Mobius can't buy enough Vietnam equities on foreign limits

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"It's like a double-edged sword," Mark Mobius, who oversees about $53 billion as the chairman of Templeton Emerging Markets Group, said in a Nov. 5 phone interview from Singapore. "On one hand, it's difficult to get in. But once you're invested, you could do quite well." Photographer: Jerome Favre/Bloomberg

The rush of foreign investors into Vietnam's most-favored companies has exhausted the government-limited supply of shares, freezing out some as inflation slows and the economy recovers from the weakest growth since 1999.

Vietnam Dairy Products JSC (VNM), the nation's largest milk producer, and DHG Pharmaceutical JSC, the biggest listed drugmaker, are among 20 companies with overseas ownership at the 49 percent limit, according to Ho Chi Minh City-based ACB Securities Co. Foreigners have bought a net $208.5 million of the nation's shares in 2013, the eighth straight year of inflows, as the benchmark VN Index (VNINDEX) rose 22 percent.

Signs that Prime Minister Nguyen Tan Dung's Communist government is relaxing its grip on the Southeast Asian economy have helped spur the fastest pace of stock purchases by foreigners since 2008. Templeton Emerging Markets Group and Dragon Capital Group Ltd. say they've been unable to buy as many shares as they want, while PXP Vietnam Asset Management predicts the $45 billion market will extend gains as limits for some companies get raised to 60 percent as soon as year-end.

"It's like a double-edged sword," Mark Mobius, who oversees about $53 billion as the chairman of Templeton Emerging Markets Group, said in a Nov. 5 phone interview from Singapore. "On one hand, it's difficult to get in. But once you're invested, you could do quite well."

New Constitution

Exports jumped 13 percent in October, more than twice the pace in China, and pledged foreign direct investment surged 66 percent to $19.2 billion in the first 10 months of the year. The central bank has cut its refinancing rate eight times since the beginning of 2012 as inflation dropped to a 14-month low.

The government predicts economic growth will accelerate to 5.4 percent this year and 5.8 percent in 2014. Gross domestic product rose 5.25 percent in 2012, the slowest pace in 13 years, International Monetary Fund data show.

Vietnam's Communist Party, which has ruled over the reunified country since 1976, is revising the constitution. A draft version dated Nov. 17 on the National Assembly's website indirectly acknowledges the private sector while saying the state will maintain its "leading role" in the economy.

"There are a lot of positive things happening that are going to push the market higher over the next few years," Patrick Mitchell, the head of institutional sales at VinaSecurities JSC, said in an e-mailed statement from Ho Chi Minh City on Nov. 19. "The charts on Vietnam are steadily moving upwards."

Relative value

The VN gauge rose 0.2 percent to 506.52 at 9:46 a.m. local time, even as the MSCI Asia Pacific Index dropped 0.4 percent. The Vietnam measure has outperformed the MSCI Frontier Markets Index by 4 percentage points this year. Both indexes are valued at about 13 times reported earnings, according to data compiled by Bloomberg.

Vietnam's finance ministry has submitted a plan to Dung for raising the foreign ownership cap. The proposal would allow overseas investors to increase holdings of voting shares in some industries to a maximum 60 percent from 49 percent, Nguyen Son, the head of market development at the State Securities Commission, said on Nov. 14. Foreigners would be able to buy as much as 100 percent of non-voting shares, Son said.

Market catalyst

The Vietnam Securities Depository and the nation's exchanges are responsible for tracking foreign ownership and enforcing the limits, said Giang Trung Kien, the head of research at FPT Securities Co. The current cap has been in place since 2009.

In China, the biggest emerging market, the ruling Communist Party unveiled its largest package of economic reforms since the 1990s this month. The nation will phase out investment caps for both domestic and foreign investors, People's Bank of China Governor Zhou Xiaochuan wrote in a guidebook explaining the reforms. The Shanghai Composite Index climbed to an almost one-month high yesterday.

Higher foreign limits in Vietnam "would be a great catalyst for the market," said Tran Thi Kim Cuong, the head of equities at Manulife Asset Management (Vietnam) Co. in Ho Chi Minh City, which oversees about $325 million. "The stocks which are at the full limit will be beneficiaries."

Economic outlook

Vietnam's economic recovery faces headwinds from slowing growth in consumer spending and a banking system burdened by bad debt. Retail sales rose 12.6 percent in the first 10 months from a year earlier, the slowest pace since at least 2005, according to data compiled by Bloomberg. Fitch Ratings estimates about 15 percent of bank loans are delinquent, the highest level among six Southeast Asian countries it covers.

"Uncertainties are still there, such as high non-performing loans that need some time to tackle," said Attila Vajda, the Ho Chi Minh City-based head of institutional sales at ACB Securities, Vietnam's fourth-largest brokerage.

Policy makers set up an asset-management company to purchase soured loans from banks in July. VAMC, as the entity is known, has bought about 15 trillion dong ($711 million) of bad debt from 15 banks as of Nov. 10, according to a posting on government's website. VAMC may purchase as much as 150 trillion dong by the end of 2014, central bank Governor Nguyen Van Binh said this month.

The Vietnamese companies favored most by foreign investors have continued to grow in the face of a slowdown in consumer spending. Vinamilk, as Vietnam Dairy Products is known, posted third-quarter profit growth of 21 percent.

Earnings growth

The Ho Chi Minh City-based company, which started in 1976 and makes dairy products from powdered milk to cheese, will probably boost earnings by 15 percent next year and 16 percent in 2015, according to the average of four analysts' estimates compiled by Bloomberg. Shares have jumped 60 percent this year and are trading at 17.5 times reported earnings, versus the average multiple of 29 for global peers tracked by Bloomberg.

Refrigeration Electrical Engineering Corp., one of the first two companies to trade on the Ho Chi Minh City Stock Exchange when it opened in 2000, has rallied 75 percent in 2013. Earnings this year are poised to top 1 trillion dong for the first time, exceeding the company's 650 billion-dong forecast, General Director Nguyen Thi Mai Thanh said in an interview this month.

DHG Pharmaceutical's profit growth will probably accelerate to 20 percent this year from 15 percent in 2012, according to the mean analyst estimate compiled by Bloomberg. The stock, which has rallied 49 percent this year, has been difficult to buy after foreign holdings climbed to the limit, said Le Anh Tuan, the Ho Chi Minh City-based chief economist at Dragon Capital, which oversees about $1.2 billion, including funds incorporated in the Cayman Islands.

Vietnam's government may announce increased foreign ownership limits in the next two months, according to Kevin Snowball, whose PXP Vietnam Fund Ltd. has climbed 52 percent in dollar terms this year.

"Improved access is a very important step," he said. It "will likely be a catalyst for a break out to multi-year highs toward the end of this year and into 2014."

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