[Vnbiz] Stock Market Story

[Craig Stevenson]

  Saigon's Stock Market Surges    *Section: *Top News

ASIA

No longer a joke, the *Vietnam* stock exchange is up by 67% this year, and
it welcomes foreigners interested in mines, pharma, and Nike

For most of its six-year history, the Vietnamese stock market has been
something of a joke. As recently as January, its market capitalization was
less than $500,000 while average daily turnover was all of $700,000.
International fund managers viewed the Ho Chi Minh City Stock Exchange as
nothing more than a financial curiosity not worth their time.

But get this: *Vietnam's* stock market has turned in a better performance
this year than China's two white-hot exchanges -- in Shanghai and Shenzhen
-- and is tops in the region. It is up 67% as of Sept. 11 and 97% in the
past 12 months. Market capitalization has increased sixfold, to $3 billion,
and it could easily double in the next 12 months if planned initial public
offerings come to market as expected. And while that's still pocket change
to most money managers, "now is the time to move," wrote Hong Kong-based
Pan-Asian equity analyst Garry Evans in an HSBC research report released in
early September.

LACK OF BENCHMARKS.

That's not to say investing in Vietnamese equities isn't a white-knuckle
ride. The market climbed 105% before hitting a peak in late April then lost
38% before bottoming out at the beginning of August. It has since climbed
back up 28%. And as in any emerging market, transparency is a problem. None
of the stock exchange's 48 listed companies is subject to audits by
international accounting firms.

Though the companies are required to release quarterly earnings reports, the
absence of sophisticated analyst research on a company-by-company basis
makes it difficult to rely on basic benchmarks such as price earnings
ratios. "There are no consensus numbers, it's pretty hard to tell," says
Spencer White, Merrill Lynch (MER) equity strategist in Hong Kong.

Yet White is still one of *Vietnam's* biggest boosters. A report he penned
back in February, in which he declared *Vietnam* a "10-year-buy," played no
small part in the first-quarter rally. Local retail investors, who account
for 95% of the market in *Vietnam*, bought in anticipation of a flood of
foreign money. White says the market got ahead of itself, though now, after
a healthy correction it offers "the opportunity to buy into one of highest
growth economies in Asia."

EARNING A PLUS.

Economic fundamentals certainly look good. *Vietnam* has boasted the second
fastest-growing economy in the region after China's in recent years, and it
is replicating its Communist big brother's privatization of state-owned
companies and embrace of the market economy. *Vietnam's* economy is expected
to grow 8% this year to $60 billion, on the back of 8.5% growth in 2005.

Standard & Poor's on Sept. 7 raised *Vietnam's* sovereign credit rating to
BB+ from BB, citing the country's economic growth prospects, improvements to
infrastructure, and reforms in the banking system. Another enticement to
potential investors is the likelihood *Vietnam* will be admitted to the
World Trade Organization by the end of this year.

In 2005 the country attracted $5.8 billion in foreign direct investment as
money poured into pharmaceuticals and shoe and mobile-phone manufacturing.
In March, *Vietnam* made big headlines when Intel (INTC) Chairman Craig
Barrett traveled to Ho Chi Minh City, also known as Saigon, to receive an
investment license to invest up to $605 million building a semiconductor
test and assembly plant there [see BusinessWeek.com, 3/13/06, "Good Morning,
*Vietnam*"].

LOW CEILING.

The good news behind all this is that foreigners can participate directly in
the *Vietnam* stock market. This entails obtaining a trading code, a
relatively simple process of submitting a four-page application form in
English together with supporting documents translated into Vietnamese. Banks
such as Merrill Lynch can also buy shares on behalf of individuals. There
are no foreign exchange limits on repatriating income, nor is there any
withholding tax on dividends or capital gains.

But obtaining the right to buy equities is the easy part. Because the 49%
ceiling on foreign ownership has already been reached for most listed
companies -- it's 30% on Vietnamese banks -- finding tradable shares in the
best companies is extremely difficult. For example, Sai Gon Thuong Tin
Commercial Joint Stock Bank [Sacombank], in which Melbourne-based ANZ Bank
holds a stake and listed in July, trades at a price ratio more than double
the average for banks elsewhere in the region.

Even so, the 30% foreign limit has been reached. Together with
*Vietnam*Dairy Products Joint-Stock Company [see
BusinessWeek.com, 1/31/06, "*Vietnam*: Land of Milk and Honey"], Sacombank
accounts for more than 50% of the market capitalization.

ENTER THE DRAGON.

There is talk, however, of lifting the ceiling on foreign ownership again.
"They have to make a decision fairly quickly," says Merrill Lynch's White,
who points out there has been an avalanche of foreign funds trying to flow
in since the limit was revised upwards from 30% to 49% last October.

In the meantime, the best way to gain *Vietnam* exposure might be through
buying listed closed-end funds. These typically invest in both listed and
over-the-counter Vietnamese stocks, a potentially large pool of some 2,400
companies. There are about a dozen closed-end *Vietnam* funds, most of them
listed in London or Dublin. The largest is *Vietnam* Enterprise Investment
Fund, managed by Dragon Capital since 1995, with a net-asset value of more
than $350 million. Saigon-based Dragon also manages the $192 million *
Vietnam* Growth Fund.

The $230 million Vietnam Opportunity Fund is managed by VinaCapital and is
listed on London's AIM board. It currently trades at a more than 30% premium
to net-asset value. Other Dublin-traded funds include PXP *Vietnam* Fund,
and PXP *Vietnam* Emerging Equity Fund. Prudential says it plans to begin
raising between $150 million and $200 million for an offshore
*Vietnam*fund, pending Vietnamese regulatory approval expected within
a few months.

CURRENT FAVORITES.

However, Prudential may have its work cut out for it, as existing funds are
already having trouble finding places to park their money inside *Vietnam*.
Instead, experts advocate the indirect route of investing in overseas
companies with significant exposure to *Vietnam*. HSBC suggests
Toronto-listed mining stocks Tiberon Minerals with a major stake in a
Vietnamese tungsten mine, and gold exploration company Olympus Pacific
Minerals.

Merrill's Spencer White likes Hong Kong-listed Yue Yuen, which owns
Vietnamese manufacturing plants producing sports shoes for Nike (NKE). Also
among his favorites are Singapore-listed Fraser & Neave, which derives 35%
of group profits from its Vietnamese brewery and owns a chunk of Vinamilk.
Jonathon Waugh, manager of PXP *Vietnam* Asset Management in Saigon, likes
Ellipsiz, also based in Singapore, which manufactures probe cards used in
test and assembly of semiconductors.

Yet greater breadth and depth in listed stocks may soon be in the offing. In
January, a new securities law takes effect in *Vietnam* that will require
unlisted companies whose shares trade over the counter to be subject to the
same reporting requirements as listed companies. The current law has
discouraged many from listing on the stock market. The government is also
offering a 50% tax break for companies during their first two years on the
exchange.

If this carrot-and-stick approach works, billions of dollars of companies'
value currently traded on the OTC market could become fair game for foreign
investors. That could bring the market capitalization to about $10 billion
by the end of next year, according to Merrill Lynch, which received a
trading code to invest directly in securities in August.

~~~~~~~~

By Frederik Balfour
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