VinaCapital Vietnam Opportunity Fund Limited (VOF) Earnings Call Transcript & Summary

Good morning from Vietnam, and thank you for joining us at our first London Stock Exchange SparkLive webinar, which is a great platform for issuers like ourselves to reach out to our investors. My name is Khanh Vu, and I'm the Portfolio Manager for the VinaCapital Vietnam Opportunity Fund, or VOF. And I'm delighted to be joined today by Mike Kokalari, our Chief Economist for VinaCapital. Over the next half an hour, Mike and I will provide an update on some of the significant reforms and changes that are happening to Vietnam as it relates to Vietnam's economic and investment outlook. We are in unprecedented times, both in global macro economy as well as importantly, domestic changes here. These will be critical for Vietnam's structural growth story, and we're seeing that beginning to reflect in the stock market. We will discuss how VOF takes advantage of these improving economic conditions through our investment decision, through how we're structuring our portfolio and looking at the opportunities and types of companies and sectors that we are looking at. Before we get into this, we encourage our viewers to submit questions into that SparkLive Q&A, and Mike and I will spend the end of this presentation to address those questions. Today, our agenda will cover 3 broad areas. The first is around VinaCapital and introducing the VOF fund. Second, importantly, Vietnam 2.0, all this program of economic reform that will propel Vietnam into that next phase of growth, which you'll hear Mike and I occasionally call affectionately Doi Moi 2.0. And third, we'll talk about how VOF's portfolio and our strategy is taking advantage of these changing macro market conditions. VinaCapital is Vietnam's leading asset manager with close to USD 4 billion of assets under management. Our founder, Don Lam, started this firm 23 years ago, and in fact, with this fund, VOF, as a way for investors to access the incredible growth story happening here in Vietnam. We think of it as a proxy for investors to access Vietnam through what we call a very differentiated approach to other funds available. We are an opportunity fund. And what that means is that we take a private equity approach, a privately negotiated approach to investing that allows us to invest across the investment spectrum from both private to public companies. And in fact, over the last 23 years, we've made over 200 investments in this fund, in which 60, for example, have been pure private equity, growth equity investments, where we have delivered one of the strongest track records of exits and returns to our investors. Within the last 5 years, VOF has delivered 60% cumulative returns or an annualized return of about 10%. Importantly, we maintain a very consistent return of capital program to our investors through dividends and share buybacks. We'll cover some of those aspects later on. We remain a FTSE 250 company, and as I said earlier, a way for investors in the U.K. to access this incredible growth story. So let's turn to Mike. Mike, can you help us here? Give us a snapshot of the economic outlook for 2025. Could you also help cover what Doi Moi 2.0 means? And finally, what's your outlook looking ahead?

Okay. So this year, in the first half of the year, Vietnam's economy grew by 7.5%. The main factor that was driving it was a surge in exports to the U.S. And also, we have a lot of tourists coming in. The second half of the year will probably be slower because all the exports to the U.S. is being driven by the timing of the tariffs. I think we should probably expect around 7% growth this year. That will be healthy for your portfolio companies. Longer term, I think we cannot understate the importance of these Doi Moi 2.0 reforms. The way I'm looking at it, I'm kind of thinking back to like my own childhood when [ Reagan ] come into office or when [ Baxter ] came into office in the U.K., there was a major mindset shift in the people working in the government and also in the population writ large. If you really think very specifically about both of those 2 cases, there were some legal things that happened and changed and that were very important, and that's analogous here as well. But really, the most important thing is there was a mindset change that focused more on productivity and pointed the country in the right direction after that. I think that's how we can really think about Doi Moi 2.0.

And that mindset change is not just that perhaps at the government level, but also within industry and the private sector.

Yes. It's trickling through. I mean, so far, the most tangible things that we can see is that there's been this massive consolidation of the number of provinces in Vietnam. That's a big consolidation. And then the other thing is there's been a surge in the investment spending, the infrastructure spending that had fallen a bit last year, fallen a bit in the beginning of this year, and it's turned around dramatically. And that's going to really boost the economy in the second -- I mentioned that the exports will slow in the second half of this year. But on the other hand, you'll see construction spending pick up both in the second half of this year and also next year in 2026 as well.

