Final post on FRT (for the moment)

There were a few more things about FRT that I wanted to look at today. First, a general comment: I believe that there is too much focus on income statements, especially with regard to consumer discretionary companies. Of course, revenues and margins are important, and we looked at them two days ago.

Source: Company data, chart by Vietecon.com

But the balance sheet is equally determinative of returns for shareholders. Remember the DuPont formula: net margin x return on assets x financial leverage = return on equity. And returns on equity are ultimately what (should) result in returns to shareholders.

FRT’s balance sheet is especially interesting, because it is similar in some ways to MWG (makes sense, both are consumer electronic companies), but the differences are illuminating.

Things that caught my attention:

Source: Company data, chart by Vietecon.com

• DSOs: Days sales outstanding, which tells you how long it takes FRT to get paid for sales, is actually pretty long at 25 days. MWG was 6 days in 2019, and at the worst was 11.5 days (2017). I would think this is a cash business, so not sure why DSOs/receivables are so high.

• Days inventory: This is how many days an item stays in the store, on average. This has been trending up, just as it has been at MWG, but it also isn’t as high as it is at MWG. As more stores open, it is likely that this will trend up, but the hope is that as the new stores reach maturity, it will fall again. Remember that inventory is ultimately cash in the form of products. If you can get a product in and sell it quickly, your returns are going to be much better.

• Debt to equity: This is crazy high at almost 3x debt-to-equity. I thought MWG’s debt was bad, but it is nothing compared to FRT. While debt-to-equity has fallen, actual debt has increased - it’s just that equity has increased faster.

• Return on equity: Remember that leverage matters a lot for returns on equity. And FRT is punching above its weight in RoE terms because of that high leverage. It was above 50% in 2016, and it only recently started to fall. In 2019 RoE was 17.5%, and because 1Q was weak, it fell to 14.5% for the TTM.

My biggest concern with this balance sheet is that it doesn’t provide much wiggle room for FRT. And right now, that’s needed. There is a potential very negative story to tell about FRT: Inventories are high, it takes a while for FRT to be paid by its customers, and to fund all of this, it has resorted to extreme levels of debt. But with COVID, margins are falling, and the ability to keep adding debt is harder.

But, I think that it is a bit too harsh. It looks like COVID will just be a small bump. And there is a real effort by the government to make sure that defaults are kept to a minimum by maintaining debt facilities and lowering interest rates, which should help FRT in the short term.

In the long term, D/E probably needs to fall, and that’s going to lower returns (all else being equal). So FRT really needs to focus on margins and inventory, to make that transition as light as possible.

Looking further into FRT's pharma business

Source: FRT, chart by Vietecon.com

Yesterday we looked at FRT, the second largest consumer electronics chain. As a reminder, it has performed significantly worse than MWG with lower revenue growth and smaller margins. Tied to this, it has not opened as many stores as MWG, although it has opened a good number of stores in the past seven years. MWG had 1,240 stores in 2016 and 3,268 as of April, compared to almost 600 at FRT as of YE2019.

So it is expanding slower than MWG, but it is also expanding slower than it has planned to. At the end of 2017 it said it should have 673 stores by the end of 2019, but it ended with just 593.

Of FPT’s total store count, 100 are pharmacies, and it plans to open another 70 this year. It is a bit more on target for expansion on the pharmacy side, with a plan to have 120 stores at the end of 2019, but it had just 100.

MWG also has a pharmacy business: it owns 49% of An Khang, which has 20 branches in HCMC. There was a push to invest and expand it after it was bought by MWG back at the end of 2017 to invest in the chain, but it never happened.

One of the reasons that MWG has been cautious is that the business is tough. Both chains are losing money, and there are a number of reasons for this:

Source: Vietecon.com

• Hospitals make up 70% of the market for pharmaceutical sales. .

• Regulatory issues are weird. “Vietnamese regulations require individual licensed practitioners and not businesses to stand legally responsible for each outlet, which could give rise to a lot of legal risk, he said.” FRT has worked around this, but it has held back MWG.

• Total pharma spend is projected to be $85 per person for 2020. That would equate to more than $8bn in total market size.

• But the market is saturated. There were 57,000 community pharmacies in Vietnam. This is approximately the same amount as in the US, despite having just 1/3rd of the population and significantly lower income. On any metric, this is a large number of pharmacies. It works out to 60 pharmacies per 100,000, more than double the OECD average of 25.

• With this many stores, pharma revenue per store is just $43,000 or so. Even with a high estimated gross margin of 30% (and that’s probably too high - the US is around 20-25%), gross profit per store is under $13k per year on the pharma side.

• Of course pharmacies sell other stuff, and this can help cover the overhead.

• Also, FRT will likely be able to steal share from the smaller pharmacies that don’t have a the corporate backing. It already has sales of $222k per store. [This figure is based on 2019 financials with total revenue of pharmacy of VND551bn, or $22m for 100 stores. It doesn’t really jive with some retail sales figures that FRT has provided previously - namely sales of $86k per store per month by YE2018.]

• And ultimately, there might be a move out of hospitals to pharmacies, although it doesn’t seem to have happened yet.

Ultimately, this is going to be a tough business. I can see why MWG has become less interested in it, although it means that its original acquisition An Khang was a dud. FRT hopefully can steal share and reach scale on expenses as it ramps up stores.

Until then, it looks like it is going to continue to be a drag on the consumer electronics business, which is already lagging considerably behind MWG.

More consumer electronics - FRT

Source: FRT, chart by Vietecon.com

On a tip from a reader, I started to look at FRT, which is a comp to MWG. Both have consumer electronics businesses and both have invested in pharmacies. But that’s about the end of the comparisons.

Revenues: if you remember, MWG had amazing revenue growth. From VND25.3tr in 2016 to VND102.2tr in 2019. That’s 4x!. FRT grew from VND10.8tr to VND16.6tr in the same period.

Source: FRT, chart by Vietecon.com

Margins: MWG gross margin has been at least 300bps higher than FRT, and it grew to 19.1% in 2019 compared to 12.7% at FRT. Operating margin was almost 5% at MWG in 2019 but just 1.6% at FRT.

Profits: Because of a falling margin at FRT, net income has barely moved from 2015 to 2019. That’s not the case at MWG.

Source: MWG, chart by Vietecon.com

Remember that during this time, MWG has been investing considerably in new stores. FRT has also invested in new stores, but not at the same pace, yet the slower pace hasn’t seemed to help profits, which would be one reason to do it.

Also, MWG added in grocery, which is not a high-margin business (having worked personally in a small grocery, I can tell you that it is a tough business).

So what’s really driving it? Well, it was partially pharmacy, which was only 3% of total sales in 2019, but it lost VND42bn (PBT) or 15% of the profit of the consumer electronic stores. But even the consumer electronics profit margin before tax of 2.0%, which isn’t great.

I am going to write more about this tomorrow, but I have to run now.

Tourism returns to normal? And deflation?

Found some interesting items today that I wanted to quickly write-up as I work on two larger items.

Source: VN Express

Can domestic tourism take the baton…

First, it looks like domestic flights are back to normal or will be by mid-June, when Bamboo goes to 120 flights a day (up from 80 flights a day, which started today). Vietnam Airlines even said they were above last year’s passenger figures.

And then there’s this:

Some hotels have reached 80-90 per cent capacity and others are completely full, which is a positive sign for domestic tourism, she said.

