Bad week for Vietnam stock investors

The IPO of Vietnam Airlines and Mondolez’s stake in a Kinh Do subsidiary shut out foreign and retail stock investors.
Split personality: cap markets are busy but investors are being shut out
Split personality: cap markets are busy but investors are being shut out

It’s turning out to be a busy week for capital markets in Vietnam – but not for investors in Vietnamese stocks.

Vietnam Airlines is scheduled this Friday to complete its long-awaited initial public offering. That's after global snacks producer Mondolez International announced on Tuesday that it would acquire 80% of BKD, a subsidiary of Vietnam’s Kinh Do Corporation, subject to shareholder approval.

However, investors in Vietnamese stocks are excluded from both deals. The amount of Vietnam Airlines that will be freely floated is just over 3% and the shares have already been sold to a pair of local banks.

The BKD sale, meanwhile, only works because BKD is private. Under Vietnamese law foreigners can own 100% of a private company – but only 49% in a listed one.

It's not the first time and fund managers are becoming angry at being locked out of important deals.

“Foreign investors are piling money into Vietnam through [foreign direct investment] and the government…sold a $1 billion sovereign bond in (roughly) five minutes last week,” Kevin Snowball, CIO at PXP Asset Management in Ho Chi Minh City, said in an email to clients. “And yet they can’t get a single foreigner interested in any IPO, and foreigners are not easily able to buy the listed stocks they want to buy unless they do so in off-market transactions with no transparency.”

Some market participants, while recognising that the latest developments are far from encouraging, note that there have been some investment opportunities this year.

Trang Pham, an analyst at Saigon Securities in Ho Chi Minh City, said investors benefited from two recent successful IPOs. Vocarimex, a cooking oil producer, raised $23.6 million in July by selling 38 million shares to institutional and individual investors (including Kinh Do, which bought 24% of the company). The deal was 2.2 times oversubscribed. And in September Vinatex, raised $58 million by selling 24.4% of its shares. 

But even those deals had an ad-hoc quality about them. "We have not had a proper, conventional, transparent, professional privatisation, with a bookbuild, a prospectus and all that," one chief investment officer at a funds firm operating in the country said on condition of anonymity.

IPO crash and burn

The Vietnam Airlines IPO, which could have been a landmark deal at a time when global investors are interested in the country’s growth story, will see only 3.475% of the company, or 49 million shares, released via an auction held under the auspices of the Ho Chi Minh City bourse.

The government insisted on a high valuation and a process lacking transparency or clarity, which ensured no foreign fund manager touched it. Foreign fund managers have called the deal everything from a "farce" to a "joke" – but they have known for a long time that this would be the case.

According to Dang Van Phap, an analyst at Viet Capital Securities, the deal’s offering price was valued at 2.2 times book value versus a regional peer average of 1.1 times. The enterprise value was put at   11.7 times Ebitda compared with a regional industry average of 9.0 times.

“Lack of interest from foreign investors and retail investors is not surprising,” he noted in a message to clients.

What's more 98% of that 3.475% stake has been bought by two local institutions, Vietcombank and Techcombank, several analysts said. That means other investors were able to subscribe to fewer than one million of the airline's shares.

The affair has left foreign investors baffled. "Why even do it?" wondered one fund manager in Ho Chi Minh City contacted by FinanceAsia. "What's the government's plan?"

The valuation was based on asset value not on revenues (the airline barely makes money and some years even loses money). The participation of the banks, and their owners or affiliates, will provide fodder to the broker rumour mill for months to come.

Not your usual IPO

No one knows when these stocks will actually be allowed to trade. The government has not given a date for Vietnam Airlines’ planned listing.

In Vietnam, what is termed an IPO is actually an interim process of auctioning shares. The actual listing (and trading) on the exchange happens afterwards, sometimes years later. Vinatex, for example, has only committed to listing and trading some time in the next three years. 

Snowball in his email fretted that Vietnam Airline was simply continuing a trend and cited the listing of PetroVietnam Gas, a giant company that also sold only 3.5% of its shares.

The company is today valued at a whopping $10 billion but based solely on the trading of that tiny free float. “The government saw no interest from investors in buying Vietnam Airlines at the price they wanted, so they looked at PetroVietnam Gas as a model,” he told FinanceAsia.

(Just 3% of PVGas is large by local standards, however; its free float accounts for 19% of the Ho Chi Minh stock index today.)

On the other hand, the government has been sticking to its privatisation schedule. The detail may not always please investors but it does show the government is slowly exiting certain industries. "The government is getting out of the cooking-oil business," said Bill Stoops, CIO at Dragon Capital in Ho Chi Minh City, referring to the Vocarimex deal. "It's getting these assets off its books."

Asset transfer confection

Kinh Do is a listed company that has now sold 80% of a 100%-owned subsidiary to multinational Mondolez. But given the restrictions on the foreign ownership of listed companies, foreign fund managers never got a chance to participate.

Kinh Do said it hopes to leverage Mondolez’s technology and experience to improve its own manufacturing, product design, distribution and marketing capabilities. Mondolez hopes the deal will enable it to sell its brands to Vietnamese consumers, including Oreo cookies, Ritz crackers and Cadbury chocolate.

BKD, the unit being sold, is a work in progress, a vehicle in which Kinh Do is consolidating its various confectionery businesses into one entity. Mondolez will invest approximately $370 million into the new company, which values it at 28 times expected 2014 earnings, said Trang at Saigon Securities – higher than Kinh Do itself or, for that matter, Mondolez.

Kinh Do’s board of directors will propose the deal to shareholders at an extraordinary general meeting on December 1. So far the market reaction has been negative: Kinh Do shares have fallen in the two days since the deal was announced, from Monday’s closing price of Vnd63,500 to yesterday’s close of Vnd62,000, a drop of 2.4%.

Trang said no one knows what the Kinh Do management will do with the cash. Selling BKD leaves Kinh Do with less appealing businesses in vegetable oil and noodles, where margins are low and competition is stiff, and in which the capex needs don’t seem to add up to $370 million.

The broader point, however, is that companies have an incentive to do deals privately because of Vietnam’s foreign-ownership laws. In the Kinh Do/BKD case the company transferred its best assets into a newly created vehicle majority-sold to Mondolez, pocketing the cash while doing damage to the parent's shareholders – the same shareholders that are prevented by law from acquiring the parent.

“What is the point of having a stock market if the rules are more restrictive than those for non-public companies?” wondered Kevin Snowball at PXP. “The answer is very simple: there is no point and the law is an ass.”

Nguyen Duc Huy, head of institutional sales at Saigon Securities, said deals such as BKD are an exception. “Kinh Do reached saturation with that business,” he said.

Looking at the equity capital markets landscape, he said investors should expect a mixed bag. “It’s going to be on and off. A few deals are going to be successful. Others are going to be bad.”

Another fund manager contacted by FinanceAsia, who declined to be named, also said some equity investors had actually done well out of the deal since Kinh Do's stock price had climbed about 40% over the year, largely thanks to leaks about the impending sale of its confectionery businesses. 

But Snowball is sceptical, noting that opaque deals such as KDB have occurred before. “Questionable takeovers are becoming more common,” he said.

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