2nd Annual letter to investors – FY2021
FY2022, if the State Bank of Vietnam (SBV) continues to maintain the easing monetary policy, roughly speaking, “injecting money” to stimulate the economy, continue the Circular on extending bad debts provision for the commercial banking sector. , and steel production – real estate developer stocks continue to be strong: us Golden River will probably continue to “struggle slightly” vs VN30 Index in 2022. But falling too far behind is a difficult odd because of the extraordinary dynamics of those groups above as we analyzed are no longer available, moreover their prices are already reflected in the relatively high area. And when FY2023-FY2025 happens, that will really be the “prosperous period” of Golden River (*) Why do we have such wild and far-fetched prediction?
Contact to invest with Golden River: http://goldenriverinvestment.com/contact
Dear investors,
After the FY2019 in Powerpoint slides format which we consider quite not interesting, not detailed and not close enough, learning from Mr. Warren E. Buffett since the first days he established Buffett Partnership in 1957, 2020 will be the first year in which we had a letter from our heart & mind to each investor, creating a habit for many years to come…
However, contradictory to FY2020 letter, as many investors shared with us that it was hard to understand, we try not to go to far from the core business, although it is still very long and macro-related (laughed). The structure of this year letter will only include 2 parts: 1> FY2021 results, when will be the “prosperous period” of Golden River (GR)? 2> Improvements and pivotings in our business related activities.
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FY2021 result, when will be the “prosperous period” of Golden River?
Table 1: Golden River track record versus our “competitors”
– Ending financial year 2021, GR brought home +21.1% return, continued our run of nearly “5 years no less than double digits return” (not under +10%) consistently since inception. Right now when we are holding our pens – middle January 2022 – it is likely that we are going to have another double digits year, when our undervalued stocks price had improved and “a huge rain of cash dividends” is going to drop on our heads very soon (laughed)!
– The 4 1/2 year track record helped us leave the competitors in the dust, particularly +20% CAGR premium vs CPI reported, and +15% CAGR premium vs risk-free rate (bank deposit 12M term). Actually, GR returns could be 5%-7% CAGR higher if we calculate the overall return by weighted average capital method, because we have billions of newly injected capital in Q3, Q4/2021, however that kind of calculation made our performance fees too high and put you investors at huge disadvantage so we rejected that idea.
– Total asset under management (AUM) reached 16.1 bn VND ending FY2021, with 20 investing clients, we don’t actively seek new investors because we believe that this is not a right time, not the “prosperous period”, we will explain below. In fact, if we push ourselves to raise capital a little bit, we can manage somewhere from 20-30 billion VND net-asset, then we borrow 3:7 margin leverage more, we will reach 80-100 bn VND easily!
However we do not establish Golden River in order to “make face” with the society (laughed), we had only one goal since the start: which is bringing home the consistent risk-adjusted return for ourselves, our family members, and our entrusted investors. Our discipline is to never borrow margin debt (we will soon have a blog article about that topic, please stay tune!), and then risk being wiped out every capital, every track record that we built arduously over the years. If we can keep the discipline, maintaining the compound interest of double digits over several decades ahead, plus we & our family members put in our savings/our business profits consistently every year, and more than that, we can find same long-term investors who are willing to hold with us for a long time, the AUM number could be crazily high, even the thought about is enough to shiver (laughed). So there is no need for us to feel rushed, feel pushed with the society for whatever reasons…
– Nevertheless, as you investors already saw, we are temporarily running behind VN30-Index of 20% in FY2021. We must admit that the temporary losing for an index full of big clunky corporations, cyclical and overally slower growth than smaller ones make us far from being happy, that’s the truth… But when we analyzed closely the reason behind, we believe that the core thing we done is not wrong, the main reason is that “our time” hasn’t come – that’s just it – and investing is like a 42km marathon rather than a 100m short run:
Firstly, we bought & held business of small and medium market cap (<100 mil USD), traditional industry yes, consumer yes, technology yes – however some were partly affected by the pandemic, some hadn’t have speculation or large money inflows to recover the “gap” between the market price versus its worthy intrinsic value in short-term period. This process needs time, and when the pandemic is slowing eroding, the business performance of our holdings increases at 15%-20% CAGR, even one case has 50% CAGR, cash dividend grows consistently, and P/E is getting lower and lower (mostly below 5-6 times), there is no way that their stock prices won’t reflect the underlying performance in long-term!
Secondly, previous year, VN30-Index had an extraordinary run of 43%, because of 3 main groups:
1> Banking group: the deposit interest rates were forced to reduce by the SBV while lending rates not dropping helped banking sector have a signifcant rise in NIM (net-interest-margin), they also enjoyed one-time big profit from bad debt provision reversal, bancassurance partnerships, securities trading -> Bank stocks rose extraordinarily thanks to P/B valuation extension, also some cases had M&A, event-driven activities which further boosting their valuation and market cap, such as VPB sold part of FE Credit, TCB had fast-growing TCBS/Masterise, STB restructured, HDB/TPB issued private equity, etc. However in 2022, we observed that the above catalysts are no longer as numerous as the last two years.
