Apocalypse Now For Investors? A Vietnam Investment Review (And Reality Check)

The Economist recently entitled a story about Vietnam, "A tiger at bay," but perhaps a more thorough Vietnam investment review by the magazine's editors would have led to the title: "Apocalypse Now." That might be overly harsh as Vietnam clearly has the potential to someday be a tiger for investors, but for most American investors right now, an investment in Vietnam would strictly be limited to the Market Vectors Vietnam ETF (VNM) - which also contains a few surprises. More adventurous investors could look at VinaCapital (VCVOF.PK), which manages the following three closed-end funds: The VinaCapital Vietnam Opportunity Fund Limited (VOF), VinaLand Limited (VNL) and Vietnam Infrastructure Limited (VNI). On the other hand, those Vietnam closed-end funds trade on the AIM Market of the London Stock Exchange - meaning they are probably out of reach for most American investors. With that said, why might Vietnam be an "Apocalypse Now" for investors at this point in time?

A Vietnam Investment Review: Stock Market, Real Estate and Now Golf Club Membership Bubbles…

I should mention that I lived and worked in Vietnam for roughly a year - meaning I have heard my share of rosy economic and foreign investment statistics and forecasts for the country along with my share of not so rosy first hand experiences that investors should keep in mind before investing in Vietnam through the Market Vectors Vietnam ETF or VinaCapital's closed-end funds.

So let me start my Vietnam investment review by mentioning the country has the distinction of having had a couple of investment bubbles already which began when the Ho Chi Minh Stock Exchange opened in 2000 and many previously state owned enterprises began trading on it. A Chinese-Vietnamese friend of mine who was a math whiz and taught at a local university focused on banking and math studies where he earned just a few hundred dollars a month, was among the first Vietnamese to get in on the action. And at first it was easy to make money and paper stock certificates were even being traded in the coffee shops. In fact, he said he made over US$350,000 - before the inevitable crash came causing him to lose most of it.

Luckily, he had bought an apartment in an area set for redevelopment with some of the profits, but many other wealthy Vietnamese who were burned in the stock market also began investing (or rather speculating) in real estate. This has resulted in a number of eerily dark upscale apartment high rise complexes scattered about Ho Chi Minh City, and I was told that it was much worse up in Hanoi (where few incomes ever hit the $2,000 a month level - still not enough to afford the kinds of apartments being built).

However, what I saw on a November 2010 trip to the Da Nang / China Beach area might be enough to surprise even veteran China watchers and show the pitfalls of too much central planning. The day I arrived, the nearby World Heritage town of Hoi An was chest deep in water due to the heavy rains that part of Central Vietnam receives during the wet season and the weather was decidedly dreary during most of my stay. Moreover, and at least during the wet season, China Beach is clearly a surfing beach (with wet suits required as the water is not warm) rather than a swimming beach.

Nevertheless, Vietnam's government seems determined on turning the Da Nang / China Beach area into its own showplace version of Phuket or something, as all along the beach were luxury home, condo, hotel and casino projects in various stages of construction or completion being built or funded by groups like VinaCapital. Plus, it looked like much of Vietnam's infrastructure budget (and no doubt venture capital money and bank depositor money) was being diverted to make the city's infrastructure world class. The trouble is, I am not so certain who would want to buy all of those luxury homes and condos or stay in the hotels being built on China Beach as foreigners have plenty of other options (with nicer weather) around SE Asia to choose from, while the beach towns of Nha Trang and Mui Ni are closer to Ho Chi Minh City where much of Vietnam's wealth and middle class is concentrated.

Wealthy Vietnamese also recognized a real estate bubble in the Vietnam real estate market as the Wall Street Journal recently reported that golf club memberships have become latest "investment" craze - especially given the Communist leadership's disdain for the bourgeois sport of golf and their moves to limit new golf courses. Never mind the fact that the golf club market in Japan and the rest of Asia crashed back in the 1990s, taking the money of many investors with it.

