Finding Value in Vietnam

10/18/2019 5:00 am EST


Roger Conrad

Chief Analyst/Managing Partner, Capitalist Times

Vietnam offers a massive opportunity for North American natural gas producers, power generators and LNG transportation and infrastructure, asserts Roger Conrad, editor of Conrad's Utility Investor.

Starting from zero, the country expects to ramp up LNG imports to 10 million tons by 2030, while natural gas generating capacity more than doubles from 9 to 19 GW by 2030. 

AES Corp (AES) recently won Vietnamese regulators’ approval to build a 2.2-gigawatt natural gas-fired power plant in the south-central province of Binh Thuan. Slated for service in 2024 under a 20-year government contract, it will be fueled by the company’s 450 Tera BTU capacity LNG import and storage terminal, which enters service in 2022. 

That same day, Vietnam’s Minister of Industry and Trade Mr. Tran Tuan Anh was guest of honor at an event hosted by the US-Asia Institute in Washington D.C. The subject: Similar blockbuster opportunities for US energy companies, as the southeast Asian nation electrifies its rapidly growing economy while controlling environmental risks. 

That’s powerful incentive for US shale-rich LNG operators like Cheniere Energy Partners (CQP), Dominion Energy (D) and Sempra Energy (SRE) to forge long-term relationships. The same is true for the world’s largest LNG player Royal Dutch Shell (RDS.A), which is reportedly pursuing growth in Vietnam’s fuel distribution sector. 

The country also expects to grow its wind and solar generating capacity even faster, by 7.5 and 41 times, respectively. AES Corp is one likely investor, though Vietnam is not now part of the 13 gigawatts of renewable energy capacity it expects to add globally through 2022. 

The game in electricity will be winning long-term contracts to fuel a coming quantum leap in the country’s power intensity. That’s currently about 2,000 kilowatt hours per person per year, compared to developed countries’ 7,000. 

Basic infrastructure is already in place, with 98 percent of Vietnam’s rural households connected to its power grid by 2016. What’s needed is investment in generation, smart grid, data capabilities and flexibility to absorb distributed solar as well as support electric vehicle infrastructure. 

AES’ American peers have largely sworn off global investing, with US revenue now accounting for 97 percent of sector revenue. That makes non-US utilities like Hong Kong’s CLP Holdings (CLPHY) more likely candidates to take the plunge. 

There’s also an emerging opportunity in power sector restructuring as Vietnam adopts a model similar to the UK. T&D will remain a government monopoly, while generation and retail become competitive businesses. The country will also seek to attract global investment in retail and generation.

VanEck Vectors Vietnam ETF (VNM) invests at least 80 percent of its assets in the MVIS Vietnam Index, which holds the country’s 25 largest stocks. Those include PetroVietnam Power Corp, which focuses on coal-fired electricity and does not currently pay a dividend. 

VanEck is underwater roughly 40 percent not including dividends since its mid-2009 launch. But it’s been a steady performer over the past year, in sharp contrast to most emerging market ETFs. That’s a good sign the Vietnamese market is maturing, even as its Trade Minister has declared the country open for business, especially in energy. 

The best way for conservative investors to play is AES Corp, with its massive recent investment in power and LNG and the likelihood of more to come.

The stock also trades at half the earnings multiple of the Dow Jones Utility Average, has a highly visible path to 7 to 9 percent annual earnings and free cash flow growth through 2022 and this month achieved the first parent level investment grade credit metrics in its history. The stock’s a buy anytime it trades under 17.  

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