I would assume that this is just a few number of hotels, and that overall occupancy rates are still quite low. There is probably pent-up demand for airline flights (people going to see family or business meetings that can finally take place). In addition, not all flights were running (and won’t until June 15), so the ones that are open, were busier.

But it seems like domestic tourism is taking on some of the burden of declining international visitors, which is positive.

From the same article, I found this interesting:

Committee's members said that even when international tourism resumes, the destinations would be limited to a certain number of islands in the country, including Phú Quốc in Kiên Giang Province, while public health measures are enforced to ensure the safety of both tourists and local residents.

The committee is the National Steering Committee for COVID-19 Prevention and Control. If they do this, it would be a weird turn of events: special islands that are only for tourists and workers. Sounds like the Shanghai International Settlement or something.

But in the meantime, I don’t see many foreigners showing up, given a 14-day quarantine. So there is no choice but to focus on domestic tourism. Plus, it is very unclear what will happen to foreigners that arrive - right now they get quarantined. This article about what happens if they come and get sick within that 14-day period doesn’t comfort me too much - it looks like they may be on their own. It’s very confusing.

Deflation already here?

One of the reasons why people can travel domestically now is that (if they had a job) they probably saved a lot of money during lockdown. I know I did.

So lots of savings, but companies still wanted to make sales, so there were a lot of discounts. Anything to push their inventory through the system.

Because of that, there is concern that prices overall have fallen. Why is that bad? Well, think of it this way: if you know that something is going to be 10% cheaper in 6 months, you will just wait and buy it then, if you can. It is a vicious cycle with people not buying things because they know it will cost less in the future then waiting even more, and then seeing more discounts.

Not only does demand suffer, deflation also makes debt more expensive as lower wages follow falling prices. Debt burdens become more onerous.

Anyway, May CPI figures came out for HCMC, and they were down 1.38% YTD and 0.33% month-over-month. CPI was up yoy. Some of this is probably because of lower oil prices (they are up almost 100% since their low in April, but are still down for the year). Transport prices fell 2.29% m-o-m, while fuel (among other things) fell 0.97%.

This is something that we need to watch closely. Deflation is hard to break out of, and it can be devastating to an economy. Remember that deflation was a big part of the great depression.

Is the VND appreciating? Yes, but the impact is limited so far

I have written a fair amount (here and here and here) about both trade flows and the currency, especially in regard to US pressure on Vietnam to lower its trade surplus with the states. For many reasons, the Vietnamese central bank and government have kept the VND/USD exchange rate mostly stable with steady low-level devaluation over time. The reasons it doesn’t want a currency that depreciates quickly include:

• Fear that a falling VND would boost exports even more and get the country labeled a currency manipulator.

• Concerns around USD-denominated debt at both the government and local level. If the currency depreciates too quickly, it may be hard for the government and companies to make principle and interest payments.

• Import-led inflation. If imports are necessary (say oil or food), then the rising costs will just feed into inflation in the country. .

But a side effect of the stable-ish VND/USD rate is that as many of the world’s currencies depreciate against the dollar, the VND has appreciated against them. Funny how that works. We see this all the time with currencies pegged to the USD (like most of the Arab Gulf countries).

Source: Vietnamese Customs, chart by Vietecon.com

An appreciated VND means that Vietnamese exports look more expensive. And this article points to exports to China, in particular, getting more expensive. Companies are scared that soon they will be forced to 1) lower prices to remain competitive or 2) lose market share due to their higher prices. I would assume that Vietnam is a low-cost provider of most of these goods, so a few percentage point increase in prices could really hurt demand.

Source: Vietnamese Customs, chart by Vietecon.com

First, let’s look at overall trade balances. We wrote about the types of exports that have done well this year here. Computers and footwear were the only ones that grew significantly. It got worse in the first half of May, when exports fell 15%. Computers (+18%) and machine parts (17%) were the only ones that held up. Every other big category was down double digits. Year-to-date, exports are flat after these figures.

Imports were down even more than exports: -21%, driving the year-to-date figure to -3%. That resulted in a deficit (more imports than exports) of $1bn. For the year, the country is still at a surplus of $1.4bn, but just 2 weeks took it down by 40%.

Source: Yahoo finance, chart by Vietecon.com

It’s hard to tell how much we should read into these figures. We saw a similar pattern in the trade balance back in 2019. Then, the surplus came down $3.4bn.

But I wanted to look and see if we can start to see the impact on any countries. It is extremely time consuming to pull the data, so I focused on China which seems like one of the most obvious areas where we would see the trends quickly and a massive trade partner for Vietnam. This article explicitly talks about how exports to China are already hurting.

Why China? The exchange rate between the USD and the CNY has depreciated (see chart), meaning it takes more CNY to buy a USD than previously. Caveat here: we saw a deeper devaluation last year starting in August. That’s when trade tensions between the two countries started to heat up. But it rose again through early January.

Source. Vietnamese Customs, chart by Vietecon.com

But let’s take it as a given that the situation is a bit worse this year, because the world is generally more fragile, demand is already weak, so higher prices are likely to cut into that demand even more. We should start to see some sort of impact on trade with China, given that the VND has appreciated.

However, we can’t really say that trade with China is much worse this year, based on the data through April. The chart to the left shows imports and exports to China and the deficit. It doesn’t look that different to me, in fact. The decline in February was basically the same as what we saw last year (driven by Tet/Chinese New Year). There is a bit of a new dip in both exports and imports in April, but it doesn’t seem too bad.

I bet we will see a further decline in both exports and imports to China in May. If so we should start to be worried. Remember that trade effects are not homogeneous across the economy. Certain sectors and companies will suffer, especially if they have made their business off selling low-priced goods to China. Or other countries - remember that the USD has risen against GBP and a bit against the EUR. That’s why so many people in the article above are starting to worry.

This is just another economic hardship that the government needs to take into account. Stimulus is great, but it would be meaningless if it was more than offset by the appreciation of the exchange rate.

More post-COVID retail insights - MWG

Source: MWG, chart by Vietecon.com

MWG reported April figures, and they are not as bad as I would have expected. Sure, sales were down 14% yoy in April, and net profit was off by a third. However, the figures actually didn’t look terrible, given that 600 stores were completely closed from April 1 to 15, and 300 of them were still closed in the second half of the month. That equates to about 10% of stores fully closed and 20% partially closed. Yet, the company still had a net profit of VND209bn.

Interesting items from the release:

Consumer electronic stores did poorly: TGDD was down 12% yoy in the first fourth months.

Source: MWG, chart by Vietecon.com

Groceries obviously did well, adding VND2tr to revenues in April alone. That was almost 17% of sales the highest percentage the company has seen yet since it started building up the division. BHX was up 167% in the first four months.

Laptops were also way up: 120% yoy. Helped by people moving to remote work.

Online revenue was 16% in April, which is a good number and way up from 7% in 1Q. But to be honest, I would expect there to be more online revenue. Maybe it is because of the strength of groceries, but MWG posted higher online sales in each of the first four months of 2019 than it did in April. I guess that makes sense with the closures, but even in March, online sales weren’t that impressive at only 9% of sales.

BHX stores, even with the pick up in March, still produce much less revenue than the other stores. Revenue per store at the division was just VND1.3bn in April (VND1.8bn in March). In the long term, these stores will likely bring down net profit margin just because of their smaller revenues and lower margins. But the grocery market ultimately is quite large, so it can be a good trade if the company makes it work. And MWG seems to be making it work very well.