Vietnam's Talent Problem

Moving beyond bubbles, it's worth noting that while Vietnam's low labor costs have attracted numerous multinationals to set up factories in the country, there is a severe shortage of highly qualified talent and especially technical talent that is preventing Vietnam from moving up the manufacturing value chain. This talent shortage is not helped by the fact that many Vietnamese who study abroad are either those who are wealthy or well connected or they opt not to return, while those who do return can be difficult to hire as they often demand unrealistic salaries.

And then there is the job hopping. I had seen CVs of Vietnamese who have had eight jobs in the past five years or less because as soon as a different employer offered them a higher salary, they were out the door without so much as a second thought. The economic downturn may have limited that kind of job hopping, but those with good qualifications and skills never have a shortage of tempting offers (and no doubt demands for raises).

In addition, what talent there is tends to be concentrated in what was South Vietnam (or rather Saigon). And while there seems to be no problem relocating Hanoians to Ho Chi Minh City (in fact, many would probably jump at the opportunity to earn more money in the more capitalist South), sending a Southerner up north to work will inevitably lead to problems (that is, if you could find a Southerner willing to relocate north where salaries are smaller and the people are "more difficult" to put it politely).

One final problem is that some Vietnamese employees can be especially clever at finding ways to be "entrepreneurial" - especially in some sectors like retail where there are no shortage of opportunities for kickbacks.

Vietnam: Too Much Corruption and "Too Many Old Men" at the Top?

That brings me to corruption, which some say pervades Vietnam. As a Westerner, I should say that I was generally not exposed to much corruption, but Taiwanese friends would explain to me how it worked in that a government official (usually a low ranking one) would be dispatched by a higher ranking government official to collect a payment from Taiwanese owned factories. After all, other Asians (along with the French who have extensive investments in Vietnam) know how the game is played and will usually pay up. That's why McDonald's (MCD) has largely left the Vietnam fast food market to Korean or Filipino brands and why Wal-Mart (WMT) has left the retail market to the French (after all, the land is technically owned or controlled by the government and you won't get a nationwide footprint built without violating the Foreign Corrupt Practices Act).

So what can one say about Vietnam's government? As a foreigner from a country that backed the losing side, I should not pass judgment, but it's worth repeating that a Vietnamese who returned permanently to Vietnam from the States once complained to me that there were "too many old men" running the country. Most Vietnamese were born after the war or are too young to remember it, but most of the country's senior leaders and members of the Politburo would be collecting Social Security and Medicare right now had they been on the losing side of the war and forced to move to the United States.

Vietnam's Persistent Foreign Exchange Problem...

Finally, and right before I left Vietnam in the middle of 2010, I had coffee with a friend of mine (whose father was among the first foreign investors to come and set up a business in Vietnam back in the 1990s) after he had just come from an event where a foreign Ambassador had given another rosy speech with the usual upbeat note about the Vietnam economy and then my friend joked: "Yea, and they only have one month of foreign exchange reserves to pay for imports!"

Vietnam's foreign exchange reserves have apparently improved enough to cover 2.4 months' worth of imports, but the real problem is that Vietnamese (especially the younger Vietnamese who make up most of the country's population) love to buy imported foreign brands because the country has only a few well regarded domestic brands of its own.

Another issue has been the black market for dollars. Some months before I left when I had already drawn down my Dong bank account, I discovered a neat foreign exchange trick that worked out well in my favor: Rather than go to the ATM machine to withdraw Dong at the official exchange rate from my US account, I would have my parents withdraw money from my US bank account and wire it to me via Western Union where I would receive it in dollars and then I would go to a money changer to get the black market foreign exchange rate.

Even though the Western Union transfer would cost $10 plus inconvenience my parents (who inevitably withdrew a little extra money to treat themselves to Bahn Mi sandwiches at the local Vietnamese takeout!), I would still come out well ahead with the black market rate to make the whole exercise worthwhile. However, the Financial Times noted that even more entrepreneurial Vietnamese would go so far as to visit Cambodia where the ATMs dispense dollars and then come back to Vietnam to exchange those dollars at black market exchange rates.

