“The Investment Environment Is Very Attractive Now”

There have been many positive changes in Vietnam’s private sector over the last 10 years. Tax compliance and transparency have improved considerably. In the early days companies didn’t have reliable financial reporting, but now it’s common that they have audits by big-4 auditors, and some private companies even use international ERP systems like SAP or Oracle. The quality of management teams has improved considerably – although it is still a constraint in general. Also, the private sector has prospered as the consumer sector grew, since state-owned companies had less of an advantage in consumer businesses, creating a lot of openings for private investment in consumer businesses.

 

We select companies based on first selecting certain priority sectors (which for us are consumer related sectors), and then selecting the company with the strongest management team in that sector. Consistently the companies that have been the most proactive about building the capacity of the management teams are the companies that have performed the best, regardless of market circumstances.

 

As of 31 December 2010, Vietnam’s CPI reached 11.75 percent year on year. We believe that inflation did not have a negative impact on the performance of our investee companies. In most cases, the companies were able to pass on increases in costs to their customers. Inflation was correlated with the VND devaluing against the USD by 5.5 per cent in 2010.

 

We believe that exchange rate in 2010 did not have a big impact on our investments, except in the case of one company that did not lock in its buying price for USD when entering into a large contract with a customer, and which was exposed to this mismatch during one of the devaluations. In 2011, in spite of devaluations and inflation in the first four months, our companies have been performing extremely well, with year on year net profit growth of 48 per cent during the first quarter. So I believe that inflation and currency risk is a situation that can easily be handled by well managed companies.

 

The valuations in the public equity markets have come down substantially from their high in 2007, and in general the valuations at which investors are currently investing in Vietnam are much lower than in the past. We recently negotiated the lowest P/E ratio that we ever negotiated for a new investment. So I believe the investment environment is very attractive now, but many investors are sitting on the sidelines due to risk of inflation and currency devaluation. I believe this is priced into the market so that when inflation actually starts to come down and when the exchange rate stabilizes, I believe public equity valuations will rise to more normal levels.

 

We believe the best companies follow some simple patterns: they have a clear vision with measurable targets, they have a clear plan for achieving their vision, they set monthly targets and track their performance with KPIs, they take action to fix whatever is not working in the company as soon as they identify something that is not working, they build strong cultures around a shared set of values, they have bonus systems that work, and they are constantly taking action to strengthen their management and leadership teams. Companies that are doing those things are performing extremely well – but very few companies are doing all of this. Our portfolio companies have been doing many of these things, and it has contributed to their 48 per cent growth in net profit in the first quarter of 2011.