March 25, 2010

Vietnam Fails to Replicate China as Funds Sour on Volatility

Thursday, 25. March 2010, 14:41:51

March 25 (Bloomberg) — Nguyen Thanh Trung brings Vietnam’s only privately owned plane level at 24,000 feet (7,315 meters) over the Central Highlands towns of Pleiku and Dalat before swinging right and bringing the eight-seat Beechcraft King Air 350 in for a smooth landing at Ho Chi Minh City airport.

Trung is familiar with the landscape: Thirty-five years ago he was a Viet Cong agent and fighter pilot who recalls dropping two bombs on the headquarters of the American-aligned southern regime in the city then known as Saigon, one of the last skirmishes before the end of his country’s civil war.

Today, Trung, 62, is on a mission that symbolizes his country’s transformation: He’s the personal pilot for Doan Nguyen Duc, an entrepreneur who is one of Vietnam’s richest men, Bloomberg Markets reports in its May issue.

Duc, 46, estimates that his empire, which includes Hoang Anh Gia Lai Joint-Stock Co., Vietnam’s biggest listed property company, gave him a personal wealth of 28.4 trillion dong ($1.48 billion) at the end of 2009.

“Duc owning a private jet is very good for Vietnam’s economy; it shows that Vietnamese people can also be successful like businessmen in other countries,” Trung says. “This is a time for dynamic entrepreneurs.”

Foreign investors in Vietnam — a land that beckoned outsiders with great fanfare in the 1990s — are having a bumpier ride than Duc and his pilot.

Roller Coaster

Indochina Capital Advisors Ltd. last year decided to liquidate a London-listed Vietnam equity fund that had lost 50 percent of its value. In November, San Francisco-based hedge fund company Passport Capital LLC demanded the return of uninvested cash from a fund that bought Vietnamese and Cambodian property.

The Ho Chi Minh City Stock Exchange’s benchmark VN Index, Asia’s best performer in 2006, plunged 66 percent in 2008 as inflation followed by global recession destroyed confidence in Vietnamese investments. The index rose 57 percent in 2009. It’s up 3.5 percent this year to March 24.

Investors who still have the stomach to stay in Vietnam are quietly bullish.

It’s still possible to make money in this land of 86 million people provided you’re willing to do homework, find the right opportunities and ignore the market froth, says Mark Mobius, chairman of Templeton Asset Management Ltd., which had $24 million of investments in the country as of February.

‘Real Value’

“Investors should see the real value of specific investments without being driven by pure sentiment,” Mobius says. “The private sector continues to grow and has become more important to the development of the economy.”

That new realism follows a decade of unbridled enthusiasm for Vietnam.

After the shift to a more market-oriented economy in 1986, foreign direct investment commitments in Vietnam went from zero to a peak of $60.3 billion in 2008, almost three times Vietnam’s foreign exchange reserves at the end of 2008.

Gross domestic product expanded at an average annual rate of 7.2 percent from 2000 to 2009, making Vietnam the fastest- growing economy in Asia after China and Cambodia, according to figures from the International Monetary Fund. The government forecasts GDP growth of 6.5 percent for 2010.

“Vietnam was viewed as the final frontier of Asia,” says Son Nam Nguyen, managing partner of Vietnam Capital Partners, who advised global investors on more than $30 billion in financing as the former head of Citigroup Inc.’s investment bank in Vietnam. “No one wanted to miss out on the next China.”

Inflation Peak

Instead, investors bought into a bubble as higher prices for commodities drove up the cost of living. Inflation peaked at 28.3 percent in August 2008. The central bank raised interest rates three times in 2008 to 14 percent to slow inflation.

Some investors grew tired of the roller coaster.

Shareholders of the Indochina Capital Vietnam equity fund in September voted to shut it down after its net asset value had plunged to $243 million by June 30, 2009, from an original value of $500 million in March 2007.