The government eventually had enough of all of this and started cracking down on the gold traders and money changers giving black market rates, but there appears to be no shortage of dollars sloshing around Vietnam as when I would go to the bank to pay my rent, there would inevitably be someone next to me at the counter making a dollar deposit that was the size of brick (and don't ask where all of those dollars came from). However, so much money earned from unknown sources is simply disappearing from the economy or the country - something government officials may be loath to address if they are also in on the action.

A Vietnam Investment Review: The Market Vectors Vietnam ETF

With all of the above issues in mind, the easiest way for American investors to invest in Vietnam would be through the Market Vectors Vietnam ETF which attempts to replicate the price and yield performance of the Market Vectors Vietnam Index (MVVNMTR). The Market Vectors Vietnam ETF has existed since August of 2009 and it's up over 8% since the start of the year, but the ETF is still down over 38% since inception (as of mid-November or so):

Much of the Market Vectors Vietnam ETF's decline this year started with the arrest of local tycoon Nguyen Duc Kien, the co-founder of the Asia Commercial Joint Stock Bank, one of the country's largest banks, for undisclosed financial or economic crimes. The arrest caused depositors to panic and withdraw five trillion Dong ($240 million) in one day (Nguyen Duc Kien also owns stakes in the Kien Long Commercial Joint Stock Bank and the Vietnam Export-Import Commercial Joint Stock Bank plus he is heavily invested in local football clubs).

Then at the beginning of this month, Dang Van Thanh, the Chairman of Sacombank, resigned amid reports that he too was under investigation for unknown reasons and the State Bank of Vietnam (SBV) announced it was preparing to inject 28 trillion Dong ($1.4 billion) to shore up things over there.

The good news could be that Vietnam is finally serious about tackling corruption and cleaning up the troubled banking sector, but investors will still want to limit their exposure to that sector (along with real estate). A quick look at the holdings of the Market Vectors Vietnam ETF reveals the following holdings:

The Market Vectors Vietnam ETF Holdings (As of November 9, 2012)

Holdings	Weight
Vincom JSC	8.77%
VietinBank	8.13%
Baoviet Holdings	7.16%
JSC Bank For Foreign Trade (Vietcombank)	6.83%
PetroVietnam FER	5.47%
Minor International NVDR	5.07%
Charoen Pokphand NVDR	4.98%
Gamuda BHD	4.96%
SOCO International PLC (SIA)	4.64%
Saigon Thuong Tin Commercial JSB	4.21%
Oil and Natural Gas Corporation Limited (ONGC)	4.19%
Premier Oil PLC (PMO)	4.00%
PetroVietnam TEC	3.40%
HAGL JSC	2.76%
Vietnam Construction and Import-Export JSC	2.65%
	77.22%

So just what is the Market Vectors Vietnam ETF's exposure to the country's troubled banking sector along with that real estate bubble I mentioned earlier in China Beach and other parts of the country? Here is a more thorough look at Market Vectors Vietnam ETF's holdings:

