After years of failing to live up to expectations, Vietnam’s equity capital markets have reached a tipping point that could propel the country up the regional league tables if companies stay realistic about valuations and the government presses ahead with reform, say market players.
So far this year, Vietnamese companies have already raised more through initial public offerings than either the Philippines or Indonesia according to Dealogic and S&P Global Market Intelligence figures (see table one). Should Vincom Retail clear its record-breaking $680 million IPO later this week, Vietnam will also beat Malaysia too.
The new issuance momentum is coming from two directions.
On the one side is the government’s privatisation programme, which is, in turn, being driven by the need to reduce the country’s fiscal deficit. Dragon Capital, one of the country’s foremost fund management firms, forecasts the government could net up to $8 billion (including strategic stake sales) over the next two years.
On the other is the country’s increasingly powerful private sector, which is likely to be main driver over the coming six months, raising an estimated $1.5 billion.
Richard Fitton, a senior manager at VietCapital Securities noted how foreign participation is accelerating. “Every few months, we’re breaking records in terms of global institutional participation,” he said.
However, those same funds also worry whether the market can absorb a large uptick in paper unless valuations stay reasonable.
Marshall Stocker, portfolio manager at Eaton Vance in Boston commented: “We’re very bullish on Vietnam, but the increase in supply is quite dramatic. We do, therefore, have some concerns about the size of some of these deals, especially if they demand high valuations.”
| Company | Sector | Amount Raised (millions) | Listing |
|---|---|---|---|
| VietJet | Transport | 166.4 | February |
| VP Bank | Finance | 500 | August |
| VietCapital Securities | Finance | 31.27 | July |
| Kido Frozen Foods | Consumer goods | 25.57 | October |
| Binh Son Refinery | Energy | 84.9 | November |
Vincom Retail
Vingroup’s mall operator, Vincom Retail is leading the pack after launching roadshows for a $620 million to $680 million IPO on October 16 via Citi, Credit Suisse and Deutsche.
The deal, which ranks as the country's largest ever IPO, could be a gamechanger for Vietnam if it is executed well and trades up in the secondary market.
"If this deal works, the government may view it as a template for its privatization programme," commented VinaCapital deputy chairman, Terry Mahony.
At its heart, the deal is facilitating the partial exit of a number of pre-IPO investors including Warburg Pincus and Credit Suisse.
In 2013, the private equity group led a $200 million investment round then ploughed in a further $100 million in 2015 according to S&P Global Market Intelligence figures.
It will drop from a 15.2% to 4.9% stake, while Credit Suisse will drop from 5.1% to 1.6%. Vingroup will retain the same 58.87% stake post listing.
Investors hope the deal will not follow the trajectory of IT firm FPT, in which TPG invested in 2006. The US private equity group was the first to use the Vietnamese IPO market to exit an investment, cashing out a few months after its investment and booking a large gain. Shortly after, FPT crashed from a high around the VN133,000 mark to the VN11,000 level just over one year later.
Vincom Retail's secondary share deal is being marketed on a range of 21.8 to 23.9 times forecast 2018 earnings.
This puts it at a discount to groups like Thailand’s Central Pattana (26.7 times) and the Philippines SM Prime (35 times). But is it enough given how much larger its peers are and the aggressive nature of its expansion plan from 41 to 200 malls by 2021?
The likelihood of success has been boosted by three new elements. Firstly, the deal embraces a $382 million cornerstone tranche comprising Avanda, Dragon Capital, Genesis, GIC, HSBC GAM, Karst Peak, RWC, Templeton and TT International.
This is a first for Vietnam, as is the deployment of a 144a tranche and the shortened timeframe between pricing (October 26) and listing (November 6) thanks to the leads' decision to take advantage of Vietnam’s rules on put-through trades.
Techombank
Shortly behind Vincom, Techcombank is also planning a roughly $800 million IPO during first quarter of 2018. VietCapital is currently holding sole books for the flotation of Vietnam’s fifth most profitable bank.
HSBC sold its 20% stake in July, leaving Masan Corp as the bank’s main strategic shareholder.
Just Vincom Retail and Techombank alone should propel Vietnam up the next rung of the ladder given the market has only ever recorded two $500 million plus IPOs before.
At the height of the 2007 boom, Vietcombank raised $656.65 million, while VP Bank raised $500 million from a combined primary and secondary deal earlier this year, although in one of the market's many “quirks”, there was no public announcement concerning proceeds raised.
One Vietnamese company is also heading for a US listing, in another first, which will have a particularly strong resonance given the history between the two countries. Tencent-backed online gaming group VNG is planning to float on the Nasdaq, although local bankers say Vietnam’s first unicorn has put the plan back slightly to complete one more strategic round first.
