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Vinhomes launched a record-breaking VND29.5 trillion to VND31.8 trillion ($1.29 billion to $1.39 billion) initial equity offering on Monday that looks set to cap a remarkable six-month run for Vietnam’s equity markets.
It is perhaps apt that the recent big uptick in primary market deal flow and secondary market momentum should reach its zenith with the country’s largest flotation of all time, surpassing Techcombank, which priced its $922.59 million deal one week ago.
The decision to spin-off Vingroup’s flagship business should also further cement the reputation of Vietnam’s richest man, Pham Nhat Vuong, not to mention his position on the world’s rich lists.
From an issuer's perspective, Pham appears to have timed his deal well given that his property group remains on course to end up with the sector's largest market capitalization across South East Asia, toppling Singapore’s CapitaLand.
Bankers said the order book for the institutional tranche was already two times covered after the first day of book building on Monday. Given that 76% of the transaction has already been locked away with cornerstone investors, this means Vinhomes should still be able to achieve a premium valuation even though Vietnam’s equity markets have been under downward pressure for nearly a month.
The VN Index still remains Asia’s second best-performing country benchmark index year-to-date, behind Pakistan. As of April 27, it was up 6.71% to 1,050 (ahead of two public holidays).
However, it has now fallen 12.8% since its early April peak thanks to a combination of global volatility and high valuations, particularly for large cap stocks.
Over the past few months, strategists have expressed increasing concerns that certain valuations may be running away with themselves as emerging market investors begin piling in. Many have, therefore, welcomed the recent pullback as a necessary breather for a market, which nevertheless promises very strong earnings growth.
As one fund manager told FinanceAsia: “IPO valuations continue to increase as demand for each deal multiplies. But there’ll come a point when investors will become uncomfortable with valuations, while remaining extremely positive about the macro-economic backdrop.”
New institutional investors have certainly been making their presence felt, taking the opportunity to build sizeable positions through primary market deals, fearful that there will not be enough liquidity to do so through secondary even if the market continues falling. Bankers say Vinhomes is following the same pattern.
They estimate that the IEO for Vinhomes’ sister company, Vincom Retail, attracted 30% of new investors by number last October. This was followed by Techcombank’s recent IPO, which drew another 10% by number, while Vinhomes has attracted about 7% of new investors for its institutional tranche so far.
VALUATION
What is not year clear is whether Vinhomes will be able to achieve the high end of its indicative price range, particularly if the underlying market continues to deteriorate up until the pricing date on May 17.
At VND110,500 to VND114,700 per share, the 267.2 million to 277.3 million secondary share deal is being pitched at 17.3 to 18.5 times consensus forecast 2018 earnings of about $750 million. On a 2019 basis, it is coming at 13 to 13.9 times consensus 2019 forecast earnings of around $1 billion.
Syndicate analysts also calculate the group’s net asset value (NAV) to span $16 billion to $17 billion. As a result, this pitches the IEO at a discount of 19.4% to 21.8%% based on its indicative price range.
Like their Thai peers, Vietnam’s listed property developers tend to trade on price-to-earnings rather than NAV and do not pay dividends.
On a P/E basis, Vinhomes valuation certainly looks more reasonable than is NAV one compared with its regional comparables.
Bankers cite Ayala Land as one close comp. The Philippine group is now trading around 20 times 2019 forecast earnings and at a 23.5% discount to NAV, versus a 30% average.
In Thailand, Land & Houses is trading around 13.75 times 2019 earnings, while Indonesia’s Bumi Serpong Damai is at 10.2 times. China’s largest residential property developer, Vanke, is at 5.6 times and at a 25% discount to NAV.
In Vietnam itself, the closest benchmark is No Va Land, which is currently valued at 14.7 times 2019 earnings and a very slim 8.5% discount to NAV. The stock is down 20% from its early April peak, but is still up 23.75% year to date.
One differentiating factor between the two groups is that No Va Land has a very heavy concentration in Ho Chi Minh City, whereas Vinhomes has national scale and a dominant 15% share of the residential market across Hanoi and Ho Chi Minh City. This scale and its long-standing execution capabilities are likely to be its two biggest selling points.
DEVELOPMENT MIX
Bankers also say the group is changing its earnings mix, but not its high gross margins, by moving from the high end of the property market to serve middle-income earners through its new VinCity brand. It has, for example, begun targeting developments about 20km to 30 km outside Ho Chi Minh City centre as well as new residential projects in fast-growing cities like Haiphong and Danang.
In a recent research report, Saigon Securities forecasts that the group should be able to achieve 2018 gross margins around the 44% mark (Vinhomes) and 39% (VinCity).
Testament to the scale of its ambitions and its expansion plans is the jump in gross development value (GDV). Since 2010, it has executed projects with a GDV of $8.6 billion. Its current land bank has a GDV of $11 billion (VinCity) and $29 billion (Vinhomes).
Contracted sales of launched projects have also been expanding fast over the previous few years, rising from $1.6 billion in 2015 to $2.3 billion in 2016 and $2.9 billion in 2017.
This growth is being propelled by a combination of Vietnam’s high GDP growth (7.38% during the first quarter) and its changing urbanisation ratio (34.2% in 2016 rising to a forecast 45% in 2020). Home loans still represent just 1.9% of GDP compared to 4.9% in the Philippines and house prices are also still affordable at four times average income in Ho Chi Minh compared to 7.5 times in Metro Manila, according a Vingroup presentation.
Analysts also report quickening mortgage growth. Housing and home improvement loans accounted for 52.9% of the total consumer credit extended in 2017. The latter also rose 59% year-on-year and analysts expect this to continue.
VNDirect concludes that “the property market will continue to expand thanks to strong domestic demand and accommodative monetary policy.”
One key risk factor will be whether the government decides to take a chunk of this prospective financial windfall for itself. In mid-April, the Ministry of Finance announced a new land and property tax, which would potentially net it around 2% of GDP, a tenfold increase over current levels.
However, analysts say implementation will not happen before 2020 and may yet be revised down given how unpopular it is likely to be.
In the meantime, Vinhomes is scheduled to begin trading on May 22 when it will list 10% to 10.3% of its total share capital. Among its new shareholders will be GIC, which paid $853.3 million for a 7.08% stake as a pre-IPO investor. Based on a May 1 exchange rate, it paid VND102,486 per share.
Other large shareholders will include the cornerstones, which are taking 76% of the deal. Within that group, seven institutions will take 77% of that tranche. They comprise: Avanda Investment Management, Capital Research and Management, Dragon Capital, Ivy Investment Management, JF Asset Management, Korea Investment Management and Mirae Asset Global Investments.
Joint global co-ordinators for the IEO are Citi, Credit Suisse, Deutsche Bank and Morgan Stanley.
