Vietnam: Hunting Asia’s last tiger

Merrill Lynch estimates that $1 billion of capital has already been raised by Vietnam country funds in 2006 and expects another $1 billion by the end of the year (see table at end of story).

The latest manager on the road is Saigon-based PXP Vietnam Asset Management (PXP), which aims to close its third fund, Vietnam Lotus Fund, by the end of November. PXP is targeting $100 million to add to the $115 million it already manages and is likely to get commitments well above that.

“We haven’t asked for any commitments yet,” says Kevin Snowball, director and co-founder of PXP, “but we’re pretty sure we’ll be fully committed.”

Rapid market growth

That is not surprising given the speed with which Vietnam’s domestic stock market has moved. From a capitalization of some $500 million at the start of 2006, the market is now at about $3.3 billion and has increased more than 82% in the 12 months to September. By comparison, PXP’s flagship Vietnam Fund increased 90.11% over the same period.

Most practitioners expect the value of the market to have grown to as much as $5 billion by the year-end. Average daily turnover has increased in 2006 from a tiny $700,000 to a more respectable $10 million, says PXP.

The government’s official target is to reach $16 billion capitalization by 2010, about 15% of GDP. There is every sign of that target being achieved, for several reasons.

The imminent expiry of two-year tax incentives for listed companies, scheduled for the end of December and now rumoured to be postponed until mid 2007, has led to a stampede of companies seeking to list before the expiry. Snowball reckons that as many as 30 additional companies could come to market before the year-end, boosting capitalization and increasing the breadth and depth of the market.

The tax change is also likely to presage the start of the listing of many of the large state-owned enterprises, including oil and gas company Petrovietnam, telecoms businesses Mobifone and Vinaphone, several large banks including Vietcombank and BIDV, and utilities, mining and food and beverage businesses.

The government is also widely expected to remove altogether from non-sensitive stocks the foreign holding ceiling, which is stuck at 49%. Analysts predict that this change will come by the first quarter of 2007 at the latest and will help to increase the pool of available equity for foreign investors hungry to gain Vietnamese exposure. Foreign limits in banks however, are expected to remain at 30%.

Despite tight availability of stock, PXP’s Snowball is confident that his new fund will be able to invest its capital prudently. He points out that as much as $600 million of the Vietnamese market is still available to foreigners even before any restrictions are lifted.

More breadth needed

“It’s not much but it’s still there, despite the fact that Merrill Lynch, Citigroup, Deutsche Bank and now UBS all have trading codes,” he says. “It shows that there’s more breadth needed in the market.”

The advent of the bulge brackets to the local market does not faze PXP. Snowball points out that even with direct access to the stock market, the banks are unable to participate in the critical pre-listing auctions. To do that needs state bank approval. He believes some of the banks are in for a rude awakening.

“I’ve heard some of the investment banks saying they can offer clients full access to the market through their P-notes [participatory notes that act like a simple derivative contract],” he says. “But Sacombank is 25% of the index and already at its 30% foreign limit. So how can they provide proper exposure to the full index? The investment banks simply can’t get the same access to the market as we and the other local fund managers can. It’s simply not possible to reconstruct the portfolio that we have.”

If he is right, the growing number of foreign institutions looking for a way into Vietnam would be well advised to start talking to local fund managers soon, while they are still hungry for fresh capital. Hunting tigers takes local knowledge.