Vietnam Sails Smoothly Through The Commodity Storm

While the gloom faced in commodity prices has created slowed economic growth throughout frontier and emerging markets, there is one global market in Asia in particular that has not been deterred: Vietnam. Low commodity prices have been gruesome for some companies, and on a much larger scale has led to a global economic slowdown for commodity based economies.  While the current environment has created a flurry of buy opportunities in commodity based economies, investment in Vietnam provides a similar opportunity with substantially lower risk. Vietnam’s economy, driven by its strategic advantage of low cost manufacturing, is continuing to maintain its position as one of the fastest growing economies in Asia, and is poised for stronger economic growth throughout 2025.  Its key players in the oil and steel industry are continuing to deliver on growth amid low commodity prices, which displays the irrationally low valuation that is present in much of Vietnam’s stock market.  The bearish sentiment for commodity based companies has created a flurry of buy opportunities for companies in Vietnam, and the strong performance of these companies in the current gloomy state provides assurance of the low level of risk.

Steel

With steel prices plunging to a new low, Vietnam’s steel industry is still standing strong for the most part, as its two dominant steel companies have been continuing to deliver on earnings growth since 2010. Valuation for both companies is low, and a recovery in commodity prices provides ample upside potential for both companies. Amid the sharp decline of steel prices, both companies’s average annual growth between 2010 and 2014 was impressive:

  • Hoa Phat Group’s net revenue grew by 19.7% per annum, and its net income grew by 33.2% per annum.  
  • Hoa Sen Group’s net revenue grew by 51.5% per annum, and its net income grew by 22.6% per annum.

Both companies, which have dominant market shares in Vietnam, are achieving ample growth amid low steel prices, due to their strong exports and the increased demand for construction in Vietnam.

Oil

Low oil prices have not deterred the operations of oil companies in Vietnam, whose revenue is derived not only from oil drilling, but also providing technical services to the oil industry. PetroVietnam Drilling and Well Services and PetroVietnam Technical Services displayed their ability to cope amid low oil prices in 2009, and are two companies to hold confidently in the low oil price environment. Valuation is low and the companies can continue to deliver on earnings growth in the long run:

  • In 2009, PetroVietnam Technical Services increased its net income by 6.3%.
  • In 2009, PetroVietnam Drilling and Well Services’s net income only fell by 8.7%.

Fear of the low oil price environment has created strong buy opportunities for these two companies.

Commodity Portfolio

All 4 companies previously mentioned are highly profitable and have low valuation.  The strong track record of success offsets the risk, and makes the current low valuation irrational, as the average valuation in Vietnam is substantially higher.  A long term approach to commodity based Vietnamese companies can therefore be classified as having acceptable risks and high returns.

Company P/E P/B ROE(2014) Net Profit Margin
Hoa Phat Group 5.52 1.59 29.53% 15.14%
Hoa Sen Group 5.17 1.18 17.88% 4.23%
PetroVietnam Drilling and Well Services 4.52 0.75 22.7% 15.77%
PetroVietnam Technical Services 4.18 0.67 20.6% 6%

Strong Fundamentals Prevail

The high likelihood of a Fed rate hike this week has produced a gloom sentiment for frontier and emerging markets.  However, the economic catalysts are in place for Vietnam to continue leading Asia in economic growth, and its commodity based companies are coping well despite the gloom in their respective industries.  Vietnam is not a contrarian destination for value investing, and investment in its commodity based companies poses little risks, with the potential for substantial returns.  This will be driven by the recovery of commodity prices in the future, and the eventual higher valuation of Vietnam’s stock market, which currently trades at a substantial discount to its peers in Asia. Vietnam can be considered a superior destination for investment in Asia, and the relatively lower valuation found for some of its commodity based companies makes turning extra attention to these areas befitting.

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