Passport Capital, which held a 13 percent stake in property fund JSM Indochina Capital Ltd., won shareholders’ backing to replace three of the London-listed fund’s directors and begin the return of uninvested cash.

From its inception in June 2007, JSM Indochina, listed on London’s Alternative Investment Market, had fallen 70 percent on Nov. 18, 2008. It was down 29 percent at the end of October 2009, when Passport called for shareholder action. Bill Nolan, managing director of sales and marketing at Passport Capital, declined to comment through a spokeswoman.

Lost Confidence

“Historically, because of bad experiences with inflation and currency depreciation, people are very quick to lose confidence,” says Manu Bhaskaran, a Singapore-based partner and head of economic research at Centennial Group Holdings, which provides advice on emerging markets. “The global financial system still has a risk of new shocks, and in that kind of context, countries like Vietnam are vulnerable.”

The volatility may slow Vietnam’s development as an equity market. Since Prime Minister Nguyen Tan Dung came to power in July 2006, the total number of companies listed on Vietnam’s two stock exchanges has increased more than 11-fold to 486 as of March 24 from 43.

Privatization Stalled

While Dung, 60, has said he welcomes more investment, he has yet to deliver on promises to privatize major state-owned companies, including Vietnam Airlines Corp.

Foreign investors, which are limited to 30 percent holdings in local banks, have won some gains when setting up new businesses: In September 2008, HSBC Holdings Plc and Standard Chartered Plc won approval to operate wholly owned units in Vietnam, the first of five such licenses.

Foreign investors can find themselves at sea in the local culture, says Don Lam, chief executive officer and a founding partner of VinaCapital Group.

Lam, who was born in southern Vietnam but grew up in Canada, says his Vietnamese managers typically spend 18 months to build relationships with owners before striking any partnership.

“About 80 percent of my deals, when they close, it’s over dinner,” he says. “That’s why it’s so important to have a senior Vietnamese team to negotiate without interpreters.”

Lam — who purposely doesn’t use dye on his gray hair and sometimes wears rimless eyeglasses to appear older than his 42 years — says he shuns business lunches, since many Vietnamese nap in the afternoons.

VinaCapital Fund

VinaCapital’s $774 million Vietnam Opportunity Fund has invested in companies that focus on consumers, including Vietnam Dairy Products Joint-Stock Co., the country’s third-biggest stock by market value; Kinh Do Corp., the nation’s No. 1 candy maker; and Vietnam Export-Import Commercial Joint-Stock Bank. The firm had $1.7 billion invested in Vietnam as of mid-March compared with $10 million in 2003.

Gerard Lee, CEO of Fullerton Fund Management Co., the Asian fund management unit of Singapore’s Temasek Holdings Pte, is one of several investors who say Vietnam, with its political stability, ready pool of cheap labor and years of economic growth, reminds them of the superpower to the north.

“Vietnam has a lot of the characteristics of China,” Lee says. “So it’s good to do all the heavy lifting and homework in Vietnam, because we believe we will be richly rewarded in years to come.”

Fullerton’s $30 million Vietnam Fund, which primarily invests in local equities, lost 30.4 percent from its inception in April 2007. In the 12 months to March 23, the fund is up 58 percent, according to data compiled by Bloomberg.

Temasek in Vietnam

Since opening its first representative office in Vietnam in 2005, Temasek — which doesn’t disclose the value of its Vietnam portfolio — has invested in the country through its holdings in Minh Phu Seafood Joint-Stock Co., transportation company Vietnam Sun Corp. and Kinh Do, according to stock exchange filings.

“Vietnam fits well with our overall themes of investing in transforming economies and the growing middle income group,” Derek Lau, Temasek’s chief representative in Vietnam, says. “We actively look for opportunities along these general themes. Overall, our sentiment towards the investment environment in Vietnam remains positive.”

That bullishness is partially in recognition of how far the country has moved away from its founding collectivist ideals.

On April 30, 1975, a North Vietnamese tank rammed through the gates of the presidential palace in Saigon, an act symbolizing the control of the country by communist forces.

