by Keith Hilden and Dylan Waller, Squawkonomics
HANOI- Amid the onset of the TPP is a reduction of trade barriers for Vietnam and other countries, and Taiwan and Hong Kong investors have immediately responded by buying up Vietnam equities. Along with this set of trade barriers removed will be a closer look at the country, and particularly how additional capital into the country is going to bring additional interest in alternative spots of investment into the country- some routine, some drastic. Together this new investment environment will shine more light on the uncapitalized opportunities firms can springboard into after their entry or further positioning into the Vietnam market. Technology deployed will bring usefulness to previously idle land in agriculture, reduce power and water bottlenecks retarding growth and GDP plans, and more sophisticated dovetailing of separate business sections to integrate into new profit streams. Much of this has been done to one extent or another in developed countries, but this is brand new territory in developing countries. Inserting one’s business along the efficiency chain, and providing integration and maximization of yield in frontier markets undergoing rapid economic reform, provides firms with first mover advantage and the opportunity to carve out a majority share of newly-created markets.
Improving agricultural yield
Agriculture in Southeast Asia will increasingly be about maximizing yields on existing land, and utilizing land previously unusable. This will increase the land area of key agricultural markets in the region, and increase the historical low levels of agricultural productivity in these markets as compared to developed markets in the world. The coming boom in productivity in Vietnam, Laos, Cambodia, and Myanmar are set to provide massive gains for agriculture investments that target increased productivity in these countries.
Reducing power and water needs
Vietnam is planning for a near quadruple in electricity demand from 2010 to 2025, and the Asia Development Bank foresees an even tighter squeeze on water resources as Vietnam’s economic growth mandates a necessary increase in water demand, as Vietnam’s economy grows at over 5% a year. There is profitable space in providing solutions in the power and water industry, particularly when it comes to bringing the underdeveloped agricultural industry up to international standards of agricultural productivity.
Integrate petrochemical chain more deeply into agriculture and pharmaceuticals
With the equivalent of new lands in Southeast Asia opening up due to innovative agricultural solutions providing new yield in these agricultural spaces, there is more of an opportunity than ever to take advantage of the ASEAN FTA structure to provide a much needed increase in productivity to ASEAN agricultural lands. And a well developed petrochemical chain can be integrated into agriculture and pharmaceutical operations. For petrochemical companies, this could be a closer step to solid business relations with agriculture and fertilizer companies, or it could be a new business line entirely as petrochemical companies step directly into the arena of agricultural yields and pharmaceutical solutions, blurring the lines between a petrochemical business and a pharmaceutical business.
An entryway into pharmaceuticals in Vietnam is expected to be a profitable one: the market is projected to have a CAGR of 15.4% until 2020, and had 18.8% revenue growth between 2009 and 2013. Healthcare expenditure per capita is also extremely low compared to other Asian nations, with Vietnam’s $111 trailing significantly behind China’s $367, and Malaysia’s $264 .
The industry in Vietnam still has ample room for further growth, as health expenditure will eventually approach the levels seen in China and Malaysia as the industry continues to grow throughout 2020.
Domesco (VN Index: DMC) is an excellent way for investors and firms looking for exposure to the Vietnamese pharmaceutical market to profit from the industry’s growth, as the company has a diverse portfolio of products beyond antibiotics and prescription drugs. Chilean CFR International SPA Group is the strategic stakeholder of Domesco, and CFR was recently bought out by Abbott labs, which means that Abbott labs has an indirect entry point into the Vietnamese market, and that Domesco has the backing of Abbott labs. For investors or firms looking to take advantage of the lifting of the foreign ownership law, Domesco is an opportunity to gain yield in the growing Vietnamese market and for firms to get exposure to Abbott Labs multinational subsidiary-level acquisitions, and the counsel that comes with being advised by a multinational pharmaceutical corporation.
Cheap input of rubber and crude oil a boon for finished tire manufacturers
The TPP signing has come at a time for Vietnam in a cheap crude, cheap commodity environment, and these are synergistic developments upon the outcome of increased levels of production throughout the country. Understandably, Vietnam has started to build more infrastructure and transportation networks to be able to handle the increased demand in Vietnam as production destination of choice. Heads of business have gathered for events such as groundbreaking ceremonies to signify Vietnam’s commitment to hosting a wide array of businesses increasing eyeing the country as a potential production hub.
IMAGE: Global industry leaders meet in Vietnam for such events as economic zone ribbon cutting ceremonies and other groundbreaking events.
The cheap price of rubber combined with cheap crude and greater demand for tires unfolding across Myanmar, Vietnam, and other Southeast Asian countries makes it an excellent time to increase stockpiles of rubber while producing derivative products such as tires to serve the growing Southeast Asian market. And China’s State Reserves Bureau would tend to agree.
The state-owned entity bought last year over 128,500 tons of rubber to capitalize upon low prices to build stockpiles. The Thai government has also stockpiled rubber last year while motioning for its farmers to halt additional production in favor for palm oil. This was done at a time that rubber was close to its 5 ½ year low. While this is on one hand to put a floor under the rubber price, the Thai government also acknowledged they will most likely sell later at a profit. Furthermore, the Thai, Malaysian, and Indonesian governments have been trying to jointly stop the rubber price decline, a sure sign that price levels have hit such a low amount that rubber acquisition is an excellent investment at this time.
