4tr to shareholders, which is about a 6% yield in total.

Even this aggressive returning of cash to shareholders didn’t help the stock, and I think there are is one main reason for that: it looks so expensive at first blush! P/E is 25x (trailing), and P/B is 2.6x.

For P/B, as we have talked about before, it looks expensive because all assets are marked at cost. That’s not really fair, because things like malls are probably worth more, and that should be reflected.

I ran a quick scenario analysis to look at the potential book value of the company if all we did was update the valuation of investment properties.

A few assumptions:

Source: Vietecon.com

• All other assets are unchanged on the balance sheet. This is probably pretty conservative. Liabilities are probably not going to be worth more than what they are listed at. And it is conservative with other fixed assets, which may be worth more now. Receivables are a big question - because hopefully the company is using a reasonable net figure.

• We assume that the caprate is somewhere between 7% (low, resulting in a high value) and 11% (high, resulting in a low value). The formula for caprate is NOI/asset value. So to find the asset value, you take NOI/caprate.

These assumptions result in a price-to-revalued book (or let’s call it P/NAV) of between 1.0x to 1.6x, well below the 2.6x reported value.

Unfortunately, it isn’t that cheap. Should VRE be trading above its Net Asset Value (NAV)? Unless we used a caprate below 7%, the company would be trading above its NAV (which is what 1.02x P/B implies). And that’s a pretty aggressive caprate for a company in Vietnam.

Of course, this is all backwards looking. Let’s make some quick assumptions:

• NOI grows by another 20% to VND6tr in 2020..

• Investment property costs grow by just VND2tr to VND30tr.

• The caprate range stays at 7-11%.

Our new assumptions get us to a forward P/NAV of 0.69x to 0.98x. That doesn’t really take into account any of the sales properties they are doing (things like land and inventories should be written up as well). And the 20% growth in NOI is pretty conservative, given the company opened 10 malls in 2H2019, or 15% additional malls. There are new malls coming in 2020 too, and leases are likely to increase.

Of course, there are some headwinds around VinPro stores closing (2.4% of VRE revenue). The company says this will actually result in higher prices, but we will have to see. Plus, coronavirus may hurt retail, if people stop going to malls.

But ultimately, the stock seems fairly cheap right now, at least on a forward P/NAV basis. It might be hard to buy at this exact moment, but it is is definitely something to watch. It dropped below VND29,000 a few days ago, and that just is crazy cheap. At that price, it would be trading below forward NAV using just a 9% caprate.

I would probably feel pretty comfortable about buying the stock and waiting for it to grow over time, plus there is a very good chance that dividends will help support returns over time, especially as the company gets bigger and has less need for new properties.

Biomass, traffic and Brit robs Saigon convenience store

three disparate stories today that caught my eye.

The first is that there is a draft of new biomass generation feed-in tariffs (FiT):

This is sort of old news, but I haven’t written about it yet. And it caught my eye because I was talking to someone yesterday that knew someone trying to innovate in biomass. Maybe Vietnam would be a good location for that, given the new tariffs.

Source: BP, government targets

• For combined heat and power (CHP) the tariffs is increased to 6.77 US cent per kWh. That’s up from 5.8 cents previously, for a 17% increase.

• Other biomass projects get a FiT of 8.47 cents.

This compares to the updated draft solar tariffs of 7.09 cents per kWh for ground solar (floating is 7.69 cents). Rooftop solar is much higher at 9.35 cents, as we wrote about the other day.

Overall, though, this is a positive move. Right now, there are only 10 biomass projects, all around sugar mills (using the waste). The government wants to provide incentives for more construction. It is targeting to have more than 2% of electricity generation to come from biomass by 2030.

Second, traffic deaths are falling.

January traffic accident figures are out, and they are pretty good. We have talked before about the new drunk driving laws, and they seem to be working.

• Traffic accidents: -14.9%

• Traffic deaths: -18.9%

• Severe injuries from traffic accidents: -14.9%

• Slight injuries: -14.8%

The almost 20% drop in deaths is amazing, although the number is still high at 591 from 1,300 accidents. If this continues, the trend will be positive, meaning fewer accidents, deaths and injuries than in 2019.

In HCMC, deaths were actually down by almost a third over Tet.

Third, Brits are coming to Vietnam to rob convenience stores.

Actually, I am overstating things here, but a Brit did rob a convenience store. It seems so weird to me, because if he robbed a convenience store in the UK, we would probably have made off with so much more money!

