[Vnbiz] Shares on a tear in Vietnam

[Phan, Tai]

Southeast Asia
     Apr 19, 2007  
  
 
  
 Shares on a tear in Vietnam 
By Karl D John 

HANOI - Up 145% last year and rising another 40% so far this year, can Vietnam sustain its spectacular stock market rally? 

After China's benchmark CSI 300 Index, Vietnam's bourse is the second-best performer in Asia so far this year. Earlier reports that the government planned to apply capital controls to curb market speculation has trimmed around 12% off the Ho Chi Minh City Securities Trading Center's VN Index, which reached a peak of



1,170 points on March 11. 

Foreigners have lately been net sellers and some analysts warn of a bubble poised to burst, as market speculation pumps share prices up and beyond their underlying earning power. Others are optimistic that big new share listings, galvanized merger and acquisition (M&A) activities and sunny forecasts concerning the country's overall growth potential will propel the market forward through the rest of this year. 

The planned privatization - or in Communist Party parlance, "equitization" - of various other state-owned companies promises to give the bourse a supply-side boost in the months ahead. The State Capital Investment Corp (SCIC), the government agency responsible for overseeing the sale of government holdings, recently co-sponsored with Euromoney magazine a well-attended investment promotion forum in Hanoi. 

The SCIC has taken administrative control of around 450 state-owned enterprises, with the aim of transforming them into commercially viable, market-driven businesses. So far, however, the SCIC has listed only 17 companies on the stock market. And the number of companies under its control is set to grow to around 1,000, with a long-term aim to maintain control of only 100 to 200 "strategic" companies, including interests in certain aviation, banking and insurance holdings. 

Tran Dac Sinh, director of the Ho Chi Minh City Securities Trading Center, recently said that the government aims to increase the stock market's value from its current 6% of gross domestic product (GDP) to 20-30%. To encourage more private companies to list on the stock exchange, last year the government offered a two-year 50% corporate tax rebate for newly listed concerns. The authorities are offering slightly less generous tax incentives to encourage companies to list this year. 

At least 22 more companies are scheduled to sell shares on the bourse in the next four months, which analysts say should raise the bourse's capitalization to around 10% of GDP by the end of this year. Some market analysts predict that if the government follows through on all its ambitious privatization plans, including big listings of the public utility Electricity of Vietnam and the Mekong Delta Housing Bank, the stock market's total capitalization could hit US$24 billion over the next four years. 

"We're going to see a very significant transformation of the Vietnamese stock market over the next two to three years," said Spencer White, a Hong Kong-based Asian strategist with Merrill Lynch. "It's going to have a lot more breadth and a lot more depth, and it's going to be a combination of both the transitions from the over-the-counter market as well as these privatizations." 

New listings are also expected to spur more M&A activity among foreign and local companies. Last month's opening of a brewery by South Africa's SABMiller and Vietnam's top dairy firm Vinamilk - where the foreign firm provided the technical expertise and the Vietnamese concern local market knowledge - has raised hopes for more foreign-local joint ventures. Taiwan's Ta Ya Electric Wire and Cable last year listed shares of its Vietnamese subsidiary on the exchange to raise capital locally, representing the first foreign company ever to take the local stock market plunge. 

Banking is one sector that has already seen a slew of M&A activity. ANZ, HSBC and Standard Chartered have all taken stakes in local banks in recent years - though local laws have limited their stakes to 10%. Citigroup is now preparing to take a stake in the Military Bank, according to news reports. And as restrictions limiting foreign ownership are relaxed, HSBC has already indicated it hopes to double its stake in Techcombank to 20%. 

To date, the most common type of foreign acquisition has been through the transfer of legal capital. Foreign merger activity is still embryonic in Vietnam. But recent foreign-local tie-ups in the supermarket sector and negotiations under way in other business sectors indicate that M&A activities are steadily picking up. 

Embryonic M&As 
Until now, M&A activities were almost non-existent in Vietnam. That owed largely to regulatory hurdles, including restrictions on licensing, taxation and foreign investment. Foreign share holdings were capped at 49% and 30% of chartered capital in listed and unlisted enterprises respectively. Meanwhile, approvals for foreign investments were often handled arbitrarily by government officials on a case-by-case basis, frustrating many a foreigner in the process. 

That restrictive investment regime stymied the government's plans to reform its many inefficient and loss-making state-owned enterprises. Now, with Vietnam's entry to the World Trade Organization (WTO), M&A activity is steadily starting to pick up as first mover foreign investors take advantage of the improved business and regulatory environment for joining up with domestic enterprises, either as business partners or through outright acquisitions. 

Most local companies desperately need the foreign capital, technical know-how and management expertise to compete for global markets and maintain a foothold against the anticipated inrush of foreign competition for local markets. Still in transition from a command to market economy, Vietnamese businesses are by and large out of touch with the modern technological and human resource management processes that drive international business. 

The government has expressed its hope that a soon-to-be-launched online portal aimed at supporting M&A transactions will help to bring more foreign and local companies together. The key driver of recent M&A activities is Vietnam's high economic growth rate, which averaged 7.5% from 2001 to 2005. Some investment bank economists predict that Vietnam's economic growth may surge over 8% this year, potentially surpassing China as Asia's fastest-growing country. 

At the same time, many market analysts are less sanguine about Vietnam's prospects. They note that the stock market has already slumped around 20% off its March 11 high and suggest that the benchmark index could shed another 30% before share prices reflect listed companies' real underlying performance. In March, renowned market watcher Marc Faber, known among financial analysts as "Dr Doom" for his downcast market forecasts, predicted Vietnamese shares could slide as much as 50% in the weeks ahead. 

Vietnam's shares are some of the most expensive in Asia, trading on average at 32 times earnings. Poor accounting and financial reporting standards make it nearly impossible for potential investors to conduct due diligence on Vietnamese companies. There are concurrent concerns about the quality of management at many Vietnamese private and public companies, which is steadily improving but still wayward from accepted best international practices. 

So far that hasn't discouraged foreign investors, who accounted for around 20% of last year's 145% market rise, many anxious to get exposure to Asia's next great growth story. The number of local trading accounts almost quadrupled from 32,000 to about 120,000 last year while the number of companies listed on the bourse has over the past six months more than doubled to 107. 

There are significant regulatory changes on the cards aimed at easing mounting investor concerns and bringing Vietnam's investment framework more in-line with WTO requirements. A new securities law issued at the beginning of this year aims to establish new standards for corporate disclosure and governance, whether they trade over-the-counter or on the formal exchange. Market regulators are also moving to adopt international financial reporting standards and applying international auditing standards for all state-owned enterprises. 

How effective those new regulations will be in curbing excessive speculation will depend on the timing, implementation and enforcement of the reforms - always a wild card in Communist Party-run Vietnam. Jonathan Pincus, the United Nations' chief economist in Hanoi, recently said: "It's a frenzy, all the chatter in Hanoi is about people investing in the market. I don't know if anyone knows what these companies are worth, but they are buying the paper." 

If market regulators are unable to keep pace with rapid-fire foreign capital movements, the pessimists could be vindicated - at least over the short term. Dire predictions of a stock market collapse have the government itching to introduce draconian controls, including possibly Thailand-style curbs which entail a one-year lock-up period on short-term foreign equity investments. For better or worse, the Communist Party leadership has so far heeded foreign advice to allow market forces rather than crude administrative fiats dictate any corrections in share price valuations, the latest indication of Vietnam's new commitment to market economics. 

Karl D John is chief executive officer of The TCK Group (www.tckgroup.org),a Vietnam-based investment consulting group. He has more than a decade of involvement with Vietnam and lives in Hanoi.