New lower plan for 2020. Unsurprisingly, the company lowered forecasted revenues to VND110tr, from VND122tr previously. This still represents 8% growth over last year’s VND102tr. Net income should be VND3.45tr, down from the plan of VND4.8tr, and also 10% down from 2019’s VND3.86tr.

Overall, it seems like MWG is weathering COVID fairly well. I assume that May will be mostly back to normal, in terms of store openings, but sales are likely to suffer. It seems to me that the new plan figures are kind of low and give the company a bit of room to exceed expectations. But we will see.

World Bank and Vietnamese productivity

The World Bank released a report on Vietnam today that looks at the future of Vietnam and what needs to happen to make sure that growth continues. The report is really large and has lots of interesting ideas. The key thing that struck me was that productivity is the name of the game going forward, because demographics may not be as big a driver.

We have talked about a few components of this in the past, but lots of Vietnam’s growth was due to 1) a demographic dividend of lots of young people and 2) a move from agriculture jobs to industry and services.

Today the employment structure in Vietnam looks very different; respective shares of agriculture, industry, and services in total employment are 39.5 percent, 25.8 percent, and 34.7 percent, compared to 68.6 percent, 12.3 percent, and 19.1 percent in early 1990s.

Source: World Bank

And while that will continue, it probably won’t drive growth, the way it did previously.

Driven by a rise in life expectancy and declining birth rates, Vietnam’s population is aging rapidly, leading to a substantial decrease in the ratio of working-age people to dependents from about 230 percent today to 200 percent in 2030 and only 165 percent in 2050….Similarly, while the shift of the labor force toward industry and services should continue, the magnitude of these intersectoral labor movements (and their associated productivity gains) should decrease.

Added to that, there are concerns that export-led growth will not be the driver it was in the past 20 years. There is some idea that Vietnam will be able to take advantage of trade tensions, but it seems like growth in trade is no longer a given, and we could see declining trade.

Source: World Bank

The report goes on to promote more domestic consumption, which goes along with my domestic tourism post yesterday. I was especially surprised by this:

Today, almost one out of six Vietnamese has already joined the global middle class (with per capita spending of more than US$15 per day) and, at the current pace, 1 million more Vietnamese will be added to this category every year.

Source: World Bank

That’s a big number: Adding 1 million consumers a year. There are a lot of products that they will need, and hopefully a lot of domestic companies can provide those products. And if they do, then they will need to employ more people and then those people will have spending money. It’s a virtuous cycle, if you can get the wheel spinning.

And one way to get the wheel to spin and keep it spinning is to move from growth based on demographics and sectoral shifts to growth based on productivity improvements, according to the World Bank.

Productivity has not been part of the story yet. Looking at the chart on the right, the green part (Human Capital) is the portion coming from productivity, not additional capital or more people. It is only about 20% of overall growth. That needs to change.

Source: World Bank

The World Bank has a similar chart for Korea that shows that productivity has become the main driver of growth. it was tiny until the 1980s, and then it just jumped. Now it accounts for 56% of growth. That’s why Korean growth has been so sustainable.

Vietnam is definitely on track to follow Korea. In fact, if you look at the chart at the bottom, it is tracking Korea very closely. And doing better than Thailand was at this point in its growth cycle.

Export-led growth is really what Vietnam is betting on, and this report probably won’t change it. Plus, there is some near term positive reinforcement from the US-China trade war pushing supply chains to Vietnam. But the overall trend is not Vietnam’s friend - the gigantic growth in trade we saw over the past 20 years may have run its course. Trade will still be big and important, but it is unlikely to grow the way it did.

Let’s hope that Vietnam can find a model to succeed in this new world.

Source: World Bank

Tourism and Panasonic

Hope everyone had a nice weekend. I was off yesterday to celebrate the US Memorial Day. If you were too, happy Memorial Day. If not, hope you didn’t miss me too much.

Mostly tourism today, although an article about Panasonic caught my eye:

Tourism: We are getting a sense now about how the Vietnamese government will deal with the dramatic drop in tourism revenues. April visits were down 98%, and May is going to be the same. June will probably be close to that, even with international flights opening up. No one is really traveling internationally right now, and there is still a quarantine in place for all visitors. Iceland will open up in June, and it will require testing at arrival and throughout the first two weeks.

Source: World Travel & Tourism Council, chart by Vietecon.com

Remember that tourism is extremely important for Vietnam. It contributed over $16 billion to Vietnam’s economy in 2019, according to the World Travel & Tourism Council. And the country was looking for solid growth this year (pre-COVID, of course). Plus, while it is more than 6% of GDP, it also employs a lot of people - 3.3 million in total. [Note that the Reuters article says tourism made up 12% of GDP or $31bn - not sure where this comes from. I went with the more conservative, lower number.]

So Vietnam is now promoting more domestic tourism, which is likely to be less lucrative, but hopefully more stable.

To lure local travellers, hotels and airlines have cut prices by as much as half, Vu The Binh, chairman of Vietnam Society of Travel Agents, and vice chairman of the Vietnam Tourism Association, told Reuters.

It is going to be hard to replace all of those international dollars with domestic spending, especially at these prices. However, in the long term, it is good to promote domestic tourism, because it can be much more stable.

FYI, if your tourist visa is expired, you can extend it to June 30 for free. Although it looks like you need a letter from your consulate or embassy.

Air travel to the US: The first direct flights to the US happened this month to repatriate Vietnamese during the pandemic, and there is hope that this will lead to more direct flights as Vietnam is now cleared by the FAA. I saw this post on the potential for direct air travel between the two countries, and I was surprised that the issue is price, not number of passengers.

Over 900,000 people flew between Vietnam and the USA last year, according to OAG Traffic Analyser. Ho Chi Minh City is by far the key Vietnamese city for US traffic. Ho Chi Minh – Los Angeles was the largest unserved market, with 193,000 local passengers. San Francisco was next, with 137,000; adding San Jose, with the most Vietnamese diaspora in the US, the Bay area increases to about 145,000.

That’s probably enough to justify a flight, especially one that flies just a couple of times a week. But air fares between them appear to be about a third lower per kilometer than similar flights to/in Asia. Unless fares rise (and it seems like COVID-19 will likely keep them low for a while), it might not make sense to open up the route.

The author of the post seems to think Bamboo is the obvious choice to start flying between HCMC and LA, but I would assume that Vietnam Airlines would, as the national carrier, would be the first. The problem with Vietnam Airlines is that it would have a higher cost base (presumably), but still wouldn’t be able to charge a premium price.

Terminal 3 in HCMC: One more tourism story, the PM has agreed to the expansion at Tan Son Nhat airport. The new terminal will have capacity for 20 million passengers at a cost of $472m (VND11tr). Construction will start in October 2021 and finish in mid-2023. Not soon enough for me.

Finally, Panasonic is moving from Thailand to Vietnam: Just another article that talks about supply chains moving to Vietnam. Now it is Panasonic moving white goods production from Thailand to Vietnam. It’s different because its not moving from China to Vietnam! Panasonic is looking to save money.

Friday grab bag: ecommerce, solar, motorbike emissions, waste management

A few things to round out the week that caught my eye:

Source: Google, Temasek

E-commerce: The government is targeting $35 billion in ecommerce sales by 2025. That compares to $4.6bn in 2019 and is above the forecast by Google Temasek and Bain report on their e-commerce in SEA. [Note that the article says e-commerce sales were already $12bn in 2019, so maybe the definition of e-commerce isn’t consistent.] The $23bn figure already implied at CAGR of 31%, and this ups it to 33%. However, this pandemic should really give e-commerce a shot in the arm, with sales up 20% yoy.