Interesting. We talk about Vietnam as this structural story, this long-term structural story. And within that, a series of market cycles...

Which is always in an emerging market or frontier.

Exactly. And that creates what we talk about is that volatility. But long term, the structural cycle has been consistent. And Mike, you know how much I like charts that go from the bottom left into the top right.

Because you're an investment person, you're supposed to.

So here's an example, looking at the GDP growth, right? So when we started this business in 2003, GDP per capita was about $500, right? I mean today, GDP per capita is...

$4,500...

$4,500, and GDP today is close to $500 billion, right? So what...

Or $0.5 trillion.

Or $0.5 trillion. There you go. That's a great number. So what we see in this chart that's really interesting is that from 2025, that red dot, you can see that the line through that economic growth, there's a step change. And can you talk a little about what -- why we think that this is a step change?

So the first thing to point out, you're making a very important observation, and I'll go back to a point I like to make over and over, which is that although I have the Chief Economist job, I'm more of a math and engineering type guy. And actually, in math, when you have an angle that starts out kind of fairly small but you project it way forward, you end up in a very different place. And so what the government is really focusing now is improving productivity and improving efficiency in the economy. And that's why you see that initially, you get kind of the slight trajectory, an improvement in the trajectory. But when you project -- when you go out 10 years, it ends up making a huge difference in where the performance of the economy is later.

Yes. I mean for us, as investment people, we like to describe that as that power of compounding, right? And over time, that ability for good companies to grow to compound.

Because you compound it just a slightly better rate and you get dramatically better performance.

Absolutely. So here we are, as we talk about this Vietnam story, it is a long-term structural story. And within that, we have been coming off what you can see has been a difficult period in recent times, triggered by that bond crisis and liquidity issues that affected the real estate companies. This is a topic that we've covered in previous webinars. What's the important thing, though, is that we are seeing some genuine recovery in some of these sectors, real estate, for example, Mike. So looking ahead, if you think about the opportunity sets, and I'll turn now to the VOF opportunity. You hear Mike talk about the private sector and the private sector reforms, they're going to create a lot of really interesting opportunities. If you think about Vietnam's -- the investment universe that we have, there is about 1,600, 1,700 listed companies. However, on the private side, there are well over 15,000 companies that are of meaningful size where we, as investors executing the strategy, like we said earlier, taking that opportunity privately negotiated approach to investing, we can seek a lot more opportunities within that. And so what we find today is that these reforms, Doi Moi 2.0, creates this platform for a lot more opportunities to present itself to investors that are on the ground like ourselves.

Because of this idea that it's sort of rebalancing towards the private sector, domestic private sector. So it's not just FDI and government.

And that's what, I guess, the past 20 years, we've seen FDI driving a lot of this economic growth. And that's why exports have been important. However, you're suggesting that the next phase of growth is going to be driven by this private sector.

FDI has been fabulous. But when you think about it, the economic value that gets created from that gets sent back to Korea or whatever. So now you're going to have a lot more investment opportunities to make money in the country.

And if you only think about the portfolio that we construct and then the opportunity sets that were in that, you can see that our portfolio is made up of essentially 4 main sectors. Financials represent about 25% of the portfolio. And we think of banks as a great proxy as a great way to access a country's GDP story, right? And today, the banking sector is one of the core sectors that contributes to the economy. It is also one of the significant sectors that are on the stock market, representing about 40% stock market weight. The next sector that's very important is consumer and health care, and we've sort of lump those 2 together. And that plays into this incredible demographic dividend that Vietnam presents. We have 100 million people, 65% under 35 years of age, a rising middle-income class. We saw from that GDP growth chart what GDP per capita is today. We're entering this inflection point where there's going to be significant amounts of consumption, consumption-led activity. And Mike, remind us again, consumption is how much percentage of GDP, something like?

