Investing in Growth Shares

“The zigzagging stock market is the good opportunity to invest in growth shares and investors might take 20 per cent of profits by the end of the year,” said the Vietnam Association of Financial Investors (VAFI).

According to VAFI, progressive shares are issued by enterprises with annually growing revenues, profits, fixed assets, human resources and others. The growth of those enterprises always goes in lines with the country’s GDP expansion.

 

Almost monopoly in business generates continuous growth of enterprises. They are also well governed by excellently creative, wholehearted and responsible managers. They, at all times, accept stiff market competition. However, good governance is not enough to ensure continuous growth but the growth depends on business environment improvement as well as continual economic growth to create output markets for enterprises. Besides, continuous growth is also seen in enterprises set up by founding shareholders and groups which will care the outputs for the enterprises. By this way, the growth of the enterprises depends on founding shareholders and groups.

 

Especially, according to VAFI, continuous growth is also generated in companies transforming their governance regime from State-owned concerns into joint stock entities. If the equitisation result is good enough, it will create growths for following years.

 

In general, State-owned economic groups like VNPT, Petrolimex, PetroVietnam and EVN exposed many shortcomings in governance and administration. In terms of governance, administration levels of private enterprises are much better than those in State-owned enterprises. However, with their business monopoly, State-owned companies always make growths in assets, revenues and profits. Their growths are clearly in line with the economic expansion. However, business monopoly is diminishing.

How to know and valuate the growth of an enterprise in short term and long term? According to VAFI, investors need to study the development history of targeted enterprises through different economic phases to know the growth of revenue, profit and owners’ equity, assess core business and possibility of increasing revenues of individual products and services, look through the possibility of growth of individual industries in the future, and position the enterprises in such industries.

 

In addition, investors also need to analyse corporate governance apparatus and alternative human resources, and dissect incomes of employees and managers relative to the social average and the industry. If the incomes are high (exclusive of monopolistic enterprises), personnel of those enterprises are good. This is crucial factor for long-term stable development of enterprises.

 

Notably, according to VAFI, investors need to know revenue and profit prospects of growth enterprises. This is a hard job because it is sometimes very difficult to understand an industry as well as its risks in a business environment as in Vietnam. In the near future (1-2 years), an enterprise can establish quite accurate business plans but it is harder for plans in longer terms. However, according to VAFI, several listed companies are believed to double their profits in 3 - 5 years to come.

 

Empirically, the economy will continually make high growth rate but will slow down when it reaches certain level of development. Together with it is slower growth of enterprises. In Vietnam, the corporate governance levels and knowledge are limited in relation to the world. It is more difficult to manage larger enterprises and capital use efficiency falls as a result. Normally, smaller enterprises have higher growths while larger entities see lower rates.

 

If investors determine profit growth of enterprises in medium term, their investments will hardly lose, given the current context of stock market.

 

“Selecting high growth shares to create a good portfolio when the VN-Index is around 500 points, investors will never loss in the medium term. However, wrong picks and prices may cause more risks to investors,” VAFI recommended. 

 

VAFI said selecting growth portfolio, with a reasonable price level, usually means success. Reasonable price means low relative to future growth of target enterprises. For instance, today, you buy shares with P/E at 10 but the P/E is 5 in the next two years. 

 

Investors not only pick up high growing shares but also lower growing ones but with fewer risks like power plants.

 

Last but not least, investors also need to look at dividend policy of targeted enterprises. This is the factor to ensure liquidity as well as investment efficiency.

Hai Anh