Vietnam ECM: Buyer beware!

Foreign investors have beaten a hasty retreat since the market turned in May. Is value starting to re-emerge?

Financial analysts and fund managers believe new buying opportunities are starting to open up in Vietnam after the market’s sharp correction, which began in the spring on the back of high valuations and concerns about a global trade war which will impact the country’s export-oriented economy.

Since the VN Index peaked at 1,204 on April 9, it has fallen 21.12% to close at the 949.73 level on July 30. Vietnam has done a rapid about turn from being Asia’s second best performing market during the first quarter to one of its worst performing during the second.

PXP Vietnam Asset Management partly attributes the sell-off to the rapid disappearance of hot money investors and argues that even stocks at their foreign ownership limit are starting to attract bids as investors refocus on expectations for strong first half results.

However, this may not provide much solace to investors who purchased shares in Techcombank, which executed its initial equity offering in late April just as the market was on the turn. Its secondary market trading performance has provided a salutory lesson for investors hoping to make short-term returns from hot markets with high valuations despite the bank and country's undoubted long-term potential.

For the private sector lender has lost about a quarter of its market value since raising VND21 trillion ($922 million) on April 27. The deal was priced at VND128,000 per share on the back of an order book, which topped $3 billion and had to be closed one day early due to strong demand.

On July 30, the stock closed at VND26,100, down 38.8% from its issue price after factoring in a one-for-three stock split.

At this level, it is now trading at 1.8 times 2018 book and 1.5 times 2019 book according to SSI Securities. This puts it at a slight premium to the country’s banking sector average.

Other domestic banks have witnessed sharp corrections too. Consumer-oriented VP Bank, for example, has lost nearly 38% of its value since the stock peaked at VND42.83 on April 9.

As Techcom Securities says in a recent research report: “Since the first quarter of 2017, the banking sector outperformed the VN Index. However, since the second quarter of 2018, it has recorded the biggest loss in value.”

That loss now stands at about 33% across the whole sector according to Credit Suisse. In a research report, published on July 25, the bank argues that value has returned, assigning an overweight recommendation to the banking sector.

The Swiss bank says the correction has provided “a good entry point.” It adds that “sector valuations seem fair now at 1.7 forward P/B and 12.1 times forward P/E. Vietnam banks also look fairly valued compared to the regional banks for the level of ROA (1.4%) and ROE (18.2%) they generate.”

But one foreign institutional investor told FinanceAsia that if Vietnam wants to move up to the next level and attain emerging market status, it needs to address underlying structural issues.

One of those concerns foreign ownership rules. Where the banking sector is concerned, this is capped at 30%. However, Techcombank has a lower cap at 22.5%.

The rule proved to be a complicating factor for the lender's flotation since foreign investors were unable to purchase shares in the secondary market after the syndicate fully allocated the 22.5% limit in the primary market.

Consequently, when a few local investors flipped the stock on its debut, foreign funds were unable to step in and soak the excess up. The foreign investor says this helped to create a downward spiral, as retail investors tend to buy stocks they believe foreign investors will purchase and have swerved Techcombank too.

To make matters worse, the investor said there is no public information about foreign investors’ holdings in individual Vietnamese stocks, making it hard to conduct proper risk-return evaluations.


One investment banker familiar with Vietnam added that tight foreign exchange controls and the Vietnamese dong’s lack of full convertibility also remain major hurdles to the development of a truly open stock market.

Payment and cross-border remittances are subject to stringent State Bank of Vietnam controls. In particular, cross-border money transfers can only be conducted through a local financial institution, which means foreign investors cannot use their existing international bank accounts.

Foreign stock market traders need to set up a custody account with a licensed local bank to hold securities and cash. They also need to trade securities through a local bank or brokerage.

This is clearly negative from a risk management perspective. Many international fund managers do not feel comfortable depositing money in local Vietnamese banks, which are perceived to be less financially sound than their international counterparts.

Similarly, transfers of securities into, and out of, local brokerages add another layer of risk for international fund managers.

Big-ticket fund managers like GICWarburg Pincus and Fidelity have already been active in Vietnam for some time.

Few doubt the market’s long term potential, least of all the investment banks, which have booked $3.3 billion in funds raised during the first seven months of this year, according to Dealogic figures.

That compares to $2.9 billion for the entire 17 years before that. Big-ticket listings are adding much needed liquidity to the market and the Communist government’s growing embrace of capitalism should spur lucrative investment returns for foreign and local investors alike.

And not all of Vietnam's recent flotations have performed poorly. Vinhomes is down only 4% since it raised a record breaking VND30.74 trillion ($1.35 billion) in May, outperforming the market. 

But if the country is to attract a broader range of foreign investors, it will need to simplify some of the complex rules and bring them in line with international standards.

This article was amended to correct Techombank’s stock price and foreign ownership cap.

¬ Haymarket Media Limited. All rights reserved.
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