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ASEAN fund finds deep value in Vietnam’s market research inefficiency

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A Vietnamese cable car company that has gone up 800 per cent in three years is one of the deep value stocks already exited by ASEAN Investment Management. Co-founder and chief investment officer of David O’Neil explains that the firm has been focused on ASEAN and wider Asia markets for the last ten years.

“As deep value investors we are looking for the best value in the Asian region” O’Neil explains. Historically the firm favoured Thailand and Indonesia but now sees an overabundance of foreign capital deployed in those countries, while Vietnam is accelerating out of recession.
 
The fund has USD20 million under management and through a combination of performance and new money coming in is 19 times what it started out with. Investors are a mixture of private individuals, institutions and family offices.
 
“We are ideal for family offices and high net worth individuals looking for higher returns and exposure to contrarian deep value opportunities in Asia” O’Neil says. “They can see and understand our deep value investing approach which is what we deploy early in a new cycle and we are out post the arrival of the mature hot money flows. We also invest in unique under researched opportunities where we work hand in hand with the companies to improve investor relations and deploy positive corporate actions.”
 
The portfolio is currently weighted 92 per cent in Vietnam. The fund can go long or short, but given the nature of deep value investing, their margin of safety is achieved by the portfolio’s discount to intrinsic value. “We are contemplating hedging against the US markets on the basis of interest rates moving higher” O’Neil says. “While markets like Indonesia and Thailand are more susceptible for substantial correction, there is only minor relative contagion expected in Vietnam.”
 
The country is recovering from its 2011 recession with a low earnings base; accelerating GDP growth, predicted to be 40 per cent over the next five years; high export growth, doubling of the middle class by 2020 and increasing foreign ownership levels.
 
That Vietnamese cable car company was a tourism attraction exposure. O’Neil says that in the early stages of economic recovery non-durable sectors jump first, so a tourism play has fit that bill for the fund. In the next phase real estate and construction sectors will outperform.
 
“We purchased Tay Ninh Cable Car (TCT) at an earnings multiple of less than two times and a dividend yield of over 20 per cent and the company was near net cash backing so had no debt” he says. “This is deep value investing. It was the cheapest listed cable car company in the world and tourism was a portfolio theme because the currency in Vietnam had decreased by 50 per cent against a basket of currencies from 2007 to 2011.”
 
Vietnam is a tourist mecca with average hotel room rates coming in at USD30, making it one of the best value destinations in the Asian region.
 
"This is the second bull market cycle for Vietnam and we think it is underpinned with 40 per cent GDP growth over the next five years, which may exceed the Chinese growth rate over the same period” O’Neil says.
 
Lower wages and a young and educated workforce with geographical proximity to China make Vietnam an attractive destination for manufacturers, while its growing middle class and increasingly affluent population are producing budding consumers.
 
Standard Chartered Bank has said that Vietnam is emerging as the most preferred destination for companies planning to move production out of China. O’Neil says that Vietnam has a material ASEAN cost and productivity advantage compared to Indonesia and Thailand which will provide a natural demand source for at least the next five to seven years.
 
Inflation in Vietnam is trending 25 per cent below expectations. “If this continues through the third quarter of 2015, deposit and lending rate cuts will come in above expectations – providing a boost to equities for 2016,” O’Neil says. 2015 performance projection for his fund range from 25-30 per cent and for 2016, range from 40-50 per cent.
 
 
 
 
 

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