2> Steel group: in VN30 there is only one case which is Hoa Phat Group (HPG), Hoa Phat had increased their market cap somewhere from x3 to x4 when steel rebar and hot-rolled coil (HRC) China/US FOB price rose signifcantly, plus the company ran in operation their Dung Quat 1 Complex early in 2020 and luckily got over-capacity immediately thanks to easing monetary policy and exports, sold out almost every products before everyone surprised eyes. However, recently in 2H-2021 and now, the steel price has cooled off signifcantly from -25% to -30% over the peak at May and June 2021.
3> Real estate developers group: Novaland (NVL), Phat Đat (PDR), Khang Dien (KDH) are also the names which had x2 or x3 their market cap in 2021 when project land bases in Vietnam become a rarity (due to slow approval process and political pressures), the selling price of housing in a rising trend, plus the above stocks were put into the basket of big foreign ETFs. However, the same with the two above groups, their market cap increase is too high in too short term period and is coolding down too.
-> Looking back, we had mistakes that we are quite biased with the banking sector, so that we learn from that mistakes and throw away the biases, following 2 or 3 banking cases which are using and observing their digitalization efforts pretty close, and they are also forgotten by the market for many years. With Hoa Phat (HPG) case, we literally had no regrets whatsoever because we don’t have more insights about the steel sector than the market participants (no competitive advantage), thus when it rise significantly and a little bit luckily, we are nothing to sad about (laughed). Furthermore, we are closely putting on our watchlist one big manufacturing company, with expansion steps and great management just like HPG 10 years ago, we can say that it can grow even bigger. If we can buy that company at a discount over the next 1-2 years, it can help change Golden River destiny & size forever (*)
– FY2022, if the State Bank of Vietnam (SBV) continues to maintain the easing monetary policy, roughly speaking, “injecting money” to stimulate the economy, continue the Circular on extending bad debts provision for the commercial banking sector. , and steel production – real estate developer stocks continue to be strong: us Golden River will probably continue to “struggle slightly” vs VN30 Index in 2022. But falling too far behind is a difficult odd because of the extraordinary dynamics of those groups above as we analyzed are no longer available, moreover their prices are already reflected in the relatively high area.
– And when FY2023-FY2025 happens, that will really be the “prosperous period” of Golden River (*) Why do we have such wild and far-fetched prediction?
(1) The inflation era of 7%-8% CPI/PPI in the United States is a fact now, not a threat anymore, so that The Federal Reserves (FED) changed 180 degree from easing monetary policy to tightening monetary policy, even threatening to raise their FED funds rate 3 times in 2022 is almost a certainty now. The banks had to increase their lending rates when inflation is high because they don’t want to receive back worthless papers from debtpayers like borrowing individuals or corporations.
We believe that in the existing inflation era, and the fact that FED will raise interest 3 times in 2022, Vietnam State Bank (SBV) cannot “ignore” that fact forever or they will face two situations: one, their commercial banks will receive worthless paper money from debtpayers; second, “capital flight” – the FDI/FII capital will outflow signifcantly from VND to USD if we do not raise interest at the same pace with FED, putting the whole country in serious consequences like Thailand in 1998. As a result, we had high conviction that the SBV is forced to reverse their monetary policy, slowest from 2023 to beyond.
And when SBV raise their base rates, the “happy song” for the speculators will end, the overvalued stocks, the heavily-indebted stocks, the crazily-speculated stocks will be corrected hugely. On the other hand, the strong businesses growing at double digits rate, in important – necessity – trendy industry, bringing home high ROE, strong financial position selling at discounted P/E valuation, ridiculous dividend yield will soon be recognized by the market and recover its true intrinsic value. In 2018, we used to own ViettelPost x5 its market cap from 1,800 bn VND (OTC) to 9,000 bn VND despite the fact that FED raised 3 times interest in the same year.
(2) Our portfolio had already prepared intensively for the infaltion era, even well-protected from inflation, many times above physical gold or Bitcoin preferred by many people. These businesses enjoy: strong brand value, rare products, strong competitive advantage which is the reason they can raise prices above inflation; do not have too many capex, construction in progress expenses needed for expansion; lastly, they have little debt, or even no debt. They are not only well-protect from inflation, but also grow their earnings power and free-cash-flow beyond 15%-20%-50% CAGR, when sold at 4-5 times P/E or P/FCF core when we first bought them. More than that, they have turnarounds in their management system, employing new young-energetic human resources, to supply fast-growing business activities. It is too ridiculous and we calculate that to the end of 2025, when these stocks reach their true worth, Golden River can have >40% CAGR annual returns.
Of course right now at the end of 2021, when we say that you investors cannot believe our wild and overconfident predictions, but let us see! You can see our actions that the CEO, his family and his performance fees accounted for >60% AUM contribution of Golden River, plus he promise not to withdraw performance fees out of Golden River until ending FY2025, he will keep it there to invest alongside with all the clients, and more than that, he kept putting in his own savings & business profits consistently from now to there, is enough for you to see the level of conviction he had in that predictions (laughed):
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(For business privacy protection reasons, we won’t publicly publish the below content for this letter, so potential investors who haven’t invested in Golden River please sympathize with us. On the opposite, current clients/investors of Golden River who violate their privacy protection terms in the BCC contract could face potential responsibilities and penalties according to the law.)
January 2022, Mr. Howard Nguyen – CEO & Chief Investment Officer