Vietnam, A Repost

This is worth a repost, mark the date down. Global manufacturers streamed into Vietnam, partly to escape rising wage and land costs in China but also to tap a young and industrious work force who saw a glimpse of prosperity after years of war and stagnation. Foreign companies sought approval to invest US$20 billion in the country last year -- a third more than in nearby Thailand -- adding to the inflationary pressure by driving up land costs, skilled-worker wages and office rents.The central bank widened the range in which the dong could trade against the dollar. The idea was to free the local currency from a sliding U.S. currency and to enable Vietnam to better absorb higher oil costs.

Some local banks refused to exchange dollars, and local stock prices collapsed as banks held on to their dong and refused to lend money to buy shares. The government in March lowered Vietnam's growth target for 2008 to 7% from 8.5% to help focus the drive against inflation. Since then, a global spike in food prices and a poor rice harvest have made things worse. The central bank expects Vietnam's current-account deficit -- the difference between a country's import and export of goods and services -- to hit 7.5% of gross domestic product this year, up from 5% in 2007. The current-account deficit in Thailand was 6.5% of GDP when it was forced to devalue the baht in 1997, triggering the Asian financial crisis. The Vietnamese, meanwhile, have been draining bank accounts and buying gold instead. Some have also started hoarding dollars as a hedge against inflation.

Apartment prices in Ho Chi Minh City, the country's commercial hub, have fallen by half so far this year, local media reports say. Morgan Stanley estimates loan growth has been expanding at over 35% a year and exposure to the property market is about 10% of total loans.

Wednesday, October 24, 2007

Vietnam Calling

If you examine Gamuda's earnings forecast for the next 3 years, much of it relies on the success of its Vietnam property and construction projects. Vietnam is the new India or Colombia, the really exciting emerging market today. Foreign funds have been piling into Gamuda and other Vietnam proxy plays. The valuations are such that nothing much can go wrong. Vietnam, for many Malaysian property developers, has become the land of milk and honey. Today, almost every big player wants a piece of the action.

Well, Gamuda is not the first, in fact Singaporean & South Korean companies have been piling in much earlier. On conservative estimates, there are RM200bn on-going projects that is supposed to be completed within the next 5 years. In Vietnam, obtaining an investment licence is very crucial, because without it, foreign developers cannot commence their projects. Berjaya Land Bhd is the first Malaysian company to be given an investment licence to start work in Vietnam. To date, BLand has identified four major projects in Vietnam, three of which are in Ho Chi Minh City (HCMC) and one in Hanoi. BLand is one of the early birds that have made significant progress in its foray into Vietnam. In Hanoi, it is the first Malaysian company to be given an investment licence to undertake the Thach Ban project. In HCMC, its proposed projects include the Vietnam Financial Centre (VFC) and the Vietnam International University Township in the North West Metropolitan Area, about 19km away from HCMC centre. In the province of Dong Nai, BLand is planning the development of a gated community and three apartment blocks on 20 acres of land, with a gross development value (GDV) of US$120 million (about RM408 million). Together, the GDV of BLand's projects in Vietnam is RM31.9 billion.

Investors do note that BLand does not have a track record in overseas projects. The issue of funding is also cited as a possible constraint. So far this year, some US$13 billion in FDIs had flowed into Vietnam. Indeed, demand for properties thus far has outstripped supply, and a major source of this demand is from the Viet Khieus (overseas Vietnamese).

Besides licensing issues, other potential problems include the relocation of squatters, shortage of skilled labour and lack of transparency in business dealings.

The largest foreign investors is South Korea, followed by Singapore. Vietnamese authorities has a list of FDI amounting to US$50bn seeking and awaiting approval as I write. Last month CapitaLand announced a joint venture to develop 1,200 apartments in HCMC - the fourth project by CapitaLand in HCMC, now it has 2,800 new homes in the pipeline. Keppel Land also announced an even greater number - 20,000 homes in Vietnam.

What is luring so many developers there is the margins and pricing. A US$250,000 link/semi-dee in Malaysia will fetch about US$450,000 currently in Vietnam top locations. Its not cheap. Things are looking good in Vietnam, and with "good things newly discovered" there will be a rush of capital to tap the potential. Just like internet was a big thing in the late 90s, VCs fell over themselves to invest in internet startups to jump on the golden bandwagon. The internet itself is a good thing and yes, there is money to be made from it, but it is also true that more than 95% of all ventures started in the late 90s and early 2000 went to zero very fast. This is typical development in any "gold fields being discovered", and the same is being witnessed in Vietnam. Capital is a big extractor of real value. Even when 95% of internet startups fail, the remainder do extract real value and evolve into viable new businesses.

In Vietnam's case, there doesn't seem to be a solid masterplan to accomodate the capital coming in. The pubescent stockmarket is not financially sound enough to support the FDIs. The credit markets there are also not sophisticated enough for the amount of FDIs coming in. The good thing supporting the long term prospects of Vietnam is their adequate population, which is more than 87m. That is sufficient critical mass for a competitive labour force to be galvanised initially. Later as per capita grows, the domestic economy will fuel itself much like where China and India are at now. GDP growth was 8.17% in 2006, the second fastest growth rate among countries in East Asia and the fastest in Southeast Asia. We have to remind ourselves the country is still a socialistic country trying to move into a market economy. The infrastructure is still inadequate and requires rigorous planning.

Property developers are all looking at 30% margins on their projects. It is achievable if supply ties in with demand. RM200bn or more property coming on stream over the next 5 years is no joke. All is hunky-dory because not much has really reached finished status yet. Everyone is selling off the plan. I am not trying to bash the Vietnam investments, but its not as great as everyone makes it out to be. There are still a lot of unknowns. The dependence on returning expat-Vietnamese to buy is one. Pricey property has to be supported by strong industries and a strong job market, we all know there is still a lot to be done to foster FDIs into long term investments. Hence the 30% margins will look increasingly iffy down the road. I would be more comfortable if companies such as Gamuda and BLand were to tone down their margins expectations, maybe to 20%.

Over-investment is a normal trait into exciting markets / industries - just look at China, the internet, India, Brazil, Colombia - investors still need to guard themselves from over-optimism.