Almost 2/3. Much, much higher than China, by the way.

There you go. Then the other sector that is actually really interesting and a sector, in fact, we've been invested in for some time now is industrials and technology. We hold FPT, which is the leading technology company in Vietnam. They do software outsourcing, but they're also entering into data centers and AI. They've really been a beneficiary of this wave of technology that's happening. But actually, Vietnam technology is a very important part of that economic story right now.

I'm extremely optimistic about the tech sector here. If you think about AI, there's sort of 2 angles that Vietnam is in a really sweet spot to take advantage of. We're doing a lot of outsourcing. FPT is a huge outsourcer, also other companies like CMC and some unlisted companies. The nature of the AI tools that are spreading right now will increase the productivity of those companies dramatically. So there's a bunch of tools -- you may have heard of in the news, things like Windsurf, Cursor, et cetera, so those companies are going to see a big pickup in their productivity. That's one thing. But the other thing is, actually, if you pay attention, in the world right now, the number of world-renowned experts in AI that are coming from Vietnam is way disproportionate. Even though we have 100 million people, it's amazing. The #1 book in AI right now is by a woman called Chip Huyen. She went to Stanford, got into the blah, blah, blah. And now she's -- her book is the #1 book in AI. So I'm very optimistic about the AI prospects for Vietnam.

And how we look at within our portfolio is, obviously, we don't invest directly into these technology companies, but we look at how they affect and how they can enhance productivity; improve business processes; improve margins through the use of technology and whether that be within banks, brokerages, looking towards consumer and health, for example, in medical and health care and checkups; and then, of course, into the real estate sector. And real estate sort of rounds off the fourth largest sector in our portfolio. It represents almost 20% of our portfolio. And it's a sector that we've been invested in for a long time. Now we've talked about that bond crisis and liquidity issues that affected the real estate companies in recent years. We have seen a recovery in that sector, and we've been seeing the corresponding improvement in some of the performance of some of the companies that we do hold in that portfolio. If you think about how we look at investments and opportunities in here, this here shows us briefly the sort of key themes that drive and structure how we look at companies in the market. We look at scale, brand and distribution. Why is that important? Because when we go through a process to sell a company, scale, large scale, recognition of a product through its brand or the ability to distribute throughout the country are important aspects that buyers look for when they are looking for investing here. Obviously, the other elements that are equally important, the quality of management, how management are aligned, that competitive advantage or what you describe as the moat that some of these businesses have. And of course, importantly, in a frontier market, being -- doing good and demonstrating doing good through sustainable practices, through good corporate governance. These are companies that you see here that are all representative of our investment philosophy. And in fact, if you look across these companies, they are all #1 in their segments. We've held on to some of these companies for a long time. And why is that important? Because I come back to Mike's earlier point about this power of compounding. Little changes at the start create big changes over time. And if you think about our portfolio today, many of the companies that we hold, here's the top 10, we've entered through private means, through privately negotiated means. In fact, in the top 10, there's probably just one company where we just bought in the stock market. Most of the opportunities we have in our portfolio has come from some negotiated process because we're here on the ground, we're able to access and find those opportunities. And that's reflected in the portfolio today, where about 80% of the portfolio is listed companies and about 15% is private equity. Over time, some of that private equity crosses over to the public equity. They become great public companies, and we might hold them for a long time, or we can go through a process, an M&A process and exit these companies. And this power of compounding is really interesting. Vinamilk is -- was one of the leading state-owned companies. We participated in their privatization way back in 2003, 2004 when we started the fund. We've held on to that stock for 17 years. And over that time, we've seen that investment do a sixfold increase or about a 50% IRR over that time. But the sell discipline is important as well. And at one time, Vinamilk was one of the largest positions in our portfolio. We had visibility of perhaps the slowdown in growth and that we could take that money and move it into other opportunities that could deliver higher growth. And therefore, we fully exited our investment in Vinamilk. It remains a great company, and it remains a very important part of the consumer sector market. Another example is FPT. We talked about this technology company earlier. FPT is a leading software outsourcing company. In fact, about 60% of their revenues come from software outsourcing to markets like Japan, the U.S., Europe. And this is a company that differentiates itself from others in the region, whereby it produces and trains with its university and education efforts, some very high-quality engineers that then can go into the company and deliver software sourcing. We've held this investment for 8 years now, well before the sort of AI hype and trend because they represent the leading company in this space. It's delivered us over 3x our investment over that period of time or about a 34% IRR. So how does this power of compounding reflect in our NAV and in our return of capital to investors? Mike, I love this slide. It shows our return of capital since 2011 when we started the buyback program. And then in 2017, we introduced a dividend to investors. We're the only Vietnam-focused fund that consistently pays a 2% dividend yield to investors. Think about 2011, we were managing about $740 million. Over that time, we've seen growth compound and deliver $1 billion in growth. From that number, we've actually returned almost $800 million to investors, again, through buybacks and dividends. And that's a unique feature of this fund, and it comes from the quality of the companies we invest in, that power of compounding, the sell discipline where we trim and exit positions, return capital to investors that are able to continue to make investments in Vietnam. So Mike, before we move on to Q&A, the elephant in the room, the U.S. tariffs, how is that playing out for Vietnam? And then perhaps I'll finish off by how is it affecting some of the companies in our portfolio.