He only got VND3m ($128), which is not much but actually a bit more than I expected. Anyway, he was arrested, and his life is going to be so much worse than if he hadn’t robbed the store, even if he was broke. Poor dumb man making very bad life decisions.

Friday roundup

I am proud to say that I was able to write about something besides the coronavirus for two days, but I have to include it in my Friday roundup:

1) There are now 12 coronavirus cases in Vietnam, as of yesterday, which isn’t too bad. But I expect this understates the real number, and it will continue to rise.

In the meantime, schools were shut last week and will probably be again this week. Plane flights are cancelled, and the border is mostly shut.

That has affected companies in Vietnam that can’t get supplies, as reported here. This is going to have a big impact on Vietnam’s economy:

Although China has largely weathered Trump’s trade war, many economists expect its annual growth to slump to below 4 percent for the first quarter as services halt and consumers avoid going out due to contagion fears.

The coronavirus itself isn’t hurting the economy. It is actually the efforts to limit the coronavirus that is hurting the economy. If there were a vaccine or a cure, then it wouldn’t be that big a deal.

2) Vietnam introduced hefty fines for fake news. That makes me, as a blogger, worried. I try very hard to get all my stories correct, but I do make mistakes. I correct them, but that might not be enough here. Plus I have opinions. A writer without opinions is kind of useless, even for an “objective” journalist. Even the most objective journalist needs to contextualize things, and adding context takes judgement and opinions.

Of course, I agree with why they are doing it: there is “fake news” [I must say Trump was a genius for naming this]. In Vietnam, this new law is meant to stop rumors and misinformation spreading about the coronavirus. In the US we have seen horror stories about anti-vaccine “news” that led to a measles outbreak and this horrifying story about a woman who wouldn’t buy or give her child Tamiflu, guided by an anti-vaccine facebook group. The child died.

But I am worried that the authorities will be heavy-handed in applying this new law and round up people with legitimate opinions. This is bad for the government and the country. Better to have open conversations about big, contentious issues.

3) Rooftop solar got a boost a few weeks ago, but the story might have been buried under all of the other things happening.

Following recommendations by the Ministry of Industry and Trade, Vietnam's power utility Electricity of Vietnam (EVN) has agreed to maintain the current feed-in tariffs for solar rooftop installations at US$9.35c/kWh until 2021, in order to encourage solar development.

That’s a very good price, and should help support new development.

4) The country is trying to move back to bicycle mobility. As a somewhat avid bicyclist, this is great news. Like in many major western cities, people will be able to rent bikes and drop them off all around time. And there will also be dedicated bike lanes. My view is that unless the bike lanes can be truly protected from the rest of the traffic, HCMC won’t be able to promote bicycles successfully. It’s just too scary, with motorbikes and cars. But maybe that’s just scaredy-cat me.

5) Business households are not incorporating. HCMC’s government has trying to get family business to incorporate for a few years. It hasn’t worked, with the numbers falling annually. That’s because it is an extremely hard sell. There are tax and reporting requirements that no one wants. Unless fines get big or the benefits get bigger, I just don’t see this happening.

6) There are a bunch of infrastructure projects in HCMC now (here and here):

• Antiflooding project: Total cost of VND10tr ($431m), this is a big one and has been delayed. The city hasn’t handed over the final plots of land to the contractor yet, so we will see when this is finished.

• Four arterial roads in Thu Thiem: This is another big project costing VND8.2tr ($354m). This is centrally located and will have a major impact on the center of the city.

• Thu Thiem Bridge 2: This will connect Thu Thiem to District 1 at a cost of VND4.26tr ($184m). More land issues here. So I expect this will be delayed a bit.

• New Eastern bus station: Total cost is VND4tr ($173m). It will have capacity for 7 million passengers. This should be opening soon. It may have to wait on…

• Flyover in front of the new Mien Dong (Eastern) bus station in District 9: Estimated to cost VND437bn ($19m), it will go out for bid this year.

• An Suong tunnel: It’s halfway built, and the total cost is VND514bn ($22m). It should help traffic to the southwest of the city.

• Intersection at Nguyen Van Linh-Nguyen Huu Tho crossroads in District 7: This has been partially approved with a budget of VND830bn ($36m).

Just adding these up, it is a total value of $1.2bn, and that definitely undercounts just what is in these two articles (other roads are mentioned without price tags).

My opinion is that if the central government is worried about the coronavirus’ impact on economic growth, it should speed up this infrastructure spending. In Western countries, the economic payoff of new infrastructure is not as great, because all of the important roads have been built. But in Vietnam, every government dollar spent on infrastructure has a big multiplier, because make transport and logistics so much more efficient. Same with trains, buses, airports.

