One of Vietnam’s most recognisable brands and dynamic private sector companies has launched an initial public offering that may herald a long hoped for turning point in the development of the country’s equity capital markets.
Vietnam remains one of Asia’s last major outliers when it comes to a fully functioning stock market, with progress bedeviled by a series of small, mis-priced deals that have done nothing to improve liquidity or foster good market practice.
VietJet’s $200 to $259 million IPO (including the upsize option) therefore carries far more symbolism that its issue size indicates. It is also coming at a time when the government is lining up trade sales and public equity offerings in a clutch of state-owned companies including its two national brewers Saigon Beer & Alcohol Company (Sabeco) and Hanoi Beer & Alcohol Company (Habeco).
Kevin Snowball CEO of Ho Chi Minh-based PXP Vietnam Asset Management suggests the government’s enthusiasm is not primarily being driven by a desire to embrace capital markets development as much as the need to raise revenue for infrastructure projects at a time of low oil prices.
But he also told FinanceAsia, “There’s still been a sea change in thinking about what a stock market can be used for. Before, we’ve typically been offered tiny percentages of companies at inflated multiples. The government has finally figured out it can use the stock market as a valuation methodology.”
VietJet’ deal structure is as closely aligned to international best practice as current Vietnamese regulations allow. The company will have a reasonable freefloat (18% including the upsize option).
Back to front regulatory process
However, Vietnam’s arcane securities laws means much of the IPO process is back to front, leaving investors exposed to an exceptionally long period between settlement and trading.
Yet, this is not quite as long as it first appears. While pricing and allocations are scheduled for December 13, investors have until January 9 to fully fund the deal by placing their money into an escrow account. At this point, the shareholder register is updated and investors will receive their certificates one day later on January 10.
The regulatory approval process, which would take place pre-launch in other countries, now begins. The leads expect to submit the listing application around January 16 and receive approval on February 15, targeting a preliminary trade date on February 20.
As one banker explained, “The regulator not only requires all funds to be placed in an escrow account, but also wants full disclosure for every investment vehicle so they can see who the beneficial owners are. It’s a different world, but that’s their rules.”
The lengthy six-week wait before settlement and trading is expected to put off a lot of hedge funds and momentum players. It is also likely to result in fairly accurate demand indications from long-only funds.
However, the leads have been able to facilitate access for prospective investors, which are not already set up to trade the Vietnamese market, by offering participation via P-notes.
Bankers said VietJet’s deal is being pitched as a macro play on Vietnam.
On this basis, it offers a compelling sales proposition given the country’s high GDP growth rate compared to the TIP countries of Thailand, Indonesia and the Philippines, plus its young upwardly mobile population. In the third quarter, the country registered 5.93% growth compared to 5.02% in Indonesia.
From a travel perspective, VietJet also holds advantages over competitors in other countries. Vietnam is one of the world’s longest nations and a train or bus journey between its two major cities, Hanoi and Ho Chi Minh, takes nearly 30 hours. Flying takes roughly two hours and costs the same amount of money.
VietJet has also prospered in a fairly closed market and against an uncompetitive state owned airline. As a result, it has snatched market share very quickly from Vietnam Airlines since it started up in 2011.
By 2013, it had already achieved a market share of 20.2%, rising to 43.1% by the end of June this year.
Low-cost carriers typically trade at a premium to national carriers during their early growth stage. They are also a good proxy for a country’s GDP growth, although typically trade at a discount after accounting for their more volatile earnings stream.
For example, VietJet does not hedge any of its fuel costs unlike the airline it aspires to emulate, AirAsia. The latter usually hedges roughly three quarters of its jet fuel costs.
According to the IPO termsheet, VietJet will have a market capitalization of $1.08 billion to $1.4 billion based on a price range of VND75,900 to VND98,400 and offering of 59.723 million shares (including the upsize option).
The primary shares will be structured as a top up placement, again because of an arcane law, which subjects straight primary share offerings to a one-year lock up. The company and the selling shareholder, CEO Nguyen Thi Phuong Thao, are both locked-up for 90 days.
Valuation
Specialists say the deal is being marketed on an EV/Ebitda multiple of 6.3 to 7.4 times prospective 2017 earnings.
By contrast, comparables such as AirAsia are trading at 5.9 times, while Asia Aviation is at 7.6 times, Cebu Air at 5.5 times and Indigo Air at 6.6 times.
Syndicate research argues for an Ebitda compound annual growth rate (CAGR) of 20% to 25% over the next three years.
