Description

FPT Corporation is a leading technology company in Vietnam with businesses in software outsourcing, IT services, telecom, and education.  FPT’s businesses are each among the leaders in their respective industries and have long runways for growth ahead.  Collectively, they produce returns on equity above 20% with an unlevered balance sheet.  The company is well managed, entrepreneurial, and trades at less than 10x forward earnings.

Razor99 wrote-up FPT in February 2019, which provided an excellent overview of the business.  Please refer to that write-up for a general background as I will try to keep this brief and focus on recent updates.  Since Razor’s write-up, FPT has continued to grow nicely, and more details have emerged on the company’s large stake in Sendo, a growing e-commerce platform in Vietnam that could provide further upside.   

A major reason why this high-quality business is available at an attractive valuation is the difficulty involved in buying shares for foreign investors.  As Razor99 discussed, it takes time and effort to transact in Vietnam, and foreign shareholders typically have to pay a significant premium to the local price to acquire shares (15-25%).  This premium has been relatively consistent in recent years, and therefore the extra cost to buy FPT is likely to be recouped by a foreign investor when they sell.  We have spoken to large investors who have said this is the main reason why they do not own the company - how many investors want to take an immediate 20% writedown on a new investment?  We think it is possible that it will become easier for foreign shareholders to own FPT in the coming years, in which case it will likely trade for a meaningfully higher valuation.  If that does not happen and the multiple does not re-rate, we still expect a solid outcome, and overall we forecast an annualized return somewhere between 15-25% during the next 5-10 years.    

Business Update

FPT has held up well this year, with growth coming in slightly behind the pre-COVID 2020 plan.  Through June, revenue has grown 9% year over year, and pre-tax profit has grown over 13%: 

FPT’s outsourcing business has grown revenue and pre-tax profit at 18% and 21% year to date, respectively.  This is a high-quality business that has compounded revenue 30% annually since 2013.  FPT is Vietnam’s leader in outsourced software and IT services, with an estimated 30% market share and competing with larger companies in India and elsewhere.  Half of FPT’s business comes from Japan, with another 25% in the US.  We believe Vietnam, and FPT, remain well-positioned competitively in the space and expect this business to continue to grow at attractive rates for many years to come.

FPT’s telecom segment includes a broadband internet provider and a content company with leading internet brands.  FPT’s broadband operation competes against two larger state-owned entities (VNPT and Viettel) and is itself partially government-owned – FPT owns approximately 46% but controls management.  FPT is well-positioned to buy the remainder of the stake when the government decides to sell.  The broadband internet business commands a high-teens percentage market share in Vietnam and has compounded revenue at 20% since 2013 and pre-tax income at 12%.  The content business, among other properties, owns VnExpress.net, one of the largest online news websites in the country and is the largest internet advertiser in Vietnam.  While the broadband market is competitive, FPT should be able to continue to grow this business at a mid-teens rate, given growing penetration and rising incomes.  We believe margins should gradually increase over time as well.    

In education, FPT is the largest private educator in Vietnam and ranks among the top 10 largest universities in the country.  It competes against a traditional university landscape, including Vietnam National University and Ho Chi Minh City University of Technology, as well as several private institutions.  The company has more recently expanded into primary and online learning.  FPT University is also a strategic channel for its other businesses to acquire tech talent - at one point, 40% of graduates became employed with FPT.  Since 2015, the Education business has grown the number of students at approximately 30% per year and, at the end of 2019, was educating nearly 50,000 students.  We believe FPT Education is well-positioned to continue to grow more than 20% annually, given an improving reputation, tight university capacity, and a growing technology market.  With some room to improve margins and recent large capacity additions, FPT Education’s share of FPT’s overall profits will likely continue to expand.  

FPT’s domestic IT services business is more hardware-focused and has been roughly flat in recent years.  Buried in the domestic business, however, is a software business in which FPT is a traditional software provider as it creates and owns the IP.  According to management, this business represents approximately 4% of revenue and has margins that exceed 30%.  It hopes to at least double the size of the software business in the next few years.  FPT refers to these products as “Made-by-FPT,” and the category includes a variety of products for hospitals, e-signature offerings, e-invoicing RPA tools, and many others.