Execution challenges
However, as FinanceAsia has written a number of times before, the market’s back-to-front IPO rules have historically made execution incredibly difficult.
They left institutions investors exposed to lengthy market risk given they had to wait anywhere from one to two months between settlement and trading because companies only file for their listing once they have completed the capital raising.
As one local observer put it: “Unfortunately Vietnam thanked South Korea and Taiwan for their political support by taking two of the world’s worst sets of securities laws and melded them together to create an unholy mess.”
Vincom Retail has finally turned this on its head by planning to list first and then sell secondary shares immediately after via a novel put-through trade. But the government has still not addressed other regulatory hurdles institutional investors face.
“When an investor signs a share purchase agreement (SPA), there are multiple pieces of paper, which need to be signed and notarised including the passport of the SPA signatory,” said one investment banker.
Many international fund managers have opted to enter the IPO market through promissory notes issued by international investment banks instead.
“The P-note fee paid to investment banks is the regulatory cost Vietnam is burdening investors with,” said Eaton Vance’s Stocker. “The government won’t get the highest price it could for companies if it maintains these kind of barriers to access.”
Indeed Eaton Vance is one of the few international fund managers, which has gone through the tortuous IPO registration process to avoid the P-note route - sending a five-strong team to the Massachusetts state capitol to get all the necessary documents notarised.
Progress
However, there have been a number of positive developments including the beginnings of a derivatives market following the launch of a futures contract on the VN30 Index in August.
But the biggest step forwards should come from Vietnam’s new securities law.
As Dominic Scriven, founder and chairman of Dragon Capital explained: “It’s currently in draft stage and should come before the National Assembly in about a year’s time. It will deal with many of the issues currently challenging the market including an overlap between enterprise law and securities law.”
Kelly Wong, CFO of Kido Corp, recently oversaw the third listing of a group entity earlier this year: Kido Frozen Foods.
He noted that since the group’s second IPO, Vietnam has set up the UPCoM (Unlisted Public Company Market) exchange, replacing the OTC (over-the-counter) market. Traded shares are centralised with the share depository, which means companies are no longer required to update their shareholder registers prior to listing on either the Hanoi or Ho Chi Minh stock exchanges.
Kevin Snowball, CEO of Ho Chi Minh-based PXP Vietnam Asset Management, also says a decision to let companies remove foreign shareholding limits in non-conditional (strategic) sectors in the summer of 2015 has been a major step forwards, in theory if not so far in practice.
Work in progress
One gaping hole in Vietnam’s public equity markets is the absence of domestic institutional investors. Local players say the country has done half the work, since it is very progressive at collecting money for employees’ social and health insurance.
The problem is that it is not centrally managed. “Every year, I pay 16% of my salary to the central government but that money isn’t being invested in the local stock market,” said one Ho Chi Minh resident. “No-one knows whether it’s generating an investment return, which would need to be in the region of 7% to 8% to beat GDP growth.”
Bankers also cite two other areas where greater transparency is needed. The IPO process has improved greatly since VietJet set the precedent and conducted its international offering using a bookbuilding process.
Other private sector companies have followed suit this year, but not all of them have published a prospectus in English: a pre-requisite for the foreign fund managers, which comprise the institutional market in its totality.
Fund managers also want the regulator to be given more power to do its job.
“The State Securities Commission has done as well as it can under the circumstances,” PXP’s Snowball commented. “But it needs to be able to impose and enforce meaningful penalties.”
He cites the example of ferry company Superdong, whose chairwoman applied to sell stock in July - during what anywhere else in the world would be regarded as a closed period - and several weeks before the company announced that it had been slapped with a large tax fine in June.
“I’m pretty sure insider trading is illegal even in Vietnam” is Snowball’s retort.
Earlier this year, questions were also raised after exchange traded funds (ETFs) had to include real estate company, Faros Construction, after the stock rose almost 14 fold from VN12,000 to VN161,000 between September 2016 and March 2017. The Hanoi-based construction group is 76%-owned by its president, Trinh Quyet Van.
As a result, Faros now ranks among 22 companies with a $1 billion market capitalisation, up from seven in 2012.
Barry Weisblatt, head of research at VietCapital Securities, highlights that foreign interest remains strong, with ownership of the overall market remaining steady around the 15% to 20% mark (currently 19.45%) even though Vietnam’s market cap has expanded roughly 38% so far this year.
In total, the market has roughly 1,300 listed entities, but investment opportunities are still fairly limited given only 300 have a market cap above $20 million and 50 above $500 million. The government has also made the matter worse by traditionally listing tiny percentages of SOEs.