This $25bn would mean that there each shopper would spend $600 a year, accounting for 10% of retail sales. That seems pretty high to me, given that GDP per capita was just $2,600 in 2018. For comparison, in 2019, ecommerce sales in the US were at just below 14% of all retail sales at $602bn, but the US is 84x as big.

Source: World bank

Solar incentives in HCMC: Loyal readers of the blog know that I am very supportive of renewables. I wish we would take the opportunity of the COVID-19 stimulus to boost renewable investments. I am not sure that this is the reasoning behind this move in HCMC, but the city just signed MoUs with solar providers to promote rooftop solar. The city is also pushing residents to able to sell electricity back into the grid. There were some interesting stats in the article:

• The city had a total of 6,835 roof solar power projects as of May 11.

• The total capacity is 88.78 MWp

• Electricity generated on the grid reached 30.49 million kWh.

• I am not sure about the period of the above figure, but let’s assume it is since the beginning of the year. I don’t have recent per capita energy usage figures, but the 2014 figure was 1,400 kWh per capita (see chart), and I assume it could have grown to as high as 2,500 kWh now. That would be a 10% CAGR, in line with the prior period.

• If it were 2,500 kWh per capita, then with that generation it could serve almost 30,000 people or almost 8,000 households. Not that much but a good start.

With the way that Vietnam is growing, it will probably need all sorts of electricity generation, even some that are not environmentally friendly. So anything that incentivizes renewables should be seen as a positive. Didn’t we all enjoy the low levels of pollution during the lockdown? This is a way to continue that.

Motorbike emissions tests: The city is also working to reduce air pollution by offering drivers incentives to get their bikes tested. This is a pilot program that gives incentives to drivers who test. I am not sure exactly how it would work, because I assume only those motorbikes that would past the tests would do them for fear that failure would result in a fine or confiscation. A real self-selection bias. But maybe if even those “better” bikes get tested and are therefore maintained better, emissions will fall.

“Associate Professor Ho Quoc Bang, Director of the Air Pollution and Climate Change Research Centre, said that if the city launched a programme to monitor motorbike emissions, a 30 percent decrease in air pollution could be achieved.”

I don’t know much about this, but I think a key component of this would be getting older bikes off the road, and that will be hard without the city giving monetary incentives or penalties to get them off.

More HCMC infrastructure: This time, combining three waste treatment plants into a new facility. Saves land, allows for renewed (hopefully much better) technology, and reduces cost. With flooding becoming a major issue annually in the city, any upgrade to sewage systems should be seen as a win.

Can we hope for a V-shaped recovery? The case of PNJ

Everyone is hoping for a V-shaped recovery. Economic activity goes down but then pops right back up. That means this is just a small interregnum from the solid growth on each side. That’s what Vietnam is looking for too.

Source: Pantheon Macroeconomics via Business Insider

We are starting to see some mixed messages from China as it has now come out of quarantine (until the northeast was put back into quarantine).

Pantheon Macroeconomics has a report out that looks at industrial production and retail sales volume in China (here’s an article about the report). As you can see in the chart to the right, it sure looks like a V-shape to me.

The research shop points to a few reasons for the recovery:

• State-owned enterprises that were pushed to reopen at normal capacity.

• There was a catch-up in production, potentially to fill unmet demand.

• There was an inventory build-up in order to facilitate this production and to restock stores.

But that lower consumer spending plus lower exports (as demand falters elsewhere) will make it hard to keep activity up. The catch up will only last so long. This article from the New Yorker goes into more detail for the reasons that economic growth will be hard to sustain. For example, Disney Shanghai can only open at 30% capacity. Having as high as a 70% decline in revenue is going to be hard to sustain.

But what we can take from this is that there will be a catch up period that may provide some employment and sales for people and companies. If the government steps in and replaces some of that lost consumer income, we may avoid a W-shaped recovery.

Now let’s look at Vietnam. What can we see so far? Looking at PNJ, we can start to estimate the total loss. By April 1, 100% of the jewelry chain’s stores were closed in the HCMC and the North. Only in the Southeast were more than 50% its stores open, and it was barely above 50%. However, in the second half of April, stores started to re-open.

It’s not just April that was hurt. The company had already seen a decline in sales growth in March (see charts below), and lots of that growth was from sales of gold bars, which were up a lot — they made 29% of March 2020 sales, compared to 18% in March 2019. That combined with sales of more gold jewelry reduced gross margin by 90bps in March and net income fell 34%.

But the real impact was felt in April, when revenues fell 46% (still better than expected, probably because people really do stock up on gold in crises - gold bars were 38% of sales). The company lost VND89bn in the month. April is usually a weak month (net income was just VND59bn in April 2019), so it actually wasn’t the worst time for the store to be closed.

The company says sales started to pick up in late April and early May. One reason is that PNJ is ‘capturing additional market share while many companies in the jewelry industry are shrinking and "hibernating"."‘

My concern is that lower consumer income will start to hurt sales, particularly of highly discretionary items like jewelry. Sales of gold could still be good with continued pandemic elsewhere, but I am worried about declining sales of the higher margin products.

Having said that, I really do think that PNJ’s management team is one of the best. Very transparent, good crisis management. If you aren’t too scared of discretionary retail, the company seems like a good place to put your money.

Source: PNJ, chart by Vietecon.com

Source: PNJ, chart by Vietecon.com

Returns on capex vary significantly for Vietnamese companies

This crisis may tell us a few things about companies. First, which business models are most resilient (at least most resilient to a pandemic). Second, which companies are best at crisis management. Third, which companies have the underlying profitability to make it through a severe downturn.

My supposition here is that those companies that are not good at allocating capital (their investments don’t increase profitability) are likely to face a reckoning post-crisis. And those with good capital allocation will be the winners.

So let’s take a look at some of the bigger names of the Vietnamese market and see how their capital allocation decisions look. As a proxy, I decided to look at returns on capital expenditures. Basically, I want to know, if a company invests $1 in one year, does that equal $0.1 in additional earnings, or $1 or $10. The last would be amazing, while the first is equivalent to a return barely above the cost of capital. Turns out the range of outcomes is even wider than I thought!

Source: Vietstock.vn, Vietecon.com

Source: Vietstock.vn, Vietecon.com

For this exercise I took larger cap names along with some consensus favorites and looked at their capex from 2016 to 2018. Then I looked at the additional revenue generated from 2017 to 2019 (over the 2016 base). Generally, capex has been a good investment, both in terms of revenue, and in terms of net income (this is net income after tax and minorities).

On average, every dong of capex spent from 2016-18 added 2.3 dong in revenues and 0.20 dong in net profit in 2017-2019. For example using PNJ, the company spent VND539bn in capex from 2016-18. Its revenue increased by VND16,854bn in 2017-19 (above 2016 levels). Earnings also grew VND1.5tr in 2017-19 (above the 2016 baseline). This is a great return. If you told me that I could spent $10 to make $28 just over the next 3 years, I would do it 10 times out of 10.

This isn’t exact, because the company spent some capex in 2019 that probably boosted both revenues and earnings, and some capex spent in earlier periods before 2016 increased revenue and earning figures in 2017-19. For example, a store continues to produce earnings (hopefully) for many years after its built). But it is a good approximation of returns.

