VinaCapital Vietnam Opportunity Fund : VOF July 2017 Update

GBP/USD exchange rate as at 30 June 2017: 1.28

GBP/USD exchange rate as at 31 July 2017: 1.32 Source: Reuters

July was the market's most volatile month of the year thus far, with the VN Index see-sawing between 760 points and 783 points before ending the month more or less flat (+0.9%). As at the time of writing, the market has resumed its upward trend and is still at a nine-year high. Foreigners continued to be net buyers, and the high levels of both foreign direct and indirect investments continues to support the VND, which has moved just 0.4% during the first seven months of 2017.

VOF's share price was up 4.6%, outperforming the VN Index, to end the month at USD4.00. The discount between share price and net asset value (NAV) per share narrowed to 15.4%.

The month saw a large number of companies reporting results for the first half of the year, and on average profit growth is running in the 20% range, although there are some companies posting stronger growth, including our investee company Viejet Air. The airline's first half results saw revenue and net profit increase 31% and 45%, respectively, mainly driven by solid growth in core revenue (+47%, excluding the revenues from sale and leaseback of aircraft). The addition of 20 new routes, a 3% increase in air fares, and a

16% increase in passengers all contributed to the rise in revenue. As we pointed out in our aviation note in May, we believe that core earnings growth of Vietjet and other companies

in the sector is sustainable as they benefit from the continued substantial growth in tourism, both international and domestic.

Another standout is Phu Nhuan Jewelry (PNJ), which reported robust sales and completed a private placement. Coming off a successful year in 2016, PNJ continued to deliver very

strong results in the first half of 2017, with sales increasing 39% and net profit surging 54%, driven by growth across all segments. In particular, gold retail sales surged 46% propelled by an 28% increase in same store sales and rapid store expansion. PNJ opened 20 stores

in during the first six months of the year, raising its total store count to 240. PNJ expects to have 280 and 310 stores by the end of 2017 and 2018, respectively. Silver sales also advanced 44% thanks to new product designs and effective marketing campaigns. We

believe core profit growth will remain strong for the next few years, primarily driven by retail network expansion that will capture rising jewelry consumption and the continued gaining

of market share away from mom-and-pop shops, which still account for 80% of total market sales. We project PNJ's net profit to grow 57% and 20% to USD35 million and USD42 million

10.0

9.0

VOF shares purchased (millions)

8.0

7.0

6.0

5.0

4.0

3.0

2.0

1.0

0.0

2011 2012 2013 2014 2015 2016

6.00

Share price and NAV (USD)

5.00

4.00

3.00

2.00

1.00

-

Shares bought back VOF share price Monthly NAV

1.3% 0.5%

4.0%

4.4%

4.8%

6.7%

8.2%

12.5%

57.7%

Food & beverage Construction materials Real estate equities Consumer discretionary

Infrastructure

Cash Financial services Real estate projects

Bonds Receivables, Payables and Others

7.2%

6.9%

6.7%

5.1%

4.8%

4.4%

4.0%

15.2%

11.9%

21.9%

Listed equity (57.7%) OTC stocks (12.5%)

Private equity (8.2%) Cash (6.7%)

Real estate projects (4.8%) Bonds (4.4%) Receivables, Payables and Others (4.0%) Operating assets (1.3%) Overseas equity (0.5%)

Industrials Mining, oil & gas

Agriculture Operating assets Pharma & healthcare

4.0%

2.9%

2.5%

1.3%

1.3%

in 2017 and 2018, respectively.

PNJ just successfully raised USD43 million via a private placement in July. The new issuance is equal to 10% of pre-money outstanding shares, in which 51% has been distributed to

domestic investors at a price of USD4.20 per share, representing a post-money market cap of USD456 million, and 49% has been distributed to foreign investors at a price of USD4.80 per share, representing a post-money market cap of USD514 million. VOF currently is the largest investor in PNJ with 10% ownership. We are happy with the valuation of the fundraising.

However, we feel that our portfolio is quite overweight with PNJ, so we did not take part in the private placement. We understand more than 50% of the foreign block was taken by a large locally-based institutional investor. At the full foreign price of USD4.80 per share, PNJ's multiple on invested capital is 2.8x.

On 17 August 2017, the Board announced the payment of the Company's first interim dividend of 4.8 US cents per share, which will be payable to shareholders on 27 September 2017. For more information, please visit http://www.vof-fund.com.

The State Bank of Vietnam (SBV) unexpectedly cut Vietnam's policy interest rates by 25bps on 10 July 2017 with the stated aim of boosting GDP growth to meet the government's

annual growth target of 6.7%. Policy makers aim to achieve this target by loosening monetary policy rather than fiscal policy because fiscal constraints preclude the reliance on aggressive government spending to stimulate the economy. Furthermore, Vietnam's government debt- to-GDP ratio has already more-or-less reached its 65% of the GDP statutory limit. We expect Vietnam's GDP to grow by 6.3-6.5% this year.

We note that tepid inflation (Vietnam's CPI increased just 2.5% year-on-year in July), coupled with a weak USD (the DXY index fell 10% YTD, and the market USD/VND exchange rate is

more-or-less unchanged YTD), give the SBV the latitude to flood local banks with liquidity. The government hopes that the prevalence of excess liquidity in the banking system would prompt banks to extend loans to businesses and individuals - which would in turn propel GDP growth. The perceptible impact of banks' flush liquidity has been a drop in the one-week interbank bank rate from 4.5% at the beginning of 2017 to 0.7% at the end of July (interbank rates fell by about 200bps in July).

Finally, the factors that have been propelling (and constraining) growth this year all persisted in July. In short, Vietnam's GDP growth is currently being driven by consumption and manufacturing, but a plunge in oil production is weighing on growth. Specifically, real retail sales (a close proxy to consumption growth), and manufacturing activity grew by 8.7% year- on-year (y-o-y) and 10.6% y-o-y respectively in 7M17, both of which are comparable to the growth rates recorded in 1H17.

In contrast, the decline in Vietnam's mining activity eased from a 5.5% y-o-y drop in June to

a 3.5% decline in July, but this apparent improvement was primarily attributable to favorable base effects, rather than to a rebound in oil production growth - meaning that weak oil production continues to drag on GDP growth.

Vietnam's PMI reading fell from 52.5 in June to 51.7 in July, but forward-looking components within the PMI point to a likely further expansion in manufacturing activity well into 2018; in July, firms reported that their inventories of finished goods fell, at the same time that their work backlogs grew at the fastest pace in six years. Furthermore, FDI inflows increased 6%

y-o-y in 7M17 to USD9 billion, and the vast majority of Vietnam's registered FDI is earmarked for the development of new factories and other production facilities.

7.0

6.0

5.0

4.0

3.0

2.0

1.0

0.0

60

55

50

45

40

30.0

25.0

20.0

15.0

10.0

5.0

0.0

1,500

1,000

500

- (500)

(1,000)

(1,500)

(2,000)

(2,500)

Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar

Jun

2010 2011 2012 2013 2014 2015 2016 2017

expanding

expanding

Dec-12

May-13

Oct-13

Mar-14

Aug-14

Jan-15

Jun-15

Nov-15

Apr-16

Sep-16

Feb-17

Jul-17

Disbursed (YTD) Registered (YTD)

Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15

Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16

Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17

YoY CPI

MoM CPI

8 1.2

71.0

0.8

6

0.6

50.4

4 0.2

30.0

(0.2)

2

(0.4)

1 (0.6)

- (0.8)

2013 2014 2015 2016 2017

YoY CPI MoM CPI

Source: GSO, Vietnam Customs, Bloomberg

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