• Vincom JSC develops real estate properties, manages and leases commercial and entertainment locations at Vincom Tower (an upscale office and mall complex in downtown Ho Chi Minh City) plus it has real estate operations, advertising and media and brokerage activities through its subsidiaries.
• VietinBank is one of the four largest State-owned commercial banks of Vietnam and its total assets account for over 20% of the market share of the whole Vietnamese banking system.
• Baoviet was the first and is a leading insurance group in Vietnam with 45,000 agents nationwide. HSBC also has an 18% stake in the group while Baoviet Bank is one of Vietnam's newest commercial banks.
• The Joint Stock Commercial Bank for Foreign Trade of Vietnam or Vietcombank is another state owned bank. Vietcombank is probably one of the Vietnam's best capitalized plus it has a strategic partnership with Mizuho Corporate Bank of Japan
• PetroVietnam is Vietnam's largest oil producer and second-largest power producer. However, PetroVietnam also has significant interests in everything from hotels and real estate to securities, insurance and even taxi cabs.
• Minor International is one of the largest hospitality and leisure companies in the Asia Pacific region, but it's actually based in Thailand where it was founded by an American who became a Thai citizen.
• Charoen Pokphand is another Thailand based conglomerate with core businesses in agribusiness and food; retail and distribution (including 7-Eleven in Thailand); and the telecommunications industries throughout Southeast Asia and beyond.
• Gamuda BHD is a major Malaysia based infrastructure and property developer with operations in Asia and the Middle East Regions.
• SOCO International PLC is a London headquartered international oil and gas exploration and production company that is active in Vietnam. Market Vectors Vietnam ETF, VinaCapital, The VinaCapital Vietnam Opportunity Fund Limited, VinaLand Limited and Vietnam Infrastructure Limited as there are plenty of bumps in the road ahead.
• Saigon Thuong Tin Commercial JSB is the actual name for the previously mentioned Sacombank whose Chairman has just resigned.
• Oil and Natural Gas Corporation Limited (ONGC) is an Indian multinational oil and gas company that's active in Vietnam and in other exotic locales like Cuba, Iran and the Sudan - places American companies generally aren't welcomed.
• Premier Oil PLC is a London based oil company with oil and gas interests in the UK, Asia and Africa. Premier Oil PLC is active in Vietnam plus it has been doing business in Myanmar since the 1990s - when the country's generals were still being routinely condemned by many Western governments.
• HAGL JSC is a real estate company with projects in Vietnam, Laos and Thailand. The HAGL JSC is also involved in trading, construction, football clubs, power, mining and plantations.
• Vietnam Construction and Import-Export JSC provides property development and contract construction services primarily in Vietnam.

In fact, nearly 30% of the Market Vectors Vietnam ETF's holdings are in non-Vietnam based companies that merely have some interests in Vietnam while out of the remaining holdings, there appears to be a good deal of direct or indirect exposure to the country's troubled banking and real estate sectors. Of course, there are a limited number of "high quality" Vietnam stocks to choose from to create a Vietnam ETF - meaning exposure to troubled sectors (even if it's through well managed companies) is probably unavoidable. However, that could also be another reason why investors might want to be cautious about emerging market ETFs in general.

VinaCapital and Its Vietnam Closed-End Funds

Finally, for more adventurous investors, VinaCapital was founded in 2003 as an investment management and real estate development firm in Vietnam with $1.6 billion in assets under management. VinaCapital's management team has extensive international finance and investment experience and they manage the following three Vietnam closed-end funds:

• VinaCapital Vietnam Opportunity Fund Limited (VOF). A diversified fund that invests in all asset classes, the VinaCapital Vietnam Opportunity Fund Limited's investments include listed and private equities, real estate and bonds.
• VinaLand Limited (VNL). A real estate fund, VinaLand Limited makes direct investments in residential, retail, hospitality and office properties.
• Vietnam Infrastructure Limited (VNI). An infrastructure focused fund, the Vietnam Infrastructure Limited's investments are in the transport and logistics, power, telecommunications and environmental sectors.

However, there is one big problem that venture capital or investment management firms or funds like VinaCapital have traditionally had in Vietnam: the money invested can disappear without much of a trace right after an investment is made while one has to wonder just what the "real" value is of any investment made - especially one in real estate when there is a bubble.

Vietnam Investment Review: Not an "Apocalypse Now" For The Long Term?

From my personal experience in Vietnam and with Vietnamese, I would conclude that there is no reason why Vietnam cannot be another South Korea or Taiwan because the Vietnamese do have a good work ethic like the Chinese (just don't mention the Chinese around any Vietnamese as the former ruled the country for 1,000 years and aren't liked by the latter, plus the Vietnamese don't always work "smartly" as the thinking can be rather narrow thanks to Confucianism and Communism). However, I don't see the country really taking off until the next decade, when there is a new generation of leaders in charge and some of the problems I mentioned above are worked out or resolved.

So for investors, a thorough Vietnam investment review may show the country is not an "Apocalypse Now" for the long term. For the short and medium term though, most investors will want to be cautious about investing in the Market Vectors Vietnam ETF, VinaCapital, The VinaCapital Vietnam Opportunity Fund Limited, VinaLand Limited and Vietnam Infrastructure Limited.

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