Time for equity investment funds to have rethink

As the government changes gold transaction management policies, what are the impacts on Phu Nhuan Jewellery (PNJ) - a Mekong Capital’s investee?

Pham Vu Thanh Giang

In our view, savings in terms of gold have been a habit for Vietnamese households and it will not take one or two days to change. When prohibited from buying and keeping gold bars, they will be driven to keep gold-in-kind and gold jewellery of prestige brand-names and PNJ will certainly be one of the best options.

Given that jewellery sales accounted for about 30 per cent of PNJ’s total sales last year but contributed 80 per cent of the company’s gross profit, a shift in sales towards jewellery will improve its margin and increase working capital.

So far, according to what is being reported to us, PNJ is well on track to reach its 2011 net profit target.  

What is your fund’s support to PNJ at this time to deal with the current situation?

The company is a market leader, fundamentally strong and managed by an experienced and committed management team, which gives it a great advantage to continue growing income.

Although we normally get involved in adding value to our investee companies by applying our vision driven investing approach, PNJ is one of our few investee companies in which we are not applying this approach.

However, we have encouraged it to divest its non-core businesses and focus on building its core retail business more aggressively. PNJ has also participated in some leadership training programmes that we coordinate several times per year. We expect PNJ to continue to realise its plan to divest non-core businesses which enables a stronger focus in terms of management capacity as well as capital to quickly expand its retail network and reinforce its dominant market position.

Are there any difficulties to the operation of another Mekong Capital’s investee, Digiworld - an IT products distributor?

While the local currency’s depreciation has made imported laptops become relatively more expensive, we have seen a year-on-year sales growth of about 130 per cent as of March. Digiworld is on track to achieve its 2011 net profit which is set to be 120 per cent higher than actual net profit of 2010.

The gold and IT distribution sectors are mostly affected by the currrent tight monetary policies, will those be one of the main reasons for Mekong Capital to consider of divesting from these investees?

We are convinced in the long-term growth story of Vietnam despite recent hectic macroeconomy changes. PNJ and Digiworld are well-managed companies in consumer-driven industries thus their outlook for growth is bright. Internally, our exit decisions are based on a very disciplined analysis of expected internal return ratio derived from target exit valuation which, in most of the cases, based on a mutual alignment with the company.

In the current circumstance, what other sectors in Vietnam will Mekong Capital find new opportunities to invest in?

We find sectors with consumer-driven aspects attractive, which include restaurant and retail chains, personal and household care products, package food and beverages, education, healthcare, on-line services and housing development.