In 2015, VietJet recorded Ebitda of $190 million, which represented 119.9% year-on-year growth.
This equated to an Ebitda margin of 32.8%, which rose to 38.2% at the end of the first half of 2016.
Bankers and investors agree that the domestic retail offering will be extremely popular, with demand easily covering the entire deal. The research company, Nielsen, counts VietJet as Vietnam’s most recognisable brand and the only one to feature in its Asian top 500.
As one investor commented, “This IPO will be very popular with retail investors. The company has an extremely high profile, not least because of its bikini-clad stewardesses.”
Using scantily glad young girls to market an airline might raise eyebrows in the western world, but the campaign is likely to make the company’s female founder a billionaire on paper if the IPO prices above the bottom end of the range. The company’s chairwoman, Nguyen Thanh Ha, is also female.
VietJet has lofty ambitions to overtake AirAsia and one day take on Emirates. For investors, this promises considerable upside, but will also provide one of the main risks. As the company accelerates its international strategy it will increasingly butt up against other competitive regional airlines.
VietJet flew 9.3 million passengers in 2015 and operates 39 domestic routes and 17 international routes. It plans fly 45 domestic routes by 2019 and 36 international routes by 2018.
Passenger traffic has been growing at a CAGR of 71.8% since 2013 according to the group’s online roadshow.
It has a young fleet with an average age of 3.3 years. This comprises 33 Airbus A320s and five A321s. But it also has 102 Airbus and 100 Boeing planes on order.
Syndicate research predicts 44% traffic growth in 2017 and 26.2% in 2018. It is also forecasting a load factor of 87.1% in 2017 – pretty much the same level the company has averaged for the past three years.
Listing will take place on the Ho Chi Minh Stock Exchange (HOSE) and investors believe the company will just fall outside the top 10 in terms of its VN Index weighting. However, as Snowball explained the latter index can be a little misleading.
“The Vietnamese market looks bigger than it actually is because the index is calculated on market capitalisation, but most companies have tiny freefloats,” he commented.
One exception is Vinamilk, which Snowball says can now trade up to $20 million a day and accounts for about 18% of the VN Index.
The government is preparing to sell a further 9% stake from its 44.7% holding on December 12. Morgan Stanley, Saigon Securities and VinaCapital are advisors.
The stock is currently trading around 23 times 2017 earnings ahead of the market’s 12.5 times P/E average.
Snowball concluded: “Vietnam trades at the same level as the other TIP markets, but it has much higher GDP growth so investing here makes a lot of sense, stock specific issues aside.”
Other houses are not so bullish. In a research report published towards the end of September, Credit Suisse wrote: “While structural drivers remain intact and reform seems to have gathered pace, we highlight that valuations are rich and credit growth is unsustainably high.”
State divestments brewing
Two other big sales flagged for 2017 are Sabeco and Habeco. Investors believe both will involve a trade sale and a publicly marketed offering to build up their respective freefloats.
Under Vietnamese law, a company needs only 300 shareholders to list, so many companies have a public listing in name only. Sabeco and Habeco both completed their IPOs in 2008, for example. The government is now trying to rectify this.
Sabeco, Habeco and Vietnam Airlines are all scheduled to move from the third board Unlisted Public Companies Market (UPCoM) to the HOSE main board by way of introduction in December.
Under its present shareholding structure, the government owns 89.6% of Sabeco and has said it will sell it in two separate tranches.
Where Habeco is concerned, Carlsberg has first right of refusal on any potential trade sale when the government begins to divest its 82% stake. It currently has a 17.5% stake and has publicly said it wants to purchase a 61.79% stake following the public auction of a 20% stake, which will determine the valuation.
However, it is not happy with the company’s current UPCoM-based market valuation, on the grounds that a tiny freefloat and huge demand has had a distorting effect. Since it began trading on UPCoM at VND39,000 in late October, Habeco’s stock price has more than doubled.
These are just the kind of companies Snowball says his fund has been targeting. “We’ve been looking at UPCoM listed companies, which are likely to move to the main board,” he commented.
Vietnam Airlines is also due to be moved from UPCoM to HOSE in December and analysts believe the government will also sell its 45.1% stake in batches.
If the Vietnamese government can finally get its privatization moving at a faster clip, it will in no part be testament to the country’s most powerful man and Communist party secretary, Nguyen Phu Trong.
Earlier this year, he won a power struggle over former prime minister Nguyen Tan Dung, who had been perceived as the reformer but stood down in April. Joint global co-ordinators are BNP Paribas, Deutsche Bank and Viet Capital Securities.
