The Revelation of Vietnam's Masan Group

The abbreviation MSN may be better known as Microsoft’s instant messenger software, but it is already a well-known stock code to investors frequenting the Ho Chi Minh City stock exchange. It belongs to Masan Group Corporation, the food, banking and natural resources conglomerate that possesses the third largest market capitalization on Vietnam’s exchange (circa US$1 billion). Besides the exposure to one of Vietnam’s premier corporations, Vietnam’s own economic growth and development can also be tapped into, particularly within the fast-growing non-cyclical financial services, food and natural resources sectors. This growth is mirrored in the benchmark VN Index, which tracks the Ho Chi Minh City stock exchange, being the best-performing in Asia so far this year by increasing 32% since January 2013.

Seeking Alpha in Vietnam

Doi Moi reforms that opened up Vietnam’s markets have ensured low labour costs and higher worker productivity for the past ten years, which has supported Vietnam as Southeast Asia’s fastest growing economy, with a compound annual growth rate of 7.1%. Despite two decades of breakneck growth, Vietnam still has latent potential to unlock within its myriad untapped natural resources and its domestic consumption. Vietnam has a suitable demographic to support potentially strong domestic consumption. 68% of the country’s 90 million people are under the age of 40 and the country’s workforce is projected to increase, which points to rising income levels. Real GDP per capita has also increased from US$560 in 1989 to US$3,355 currently, which has helped double the size of Vietnam’s middle-class just over the past five years. In Vietnam, it is the emergence of a middle-class that is driving growth in non-cyclical financial services, food and beverages sectors, which account for 55% of total consumption. Vietnam also possesses an abundance of unexplored natural resources, particularly mineral resources, agriculture and energy. Vietnam boasts 7% of the world’s bauxite reserves, 7% of the world’s tungsten production, and significant amounts of rare earth, titanium, iron ore, copper, gold, nickel, zinc, tin, lead, chromite and manganese. Meanwhile, agriculture, forestry and fisheries makes up 21% of Vietnam’s GDP and the country is a major player in the world rice, rubber, cashew, coffee and seafood markets. Vietnam also has Southeast Asia’s third largest petroleum reserves with strong current capacity to produce crude oil and natural gas and with prospective reserves of 4.5 billion barrels of oil and 23 trillion cubic feet of natural gas.

The Masan Group has controlling ownership stakes in Masan Consumer, Techcombank, Masan Resources and 68 other subsidiaries. The Group seeks to maintain a Vietnamese conglomerate of businesses focused on non-cyclical sectors such as consumption, services, natural resources, and infrastructure. They want to achieve sustainable cash flows by building cash flow generating businesses in order to combat potential macroeconomic volatility that is a concern with developing economies. Therefore, Masan Group does not engage in asset trading or short-term speculation and they do not hold any minority stakes in companies, believing that they should always hold majority ownership in order to actively drive value and best practices in their companies. Masan Group focus on hiring professional managers at all levels of the organization and to incentivize them with the opportunity to become shareholders. Masan Group’s businesses are also not interlinked or partnered with each other, so Masan Consumer and Masan Resources do not borrow from Techcombank, meaning there is increased transparency and prevention of conflicts of interest. They achieved an EBITDA of US$142 million last year and are aiming for US$1 billion by 2016. Masan Group also seek to achieve sustainable growth by operating three market-leading businesses that are in the top three within their respective industries and that aim to be world-class. Linked to this goal is the attainment of economies of scale by being a market leader in each industry, as this is imperative to compete in Vietnam’s economy where there is a fragmented local private sector and intense competition from multinational companies and state-owned enterprises. It is telling that Masan Group have attracted major shareholders globally, such as BankInvest, R.F Chandler, Dragon Capital, TPG Capital, Kohlberg Kravis Roberts and Goldman Sachs. KKR had initially made the biggest investment in Vietnam ever by purchasing 10% of Masan Group in April 2011 for US$159 million and has since doubled its share in 2012. Additionally, leading Japanese food and beverage company, House Foods Corporation took a 1.85% stake in Masan Group Corporation in December 2012 as they sought to take advantage of the tremendous growth opportunities in the Vietnamese market.