To make sure that I am not missing anything important, I ran the same exercise using capex from 2016 and 2017 to see what the additional revenue/earnings were for 2018 and 2019. The results are below.

Source: Vietstock.vn, Vietecon.com

Source: Vietstock.vn, Vietecon.com

Ultimately, the trend was the same, with some companies getting really high returns per dollar spent. Looking at earnings, these were:

• PNJ: We talked about it above. New stores are wildly profitable and a great investment (at least for now before the market is saturated).

• SCS: Surprisingly, logistics for SCS doesn’t mean high capital costs. The company had earnings of VND502bn in 2019 with net fixed assets of just VND496bn. That’s great. Seems like there is probably something behind these numbers, but interesting to look at.

• VEA: I guess manufacturing new truck/tractor capacity is a good idea in Vietnam!

• ACV: More airports are needed, and when built/expanded, they bring in good earnings.

Now looking at the worst performing:

• DXG: I accidentally kept DXG in here (I took out all of the other real estate names). It’s a bit unfair, because what is capex in most companies (building buildings) is operating costs for DXG. And the falling net income could be due to timing differences for net income.

• HSG: This appears to be somewhat company specific, because HPG, another steel company, doesn’t seem to have the same issues.

• CII: The construction business has some of the same problems of timing as real estate.

• QNS: Capex is surprisingly high, but we don’t really see a change in revenue.

Looking at these, there really doesn’t seem to be a specific trend that is driving performance. Retailers aren’t a bad bet, especially in a young-ish growing consumer country like Vietnam. And then some of the companies that service retail and growing consumption also invest well. As for what to avoid, it seems like its company specific.

Currency issues

Source: Yahoo Finance

Yesterday, I mentioned that if things get worse for net exports (and I should have said capital flows as well), we could see a depreciation in the currency, unless the SBV started to use its reserves to protect it.

And today I saw this article from Vietstock today that says that the currency is likely to fluctuate this year.

Looking at the history of the USD/VND exchange rate, you can really see that it has depreciated over time, but with two times where it was accelerated. The first was in the Great Financial crisis, when it fell from just under 16,000 VND to the USD in early 2008 to above 20,000 by May 2011 for a 20% decline. This isn’t actually too bad, compared to depreciations in other countries.

Source: SBV

For example, Egypt went from a fixed exchange rate of just under EGP9 per dollar on Nov. 2, 2016 to above EGP15 on Nov. 3. It settled around EGP18. That’s because the Egyptian central bank was fixing the exchange rate and was unable to do so any more, so it floated it until it got to a new equilibrium, and it then allowed it to float around that.

the second acceleration was around 2015, although it was much less.

Looking at the whole history, since 2003, the SBV has allowed the currency to slowly depreciate, including this year. At the beginning of the year, it cost you VND23,155 to buy USD1, but now it costs you VND23,259, or VND154 more. That equates to a 0.5% decline. And the SBV has been pretty consistent with that - looking at the past 5 years, the VND has declined about 6%, or a bit over 1% per year.

Now there, are three main buckets for hard currency sources and uses:

• Net imports (also generally called the current account, although the current account includes a few other things): If there are more imports than exports, they need to be paid with hard currency. We saw yesterday that we have net exports (meaning a source of cash) of almost $3bn through April, so things are holding up here. That of course is just merchandise: there is also services exports/imports, and those net against the merchandise.

• Capital account: I don’t have the full capital account, but according to the article, FDI was down almost 10% in the first four months of the year, but it was still $5.2bn. There are probably some capital outflows (investments by Vietnamese abroad, among other things), but all told it seems like there is money coming in.

• Reserves at the central bank: This is normally within the capital account, but I want to highlight it here. The article says that reserves went up $4bn since the end of 2019, reaching $84bn. So that means some combination of the current account and capital account added up to $4bn. Looking at FDI and net exports, it appears around $4bn went out through investments or paying off debt or in services.

But even with the money coming out, the absolute reserve figure was up 5%. So it seems like there is plenty of firepower for the SBV to continue to support the economy without having to go for a massive adjustment in the foreign exchange.

However, there are risks to this. The USD has appreciated against other currencies. It is up 3% against the EUR, 6% vs THB. Because the VND has not depreciated as much against the USD, that means it actually appreciated against these other currencies, which might not be great for exports to these countries.

The main risk for the SBV is that they hold the line against the USD, which allows for stability for foreign investors and helps anyone borrowing in USD. But you could see exports fall, if prices to target markets go up too much.

It wouldn’t surprise me if the SBV allowed for a bit more depreciation than they are doing now. But we will have to see.

Checking on exports

Vietnam has become heavily dependent on exports, and the big worry with COVID-19 is that these are going to take a dive. Well, we got some export data for April last week, and it doesn’t look great. Remember, Vietnam was mostly closed down for April, and we have only seen it pick back up in the later half of the month.

Exports were down 27%, while imports were down just 16% for April. This resulted in a negative net export figure (which hurts GDP). To give you an idea of how bad it is, computers & parts fell 18%, while telephones fell 53%. Just these two categories make up almost a third of all exports in April. Only plastics (+19%), precious stones (37%), fertilizers (17%) and tea (+25%) grew - combined these made up only 1% of exports in the month.

Source: General Dept of Customs, chart by Vietecon.com

Source: General Dept of Customs, chart by Vietecon.com

Source: General Dept of Customs, chart by Vietecon.com

For the year-to-date, imports were mostly flat (-0.3%), while exports grew 2%. Computers are still growing looking at the year-to-date figures (+26%), but that might be hard to keep up, given the decline in April. And the April figures drove telephones (mostly Samsung) down 4% ytd.

Out of the top 10 categories, only 3 grew ytd. Those three were computers, machines/equipment (+27%) and wood (+5%). Textiles, the third largest category, fell 9%. Food products weren’t immune, with fishery products down 8% and fruits/veg falling 12.5%. There were some bright spots within food (coffee +5%, rice +11%, cashew nut +6%). Exports of coal also grew more than 700% ytd, but that was from a low base.

The big fear here is that if exports don’t pick up, then we are going to see the following:

• The worst and more immediate impact is layoffs - we have started to see already

• Net imports will start to drain Vietnam’s hard currency reserves (as hard currency is used to fund imports. This could make it hard to protect the currency. Worst case, this leads to devaluation and higher costs for both imports and debt. Ultimately, bankruptcy of companies that have large amounts of foreign currency debt.

The second impact is one that is a bit more long term. Remember that the government went into the beginning of the year with high reserves (more than $80bn), plus the country had net exports through April. So they can handle a few months where exports don’t look good. Plus, some of the imports are for inventory build-up by export-oriented companies (for example: a company getting parts that are used to make a computer or mobile phone, and then that computer or phone is exported). As exports fall, imports should fall as well.

But not all imports will fall, because some are for domestic consumers. And these consumers will still buy them unless they are not able to, either due to higher prices (through devaluation or tariffs) or closed borders (which aren’t difficult giving all of the trade agreements). Vietnam needs to hope that exports start to pick up again.

One mitigating factor is that some companies are moving out of China to Vietnam, such as Apple moving part of its Airpod manufacturing. This could take the place of exports that have fallen off.

