Merrill Lynch touts the virtues of Vietnam

Merrill Lynch explains why investors should seriously look to Vietnam as an emerging market option.
Merrill Lynch leads the bandwagon of banks and investors who are bullish on Vietnam these days. The title of its latest Asian Insights report says it all: Buy Vietnam û The Emerging Frontier of ASEAN.

The gist of the bankÆs argument is that ôthe pace of economic growth, policy reform and development in VietnamÆs capital markets now demand attention. One of the last frontier markets to emerge in Asia, we see Vietnam as a ten-year buy.ö

Some of the pro-Vietnam macro-main arguments include the fact that the economy has shown growth of above 7% since 2002, boasts annual foreign direct investment of about $5 billion and $4 billion of inward remittances. Its population is amongst the youngest in Asia and boasts a literacy rate are above 96% making them a highly-employable group.

There are risks, of course. This is a communist government, so policy makers could always put a break on reforms if they felt they were losing control. And, as Merrill Lynch points out in its 52-page report, if growth falls below 7% there could be social unrest given the high numbers entering the workforce each year. And while corporate governance and transparency is improving, this is from a very low base, so investors need to be skeptical, well-informed and risk-tolerant.

If you fit that description, read on.

State-owned enterprises are planning privatizations over the next two years, and the government is backing this effort, which will up the number of companies on the stockmarket in which to invest. But that may take some time.

As a result, investors may want to look at some of the bigger banks. Merrill Lynch analysts write: ôThe bank sector is one of the most interesting ways to play the growth of Vietnam Inc. as the consumer gains appetite for credit, infrastructure needs are addressed and the private sector looks to fund its capital expenditure. We liked ACB and Sacom Bank.ö

For now, the five-year-old Ho Chi Minh Exchange is still small, but the recent listing of the nationÆs top dairy company, Vinamilk, may mark the start of something bigger. As Merrill Lynch notes, VinamilkÆs listing added $513 million worth of market capitalization to the VN Index, taking its total value to $1.1 billion in the twenty minute trading session that occurs each weekday morning.

This is undisputably an embryonic market: with only thirty five listed companies, plus one fund, the Southern Exchange remains one of the smallest and least liquid markets in the region. ThereÆs also a Hanoi exchange, but thatÆs even smaller.

Average trading volume in the listed market is only about $1 million and the regulator, the Securities Stock Commission, estimates that retail investors account for 90% of this. Typically, many Vietnamese investors look to the pre-listed over-the-counter market, which boasts more than 2,000 mostly private companies and total daily volumes are estimated to be in the range of $5 million to $6 million, but transparency is about as clear as the skies above Chinese factory cities.

In one of the more accurate summaries of this OTC market, Merrill Lynch describes it this way: ôUltimately, however, the transaction price is determined by an opaque agreement (by international standards, at least) between the specific buyers and sellers, and this can take place anywhere, at anytime. Think of this as the Starbucks trade û terms and conditions can be settled in local coffee shops and simply reported to the company registrar as the pile of certificates is re-registered to the buyer. As for brokered deals, commission rates can be extremely high û ranging from anything between 5% and 20%.ö

So it suggests looking at banks that may want to formally list and operate by international standardsû Vietnamese banks are in the early days of capitalist-style development in a communist nation. For years, credit was based on state-policy and directed lending, but that has given way to more market-driven forces as the government recognizes that a strong business community helps the overall health of the nation. That means banks now make for a growth market: with only an estimated 5% of the population use banking services, there iscertainly a market to be captured.

While the current legal and regulatory framework in Vietnam is heavily biased towards the local banks and financial institutions û restrictions on foreign banks include that they cannot establish local subsidiaries, and thus most operate through branches and representative offices. However, the government has said it will lift these regulations û as it fairly well must, in order to comply with the requirements of the 2001 US-Vietnamese Bilateral Trade Agreement (BTA) and to live up to the requirements for entry into the World Trade Organization.

Nonetheless, home grown banks will have home-field advantages, even when regulations make for a more level playing field. Merrill Lynch notes several banks are expected to list sometime during the second half of this year, including: Vietcombank (the largest of the State Banks), Asia Commercial Bank (Standard Chartered has a 8.6% stake) and Sacombank (where ANZ has recently taken a 10% stake). How regulatory changes unfold, and these listings go, will be a test for Vietnam and a signal for investor confidence.
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