Masan Consumer is Vietnam’s second largest food company. Their products include instant foods such as noodles, sauces and condiments, cereals, and coffee. It is estimated that 90% of Vietnamese households purchase Masan Group’s food and beverages products. Our key brands include Chin-su, Tam Thai Tu, Nam Ngu, Omachi, Oh Ngon and Tien Vua. Since 2007, Masan Consumer has grown its fish sauce business from a 3% market share to 76% share now, soya sauce from 42% to 78%, chilli sauce from 14% to 37%, and instant noodles from 1% to 16% to become the second biggest instant noodles supplier. Instant coffee has grown to a 44% market share just within the last three years. Masan Consumer’s net revenue has increased from VND660 billion in 2007 to VND 7,057 billion currently, approximately 81% compound annual growth rate in this period. Meanwhile net income has increased from 12% in 2007 to 32% now. Masan Consumer has a bright future due to its strong food and beverages business, the fact that per capita food spending in Vietnam is relatively low compared to other Asian economies, and that Vietnamese have a habit of spending much more of their disposable income on food than Asian countries (62.5% compared to 58% in Thailand, 53% in Malaysia, 44% in South Korea, 41% in Singapore, and 37.5% in Hong Kong). These factors suggest there is considerable room for growth as incomes rise and the burgeoning middle-class acquires a busier lifestyle that requires more convenient foods. A concomitant development is the importance of quality and brand recognition to consumers in Vietnam.

Techcombank is the third largest joint-stock commercial bank in Vietnam by total assets and the most profitable bank in Vietnam measured by Return on Equity. Techcombank has the third largest total deposits of all private sector banks in Vietnam and champions a focus on its core retail and SME banking businesses. FinanceAsia magazine awarded them “Vietnam’s Best Bank 2011”. Just founded in 1992, Techcombank has already developed a diversified financial products and services offering for both Vietnam’s 50 million strong work force and its 305,000 private companies. Techcombank has the third largest network of branches in Vietnam with 307 and the largest number of ATMs with 1,205. Net profit has grown from VND 510 billion in 2007 to VND3,154 billion currently. Techcombank has the second largest total deposits base among private sector banks in Vietnam, with VND88,648 billion in total deposits at the end of 2011. Techcombank’s emphasis on branch banking and retail customers is their attempt at developing a competitive advantage of fast acquisition of customers and gaining low cost funding from deposits. Techcombank will continue to experience fast growth in tandem with Vietnam’s banking sector, which is growing faster than its GDP. Additionally with 68% of Vietnam’s population under 40 years old, the banking sector looks blissful. Only 20% of Vietnam’s population has a bank account, which compares quite negatively to all its major neighbours such as Philippines (45%), Indonesia (50%), India (56%), China (64%), Thailand (72%), and Malaysia (78%). Looking at owners of credit cards as a percentage of its population, only 0.6% of Vietnam’s citizens own credit cards compared to 1.5% in India, 5% in the Philippines, 6% in Indonesia, 11.1% in Malaysia, 21.3% in China, and 30% in Thailand. Therefore, banks such as Techcombank with strong fundamentals and a core of retail customers have a great long-term future.

Handy Resources?

Masan Resources’ goal is to be Vietnam’s largest private sector natural resources company. In moving towards that goal, they completed Vietnam’s largest M&A deal in 2010 by acquiring Nui Phao Mining Joint Venture Company Ltd, which had world-class tungsten and base metal mining projects and is expected to be the largest producer of tungsten in the world outside of China as well as one of the largest single-point producers of fluorspar and bismuth globally by 2015. Tungsten has been applied in the production of wear-resistant abrasives and cutters and knives for drills, milling and turning tools for metalworking and mining and petroleum industries, as a replacement for gold or platinum jewellery due to its similar density, in producing heavy metal alloys such as high speed steel, as an alternative to depleted uranium in kinetic energy penetrators, in producing grenades and missiles to create supersonic shrapnel, in producing fluorescent lighting, as scintillation detectors in nuclear physics and nuclear medicine, and in light bulbs, rocket engine nozzles, cathode-ray tubes, and vacuum tube filaments. Fluorspar is used as a flux to lower the melting point of raw materials in steel production to aid the removal of impurities, in the production of aluminium, the production of opalescent glass and cooking utensils, to make hydrogen fluoride and hydrofluoric acid, and to replace glass in some high-performance telescopes and camera lens elements. Conversely, Bismuth is used as an ingredient in some pharmaceuticals, in cosmetics such as eye shadows and nail polishes, and as a replacement for lead such as in bullets and less-lethal riot gun ammunition.

  

Masan Group Corporation shares are currently trading at VND113,000 within a 52 week range of VND85,000 to VND135,000. Buy now and hold long-term for this is one of the best shares to gain exposure to Vietnam’s unique economic development story.