Economic tidbits: mobility

Lots of short news bits that I feel are important but not enough for a full post:

Source: Apple

1) People are back to moving in Vietnam. Apple provides mobility data for a large number of countries and cities, including Vietnam. You can see in the chart to the right that people are moving again. It had fallen to 40% of the baseline (a date in early January), and now it has gone back up.

Source: Google

This rhymes with what Google is seeing as well. Google provides a bit more granularity, and we can see that workplaces are seeing returned movement, but retail/recreation and parks are not. Transit has also not recovered compared to the baseline.

So things are not completely back to normal, even if most restrictions have been lifted. People are clearly not comfortable to go back to bars, restaurants, stores and parks at the level they were pre-COVID. This is similar to what we are seeing in China, which also has returned somewhat to normal.

I think we will see an impact on retail landlords - here’s looking at you, Vincom (owned by Vingroup).

As mobility returns, Vietnam is starting to import more gasoline.

Vietnam's state-owned Petrolimex has issued a tender to buy gasoline amid easing travel restrictions in the country. Petrolimex is seeking about 105,000-120,000t (0.89mn-1.01mn bl) of gasoline for delivery during May and June.

March imports were the lowest level since January 2017.

2) The US can now export sorghum to Vietnam. This article goes into the details. For some reason, the US did not have an acceptable pest risk assessment for the Vietnamese government. Remember when thinking about trade and trade deals that most of the actual impediments to trade are no longer tariffs and such. Sometimes those are there. But more and more (especially as trade moves from merchadise to services), regulations are more important.

The crazy thing is that this has taken 5 years (!), meanwhile the US has been pushing to increase exports the whole time. But it still took 5 years. And it looks like Vietnamese buyers are interested.

Sorghum is attractive to Vietnamese buyers seeking to diversify their sources of energy in feed and find feed sources that store better in local climates. Sorghum is gluten-free and non-biotech, which is also attractive to niche sectors in Vietnam, including the pet food industry.

I doubt this will do much to the trade deficit, but it might get Vietnam a little bit more goodwill with the trade negotiators.

3) Don’t expect more competition in the airline industry. According to this article, the government will not allow new airlines to be established. Vietnam is already fairly competitive, and airports are pretty crowded (at least pre-COVID). Right now, very few people are flying, especially long-haul international flights where a lot of the money is made. And the decline has been percipitous:

[T]he number of arrivals this year is expected to fall by 43% on the year, according to a Transport Ministry report in April.

It is going to take some time before passengers get back aboard. Vietnam won’t even open up for international flights until June 1, and the 2-week quarantine will likely remain in force for a while. That is going to stop all but the most determined traveler.

Looking beyond airlines, I wonder if we will see more of this sort of soft help for incumbents. All existing companies are hurting, but it doesn’t make sense to protect them forever. Will we see a return to normalcy next year, and will that mean more businesses are able to get licenses? Or will it take even longer? These are going to be difficult calculations, especially because incumbents are going to lobby hard to keep their preferences.

Banks and more capital

Following up on our discussion yesterday about interest rates, one of the impacts of lower rates will be less income for banks. Banks are already in turmoil because of COVID-19 for a number of reasons.

The first is that lower interest rates mean less income, because many loans are repriced quickly (they are floating, meaning a fixed spread over short-term interest rates). Meanwhile, the cost of money (savings rates, etc) don’t fall as quickly.

Source: SBV

Returns at Vietnamese banks are already kind of low. The whole system has a return on equity (RoE) of 10.37% (as at 3Q2019), while the US system had an RoE of 11.67% in the same quarter. Returns in the emerging parts of Europe are also higher than Vietnam. Vietnam should have a higher cost of capital, so those returns look less exciting.

The state-owned banks (which include Vietinbank and Vietcombank, both of which are public) are doing the best with an RoE of 13.5%. Surprisingly the JVs and foreign-owned banks are not doing that well.

Source: SBV

Another impact is higher bad loans. These return figures are from 3Q2019, and it looks like returns are going to get worse from here. The reason is that non-performing loans (NPLs) are very likely to increase. They had been trending down, as can be seen in the chart to the right. The government and SBV have really tried to bring down NPLs.

Source: Vietstock.com.vn

This will likely rise again. According to Fitch:

Fitch-rated local banks* have reported a 45% surge in past-due loans in 1Q20 relative to end-2019 as the coronavirus takes a toll on the economy

We have already started to see a small increase in NPLs in 1Q2020. It varies a lot. VPB saw a 61bp decrease in NPLs, while CTG saw a 67bp increase. Out of the big state-owned banks, VCB increased its provisions 43%, while CTG increased it 36%. Note that VCB has a lower NPL than CTG at 0.82% vs 1.83%.

Of course, the full impact of COVID-19 will take a while, so we will likely see NPLs increase for all banks. Retail loans have increased dramatically over the past few years, so if consumers start to feel stress, banks could suffer. Most of these retail loans appear to be mortgages and personal business loans secured through property. I will be following property values to see the full impact on banks.

Unfortunately, for the system overall, there was already a need to increase capital. I wrote about this back in October 2019, when I quoted Moody’s and Fitch reports that said Vietnamese banks need $4-9bn in additional capital to meet Basel II requirements and grow. To put that in context, that’s 2-3% of GDP.

The capital adequacy ratio published by the SBV has hovered around 12% since November 2018 (the last date I have), but state-owned banks and joint stock commercial banks have been well below that level.

Fitch says that potentially NPLs could go as high as 6-9%, which would a massive jump and really hurt capital adequacy ratio. That’s really the worst case, while Fitch’s base case isn’t that bad. The ratings agency thinks that the majority of banks will not have problems meeting the 8% CAR required by Basel II.

One final point I would make is that we want banks to lend money right now. And we do not want them to come after borrowers right now. But unless the SBV relaxes some of its rules, they might be forced to. And if there is general deleveraging in the economy, that’s not going to be great for growth.

* Fitch-rated local banks include: Vietcombank, Military Commercial Joint Stock Bank, Vietinbank and Asia Commercial Joint Stock Bank.

Lower interest rates

The State Bank of Vietnam (SBV) has lowered interest rates by 50bps. The refinancing rate is now 4.5% (from 5.0%) and the discount rate to 3.0% from 3.5%.

This is more stimulus from the central government to help boost the economy. There was already a 100bps rate cut back on March 17. In addition, according to CSIS, the Vietnamese government has announced a $1.16bn fiscal stimulus back on March 3, and then an additional $2.6bn in early April. This goes along with delays in tax collection to the tune of $7.6bn. That’s for a total $11.36bn or more than 4% of GDP (although some of it is just deferred).

There is even a call for further rate cuts, according to this Bloomberg article.

But people seem to be doubting the efficacy of the lower rates in actually stimulating the economy. The reasoning is that the cost of credit isn’t the problem, but rather it’s getting credit in the first place.

Why is this happening? Well, banks want to get back their money. So they are going to do careful due diligence in underwriting new loans now to make sure that companies can repay the loans at some point. Of course some companies will look fine (they have weathered the lockdown well - like MWG), a very few have actually done well (maybe the grocery stores or online ordering companies - like Instacart in the US), but the vast majority look worse after this.

Luckily, it seems like economic activity is returning, based on pictures of Hanoi traffic. But my default is that everyone’s business is at least a little worse, just because economic growth is worse. And some businesses are really hurt: hotels, tourist companies, airlines. Many of these are getting stimulus, but probably not at the level as lost profits (and remember some of the stimulus is tax deferment that needs to be paid back).

