VietJet offers Vietnam government valuable IPO lesson

One week, two contrasting equity share sales. But will the Vietnamese government heed the lessons it needs to build a vibrant stock market and gain coveted MSCI Emerging Market status?

VietJet broke new ground in the Vietnamese equity capital market markets on Thursday when it priced and allocated its $167 million initial public offering at VND84,600 per share, just below the middle of its indicative VND75,900 to VND98,400 price range.

Final pricing was delayed by two days due to the intricacies surrounding the allocation of P-Notes rather than direct stock, plus a 0.1% move in the FX rate, which impacted orders placed in US dollars.

As a result, final pricing was inched upwards from an indicated level of VND84,400 when the deal was scheduled to price on Tuesday, to VND84,600 on Thursday.

But the transaction was a revolutionary one for the Marxist-Leninist state (although possibly not along the lines the philosophy's founding fathers envisaged). VietJet represents the first publicly marketed international IPO from the country.

Determining the valuation using a book building method rather than a Dutch Auction process and fixing the IPO price below the maximum possible level are also both unprecedented concepts in a country where officials could previously be jailed for achieving the "wrong" price.

The law was amended a couple of years ago, but the mindset has been slow to change and Vietnam specialists say the government still remains "very fearful" of allowing the market to set the price.

If Vietjet trades well (notwithstanding the long regulatory and settlement risk investors will incur before it lists in late February), it may help convince the government to adopt more international best market practises for the series of state divestments it is lining up for 2017. 

Indeed, the contrasting response to VietJet's 44.78 million share sale (excluding upsize option) and the government's attempted divestment of a 9% stake in Vinamilk at the beginning of the week could not be more stark.

VietJet

VietJet's management appear to have shown a clear willingness to listen to feedback and price the deal where it needed to be to clear the market.

At VND84,600 per share, VietJet has come 38.5% through its marketed range, with specialists noting the order book was well covered from a mix of long-only, hedge funds and sovereign wealth funds.

Specialists said there were about 30 lines in total. This number is fairly concentrated, but reflects the frontier nature of the deal.

They added that the book had a split two thirds/one thirds between foreign and domestic institutions. The deal has an overall split of 97% institutional and 3% retail. 

The upsize option is unlikely to be triggered.

Specialists also noted that while nearly 100 accounts had looked at the company during roadshows, many decided to adopt a wait-and-see approach until they have more proof of the government's commitment to open up public equity issuance. 

"The vast majority of accounts, which participated had already dipped their toe in the water and are set up locally," said one. "This was a good opportunity for them to get paper."

However, even below the middle end of the range, VietJet was not cheap.

It priced on a 2017 EV/Ebitda multiple of 6.7 times against an initial range of 6.3 to 7.4 times. Other regional low cost carriers such as AirAsia are trading around the 5.9 times level.

VietJet has aspirations to become the next AirAsia, but it will not have the same clear field the Malaysian operator had in the early noughties.

Investors were also conscious of the need to balance their desire for an illiquidity premium with the opportunity of gaining sizeable chunks of liquid stock in a market where freefloats are tiny.

In the end, it appears the desire to gain paper won out. Post IPO, VieJet will have a 14% freefloat and fall just outside the top 10 in the VN Index.

Vinamilk leaves sour taste

In contrast to VietJet, country specialists described Vinamilk's outcome as "disappointing," but not that unexpected given the barriers the government had erected prior to the sale via Dutch auction on December 12. 

State Capital Investment Corp (SCIC) held a 47.7% stake in the country's largest listed company but had capped prospective bids at 2.7% a piece. This deterred the company's largest foreign shareholder, Singapore-listed Fraser & Neave, from bidding for the whole 9%.

In the end, the only bids came from two subsidiaries backed by the ultimate owner, Thai tycoon Charoen Sirvadhanabhakdi. Together, F&N Dairy Investments and F&N Beverages Manufacturers purchased a combined 5.4% stake for VND 11.3 trillion ($496 million).

This represented a 2017 EV/Ebitda multiple of 15.4 times according to S&P Capital IQ and brings the group's overall stake up to 16.35%. It currently has one board seat.

Morgan Stanley, Saigon Securities and VinaCapital were advisors to the sale, which was pitched at VND 144,000 per share.

Given this level was 8.27% above the stock's VND 133,000 closing price on December 12, it deterred any institutional participation. 

Investors long wait at the gate

Investors hope the government will not only sell more meaningful strategic stakes in Saigon Beer & Alcohol Company (Sabeco) and Hanoi Beer & Alcohol Company (Habeco), which are being lined up for next year, but also include a public offering to boost their respective freefloats.

In the meantime, VietJet investors will still have to stomach Vietnam's back-to-front regulatory process. 

They have until January 9 to fully fund the IPO by placing their money into an escrow account. At this point, the shareholder register is updated and investors will receive their certificates one day later on January 10.

The regulatory approval process, which would take place pre-launch in other countries, now begins. The leads expect to submit the listing application around January 16 and receive approval on February 15, targeting a preliminary trade date on February 20.

Specialists say Vietnam is now making progress developing its stock market, but add that it is still painfully slow and a case of two steps forward and one step backwards.

As one investor told FinanceAsia, "It's been said many times but China is a Communist-capitalist country and Vietnam is Leninist-Marxist. The Vietnamese have very different views on market development, but at least now they’re finally listening to experts and starting to use the stock market to price these deals.

“That wasn't the case two to three years ago," the investor added.

The same investor also highlighted the country's burning desire to achieve MSCI Emerging Market status, but suggested this is likely to be some way off without radical changes to improve liquidity and freefloats on the Ho Chi Minh Stock Exchange. 

For while Vietnam is often compared to the TIP countries of (Thailand, Indonesia and the Philippines), the reality is that it lags far behind. 

Its market cap to GDP ratio of 39% is less than half the Philippines 82% level. The government hopes to reach 70% by 2020.

The country's ratio of IPO's to Foreign Direct Investment (FDI) is also terrible.

In 2015, the country received $11.8 billion in FDI but IPO issuance was negligible. In fact, the only IPO Dealogic records for the whole year was the $19 million flotation of PM Thoresen Asia Holdings and that was on the Thai Stock Exchange. 

As VinaCapital chairman, Terry Mahony, recently told the Vietnam Business Forum, “We hope the government will take advantage of the current investment climate but the process must be implemented along international standards and not allowed to be sidetracked by concerns of accountability, a lack of understanding or vested interests.”

Joint global co-ordinators for VietJet's IPO were BNP ParibasDeutsche BankJP Morgan and Viet Capital Securities.

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