Potential currency devaluation in Vietnam - Keppel Land

Vietnam’s inflation rate soared to 25% in May, the highest since 1992. There are rising concerns that this may result in a financial crisis and the Vietnamese currency, the dong, could see a hefty devaluation. There are talks that Vietnam’s currency crisis could rival Thailand’s currency crisis in 1997. We have examined Singapore stocks in our coverage and there are four stocks that significant business presence in Vietnam. They are Keppel Land, Ascot Residence Trust, Low Keng Huat and SembCorp Industries.

Singapore Property Developers
Singapore property developers have ventured into Vietnam across all major property segments that include residential, office, retail, hotel and serviced residences. The table below provides the exposure of the property developers under our coverage. Keppel Land is the most exposed to Vietnam drawing 19% of its gross RNAV from Vietnam. The exposure of other property developers is quite small and limited up to 3% of their gross RNAV.

Keppel Land
We understand from Keppel Land management that the company does not borrow funds for its Vietnamese projects locally due to the high funding costs involved (around 12-15% levels). Instead it follows the approach of group borrowing mainly in S$ at relatively low interest rates (blended borrowing rate around 3.2% as at 1Q08) to fund the needs of its various subdivisions. This approach however is prone to risks associated with a severe devaluation of the Vietnamese currency.
We further understand that prices and rentals are quoted in US$ but the collection is done in Vietnamese Dong offering some protection against currency fluctuations. However, in the event of a severe devaluation of the Vietnamese Dong, the affordability constraints will pose a downward pressure on the prices and rentals.