Moving Up Through the Challenge

SAM 7th March, 2009

Saigon Times Weekly- Among fund managers who have suffered losses due to the global crisis and the local economic slowdown, Saigon Asset Management Corporation (SAM) has managed to create an impressive position to go forward. The Weekly had a talk with Louis Nguyen, chairman and CEO of SAM, about the market’s potential and SAM’s plans to take advantage of the market challenge.

Q: Listed companies have incurred losses and fund managers have seen invested capital vaporize. Net asset value (NAV) has been written down. Not to mention the market correction factor, how could they lose so much?

A: Fund managers around the world have incurred losses. Some Vietnam focused funds lost more than the VN Index (more than 66%), which may appear unreasonable and unacceptable to investors. Our guess would be these funds weren’t diversified enough and concentrated too much on certain losing industries and sectors. Additionally, some fund managers did not have mechanisms within their investment processes to stop the losses when the market was spiraling downward. This dismal result will be painful for the track record of any fund management company and will impact their ability to raise capital in the future.

Investors are also concerned in how funds calculate NAV for real estate and private equity investments, as most will hold it at cost and no further write-down, partly because it is difficult to substantiate the true value of a private equity investment or real estate, where listed equities are easily calculated. Unless funds are transparent in how conservative they calculate NAV, this could be an issue looming worldwide.

How is SAM doing during this slowdown?

SAM manages approximately US$125 million in two local funds, Vietnam Equity Holding (VEH) and Vietnam Property Holding (VPH). According to the LCF Rothschild Report at the end of December 2008, VEH and VPH are in the top- three performers among 17 Vietnam-focused funds. VEH is ranked No. 1 in the equity class and VPH is ranked No. 3 in the property class.

We achieved our favorable NAV result due to timing and selection. We started to invest when the market was spiraling down, while perhaps other funds invested earlier at higher valuations and held on until it was too late. Our investment team did a good job of picking the right companies and real estate projects. We attempt to hire only the best and brightest and will continue to seek additional local talents.

As far as NAV calculation concerns, we had third party companies conduct valuation of our private equity and real estate investments as we strive to be ultra- conservative in our NAV calculation and protect our investors’ interest.

What is the difference between SAM and its counterparts?

There are four things. First, SAM utilizes a hybrid model of foreign and local funds in one. We raise capital from abroad and invest in Vietnam by hiring only talented locals. We partner with Hanoi Fund as discussed earlier, as an investment sub-manager to assist us in deploying capital in attractive targets.

Second, we recruit and retain talents by rewarding our investment team with equity and bonuses while most other funds in Vietnam offer bonuses only, which will be tough this year. This is a sustainable long-term model which is often overlooked in emerging markets.

Third, our team, board members and active investors work directly with our portfolio companies when possible to build enterprise value by assisting the portfolio management team in various aspects, including financing, strategy, sales, marketing, technology, recruiting, continuous process improvements and corporate governance. We believe this is a clearly differentiated model that is not fully deployed in Vietnam’s fund management companies.

Lastly, I would also add that our employees are adhered to the highest ethical standard and violations are treated harshly and legally, all the way to the top. We also believe in giving back to the community and have committed US$150,000 and a minimum of 2% of our profit to a charitable fund to assist the underprivileged in Vietnam.

With the current condition of the local and global economies, what factors do you think can turn the market around?

We think the world will look to the U.S. for signs of recovery before investors will rebuild their confidence. Here in Vietnam, specifically in HCM City, we have not really felt the global downturn yet. Whereas people from the U.S. are telling me they are losing jobs, facing diminishing bank accounts and investments, and empty shopping malls, we are still not seeing that here.

Perhaps Vietnam is more cash- oriented which becomes more resilient to the downturn, or the trickle- down effect has not hit home yet. Equity valuation is questionable as we are uncertain if the VN Index has actually hit bottom yet, and real estate still appears expensive com- pared to regional markets. Word on the street is “wait another 3-6 months before buying real estate” which does not help any transactions. Also, the old paradigm of making foreign investors pay a premium for “the potentials of Vietnam” might be out of the question. Until investors are truly comfort- able with these areas, a recovery may take more time, perhaps not until sometimes next year.

Every cloud has a silver lining. What does SAM see as the light in this cloudy market?

There are more distressed deals and undervalued assets than before as some overleveraged owners are cash strapped and must exit. These are attractive deals but unfortunately there is a major shortage of capital. Banks are beginning to lend but with much tougher terms than before, which will not fully resolve the credit crunch. Most foreign investors are retreating home, and most investment funds in Vietnam are running out of cash or facing redemption. The silver lining is there if you have cash, and cash is king, if there is a king.

What are your investment strategies for 2009?

We still have approximately 30% cash and will focus on distressed, undervalued and non-performing loan assets. We will use this downturn to recruit highly talented in- vestment managers and we feel now is the time to expand.

In 2009, our strategy remains un- changed, but we will be even more selective with our investments and seek out valuations that are much more reasonable, at least comparable to the key emerging markets. This is a big problem, still, as Vietnamese companies and real estate still appear expensive despite the downturn. We don’t focus on one sector or industry but usually in vest in market leaders with a strong financial track record and growth rate. Most of the time, it’s not investing in the company but the people. Therefore we prefer to invest in an experienced management team who believes in strong corporate governance.

In your investment portfolio, what will you focus on this year?

For VEH, we will continue to focus on large companies with commanding market shares, consistent and favorable financial results, and experienced and ethical senior management teams who believe in innovation, a continuous process of improvement, and corporate governance. We will also consider private companies with compelling plan to initial public offerings within two years.

For VPH, we will invest in clear and hassle-free projects within 20km of the central business districts of Hanoi and HCM City. We will also consider listed property- related or land-bank companies with a high discount to net book value. Lastly, we will call for strategic international developers to enhance value by packaging ready- to-go projects.

Investors have lost confidence. Is this an obstacle for SAM?

Yes, there is a general retreat by investors due to the global downturn. Recently, we met with a number of institutional investors who still feel Vietnam is one of the top emerging markets and feel the next few quarters are the right time to invest. This is very positive and encouraging for us as we are considering launching new funds in the near future. Fortunately, we do not have to raise capital yet as our cash position is adequate. We are not so worried about these obstacles since it is a global phenomenon. If and when investors regain confidence, they will invest with the managers who have a positive track record, and that’s what we are trying to maintain and outperform.

How is SAM prepared for the market’s turn-around?

The Vietnamese stock market is still new and is going through growing pains, but long-term investors such as SAM needs to be patient. In 2009, the market will improve or not will depend on the global financial situation, domestic economic measures and how Vietnamese companies perform during these tough times. We all seek a quick recovery and pray for no more corporate bad news.

Right now, SAM is looking at a series of new deals of extremely attractive investments and will invest our remaining cash as well as raising additional funding to capitalize on opportunities. When the global financial crisis subsides, we plan two new investment funds, one focusing on private equity and the other on distressed properties. Lastly, we have tightened our spending budget this year by cutting all discretionary expenses without sacrificing human resources. I’m sure 2009 will be an exciting year, to say the least.