Fits and starts

IFR Asia - South East Asia 2015
6 min read

A stop-start privatisation programme and talk of landmark cross-border listings is raising hopes for Vietnam’s capital markets, although investors remain cautious about the country’s future.

The Vietnam Government has made great strides in improving local capital markets, yet foreign ownership limits and uninspiring privatisation programmes have frustrated overseas investors.

There are a lot of reasons to be optimistic about Vietnam. Last year saw a host of partial privatisations, with the country’s banks effectively addressing non-performing loans and the economy expanding.

GDP growth was 5.98% last year, versus 5.42% in 2013 and 5.25% in 2012, according to the country’s General Statistics Office. The rate for last year beats the International Monetary Fund’s 5.5% estimate. At the same time, the quarterly numbers last year suggested a much-improving growth rate: the economy expanded 5.06%, 5.34%, 6.07% and 6.96% in each successive quarter.

“As the banks continue to de-lever and GDP growth gets back closer to 7%, where we were before things blew up in 2007, the outlook is good,” said Bill Stoops, CIO of Dragon Capital, a Ho Chi Minh City-based investment firm.

Investors are moving into the nation’s equity markets, albeit in fits and starts. The Ho Chi Minh Stock Exchange’s VN Index reached a roughly 6.5-year high on September 3 last year of 640.75. Although it was down about 8% last week from that peak, investors are still confident that the current valuations will attract more issuers to market.

Meanwhile, Vietnam’s record of dealing with the burdens of NPLs, including setting up a so-called bad bank in 2013, has instilled confidence among credit investors, as local banks have started to lend again to the stronger parts of the economy.

Domestic credit expanded about 13% last year, according to Moody’s, which raised Vietnam’s rating to B1 from B2 last July. In lockstep with the increase in confidence, Vietnam’s five-year CDS last week was quoted at 183bp, down about 30% from 259bp at the beginning of 2014.

For most investors, Vietnam this year looks like a safer bet than it was last year. These factors have lifted the quarterly results of listed and unlisted companies in Vietnam, including private corporations and those under state control.

“We are reasonably positive on Vietnam for a number of reasons, including the improving GDP growth, lower inflation, stable foreign-exchange rate and better earning results from corporates,” said Rehan Anwer, head of Vietnam and frontier markets investment banking at Credit Suisse. “The capital markets used to be very heavily dominated by state-owned situations, but that has now changed and is more reasonably balanced between private and state-owned enterprises.”

All of this sentiment is expected to bode well for the government’s ambitious privatisation plans, which call for hundreds of share sales, or partial privatisations, this year.

Sceptical investors

Yet, foreign and local investors have been sceptical of the plans and the companies the government is putting on the block. State-owned firms often lack transparency, the stakes the government is selling have been small, and shares often take many months after IPO to be listed on the bourse.

One centrepiece of the country’s scheme to revitalise the state-owned sector, the IPO of Vietnam Airlines, did not attract as much foreign interest as many had hoped. In November, the state sold a mere 3.7% of the national carrier, raising about US$51m from 49m shares. More than a thousand, mostly local investors, participated.

The government is going to have work fast if it wants to sell stakes in some of the more attractive state-owned entities, such as Vietnam National Textile and Garment Group, (Vinatex), Vietnam National Shipping Lines and MobiFone.

The Communist Party of Vietnam will convene its 12th congress in January next year, and decisions made at the convention may lead to the country’s leadership off its pro-business path, market participants say.

However, even if the government stays its course, reform could still be slow. Despite much progress, the government has yet to make good on some proposals that, if put into effect, could increase foreign investment.

Officials last year put forward a revision to the current 49% limit on overseas ownership of public-listed non-bank companies, but have so far not boosted the threshold to 60% as planned. Foreign direct investment is a key component of modernising any frontier economy.

As a result, many foreign bankers and investors have been focusing on unlisted, privately owned enterprises. Companies with international ambitious, outside the ambit of Vietnam regulations, are also attractive. VietJet Aviation, part unlisted conglomerate Sovico Holdings, is a good example.

VietJet plans an IPO in either Hong Kong or Singapore to fund its expansion. Investment banks are understandably clamouring for a lead role any new issue from the carrier. Indeed, Sovico this year hired Will Ross from HSBC to advise on the group’s capital-markets strategy, including the IPO.

Despite the on-again, off-again pace of reform, investors remain focused on the bigger privatisations and the prospects of a growing class of privately owned companies.

Their success or failure will be a bellwether for Vietnam’s equity capital markets.

“Those bigger (privatisations) will be telltales,” said Stoops. “We’ll see what type of progress will be made through them. The government does want to equitise because they saw what SOEs get up to when they are left owned (by the state). This would, hopefully, make for a bigger stock market and make it more of a pillar in the system.”

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Fits and starts