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.
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