Well, on the Vietnam side, because we have very good connections with the government, we happen to have first-hand contact with some of the people that were in the negotiations. And then on the U.S. side, actually, we happen to also have either direct or secondhand contact with some people that are also in the negotiations. And it seems very clear that both sides were kind of zeroing in on around a 15%, 15%, tariff rate when Trump suddenly tweeted out this 20% number that I'm sure everybody knows, you've seen it in the newspaper and also this 40% transshipment number. The reality is that the details are still being worked out. I think it's very likely that we'll come to a number lower than 20%, probably around 15%, 16%. And that the 40% transshipment is just like a symbolic and it's not actually going to amount to anything. The key is that going back to how we thought about this from the beginning, the U.S. is really reliant on Vietnam and China. And to the extent that they -- if Trump were to really overly target Vietnam, it's going to weaken his negotiation position with China, which is already not that strong. We saw the Chinese cut off the rare earths supply to the U.S. that caused all kinds of problems in industry and also the weapons industry in U.S., et cetera. So I think it's very likely.

Automotive industries...

Automotive, yes. I think it's very likely that we'll -- in the end, tariff will be still somewhere around 15% to 16%.

And there are certain sort of types of goods that Vietnam exports to Vietnam, and we're actually well below that.

Yes. Okay. So when I said average, there's this whole -- and this is what we heard from both sides, we were able to triangulate from both the Vietnam side and the U.S. side that there was going to be the schedule of like if something was 100% made in Vietnam, if it was -- there was a whole kind of schedule. And yes, I think we're probably going to average around 15% or 16% in the end.

So Mike, just turning to our portfolio. There's really only 2 companies in our portfolio that has a very minor impact to U.S. tariffs. Hoa Phat, the leading steel company, about 8% of our NAV. They have less than 2% of their revenues, and they generate $1 billion in revenue a year. Less than 2% actually are exported to the U.S., and they were already having tariffs. The tariffs were already imposed on exports of steel and aluminum goods to the U.S. The other company is a company that was a private equity company, and they became public. They're the leading laminate and wood manufacturer in Vietnam. So obviously, that's an area that can attract higher tariffs. They only have about 10% of their revenues directly impacted by exports to the U.S. But what's been really interesting about this company is that within the last 60 days since Liberation Day, they've already started to think about and, in fact, act on moving factories closer to the U.S. in markets, for example, in South America that are going to track lower tariff rates. So the important thing here is that not only are U.S. companies thinking about how they respond to the impact of tariffs in Vietnam, Vietnamese companies that may have a potential impact are also thinking about where do they need to perhaps rejig, reassess some of their manufacturing activities. Now for a company [indiscernible], 10% of revenue is not great, but I think they're using this opportunity to move it closer to the U.S. and perhaps even expand and increase their access to the market. So in a way, companies here in Vietnam are being very innovative and rethinking about the supply chain, but how they can take opportunity from this very uncertain time. So we'll stop it there, Mike. We'll turn it to the audience and go through some of the Q&A. But I'd say, once again, thank you for joining us today on the inaugural first SparkLive webinar for VOF.

