Our M&A Advisory team followed up on the optimism on Vietnam shared in the June 2015 newsletter by spending a week in Ho Chi Minh City last month speaking to various local stakeholders to corroborate our thesis. We found the sentiment in Vietnam upbeat as after approx. 3-4 years of slow growth and watching its neighbours in ASEAN garnering investor attention, the country finally finds itself back under the spotlight. GDP growth projections are robust, credit growth is strong and deal market is abuzz.
Private Equity capital in Asia has always chased optimism and the current situation is no different – 3 of the top 5 domestic PE funds are in advanced stages of fund raising on the back of star exits and by the end of 2015 over USD 500mn of PE capital is estimated to be ready for deployment. However, deal flow volume in Vietnam has traditionally been thin and with both onshore and offshore PE funds targeting the narrow universe of USD 10-25mn growth capital deals, pickings are bound to be slim. Hence, it also comes as no surprise that an increasing number of PE funds are opting for the PIPE (Private Investment in Public Equity) route to deploy capital.
Over two-thirds of PE deals reported in Vietnam over the last 5 years have been focused on consumption-led sectors with a view towards reaping the benefits of the large 90mn population and favourable demographic dividend. However, the decade of the first wave of PE in Vietnam is over and fund managers will have to be increasingly creative to create the next multi-bagger exit. In this edition of TaipanOracle, we briefly introduce four investment themes that can be explored to potentially source attractive deals in Vietnam:
1. Bargain hunting - Banking
The Vietnamese stock market trades at a discount to its emerging market peers with current Market Cap. / GDP ratio of 23% (as compared to >45% for most of its Asian peers) and an estimated forward P/E of 12x. The banking sector in Vietnam which is still recovering from the aftermath of the banking crisis, trades at an even steeper discount to its regional peers with the top 7 listed banks trading at an average TTM P/BV of only 1.4x. Moody’s in December 2014 upgraded the outlook for Vietnam’s banking sector from negative to stable, and Fitch Ratings in November raised Vietnam’s foreign and local currency debt to BB- from B+. NPAs for the sector have reduced from 17% in 2012 to 3.25% in 2014 and the State Bank of Vietnam is committed to stabilizing the sector by reducing the total number of banks from 40 to as few as 15 by 2017.
We believe the time is opportune to take a bets on the banking sector as consolidation is likely to improve efficiency through better economies of scale, and reduce supervisory burden. Identifying and investing in one of the winners at this stage of consolidation can result in multi-bagger gains in future.
2. Sectors at a Tipping Point – Modern Retail
Vietnam’s steady GDP growth has resulted in a rapidly expanding labour force, a fast growing middle class (expected to reach 33 million in 2020), and a rapid increase in urbanisation. Consumption growth has been fuelled by rising disposable income with spend on food and non-alcoholic beverages expected to grow at a CAGR of 13.1% from 2013 to 2018E. The Vietnamese consumption market is currently dominated by traditional players, with modern grocery penetration significantly lower than any other market in SEA. Asian retailing giant BJC estimates that in 2013, Vietnamese modern grocery was estimated to be only 4% of total grocery retail sales in Vietnam, versus an average of 42% for other SEA countries, whilst the number of modern grocery outlets per million citizens in Vietnam was estimated to be only 8, versus an average of 111 for SEA. The modern grocery market is forecast to grow at a CAGR of 17.9% from 2013E to 2018E, versus the SEA average of only 5.6%.
According to the Vietnam Retailers Association, as of 2013, Vietnam had about 724 supermarkets, 132 commercial centres, a few hundred convenience stores, nearly 9,000 markets of various kinds and about 1 million family stores. By 2020, the country is expected to have about 1,200-1,300 supermarkets, 180 trade centres and 157 shopping centres. Currently, modern retail accounts for about 25% of the Vietnam distribution market.
Recent transactions include BJC’s acquisition of Metro AG’s 19 hypermarkets for USD 876mn and acquisition of convenience store chain B’s Mart, VinGroup’s acquisition of 13 supermarkets owned by Ocean Mart and Power Buy’s (Central Retail Corporation, Thailand) 49% acquisition in electronics retailer Nguyen Kim Trading at a reported valuation of USD 200mn. According to company reports, 250 to 300 new supermarkets will open in Vietnam in the next three years, a 40% increase in the existing stock (and a bigger increase for Hanoi and Ho Chi Minh City). About 1,500 convenience stores will open, three times the number operating today. There should be room for many more as by comparison, Thailand has more than 10,000 convenience stores serving a population that is only three quarters the size of Vietnam’s.
The sector is ripe for consolidation and an interesting strategy could be taking a position in of the middle-rung players and scaling it up for acquisition by one of the top 3 market leaders in future.
3. Targeting carve-out / divestment of non-core assets
As Vietnam goes about restructuring its banking sector and recovering bad debts, there are a number of large and mid-size conglomerates, both private and state-owned, which find themselves financially stressed and occasionally out of favour with the regulators and the government. Historically, diversification by conglomerates in Vietnam has been unplanned with expansion into multiple sectors with no apparent synergies. Deals can be created by reaching out to some of these large conglomerates to divest their non-core assets which are buried deep within their balance sheets and have not received adequate capital or management focus to enable scaling up. Divestment of non-core assets is also the Government’s focus with SOEs having divested assets worth USD 108mn in 2014 and have a divestment target of USD 1bn for 2015.
An illustration of this strategy is VinGroup’s acquisition of 13 supermarkets owned by Ocean Group, a beleaguered group with interests in real estate, hospitality and financial services. The rebranded entity is called VinMart and the parent has laid out rapid expansion plans to add 100 supermarkets and 1,000 convenient stores nationwide. Warburg Pincus has partnered for the retail build-out with capital commitment of over USD 300mn till date.
4. Bankrolling veteran entrepreneurs to build scale businesses
Nascent sectors like F&B retail and education are on investors’ crosshairs as they are poised to reap the benefits of a young and growing urban population. Huy Vietnam (Mon Hue, Pho Ong Hung and Com Express), Golden Gate (Kichi Kichi, SumoBBQ, Vuvuzela, Isushi, Ba Con Cuu, Daruma, and Gogi House) and Highlands Coffee have seen active interest from offshore investors and raised funds at rich valuations. However, these F&B retail companies are among the very few who have managed to achieve scale and national presence, and the hunt for the next F&B deal continues to remain elusive. Similarly, education remains a highly attractive sector but barring large names like British International School (recently merged with North Anglia Education at an estimated valuation > USD 100mn) there are not enough mid-size companies which can be backed to scale up and emerge as sector champions.
Private Equity funds looking to get access to cheaper and more attractive deals will have to dig deeper and reach out to veteran entrepreneurs and bankroll them to achieve scale through organic expansion as well as consolidation. The target entrepreneur will need to have a deep understanding of the sector, existing infrastructure including access to management and systems to mitigate scale up risks, and the vision to build the next sector champion. Similar strategy has been followed by VIG in their investment in QSR Vietnam (franchisees for The Pizza Company, Swensen's and Dairy Queen) and TPG / Vietnam Growth Capital’s investment in Masan Agri (consolidation vehicle for animal feed and meat processing sector in Vietnam through the acquisition of Proconco, Anco Nutrition and Sam Kim).
As ASEAN countries face political and economic headwinds, the Vietnam economy stands apart with its promise for investment – however, with large amounts of capital chasing relatively few quality deals, investors will have to be creative in their investment strategy to create multi-baggers. We invite you to schedule a chat with our M&A Advisory & Research team to discuss the proposed strategies in detail and identify investment opportunities for your business.