This will have a disproportionate impact on smaller businesses. The one location hotel is going to be crushed operationally, and if I were a banker, I wouldn’t touch it with a ten-foot pole. Right now in the US, which doesn’t have as severe a lockdown, 2% of small businesses have permanently closed.

The only mitigating factor is that corporates aren’t that heavily levered (we have discussed this a fair amount). And small businesses have very little access to equity or debt capital in Vietnam, so it’s not like they will miss out on what they haven’t got.

Let’s hope that Vietnam has a V shaped recovery, but the word from China is that it might be more U-shaped.

Internet application traffic share

I found this report from Sandvine especially interesting. It looks at the traffic share for different websites and applications. It has both the global figures and the APAC figures. Because of issues getting the data, APAC doesn’t include China and India, which makes it a bit more applicable to Vietnam.

Source: Sandvine

First, let’s look at where traffic is right now. (Even in these global numbers, India and China are not included - right now it seems like China has its own internet with Weibo and WeChat among many others.)

With traffic growing by almost 40% overall, it is important to recognize that pretty much ALL traffic types grew during this time, even the ones that are down as an overall percentage (like file sharing, which grew by volume over normal, but not as fast as other applications).

The one that gained the most share is video streaming, which is basically taking over all internet traffic. Later we will see that in APAC, this means Netflix and Youtube, along with a few other smaller players.

Social networking is also taking share, and its bandwidth usage is no joke at more than 10%. Areas that have seen growth but are losing share are file sharing and audio. My superficial read on this is that streaming is taking over file sharing, and video killed the audio star.

Source: Sandvine

When we look at APAC (remember without India or China), Youtube is stealing share by a wide margin, if these figures are correct. Netflix is second, but this is its lowest showing in any region, which Sandvine attributes to a weak content library in the target languages.

Facebook increased its share in social media, but its video is lagging behind the others in terms of share.

TikTok is also growing, adding another video site to the mix:

Even though it is outside the Top 10, TikTok checked in at #17 in the APAC market, its strongest regional showing and worthy of a mention since it has gained a significant new user base during the pandemic that has spawned some viral videos.

This is one of the few Chinese applications that have been able to build a broad global base. I wonder what will happen over time - is it niche or can it takeover for Youtube or does it compete with social media?

There are no gaming sites in the top 10 in APAC, which seems like a missed opportunity for Xbox, Playstation, or Nintendo. And it’s Sony and Nintendo’s backyard.

The chart only shows the top 10 applications, which account for a little over 60% of traffic. Still 40% of the traffic for just these 10 apps or all websites seems quite high. It is about the same in all regions, so its not that APAC stands out. But it does speak to how so much of the internet (traffic-wise) revolves around just a few big sites/apps.

The report is small but has lots of interesting info. I highly recommend checking it out.

Gold vs gold stocks

Things seem to be getting back to normal in Vietnam, especially in HCMC. The market is up, which is interesting, because it’s not like the economic impact is over, but I guess people are optimistic.

As I was thinking about the market, I read this article about how gold miners were beating out tech stocks in the pandemic. For a long time, I thought I wanted to cover miners and other commodity plays, and this article brought back some of that (weird) love for the companies. Miners are interesting, because you think you are buying exposure into the underlying commodities, but you can often be wrong. Remember, for a long time, there weren’t ETFs or other financial products that so easily tracked commodities, and miners were the only way to buy gold (besides getting a coin or something). Not you can buy gold, a gold ETF or a gold miner. And each of these has very different properties and exposures.

Source: Yahoo finance, chart by Vietecon.com

That actually is key. Because the exposure a gold miner provides can be quite different from a gold ETF or a gold coin. Take a long at this chart of 6 gold miners versus the price of gold (GC). It tracks it somewhat, but in a more leveraged fashion.

Why do people buy gold? I have heard so many reasons, but I still can’t really wrap my head around it. Maybe because I have too much (undeserved) faith in reserve currencies? Gold has held its value (meaning that it is still a valuable thing to hold) for millennium. And in countries with hyperinflation, people hold gold or other safe assets as a hedge. The rule of thumb is that in bad times, people buy gold as a safe haven. The problem is that these days, most people buy gold assets (like ETFs) not actual gold, so if everything really breaks down, owning a piece of paper that says someone owes you 1/57th of a gold bar probably won’t help you get bread.

All stocks listed by ticker. GC = the price of gold. Source: Vietecon.com

Anyway, gold prices have risen: 30% yoy and 12% ytd. So that should mean that the stocks are up, which they are. But I was surprised that day-to-day fluctuations don’t really depend that much on changes in the gold price. I did a simple calculation of how many days all 6 stocks and gold increased (and how many days all decreased). In only 93 of 251 trading days over the past year did all six stocks and gold trade in the same direction. Let’s assume there are a lot of variables for the companies, but even if we lower it to 5 of the 7 trending in the same direction, that only happens 145 days out of 251.

Source: Vietecon.com

Basic correlation isn’t all that great either. The gold stocks themselves are fairly highly correlated (some more than others), but the stocks with gold are all below 50% (see the chart up to the right, GC is the price of gold).

Then I did a simple regression of each of the six stocks versus gold, and gold only explained something like 10-20% of the change in the stocks. On average it was 14%, but it went as high as 0.21 (GOLD) and as low as 0.08 (GFI) - see chart up the right.

Why is so little of the change in the stock price explained by changes in the price of gold? Let’s step back and consider what stocks are. One simple way to think of them is that they are an option on the company’s free cash flow, with debt being the strike price. Anything above that, and you make money, anything below, and you got nothing. Apply that to miners: when gold goes up, that means cash flows increase (hopefully above the amount of debt owed), and the levered bet on the company is attractive.

But company specific issues can really drive performance even more than the gold price. Maybe workers at one of these companies had health issues caused by COVID-19, or it has problems getting gold to the market because of supply chain issues.

Also, the companies generally own the mines, and so the may slow down mining when prices are low and do more when prices are high. So it’s highs are higher than gold and its lows are lower.

This bring us to a basic point about investing: you could be right about a trend and still not make money. In this case: gold prices will go up. But investing around that thesis might not be as simple as buying gold stocks. Sometimes it will be, but not always, and the company that you choose will matter a lot. For example, looking back at my first chart: if you had bought Agnico Eagle Mines, rather than any of the others at the start of the year, you would have underperformed. And if you bought Barrick in late February, you would be underwater now, despite gold being slightly up!

That’s why investing is so hard.

Quick updates

Sorry, but I don’t have much time today. Friday’s are great (the weekend!) but always tough to make enough time. On Monday, I want to talk about some bank capital issues, but today, I am going to run through a few stories that caught my eye.

First, a suspicious story caught my eye, saying that middle managers have been hurt specifically in this pandemic. This was a surprise to me, because you think those people would be better positioned both to stay in their current jobs and to get new jobs. Particularly, since Vietnam generally faces a shortage of skilled workers. As a reminder, 5 million people lost jobs due to COVID-19.

But let’s make sure we aren’t jumping the gun. The specific numbers cited were:

Data from recruitment firm Navigos Search shows that among 1,200 candidates who applied for its coronavirus career support program in April, nearly half were managers, supervisors and team leaders. As many as 41 percent of the candidates had more than eight years of experience, showing that experienced mid-level employees are having difficulty finding new opportunities, the report said.

That’s pretty crazy, if half of all the unemployed were managers! And 4 out of 10 had 8 years of experience! I think it is much more likely that the only people who applied to the program were higher level people, and this is a clear indication of selection bias.