Thank you. I think we're back to a Q&A session now. Mike, there's a couple of questions. We'll start off with you. And this question is an interesting one. It's -- in this past year, we've seen -- in the past 18 months, we've seen really strong performance from particular markets here in the region, India and Vietnam. And there's a question here that asks, how is the investment case for Vietnam compared to that of, say, India?

We can have a whole webinar just on that.

We've only got 10 minutes for a Q&A today.

Let's quickly slice it a few different ways. Let's think about the economy and then the stock market. So in terms of the economy, India is a fabulous domestic-driven growth story. In fact, I -- honestly, I think India and Vietnam are kind of the 2 best GDP growth stories in the world. But the nature of the story is quite different. I mean Vietnam is doing the so-called East Asian development model, the same that all the Asian Tigers did. They focused on exports. Whereas Vietnam is -- whereas India is kind of more like a domestic. There's some FDI coming there recently. Part of it is having to do with the Trump and all that kind of stuff. But most of the FDI that goes into India will be primarily to produce products for the local market. Stock market has done fabulous those last couple of years. In fact, you could really trace it back to the demonetization, the Modi's -- when they first -- well, it's a whole long story. But at that point, the mutual fund industry took off, et cetera. The way to look at India's stock market, I think, is as a precursor of what's going to come here later. So you see that there's been an enormous explosion of the mutual fund industry there, et cetera, et cetera. That's coming to Vietnam. It's like one of these S-curve things takes a while to take off. But that's a good prediction of what our future will be here and talk about capital markets, stock market a couple of years later, basically.

And then there's a similar related question in terms of the stock market's evolution here. One of the questions we do get quite often is when does Vietnam go from frontier market to emerging market. And obviously, let us get our crystal ball out and consult that. But we don't have a specific date. But I think what's important, Mike, what we've seen is there has been this concrete progress around structures, rules, participation, consultation with folks like FTSE Russell to help push forward Vietnam to an emerging market. And consensus seems to be indicating that this could be an event that could happen either late this year or early next year. And while initially, it may not bring a lot of flows to the market, it certainly sets us on that trajectory for institutional international investors to feel comfortable that they are investing in not just a really interesting and exciting story, but also a story that is now at all -- is recognized as an evolving emerging market. So that certainly is going to be another strong catalyst compounding this private sector development program that we spoke about earlier as it relates to Doi Moi 2.0.

It's basically an off index that for active EM managers right now. So that will help to solve that problem.

Indeed. Another question also relating to neighbors near and far to us. It concerns the real estate sector. And this question is around whether or not we've seen that recovery in the real estate sector. We've briefly touched on this during the main presentation. But the question here is, are we seeing the same issues and problems here in Vietnam as, say, with China?

Okay. Well, this is a question we get pretty regularly. We've written a few different reports on this over the years, all the way back to the Evergrande days. And long story short is the situation in Vietnam and China is 100% opposite. So in China, it's a long geeky economic story. But in China, they did what's called the Gerschenkron Growth Model, which is basically the government wanted to really support GDP growth by focusing on constructing infrastructure, constructing real estate projects. That's why you have all these ghost cities in China in the middle of nowhere. And that's because China is more of like an investment-driven economy. Vietnam is more of a consumption-driven economy, which, as a side note, really presents a lot more investment opportunities on the PE side. So that's good for you from an investor's point of view. But it also means that the situation in the real estate market is completely different. So in China, I think people know that the vacancy rate is like around 25%. In Vietnam, the vacancy rate for normal -- not the high-end luxury, but for sort of normal apartments, for normal emerging middle-class people, call it around 1,800 square meters, something in that sort of range, the vacancy is basically 0. Everything that gets built gets sold. We think that the -- if you look at the supply and demand balance, the number of new units that have gotten constructed every year, launched for sale every year, basically half what the demand is. We estimate the demand by looking at how many people married that's coming to the cities, urbanization, et cetera. So it's a very, very different situation.

