Year to date, Vietnam's stock market continues to outperform its regional peers. Even the Vietnam-China disputes, which caused a profound ripple in May, failed to undermine the rally.
Vietnam continues to be characterised as a frontier market with stable macroeconomic stability in the midst of comprehensive economic restructuring. The Communist Party maintains its firm influence over economic and social discourse, and at the same time has acknowledged the intrinsic value and benefit of a market economy.
As the headline suggests, rediscovering opportunities in Vietnam is about finding hidden gems in a sea of opportunities. Increasingly, hidden gems can be detected in a new wave of initial public offerings, an important component of the government’s plan to comprehensively restructure and equitise state-owned enterprises. The sensationalised (for good reasons) banking system has improved to a level where it is no longer the black eye of the economy.
SOE reforms: The new wave of IPOs
We have seen stark differences in the number of equitised state-owned enterprises (SOEs) from two years ago compared with 2013. In 2013, although not ideal, the economic climate was permissible for SOEs to become equitised. The same cannot be said for 2011 leading up to 2013, when we witnessed a period of passive equitisation activities (2011: 12 SOEs, 2012: 13 SOEs. 2013: 74 SOEs — a total of 99 equitised SOEs in three years, with 19 state corporations with a combined total deal size of less than $1 billion). In 2014-2015 alone, the equitisation list comprises 432 enterprises, a staunch reflection of the government’s determination to implement its SOE restructuring goal.
So why did SOE equitisation during 2011-2013 fell below expectations? In this specific case, correlation does imply causation. Passive equitisation activities during 2011-2013 were correlated to and caused by:
- incomplete regulatory framework;
- delays in approvals of restructuring plans for SOEs (mostly in 2013); and
- non-core divestments were stagnant as 93.5% of divestments were purely internal transactions (Vnd3.89 trillion vs Vnd4.16 trillion).
The doctrine of not allowing the sale of state assets at a loss (which in certain cases can lead to criminal proceedings) was the major gridlock in preventing SOEs to become equitised.
In 1H14, only 31 SOEs completed their IPOs. Among the above-mentioned 432 SOEs, 135 enterprises failed to take any form of actions, the other 138 have not implemented or completed the valuation process, essentially identical to not taking any form of action. Not to be discouraged, the Ministry of Finance (MoF) expects that the 2014-2015 timeline is feasible as about 200 SOEs will complete their IPOs by the end of 2014. In regards to non-core divestment, out of the total Vnd22 trillion that needed to be divested, about Vnd695 billion has been completed in 2013, and in 1H14, total divested volume reached Vnd821 billion (again, better than 2013, but still behind the target).
To conclude that the recent wave of restructuring was satisfactory would be impartial. Reasons behind the unsuccessful rate could be traced to:
- lack of transparency, in specific, lack of corporate access and road shows before the IPOs;
- SOEs scrambled to meet the deadline, leaving investors with little time to consider their investments; and
- last but not least, concerns over delayed listing.
As a rule of thumb, in Vietnam, IPOs and listings are independent from one another, and it can take three years for a company to be listed after its IPO. On the Hanoi Stock Exchange, where the majority of the IPOs and SOEs divestments occurred, year to date only 30% of offered shares were sold with a total value of $61 million.
Poor past performances have provoked the Prime Minister to signed into law the Government’s Resolution No 15/NQ-CP on accelerating SOE restructuring (including equitisation and divestment). Effectively, it validates all the directives from the Prime Minister on this process from the start of the year. The resolution concentrated on the following:
- First, for non-core business divestments, the deadline is still set for the end of 2015 and divestments at lower than book value (or par value) are permitted (after booking provision and receiving approvals from related government bodies). Moreover, SOEs are permitted to hire brokerage houses to auction their divestments (for non-listed companies). In the case of stakes in financial institutions (banks or finance companies), state-owned-commercial-banks (SOCBs) are permitted to participate. Other related government bodies or provinces should transfer equitised SOEs to the State Capital Investment Corporation (SCIC) based on Decree No.151/2013/ND-CP.
- Second, SCIC (or even the SBV) could purchase non-core business divestments (in insurance and banks) from SOEs if all the above-mentioned measures failed. Prices will be market-based oriented, but may not exceed book value minus provision (SOEs need to book enough provision before transferring their stake to SCIC).
