Recent downward pressure on Vietnam’s red-hot stock market will not impact Techcombank’s record-breaking initial public offering as the order book is set to close multiple times oversubscribed say bankers and investors.
The VND19.69 trillion to VND21 trillion ($862.5 million to $920 million) offering is scheduled to price on Monday and will almost certainly be fixed at the top of its VND120,000 to VND128,000 indicative price range. The $230 million non-cornerstone tranche alone has garnered $3 billion in orders from institutional investors that want to pay Vietnam’s strong macroeconomic fundamentals and potential move to MSCI emerging market status.
That tranche will account for about 25% of the 164.1 million share deal, with the remaining 75% going to roughly 30 cornerstone investors of which seven have been publicly announced since they will each hold more than 0.5% of the company post IPO. They include Dragon Capital, GIC and Fidelity.
Overall the deal has a split of 5.5% new shares and 8.5% secondary shares. In line with most other Vietnamese IPOs, investors will be subject to execution risk since there is a long wait before the stock begins trading on June 4.
Techcombank, or Vietnam Technological and Commercial Joint Stock Bank as it is formally known, was not able to follow Vincom Retail’s pioneering lead and conduct its IPO using a put-through structure. It has 1,000 shareholders on its register compared to Vincom’s one, making it impossible for bankers to guarantee a smooth progression from formal listing to the deal’s share crossing one day later.
VALUATION
However, this does not appear to have deterred fund managers. They also do not appear to have been put off by either the country’s high valuation or the bank's, which ranks tenth largest by assets, fourth largest by profits.
One US-based institutional investor told FinanceAsia: “Funds want to be invested in this bank as it represents one of the best opportunities to play Vietnam’s high GDP growth rate. Techcombank is ahead of the sector on pretty much every metric so it also has the advantage of being the cleanest bank to get into.”
At the top end of the range, the deal is being pitched at 2.9 times 2018 book value on a post-money basis. At this level, it will price at a premium to its nearest comparable VP Bank, which closed Thursday at 2.6 times.
Had it been priced earlier this month, it would have come flat to VP Bank, but the whole market has come off since then. VP Bank traded particularly poorly on Thursday when the VN Index fell 3.86%.
And the banking sector was the biggest underperformer on the day, with Vietcombank down 5.8% and VP Bank down 4.7%.
This also means that Vietcombank has lost some of its froth and is now trading at 3.5 times 2018 book compared to 4.2 times a few weeks ago. Specialists argue the state-owned bank is not the best comparable for Techcombank since its share price has been “ramped” by local investors hoping to make a profit if and when GIC ever buys its hoped-for strategic stake.
The Singaporean sovereign wealth fund has become one of Vietnam’s most active investors, scooping up stakes in numerous companies at what mainstream fund managers consider high valuations. Its recent activity includes the purchase of a 7.1% stake in Vinhomes, which is set to top Techcombank with an even larger mooted $2 billion IPO over the coming few weeks.
Techcombank’s valuation is also well ahead of the regional average. However, it is below best-in-class banks at two of Asia’s other high growth markets: Indonesia where BCA is trading at 3.7 times 2018 book and India where HDFC is at 4.2 times.
The US-based fund manager believes Vietnam’s overall equity multiple is likely to hold even though the stock market has been buffeted by volatility a number of times so far this year. In 2017, it was Asia’s best performer and it is heading that way again in 2018 despite the ups and downs.
On a one-year basis, the VN Index is up 56.77% and 11.22% year-to-date. This now makes it the region’s second best performer after Pakistan: the KSE 100 is up 12.15% to Thursday’s close.
Both analysts and fund managers point out that one of the most striking aspects of Vietnam’s performance is the valuation divide between large cap and mid cap stocks. This is being driven by a surge of foreign buying into the country’s largest stocks.
“Vietnam is starting to appear on the radar of larger emerging market investors and they want liquid names to get into,” one fund manager said. “It doesn’t take much for them to move the market.”
“There’s also a fair amount of tourist capital from retail investors particularly out of Thailand and South Korea, who have been buying the market through ETFs [exchange traded funds],” he added. “Local investors have been following their lead, piling into large stocks as they know that’s where the momentum is.”
As a result, the MSCI Vietnam Index is now trading at 23.5 times forecast 2018 earnings, above its next highest Asian comparable, the Philippines, which is on 17.2 times. Vietnam’s MSCI Index is especially concentrated as it only has 15 stocks, of which two groupings (Vinamilk and Vingroup entities) account for 58%.
Can these valuations be sustained? Anirban Lahiri, head of research at VNDIRECT Securities told FinanceAsia that, “the recent correction in large caps seems to indicate that investors realise valuations are stretched. However select large caps continue to be attracting speculative inflows despite unreasonable valuations. Interesting times shall we say.”
The VN Index has been finding it difficult to breach a psychological hurdle around the 1,100-level and closed Thursday at 1,094. The index is now in its second 10% correction of the year after breaching that mark.
However, the US-based fund manager believes the stock market can hold its own. “I think new investors have missed the valuation gains, but the market still has upside if companies can deliver forecast earnings growth of 23% this year,” he commented.
CREDIT METRICS
Vietnam’s GDP grew 7.4% during the first quarter and credit growth remains strong. Techcombank should be able to play it better than pretty much any other bank in the sector because it has very strong capital adequacy ratios relative to its peers.
Moody’s says the bank’s ratio of tangible common equity to risk weighted assets will rise from 9% in 2016 to 14.5% post IPO. This has partially been helped by a $370 million capital injection by Warburg Pincus in mid-March.
Techcombank and Vietcombank are also the only two big banks, which have been able to repay their VAMC bonds (dating from Vietnam’s last non-performing loan bust in 2011/2012).
The bank’s other big selling point is its switching focus from commercial to retail lending. In 2017, 44% of its loan book went to corporates, 16% to small and medium-sized enterprises and 40% to retail. By the end of 2018, retail may become the largest component.
The bank is especially strong in mortgage lending, which represents 60% of its retail book.
It also has very strong ties with Vingroup. As one banker explained: “Vingroup accounts for 50% of all new residential mortgages and Techcombank has about 60% of its business.”
“Consumer finance is the new darling of the banking system,” Lahiri wrote in a recent research report. It rose 59% in 2017 and he warns that it could become a cause for concern.
“While total system-wide leverage still remains moderate by global standards (estimated at around 131.2% of GDP, excluding public debt), the lack of a collateral base for consumer loans and limited credit history and underwriting expertise in this segment creates some vulnerabilities,” he concluded.
In the short-term, this is unlikely to concern investors given the country is just coming out of its last credit workout.
Of more immediate concern is how Techcombank will trade in the secondary market. If VP Bank is any guide, the pop, if there is one, will happen after about six months, once it becomes eligible for margin trading.
Bookrunners are Deutsche Bank, Morgan Stanley and Viet Capital.