Let’s hope both that the coronavirus is ultimately controlled without too much damage and that the government invests in this infrastructure.

Novaland

Continuing my survey of recent stock market news, today I want to talk about Novaland (NVL). A few things:

Share purchases: The reason I was interested was because the Chairman of Novaland announced he would buy 10m shares, which is a good amount. It equates to VND530tr (USD23m) at current prices, or about 1% of the market cap. He will own 20.8% at the end of this. Usually the company buys back shares to juice the price, but this is kind of second best, I guess? Maybe?

Source: novaland, chart by vietecon.com

Fewer handovers: We have talked before about the difficulties real estate companies are undergoing because of the corruption cases that have ensnared land deals. Lots of local governments have been slow-rolling approvals, in fear of coming under scrutiny, resulting in delays for companies. For Novaland, it handed over fewer units in 2019 than 2018 because of these legal delays. As long as the handovers eventually happen, this is only a small hiccup and shouldn’t matter that much

Legal delays result in emergency request: But these delays are getting really long and are really hurting companies. NVL sent an emergency request to get its Binh Khanh Residential Area Project approved. NVL has invested VND6tr ($261m) in the project so far, and it is kind of stuck. That hurts margins (there are costs to keep the project going) and hurts returns (because they are over a longer period).

Because of the delays, revenue in 2019 was down 29% to VND10.9tr, with 3,468 units handed over. That’s an average price of VND3.2bn ($137,042) per unit. Gross profit was VND3.15tr, for a margin of 29%. I am kind of surprised that this isn’t higher. It was 34% in 2018.

Underlying operating results were significantly worse in 2019. While net profit was similar to 2019 at VND3.3tr, revenues were higher at VND15tr, and gross profit was VND5.2tr for a 34% gross margin. Operating profit in 2018 was more than double at VND4.4tr.

But the company continues to invest. Total assets rose 30% to VND90tr. Equity grew to VND24.5tr from VND20.0tr. The current book value implies a P/B of 2.1x. I suspect that a lot of their land/units are at cost, which may mean that they don’t reflect the true value. If we wrote them up, then equity would increase, and P/B would fall. Having said that, 2.1x is high, even for a real estate developer, as we talked with Vinhome.

Borrowings reached VND34.6tr, but net debt was VND28.1tr or 1.1x D/E. Again, quite high, but if Equity was written up, then it wouldn’t look as bad.

Income was VND3.4bn, helped by some bargain gains on purchases that amounted to VND3.7bn. So basically, the company lost money, if these gains weren’t counted.

Bargain gains potentially show good acquisition skills: These bargain gains happened because the company made a number of acquisitions for prices that were below the fair value of the assets. The difference is recorded as an immediate gain, but it doesn’t really speak to strong operations. It does, however, mean that the company is very good at acquiring. Of the 9 acquisitions detailed in their 2019 financial statements, 6 cost less than fair value for a total bargain gain of VND3.7bn. For the three that were done above fair value, goodwill amounted to VND1.3bn.

To break it down a bit more, the company had net cash outflows of VND13.9tr for these 9 acquisitions. For this money, it bought assets (mostly inventory) worth VND16.2bn. Inventory is held at the lower of cost or net realizable value. Because the inventory is going to be sold for more than cost, at the acquisition, the company can mark it up to the net realizable value. But that only happens at acquisitions. The rest of NVL’s inventory is marked at cost, and that’s why I said that the equity value of NVL is probably too low.

The weird thing is that the seller also knows that their projects are worth more than cost, so it was surprising that NVL was able to buy them for less than fair value. I don’t have any great insight into how it happened. Maybe the companies needed cash, or they thought that NVL could get more out of the assets, and so sold them higher than they would be able to sell them. I would want to see more on these transactions to really count them as great wins for NVL. Real estate, as a sector, has a history of complex transactions between closely-linked entities that look too good to be true.

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

Despite the strong acquisitions, the stock hasn’t performed. I am going to say something kinda stupid here, but the stock chart basically seems to be incorporating these weak results pretty fairly. Basically, it’s been trending down, which makes sense as delays result in lower profits for the company.

The stock is trading at 15x P/E, and we talked about the high-ish P/B of 2.1, so it doesn’t look like a true value stock right now. And the 2019 profit figure was goosed by the bargain gain, so a true P/E is probably worse. But it will probably bounce back this year, if the company is able to handover lots of units.

Finally, going back to the share purchases, they may help the stock, although the announcement didn’t do much, so I wouldn’t get too excited…