Boat People

In the chaotic years that followed, about one million Vietnamese abandoned the country by foot or took to the South China Sea for a precarious journey to freedom, according to the United Nations. During the next decade, the brain drain contributed to Vietnam’s economic isolation.

In 1986, Pham Van Dong, the first prime minister of the Socialist Republic of Vietnam, introduced limited private ownership of companies. The Doi Moi (Vietnamese for renovation) program cut state subsidies, lifted price controls and eventually opened the door to foreign investment.

Eight years later, U.S. President Bill Clinton lifted the U.S. trade embargo against Vietnam and in 2000 became the first American leader to visit Vietnam since the war ended.

As Western investment came to Vietnam, per capita income almost tripled to $1,042 in 2008 from $375 in 1999, allowing millions of Vietnamese to afford some of the motorcycles, home appliances and clothing produced in local factories for global consumers.

Viet Kieu

Normal relations with the West and Vietnam’s entry into the World Trade Organization lured many Viet Kieu, or overseas Vietnamese, back to their homeland. Trung Dung, an Internet entrepreneur, returned to Ho Chi Minh City in 2006, 22 years after he abandoned the country in a boat.

Dung, 43, says he was impressed by a bustling city in which countless scooters and motorcycles jostle for space alongside bicycles and rickshaws as eager young people work hard to realize their dreams.

“It was chaotic,” Dung says. “It felt like the Silicon Valley of 1995.” Using some of the money he made from selling his San Ramon, California-based electronic commerce firm OnDisplay Inc. in 2000, Dung founded MobiVi Co., a similar venture.

Today, MobiVi is helping transportation companies, merchants and banks settle payments electronically.

Local Lessons

Dung says there’s plenty of growth ahead in a country where fewer than 1 percent of the people hold credit cards and only 1 person in 10 has a bank account.

“What I learned is that it doesn’t matter how smart you are,” Dung says. “It takes time to understand the local market.”

On the ground floor of MobiVi’s office block, there’s a Highlands Coffee outlet. The cafe chain, often referred to as Vietnam’s Starbucks, was established in 2002 by David Thai, a former refugee who was raised in Seattle.

Thai’s cafes cater to a high-end clientele that can afford Western prices: A small latte costs 44,000 dong, or about $2.25, the equivalent of a beef noodle soup dinner for two. The 80 Highlands outlets are equipped with air conditioners, flat- screen TVs and Wi-Fi connections.

In January, Thai spent more than $2 million to open Vietnam’s first Hard Rock Cafe in Ho Chi Minh City.

Growth Story

“Vietnam is the most dynamic consumer growth story within the Asia region,” says Thai, who predicts that the country’s retail market will grow as much as 30 percent annually in the five years to 2015. “It doesn’t have the same population as China and India, but it’s not crowded in terms of competition.”

Outside the country’s two main cities, though, Vietnam’s economy is slowly making a transition from rural subsistence.

Agricultural and forestry work still accounts for about half of all jobs in Vietnam, employing 22 million people as of July 2008, according to figures from the General Statistics Office of Vietnam.

From 2000 to 2008, manufacturing jobs doubled to 6.3 million, making up 14 percent of the workforce.

Intel Corp. is scheduled to open a $1 billion factory in Ho Chi Minh City this year, while General Electric Co. has a $61 million power generation component plant under construction.

Samsung Electronics Co., the world’s second-largest mobile- phone maker, opened a $670 million handset factory near Hanoi in October, 14 years after it started a television manufacturing plant in Ho Chi Minh City that helped establish the company as Vietnam’s No. 1 TV producer. Microsoft Corp. outsources digital animation and modeling for its computer games to Vietnam.

License Threat

In September, the government said it might revoke the license for a high-profile tungsten mining project owned by Dragon Capital Group in Ho Chi Minh City because the facility failed to start production on schedule. A Dragon Capital fund acquired a controlling stake in the mine owned by Toronto-based Tiberon Minerals Ltd. for C$251 million ($247 million) in 2006, with two state-controlled partners holding the remainder.