E-commerce Asset - Sendo

FPT owns 27% of Sendo, an online marketplace in Vietnam.  We believe the market does not appreciate this stake – in fact, a search for Sendo in FPT’s 2019 annual report returns no results, even though FPT helped fund and launch Sendo in 2012.  Shopee, owned by Sea Limited, is currently the market leader in Vietnam.  Tiki (JD backed), Lazada (Alibaba owned), and Sendo are the next largest e-commerce companies in Vietnam.  Like many marketplaces around the globe, Sendo is also trying to develop a wallet and payments business. 

 In late 2019 Sendo raised $61 million from Softbank and other large investors.  Earlier this year, there were rumors about a merger between Sendo and Tiki.  Apparently, those discussions have quieted down, and Sendo is now considering a large Series D. 

Based on reports surrounding recent cap raises, Sendo may be growing in excess of 100% before any COVID related tailwinds.  The implied valuation of FPT’s stake based on the most recent raise would be nearly 10% of the company’s current market cap.  While competition is fierce and Sendo is not the market leader today, given Sendo’s rapid growth, COVID tailwinds, and potential strategic value, we believe this stake provides meaningful optionality to FPT shares. 

Vietnam

We believe Vietnam offers an attractive economic backdrop in which to invest in a high-quality business.  Here are a few highlights on the macro situation in Vietnam:

• MSCI considers Vietnam a frontier market with a 17.4% weighting (second largest) in the index.  It is at least a couple years away from inclusion in the emerging market index and is not yet on MSCI’s watch list. 
• Since battling 18-22% inflation from 2009 to 2012, the State Bank of Vietnam (SBV) has adopted inflation targeting measures.  Since 2014 headline inflation has averaged 2.9%.
• Real GDP growth has averaged 6.6% since 2014, and the country consistently ranks in the top 10 for growth.
• Vietnam has recently operated a current account surplus that averaged 2.8% of GDP since 2014.
• In recent years Vietnam has also produced a trade surplus.
• Public debt to GDP stood at approximately 56% in 2019 – 45% of which was external.
• The Dong-to-Dollar is a managed floating exchange set by the SBV that is allowed to trade in a 3% band.
• Vietnam is poised to benefit from further investment in the wake of ongoing US/China trade relations.
• Vietnam has thus far managed the COVID pandemic quite well.  Despite a recent wave of cases emanating from the tourist city of Da Nang, the country has recorded just over 1,000 cases to-date with few deaths.  GDP still managed to grow 0.36% in Q2 2020 (though that was the country’s lowest rate in a decade). 

Valuation

FPT is trading at just under 10x forward earnings, before counting the company’s stake in Sendo.  We think this is too low for a high-quality business with a long runway for growth.  If shares remain hard to trade and foreign owners have to transact at a premium, its quite possible that the valuation will remain low.  If it becomes easier for foreign investors to buy FPT, it’s not hard to imagine the stock trading for a mid to high teens multiple. 

We forecast 19% earnings growth through 2025, plus an additional 1-4% per year from FPT’s stake in Sendo.  We would guess that currency depreciation would take off a similar amount of return as Sendo will add, bringing the total return in USD back to ~19%.  This assumes no multiple rerating but does assume an investor can sell shares at a similar premium to which they paid at entry.  If shares become easier to trade for foreign investors, our expected returns increase to the low to mid 20’s with some modest multiple re-rating. 

FPT’s balance sheet is in fine shape, with a small net cash position and substantial owned real estate assets.  Management is also well-incentivized and focused on long-term value creation.  Insiders at FPT own approximately 20% of the company.  FPT is an entrepreneurial organization, and they will likely continue to find ways to create value for shareholders over time.

Risks

• General macro risk, including a return of significant inflation and currency depreciation in Vietnam
• While quite business-friendly, Vietnam remains a communist country
• Competition from state-owned telecom providers may pressure margins
• Valuation multiples may remain low if it continues to be difficult for foreign shareholders to buy FPT

Catalyst

• Continued earnings growth
• Easing of foreign ownership restrictions