The relationship between the drop in crude and the price in natural rubber has been one of governments enacting artificial mechanisms to buoy price levels, relationships of which will flounder in the event of a lower crude oil price. This creates conditions where we can expect to see low input prices for crude and rubber alike, a golden opportunity that firms that capitalize upon profitably for conversion in the petrochemical and finished tire industry.
The demand market in rubber is robust as well in future years ahead. In Myanmar, there was a 15% growth registered in cars in 2014. Only 300,000 cars are in Myanmar as of last year, with most of them located in the capital Yangon. Vietnam similarly is experiencing rapid growth in auto sales, clocking in at 32% growth in the first 8 months of 2014. And Indonesia’s tire market is set to grow at 10% CAGR until 2019, while Thailand’s will grow at 12% CAGR to 2019. Low input rubber prices combined with a solid growing market in Southeast Asia filled with destinations of double digit growth makes a smart move for companies wanting to get exposure to the Vietnamese and Southeast Asian rubber finished product market.
Irrigation Innovations Increasing Agricultural Yields in Vietnam
Da Nang Rubber (VN Index: DRC) is a prime choice for investors and corporate strategists alike. The company’s tire products are sold in over 33 countries worldwide. The company has been able to deliver on earnings growth, leveraging effectively declining rubber prices, and solidifying its position in the finished tire market in Vietnam while expanding its market presence abroad.
Southern Rubber Industry (VN Index: CSM) is another key player to consider in this industry, as it was also able to consistently increase its earnings and leverage the plunge of rubber prices starting in 2012. The company produces commercial and industrial rubber products worldwide, including automotive tires, motorcycle tires, and motorcycle and automotive tubes.
In Vietnam, 40% of cultivated land is irrigated. However, about half of all irrigration and drainage systems in Vietnam are deteriorating or below standard output. Water is thus an input that is not being efficiently utilized. One of the largest determinants of the cost of water is electricity, and how it is utilized. For example, California irrigates almost 50% of its land, and over 7% of all electricity produced is used for pumping water. Therefore, needless increased water usage becomes a drain on electricity that could be utilized elsewhere. California’s size and agricultural scale is similar to Vietnam’s. In an average year, California irrigates 3.8 million ha for agricultural use, while Vietnam irrigates 4.5 million ha for agricultural use. The Asian Development Bank projects that electricity consumption will increase from 85,932 gigawatt hours to 251,763 gigawatt hours in 2020. This leap in electricity demand occurs in the backdrop of China’s disagreements upon Vietnam’s resource claims in the South China Sea/East Sea, an event that would, if settled, cover much of the gap in Vietnam’s projected energy shortfall.
A more traditional way that firms are embracing beyond simply reducing use and increasing efficiently of power and water is simply by creating more of it. Korea Electric Power Corp (NYSE:KEP) , with cooperation from Japan’s Marubeni Corporation, is investing 25% of the $2.3 billion in capital that will be used to build the Nghi Son 2 Thermal Power Project, a 1,200 megawatt power station, a significant project that together with other developments such as Rosatom’s agreement to build the Ninh Thuan 1 nuclear power plant in the country, will be developments launched that over time will reduce Vietnam’s energy gap needs. But, for the meantime, there is plenty of room for companies to enter the Vietnam market to solve the country’s energy shortfall issue.
In the meantime, life in Vietnam is punctuated with rolling blackouts, a tell tale layman sign that demand is straining against supply. The US Energy Information Administration notes that Vietnam’s electricity consumption is nearly matching generation in recent years. The administration notes that higher levels of growth and in turn higher levels of power demand is not being met with sufficient investment to increase power capacity, and as such Vietnam’s power grid is and will continue to be under constant strain by the growing economy. This will make efficient use of power and water pumping techniques to be increasingly important to Vietnam in coming years. Enter Israeli drip-irrigation firm Netafim, 60% owned by private equity firm Permira, that has wooed the Vietnamese government and flagship company Vingroup’s new agricultural yield company, Vin Eco. Vietnam irrigates more land per square kilometer than California, and the gap is set to widen further in coming years, placing a heavier strain on the power grid to meet agriculture yield targets. And companies like Israel’s Netafim are being heartily accepted into the country’s market to provide such a solution, with attractive profits for early comers and first move advantage. Water treatment companies such as Singapore’s Koastal Eco has already moved in to service Vietnam’s need of maximizing its water efficiency.
IMAGE: Firms like Singapore’s Koastal Eco have already made solid progress into Vietnam’s water treatment market.
IMAGE: Vietnam has invested heavily in efficient power and water facilities that can handle the demands of foreign businesses, and is looking to modernize facilities and processes.
Vietnam’s rapid GDP growth comes with both opportunities as well as challenges, with the backbone of growth ultimately relying on an increasing strain on water and power supply to serve the needs of an expanding middle class. Those firms that answer this call, and investors positioned accordingly, will be able to answer that call in the expansion of Vietnam’s agricultural yields, process integrations, and be able to currently do so at the backdrop of a cheap fossil fuel and natural resources input environment.
At a cheap energy crossroads, a gap exists in Vietnam energy. And the Vietnamese government and Vietnamese firms are welcoming foreign business to fill it.
Squawkonomics is a crowdfunded frontier market investment research firm that handles investment into over 10 industrial areas in Cambodia and Vietnam, and provides a wide array of investment research reports concerning Asia Pacific and Latin American investment opportunities. Squawkonomics also handles private equity services, connecting investors with promising opportunities throughout the APAC and LATAM regions. For investors in need of finding their next investment destination in Southeast Asia, contact us.