It is important to remember when reading stories like these that the vast majority of people hurt by recessions are lower-income and low-skilled workers. Not highly skilled workers. The latter usually land on their feet.

Second, Vietnam’s PMI fell again in April to 32.7 from 41.9 in March. Anything above 50 is seen as positive/growth, while below is negative. And this is a survey, so it does reflect some data, it is mostly a confidence measure.

While this story is a few days old, I thought it was interesting because it talked to the pessimism of companies right now, which is a pretty big contrast to the optimism of the stock market. Since pre-Tet the market is down just 13%, and it has rebounded 23% since its bottom on March 24.

Third, testing is going to be a burden on countries. Vietnam is going to test international arrivals 4 times after arriving. This is going to take a lot of manpower, especially once large numbers of visitors start arriving. It looks like there will be some international flights starting June 1 (they have mostly been banned except for a few repatriation flights). But it really seems like the biggest threat to Vietnam’s success over the coronavirus is international arrivals, as can be seen in the 17 new cases yesterday from repatriated Vietnamese from the UAE.

I wonder if limit to international travel will be longer and more onerous than we currently expect. International arrivals to Vietnam are required to quarantine for 2 weeks, along with these 4 tests. No short-term (less than 2 month) visitor is going to go through that. It will only be people that are coming for long-term work. Hotels and such will be hard pressed to survive 6 months without visitors, and that seems very likely given how the virus is raging through the rest of the world (read: the US) right now.

Or maybe countries will just start banning Americans. Treat Trump right.

Fourth, the construction ministry is balking at HCMC’s city-within-a-city. This was a big plan to join up 3 eastern districts (we talked about the different districts and how the east was rising on Monday).

As HCMC planned it, the "Eastern Town" would be spread over more than 22,000 hectares (54,300 acres) with a population of over 1.1 million. The city expected that this innovative and highly interactive hub would thrive from already existing pillars – the hi-tech park where 13 groups are operating on an area of more than 1,000 hectares, the university precinct with 18 universities, and the Thu Thiem new urban area and financial center, which is being built on an area of 657 hectares.

I don’t know what the politics are about this, but I wonder if maybe it means something larger about the politics of the central government versus the city.

Generally I am skeptical of these “smart city” ventures, but there is something to be said about the government helping promote what were called “innovative clusters” (ala Michael Porter") back in the 1990s. Everyone wants to create their own Silicon Valley. But it does make sense for companies to be grouped near each other, so that they can play off each other….and steal each other’s employees. This is not seen as a good thing, but it really does help spread knowledge throughout the economy.

Anyway, that’s all I got time for today. Talk later.

Globalization or de-globalization - what will it mean for Vietnam

I don’t believe that COVID-19 will change everything. It just doesn’t seem like people or systems change all that much, even after massive dislocations. And while COVID-19 has locked everyone at home, physical assets (ships, factories, etc) have been completely untouched. There is a good chance everyone just goes back to what it was like before. Looking at SARS in China and Hong Kong, we really didn’t see much change happen. This is significantly worse, but I am just not sure that the effect will be so different.

Source: Ravillon (2016) updated with World Bank (2019) via OurWorldinData.org

However, I talked about a few things that will be true: lower debt holdings by companies (and probably individuals) as they try to become a bit more resilient, and a move to online or at least better data on customers for those companies that have sophisticated tools.

Another thing that is likely is that there will be more shifts to supply chains, including the redomestication of some industries. The US is learning that it would be helpful to have the ability to manufacture things like ventilators and PPE.

Quick caveat here. There was an equal push to order more supplies domestically during the Swine Flu epidemic, but this happened…

In the panic of the swine flu epidemic, HHS contacted Prestige Ameritech to ask how many more masks it could produce, Bowen said. That was around the same time the company moved into a larger factory and hired 150 people. But after the pandemic, demand declined, and it took months for hospitals and distributors to go through the surplus of masks they had ordered but never used. Prestige Ameritech had to let most of its new workers go.

But let’s go back and talk about globalization, which has really changed the post-WWII world Look at exports as a share of world GDP. It was basically nothing for millennium until 1950 when it shot up, helped by things like refrigeration and communication.

Time series of value of world exports at constant prices, relative to 1913. Source: Frederico & Tena-Junguito (2016) via OurWorldInNumbers.org

Source: Fouquin and Hugot (CEPII 2016) via OurWorldInNumbers.org

If you look at those charts above, you see a few things.

• Trade has gone up 50x from 1913.

• 1913 was the peak of a trend that had been very strong. From around 1860 to 1930, trade increased 5x, and it appeared to be accelerating, but then World War I happened.

• There was a plateau around the 2008, and post-financial crisis it has been all over the map. The data ends in 2014, but I would suspect there was a bit of a pick up.

What happened after the financial crisis? There are a few interpretations. This could be the trend going forward. Maybe merchandise exports have reached their limit? Part of this is that China, which drove a lot of this, was an exporter, not a consumer. It is slowly shifting into greater consumption, which means the Chinese economy consumes some of the goods it would have exported abroad. And another part is that merchandise exports are no longer as important at driving trends as service exports. Think of recent WTO negotiations. Among developed countries, much of the discussion has been on services, such as intellectual property, not goods. Most tariffs on goods are fairly low, with some exceptions now. That could reverse, but it seems mostly unlikely (especially if Trump doesn’t win his reelection).

Or it could be that the global financial crisis was just a pause in the ever-upward trend. If so, then it looks like COVID-19 will enforce another break. But that once things normalize, we will see the lines move up and to the right in 2021 or 2022.

What does this mean for Vietnam? Well, it sure seems like globalization has been a driver of economic growth. Looking at economic papers…

This body of evidence suggests trade is indeed one of the factors driving national average incomes (GDP per capita) and macroeconomic productivity (GDP per worker) over the long run.

Source: Michel Fouquin & Jules Hugot , 2016 via OurWorldInData.org

For Vietnam, the data is quite interesting. Look at this scatterplot of GDP per capita with trade. Except for the grouping at the bottom, it generally looks like higher GDP per capita is associated with greater trade. Of course, both of these could have been driven by an underlying factor (that’s why we say correlation doesn’t equal causation). In Vietnam, the doi moi reforms were about opening up, but also allowing more “capitalism” for want of a better term. Maybe just having more private property and a private sector drove these.

It’s hard to debate this here, so let’s assume the economists are right: Trade has caused economic growth in the past and that it probably will in the future. In that case, Vietnam may be in trouble if globalization retreats. I would say there are some mitigating factors:

• China is the biggest bogeyman here, and companies may see shifting manufacturing out of China as the only thing they need to do. US companies don’t need to bring the supply chain all the way back, but rather distribute it across multiple countries, so diversification decreases risk.

• Vietnamese labor, while getting more expensive, is still relatively cheap for manufacturers.

• Vietnam has good relations with the US and the EU, and is not seen as a threat, like China.

• There is still lots of urbanization and reform of agriculture to happen in Vietnam that isn’t exclusively dependent on globalization/exports.

• Consumption is starting to increase with the increase in income - maybe this can start to drive economic growth, like we have seen in other developed countries.

So I think Vietnam is well positioned, but the risk is there that less globalization, meaning less trade, will hurt Vietnam. And we didn’t talk about capital flows, which are even more likely to decline in the short term, as people try to shore up balance sheets. But that’s a talk for another day.