Vietnamese flotations: awaiting a fair wind

When will the pipeline unfurl its first initial equity offering in 2019?
One of Asia’s most promising public equity markets has been becalmed so far this year, disappointing those who hoped that Vietnam could build on 2018’s breakout success.
The first half of the year is ending without a single initial public offering taking place, in complete contrast to a year ago when the $1.35 billion flotation of Vinhomes and $923.4 million flotation of Techcombank propelled Vietnam to the top of the Southeast Asian equity league tables. 
According to Dealogic figures, only Thailand raised more money from IPOs – or initial equity offerings (IEOs), as Vietnam likes to call them – during the whole of 2018. 
However, both Techcombank and property developer Vinhomes were priced towards the very top of the market’s bull run and listed after it entered a sharp downturn, leaving investors with a bitter aftertaste. 
So it is unsurprising there was just one tiny $5.63 million IEO for Fulin Plastic in the second half of 2018 as the VN Index plummeted from a high of 1,199.96 on April 6 to a low of 880.9 on January 4.
As Dragon Capital’s chief investment officer, Bill Stoops, told FinanceAsia, “We raised $500 million for an IPO fund only for the market to die a death.”
There were signs of a potential revival towards the end of the first quarter of this year after the index regained lost ground, rising almost 15% to peak at 1,011 on March 18. This prompted Maritime Bank (MSB) to prepare for a second quarter IPO via Ho Chi Minh Securities (HSC) and for a number of other names, including property developer Ecopark Corp, to begin the process.
However, since mid-March the index has turned back southwards, closing June 17 at 946.95. MSB has consequently pushed its deal back to the autumn.  
The bank is targeting proceeds of about $200 million and a market capitalisation around the $1.1 billion mark. This implies a trailing price-to-earnings ratio of 29.5 times based on 2018 net profits of $37.2 million. 
Such a valuation would just not be possible in the current market given that Vietnam’s lowest-rated banks are trading at around nine to 10 times their trailing 12-month earnings.
MSB’s management recently said they hope to boost profits by 77% this financial year, spurred by the ongoing redemption of the bank’s Vietnam Asset Management Company (VAMC). But that still implies a forward-earnings price ratio around the mid-teens, above its peers. 
The difference between MSB’s aspirations and market reality demonstrates the clear water that has opened up between issuers and investors.
Fund managers say the bank is still likely to come to market at some point during 2019 because it wants to raise capital to join the seven others, which already meet Basel II standards. But other private sector entities with a less pressing need for cash have pulled back.  
“Companies are trying to work out the best time to come to market,” Nguyen Thi Huong Giang, head of investment banking south at SSI, told FinanceAsia. “It’s been quiet because the stock market performance hasn’t been strong and most prospective issuers formed their valuation expectations when the VN Index was a lot higher.” 
Kevin Snowball, chief executive officer of PXP Vietnam Asset Management, points out that the market’s average daily trading volumes remain relatively depressed. “The market was trading up to $350 million a day at its peak last year,” he said. “It’s now about $150 million to $170 million.”
SSI’s Nguyen agrees. She highlights how Vietnam’s dominant and heavily momentum-driven retail investors have been parking cash elsewhere. 
“Deposit rates have risen 50 basis points to 100bp since the end of 2018, so investors are getting inflation-adjusted returns of 3% to 4% on six-month deposits,” she explained.  
When investor sentiment revives, so should a number of interesting deals. 
There are, for example, a host of banks that need to unwind cross-shareholdings, while others want to raise capital. The latter's ranks include Vietcombank, the country’s largest bank by market capitalisation.
It has shareholder approval for a 340 million share offering to bolster its capital at a time when it is rapidly expanding its retail operations. The transaction would raise about $870 million based on Vietcombank’s current share price and rich valuation at just over 3.5 times book.  
Bank officials told FinanceAsia that they are open to placing the shares with either strategic or public investors. Earlier this year, the bank sold 3.1% of its equity to Mizuho and Singapore’s GIC
Another interesting IEO, which has joined the pipeline, is Ecopark. It was formally known as Viet Hung Urban Development & Investment until it changed its name and chief executive earlier this year. 