- Third, on state ownership in SOEs, related government bodies have to propose their respective interests for SOEs to the MoF for consideration before seeking the Prime Minister’s approval, with the general exception of: i) state ownership in Bao Viet Holdings (BVH:HOSE) and SOCBs (except Vietinbank CTG:HOSE) cannot be lower than 65% and, ii) state ownership will differ across different sectors, but would not exceed 65%.
- Lastly, SOEs’ management and related government bodies would bare responsibilities for any impediments that will ultimately lead to failures and delays in SOEs’ equitisation and divestment process.
Listing concern: The State Securities Commission (SSC) has proposed mechanisms to accelerate SOE restructuring, specifically, how to attract additional investors for upcoming IPOs. One of the most common impediments to comprehensive SOE restructuring is the long delay in listing after the initial IPO, which can take anywhere between one or two years at the minimum. Current regulations require companies to list within one year after IPO, but because the financial retribution is not very severe, many companies opt to pay the penalty rather than to list. Last year the MoF began drafting a Circular to amend Decision No 108/2008 on organisation and management of trading unlisted public companies securities on the Hanoi Stock Exchange. In details, public companies (entities that were once 100% state-owned and have been converted to a joint stock structure, after the Circular takes effect) have to register with the SSC, Vietnam State Depository (VSD) and register to list on UPCOM (the exchange for unlisted or delisted public companies) within 30 days after receiving their business licences. For the remaining public companies (whether they are state-owned or not), once they obtain securities registration certificates from VSD, they have to register to list on UPCOM within three months (or three months after the Circular takes effect, if they have already obtained the certificate).
The SSC also plans to relax listing conditions, in order to facilitate listing after IPO in order to provide investors (mostly foreign investors) with more confidence in upcoming IPOs. Big IPOs are in the distant (Vinatex, Vietnam Airlines, Vocarimex, Airport Corporation of Vietnam, Vicem, Mobifone…) and we remain encouraged that 1H14 was a learning experience and we hope to see more fruitful results in the second half of the year.
Banking sector restructuring has been synonymous with Vietnam over the past three years
Several new banking regulations were recently introduced and we believe these regulations will significantly enhance banks’ risk management in the coming time. These regulations reflect two key orientations of the State Bank of Vietnam (SBV) as follows:
- First, banking businesses will be more regulated and supervised in the future. Banks will be prohibited to execute what they did not register on their business registration certificates. In the past, banks were able to find loopholes in banking regulations and acted upon finding those loopholes. Large shareholders of banks must strictly comply with regulations on ownership which aims at reducing cross ownership issues and a stranglehold over banks by banking tycoons.
- Second, bad debts settlement is expected to accelerate in 2H14 and 2015. Banks are granted more rights to solve collaterals of bad debts regardless if debtors fail to cooperate. This regulation aims at creating a more effective mechanism for banks to solve bad debts.
Please be reminded that with the new debt classification rule (which closely reflects international standards) to gradually take effect starting this year and thoroughly effective by March 2015, the gap between reported NPL (4.8% by June 2014) and real NPL (about 8.8% by June 2014) is becoming more narrow (previously: 2-3% vs 10-15%), and commercial banks will have to aggressively amend their bad debts situations. While earnings might be negatively affected in the short term, in the broad scheme of things, stern actions to correct systemic issues in the banking system as well as the overall economy will engender optimism and confidence, two key characteristics that have been lost. Only when a sense of optimism and confidence is rediscovered, banks are willing to lend.
To help investors get a deeper understanding on the new wave of IPOs in Vietnam and the banking sector reform, please note that Gateway to Vietnam is an annual event hosted by Saigon Securities (SSI) on September 11, 2014. Successfully organised in 2009 and 2010, it has become a reliable event for domestic and international financial investors as well as pioneering Vietnamese enterprises in search of new cooperation opportunities.
This year the theme of the conference is “Rediscovering Investment Opportunities in Vietnam”. The event will capture the progress of economic reform in Vietnam. With the participation of reputable speakers and high-profile companies, the conference is expected to provide investors with insightful discussions and valuable understanding into Vietnam’s investment opportunities. More information can be found at http://gatewaytovietnam.ssi.com.vn/ .
Head of Research, Saigon Securities Inc