Description

(note - this stock is listed in Vietnam, not Thailand)

Refrigeration Electrical Engineering (REE) is a holding company in Vietnam involved in a handful of businesses including engineering, real estate and power.  The company has a long and successful history – it was one of the first companies in Vietnam to privatize and list its stock publicly and it has compounded revenue, earnings and book value at an attractive rate of return for a long time.  Despite that, the company trades for less than 7x earnings and 1.3x book value. It’s a small cap ($476 million market cap) conglomerate in a country where stocks are hard to buy so it might not be for everyone, but I think it looks interesting here today.    

Apollo Asia

REE hit our radar when we noticed that Claire Barnes, the portfolio manager of the Apollo Asia Fund, bought a large stake in the company and added to that position in April after the stock fell more than 20% along with the entire Vietnamese stock market.  Barnes literally wrote the book on investing in Asia and has an incredibly track record going back over two decades:

Her book: https://www.amazon.com/Asias-Investment-Prophets-Managers.../dp/0712675582

Context on the book: http://offpisteinvesting.com/where-are-they-now/

More on Apollo Asia: https://www.apolloinvestment.com/

Barnes has been researching Southeast Asian investments since the early 1980’s and has followed Vietnam for decades:

“It has been interesting to look back on visits to Vietnam spanning more than a quarter century. (My first visit was in 1990, and over the next few years I was privileged to be a witness to the reopening of international banking relationships and to be involved in discussions on the setup of a future stock exchange). The country's equitizing, privatising, listing and partial selldown of its companies may occasionally have seemed frustratingly slow to those on the ground, but the cumulative achievements have been remarkable…”

Source: https://www.apolloinvestment.com/F161025.htm

Given REE is a small-cap in a communist country that looked too cheap at first glance, we’re comforted by the involvement of a leading local investor. Apollo Asia currently owns 5.9% of the company (~$39 million) and an affiliated fund owns another 2.2% more.  

Company Overview

REE was started in 1977 as a state-owned enterprise focused on mechanical and electrical engineering (“M&E”).  In 1993 it became one of the first SOE’s to be privatized and was one of the first 2 companies to be listed on the Ho Chi Minh Stock Exchange in 2000.  Over the years the company has expanded into a few other areas and has produced impressive financial results:

The company has above average corporate governance for Vietnam, with several independent directors and a healthy dividend (currently 4.5%).  In fact, if you had bought the stock at its low point in 2011, you would have already recouped your cost basis in dividends alone. The company has generally been conservative, typically overdelivering versus its own guidance in past years.    

Mechanical and Electrical Engineering Business

Roughly ½ of the company’s revenue today comes from the M&E business where it is a leading contractor with a focus on infrastructure, industrial engineering and commercial projects.  The M&E business is growing nicely, with several tailwinds including demand for airport projects due to increasing air travel in the country. REE was the first M&E company in Vietnam and has strong relationships with SOEs and other local customers.  While there is some cyclicality to this business, we think REE is well positioned and this segment can grow at a double-digit rate for the foreseeable future:

Air Conditioners

Roughly 17% of revenues come from REE’s air conditioning segment, where the company makes and sells AC units under the Reetech brand, which it first produced in 1996.  This segment has had some ups and downs historically and faces stiff competition, but it has been growing nicely in recent years:

Office Leasing and Real Estate

14% of revenues come from office leasing and real estate activities. In the leasing business REE owns and leases a handful of B & C grade office buildings in Ho Chi Minh City (HCMC).  This segment has been performing well and the company is increasing its square footage available for lease by developing new projects on land adjacent to its existing buildings. Occupancy rates for REE have been close to 100%, there is lots of demand for well-located B & C office space in HCMC and the company has been able to increase prices as a result:

Pricing trends:

REE is also active in real estate development through two other companies in which it owns stakes, Vietnam Infrastructure Investment & Development JSC (VIID – REE has a 60% stake) and SaigonRes JSC (SGR - REE has a 28.9% stake). SaigonRes focuses on affordable housing in HCMC while VIID has a variety of projects.  The company expects the contribution from these stakes to increase with new projects coming online in the coming years.

Power and Water

18% of revenues come from power and water operations where REE has been investing since 2010 and owns a portfolio of assets in which it has partial stakes (typically 10-60%).  Vietnam’s demand for both electricity and water is expected to continue to grow at a healthy rate going forward given the strong underlying economic growth in the country. Electricity rates in Vietnam are far below other Asia-Pacific countries and the government is gradually liberalizing the power sector.  

The accounting treatment varies for these assets based on how much REE owns of each, but overall it has spent 5.9 billion VND on these investments, it holds them at 6.5 billion VND on its balance sheet with a market value as of year end of over 8 billion VND.  Regardless of the exact number this represents a large % of REE’s overall market cap (11 billion VND currently) and is producing a healthy amount of profit:

Summary:

We believe REE is a well-managed, cheap company that will continue to grow at a healthy rate given Vietnam’s long-term growth story and the management team’s history of solid execution.  The investment isn’t without risk given REE’s various exposures to the Vietnamese economy, which will inevitably have bumps on its long-term journey, but we think at the current price those are largely priced in.  We think the investment can work out nicely from earnings growth alone but we also think there is additional potential upside from a valuation re-rating – for example the following table from local broker VCS shows peers trading at ~30% higher valuations on both P/E and price/book:

Catalyst

• Continued earnings and book value growth
• Potential valuation re-rating from very low levels