Asia Times: Part 2: For action, look over the counter


	April 24, 2002	atimes.com

Southeast Asia

VIETNAM: TAKING STOCK
Part 2: For action, look over the counter
By Bradley Martin

Part 1: Listing toward the brighter side

HO CHI MINH CITY - On a recent trading morning, a visitor found the atmosphere in the Securities Trading Center here relaxed. No frenzy of activity lit up the board - which probably is no wonder on a stock exchange with no more than a dozen shares listed.

"Sometimes it's quiet, sometimes very active," says Phan Thi Tuong Tam, the center's deputy director. Tam, who earned her Master of Business Administration (MBA) degree in Australia, has been involved since 1997 in setting up the center and its securities trading system.

The center isn't modeled on any specific country's stock exchange, she says, but Vietnamese planners did visit a number of countries, including Japan, South Korea and Thailand. Its automated trading system was copied from the Thai exchange but with the local software developed by a Vietnamese company. It automatically notes the best offer and best bid.

A similar center will open in Hanoi before long, perhaps this year, Tam says, but it hasn't been decided yet whether it will mirror the one in Ho Chi Minh City, with the same stocks listed. Another possibility is that it will be a separate bourse specializing in small and medium-sized companies - substantially smaller than the minimum capitalization of 10 billion dong (US$694,000) required for listing on the existing big board.

One thing that probably won't be changed in the short term, Tam says, is the 20 percent limit on foreigners' holdings in listed companies. She acknowledges that the rule puts a damper on foreign investors' interest in the country but says changing it is a longer-term issue for the State Securities Commission in Hanoi. The short-term solution, she says, is listing more stocks - and "it's happening". Another change - one that will come soon, she says - is extension of the trading hours in Ho Chi Minh City to Monday through Friday, though still just an hour a day.

None of the companies now listed on the exchange would be recognizable to more than a handful of foreigners. All are former state-owned enterprises. Before publicly listing a company that has "equitized", the government typically puts up around 20-30 percent of its shares for insiders - management and staff, who are permitted to buy their shares on installment and then sell them if they wish. The sponsoring ministry or local authority hangs on to another chunk of anywhere from 1-50 percent. In addition, outsiders are allowed to buy shares.

"The typical outside holding tends to be around 30 percent, but can be much higher," says Jonathon Waugh of ACB Securities. At present, the shares earmarked for outsiders are sold at the time of equitization. It may take years after that for them to be listed. "There is legislation in place to allow for a genuine IPO [initial public offering] - ie, raising capital through the sale of shares which then are listed on the exchange," says Waugh. However, "to date, there have been no IPOs. The companies that have listed simply registered all the issued shares at the exchange where they can now be traded. As a result, the market has yet to see any underwriting activity."

Under those circumstances, the entire market capitalization of equities listed on the Vietnam exchange is only about US$100 million, says Alex Pasikowski, a partner in fund management firm Dragon Capital. Only 20 percent of the shares of any listed stock are open to foreigners' purchase.

As of the middle of last year, trading accounts - overwhelmingly individual - totaled 5,850. (The official goal is 300,000 investors in listed stocks by the end of 2003.) Turnover of listed equities is around 60 percent per annum, Pasikowski estimates.

The process of equitization (known in other countries as privatization) began in 1992, but got off to a slow start. Only 15 formerly state-owned companies had been equitized by 1997. The pace picked up then. By the end of 2001 more 750 companies had been equitized - but most of those had not been listed. Now, says Rod Carakeet of Bao Minh CNG Life Insurance Co Ltd, "they need to bring the state institutions that they have equitized to the market to increase its size".

When the exchange first opened in July 2000, recalls one foreign banker, "there were about 1,000 buy orders for every one sell order". The daily price-change limit was originally plus or minus 5 percent, but in view of the scarcity of sell orders, that meant the market routinely went up 5 percent a day.

Then the authorities reduced the limit to 2 percent, plus or minus. The market adjusted to that and rose by about 2 percent a day for the next six months or so. Going up like clockwork, for a period of time the Vietnam stock market was the best stock market in the world. Local people slept outside the brokerage firms' offices to secure early places in line to put in their orders.

In mid-2001, in an effort to introduce some uncertainty into the market, the authorities widened the band to plus or minus 7 percent. That made local investors a little nervous. Coincidentally, the events of September 11 pushed markets down everywhere, including Vietnam.

After that market crash the government returned to the 2 percent trading limit but the days of a permanently rising market were over. Having started at 100 in July 2000, the market index had streaked to as high as 550 before plunging. By the beginning of 2002 it was around 250, with the average price/earnings ratio around 20.

Before the stock exchange was set up people traded securities informally, meeting in cafes, for example. Employees whose state-owned enterprises underwent equitization would take their shares out and "literally sell the shares at the factory gate", says Pasikowski.

And now, even though the stock exchange is in place, informal over-the-counter (OTC) trading dwarfs what happens during the three hours a week that the exchange is open. "We estimate that the OTC market out there is about $1.5 billion in equities," Pasikowski says. "Some of these companies actually turn over more than some of the companies on the exchange."

OTC is so big that there have been moves toward formalizing that market. Last November the government started allowing stockbrokers to hold non-listed securities in safe custody for their clients. "Now that brokers can hold the securities, the next move probably will be that brokers will be allowed to trade those securities on behalf of their clients and provide settlement for them," says fund manager Pasikowski. It could happen as early as this year, he says. "We see it as a pipeline to develop companies to where they can actually be listed."

With the country's corporations lacking even Arthur Andersen-level auditing, prospective investors naturally are skeptical about bookkeeping. "The biggest challenges are the quality of stocks traded on the market and the credibility of the listed companies," says Chris Tragakis, general director of American International Assurance Co (Vietnam) Ltd.

Meanwhile, the official tinkering with trading rules worries foreign observers as well as some of the more sophisticated Vietnamese. "This market is very risky, especially in terms of policy risk, because the government can change the standard any time," complains one local broker.

Bonds, alas, rate only a footnote: There are 18 of them listed, most of them government-issued, and their market cap is about $200 million. But bonds are unattractive. The longest government bond is five years, its rate set unrealistically below that of a bank deposit. "There is no bonds market yet," says an investment officer for a foreign-invested insurance company. "We have to create it."

Tomorrow: The feel-good factor