Its plan to tap capital markets is driven by a desire to diversify its funding sources for an $8 billion two-decade project to build a green city to the east of Hanoi. Such a company is also likely to be welcomed by stock market investors looking for their own diversification away from the omnipresent Vingroup and its listed entities.
In the long-term Vietnamese equity markets remain dependent on government action to clarify or change rules that have long stymied development
There are, for example, four companies established with foreign direct investment (FDI) with open listing applications: Santomas (a Malaysian-owned plastics company), Seoul Metal, CTC Bio (a Korean-owned pharma company) and Vietnam Fortress Tools (owned by Taiwan’s Formosa Tools).
Under Vietnamese rules, these so-called FDI companies are legal entities in their own right rather than foreign company subsidiaries. But none can move forward until the government clarifies the rules on foreign ownership limits and what constitutes an FDI company.
That would also likely encourage some of Vietnam’s other FDI companies to list, not least South Korea’s multiplex operator, CJ CGV, which tried and failed to list its Vietnamese operations in Seoul last autumn. 
Then there are the domestic technology companies that believe their natural IPO home is New York. In a recent FinanceAsia interview, MoMo chairman, Terry Ting, bemoaned the lack of rules, which make this a viable option for the e-payments provider.
Bankers say this is why digital content and games provider, VNG, has also yet to proceed with a Nasdaq IPO through its mandated bank Goldman Sachs.
Vietnam’s tight regime to prevent capital flight means Vietnamese shareholders cannot own foreign stock.
As one banker explained: “One option would be a dual listing, using depository receipts to mirror the local stock. But the regulatory framework needs to revised to accommodate this and agreements reached between Vietnam and foreign exchanges on what rules and processes needed to be followed.” 
On the positive side, the government has made changes to the way state-owned enterprises (SOEs) can issue equity after witnessing a string of failures during 2018 including IEOs for Genco 3 and Vietnam Rubber Group.  
At the beginning of May, the country's finance ministry released a circular about bookbuilding procedures, effective this month. 
So SOEs can now issue shares via the bookbuilding route and not just through public auctions, although individual deals will still need to be signed off by the prime minister. If approval is granted, companies will be required to publicly market their proposed equity offerings to institutional and retail investors followed by a five-day bookbuilding process with daily updates from the lead managers. 
“The concept of bookbuilding is a very welcome move as there’ll be plenty of interest for properly marketed transactions,” said Mike Lynch, head of institutional brokerage at SSI. “Foreign investors don’t like auctions because they can either end up overpaying, or not getting allocated at all after putting in a lot of work.”
Local experts say work is still needed to make the process watertight. “As we’ve seen in other countries like India, potential bidders just wait until the final day to put a bid in,” the banker said. “It would be much better if there was mandatory daily participation.” 
And then there are the value judgments that lead managers bring to bear in a well-run privatisation process, taking careful consideration of the size and intentions of the institutions pitching for stock.
“There’ll be weakness in secondary market trading if stock gets allocated purely to momentum players, or big funds that only get a tiny allocation that is too small for them to hold,” the banker added.
One of the first companies that may take advantage of the new rules as they stand is Vietnam Posts & Telecommunications (VNPT). The government has been encouraging the group to hit the market since before 2019 after acknowledging that another favoured candidate, Bank for Rural Agricultural & Development (Agribank), would not be ready until at least 2020.
Nguyen Thi Bich Nga, deputy director of the International Cooperation Department at the State Securities Commission (SSC), told FinanceAsia that the regulator has spent a lot of time studying the merits of bookbuilding and is now on board.
The National Assembly has also been considering draft amendments to the Securities Law, which has the potential to kick-start the transformation of the Vietnamese equity market.  
“Our aim is to bring our regulations in line with best international practice,” Nguyen said. As such, she added that Vietnam is tightening up the rules around time lags from when companies iss ue shares and then list them on an exchange, a big bugbear for both investors and investment bankers. 
Nevertheless she said the SSC is pleased to see that the stock market beat the government’s target of 70% of GDP at the end of 2018. The prime minister has also just approved a stock market reform plan that envisages it hitting 100% of GDP by 2020. 
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