Yes. And if we look sort of into our own portfolio, with the second largest holding, for example, in the portfolio, is a company called Khang Dien Homes, KDH. They're the leading landed property developer here in Vietnam, here in the South. And if you think about that scarcity that you talk about, that supply as it relates to landed property, it's even rarer. And so what Khang Dien has been able to differentiate and deliver is a product that is differentiated from other real estate developers in that there's some land; they are well proportioned, well-built billers; affordable. And they are -- they come with clean and clear titles and licenses. And for a homeowner, that's an incredibly attractive proposition. We've been invested into this company Khang Dien for, I think, almost 18 years now. I mean we were one of the very early investors. This is part of the private equity strategy that we talked about where we came into this company in its early days of listing, where we took a significant position where we still have Board representations. And it allows us to get a very good sense of what's happening in the real estate sector. Another company in the real estate -- another company in the portfolios in real estate we've invested in for about 8 years now is the largest real estate developer in Vietnam, Vinhomes. Vinhomes specialize in building what we call sort of ecosystems in many cities where you don't just get the house, but you get, say, the schools, the hospitals, the shopping malls. So as a developer, they've really been thoughtful of how they are building and delivering a product. And today, they are the leading developer in the country. Their share price, over the past 6 months, has done incredible. I mean in the last 8 weeks, the share price has actually increased 100%. And that's, again, a reflection of this real estate recovery. So coming back to the first part of this question, are we seeing a real estate recovery? Certainly, that recovery story that we have been talking about in the past 2 years really is showing concrete evidence at the moment. Mike, I'm just going to finish off the conversation today with, I guess, sectors that we are really interested in. Besides real estate, obviously, other sectors in light of what you talked about, this huge significant program of reform, what other sectors are we looking at? And perhaps you can shed some light on to opportunities that the fund is also looking at?

Well, I don't mean to belabor the point, but I'm still enthusiastic about all the technology stuff. So I think that there's long-term future for Vietnam. Improvements in outsourcing efficiency is going to be dramatic. And I think there's lot of opportunities in AI in particular. And then, of course, we always come back to the idea of whatever middle class people want as they get more wealthy, anything premiumization products, consumer products that are getting more fancy, higher gross margin, anything in health care, basically, anything that normal -- and in that regard, I mean, we're very fortunate both as managers and from our investors' point of view that, to some extent, all we really have to do -- the story of emerging market economies, kind of what -- how they grow and what people want as they grow, it's a pretty well-understood story now. So we have a pretty good road map of the type of things that people want. And it's anything that the middle class wants or perhaps one step removed from that.

Yes. And I think for us, to reiterate, that structural story. We saw that chart of that long-term structural story that Vietnam is delivering. And that long-term structural story really plays into these consumer companies. These consumer companies that perhaps we look at slightly differently, health care, education. These are alternative ways to play into this consumption story. And the interesting thing about all that is that these are underrepresented sectors in the stock market. But as investors executing that strategy that we do, we're able to access those opportunities. So again, in the portfolio, health care has been a key feature, and we continue to look at opportunities where we can roll up and build up that platform. We've also, in the consumer sector, last year, we initiated on an investment into a private company, partnering with a public company that we've been long-term investors in and bringing the skills of the operator, the manufacturer, along with our skills as financial investors, to help build out and grow a private company. So there are certainly other opportunities over the course of the year that we would love to come back to the market, to our investors and viewers and talk about. But in the meantime, Mike, thank you again for joining me today at our inaugural SparkLive. To our viewers, for any questions that we may run out of time and not answered, our team will revert back to you. We encourage you to follow us again on the London Stock Exchange platform, and we look forward to seeing you again later this year on the SparkLive platform.