“We are currently working with all stakeholders to ensure the project is swiftly put back on track and toward construction and operations,” says Dominic Scriven, CEO at Dragon Capital.

Foreign companies also encounter institutional corruption in Vietnam, according to Berlin-based Transparency International, an advocacy group that monitors business conditions. Its Corruption Perceptions Index, which rates executives’ views on the integrity of global business environments, ranked Vietnam 120th out of 180 nations in 2009, behind China, Thailand and Indonesia.

Bribery, Bureaucracy

“Bribery is illegal but commonplace,” wrote Transparency International in its study of Vietnam in 2006, its most recent full report on the country. “Despite nearly two decades of reform, bureaucracy and red tape characterize large parts of social and business life, and having the right connections –and money — are crucial to getting things done.”

Henry Nguyen, managing partner of IDG Ventures Vietnam in Ho Chi Minh City, is one of the entrepreneurs hoping to profit from Vietnam’s emerging middle class.

His company’s $100 million fund is nurturing some 40 technology, media, telecommunications and gaming companies with a typical investment horizon of 10 years for each holding.

A black-and-white photograph of Ho Chi Minh — the communist guerrilla leader referred to as “Uncle Ho” by the Vietnamese — playing pool overlooks IDG Ventures’ conference room, while another wall features the logos of the 39 companies that the fund supports.

Vietnam’s Googles

The names include those of VinaGame, Vietnam’s biggest online game company, and Vietnamese-language search engine company “These companies will become the Googles of Vietnam in the next five years,” says Nguyen, 37, who is married to Nguyen Thanh Phuong, a daughter of Prime Minister Dung. She is currently chairwoman of Viet Capital Fund Management, a Ho Chi Minh City-based asset manager. owner Naiscorp Information Technology Service Joint-Stock Co. last year rejected Google’s offer to buy Socbay, according to Naiscorp CEO Nguyen Xuan Tai. “Google’s offers were attractive but didn’t reach our investment goals,” he says. “Besides, we really want Vietnam to have core technologies owned by Vietnamese people.” A Singapore-based Google spokesperson declined to comment.

Duc, the tycoon with a private plane, started in business by making wooden school desks and selling them door-to-door in Ho Chi Minh City in 1993. Eventually, he began buying land in the capital and nearby Danang in anticipation of a construction boom.


Since 2006, his flagship Hoang Anh Gia Lai — named after his daughter — has been diversifying into rubber plantations, hydropower and mining in neighboring Cambodia, Laos, Myanmar and Thailand. Duc also owns the 23-story HAGL Plaza Hotel in Danang, which offers a bird’s-eye view of the city.

His property developments have attracted foreign investors such as Korea Investment Trust Management Co.

“We thought Duc’s strategy to supply affordable high-end apartment buildings for Vietnam’s burgeoning middle class was pretty smart,” says Bae Seung Kwon, Ho Chi Minh City-based head of Vietnam equity at Korea Investment, which manages $800 million in Vietnamese stocks.

Korea Investment is one of the biggest shareholders of Duc’s property company, with a 2.6 percent stake as of mid- March.

Duc himself has become a symbol of Vietnam’s emerging class of Western-style entrepreneurs.

When he bought the plane, there was no luxury-goods tax on such purchases. He has since ordered an $18 million Embraer Legacy 500 jet from Brazil’s Empresa Brasileira de Aeronautica SA that will be delivered in 2012.

This time, Duc will have to pay a $5.4 million new levy on the deal. “They had to set the tax level for private jets after I bought the jet,” he says with a smile.

With that, Duc departs for the war-era Rex Hotel in central Ho Chi Minh City, where Vietnam’s highest-profile capitalist keeps a suite in the building that was used as a U.S. military press center during the American fight against communism.

To contact the reporter on this story: Yoolim Lee in Singapore at; Beth Thomas in Hanoi at


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