An ambitious but poorly executed privatisation programme appears to be reaching an important juncture that may lead to far more of Vietnam's state-owned enterprises coming up for sale over the next few years.
So far this year, the government has only made 11 divestments from a targeted 44 thanks to a combination of foot dragging and inexperience, which have made the execution process tortuous and difficult.
In 2016 the government set a target of restructuring 240 SOEs, then selling off 137 in their entirety and a further 31 in which the state would still maintain a controlling stake (see table one). Dragon Capital estimates that public equity markets could witness up to $8 billion in issuance through a mix of IPOs and secondary offerings.
If the Vietnamese government is able to pull it off, its privatisation programme alone will propel the country right up Asia’s equity capital market league tables based on the 2017 issuance volumes of the TIP countries (Thailand, Indonesia, Philippines) that Vietnam aspires to rank alongside.
But how likely is it? Barry Weisblatt, head of research at Viet Capital Securities, told FinanceAsia, “We’ve seen plenty of privatisation lists before, but this is the first time proposed percentage sales have been attached as well. This marks a major step forwards.”
The most pressing reasons behind the government’s desire to sell off large chunks of the state sector are its short-term finances and long-term political future.
“The 2012 banking crisis was a real shock to the system here,” said Dominic Scriven founder and chairman of Ho Chi Minh-based Dragon Capital. “Many thought pumping $100 billion of state capital into the system after the 2007 stock market crash and global financial crisis would support the political structure.
“But it was so mis-managed by SOEs that it actually threatened it,” he added. “There’s been a political imperative behind the general reform process of the past five years and that’s still in place.”
SOEs account for about 40% of GDP, down from about 51% at the turn of the century, but are a dead weight on the economy. Tran Qui Thanh, founder of Tan Hiep Phat Beverage neatly sums up the difference in attitude.
“They’re large but only care about themselves not their customers,” he told FinanceAsia. “When I launch a new product my primary thought is always how I can serve my customers’ needs at a profit.”
Economic pressures are providing a new accelerator to this long-term trend. GDP growth is strong, but the government is unable to provide the necessary infrastructure to support it because tax revenues are falling and it is very close to hitting its 65% public debt ceiling.
In the third quarter of 2017, for example, economic growth hit 7.5%, only the second time it has breached 7% since 2010.
But tax as a percentage of GDP stood at 21% in 2016, down from 23.5% in 2010. This is largely because the government has to rely on moribund SOEs as many multinationals enjoy tax breaks to operate in the country.
Problems brewing
Vietnam therefore has the need and the upper echelons of government appear to have the desire to accelerate SOE reform.
Most recently, the Ministry of Finance threatened to transfer the proposed divestment of national brewers Sabeco and Habeco from the Ministry of Industry and Trade to the State Capital Investment Corp (SCIC) unless the former proceed with plans to completely sell off 89.6% in the former and 81.8% in the latter before the end of the year.
Bankers believe at least one will come before that date, but highlight that all the challenges besetting the two deals can be applied to the rest of the pipeline too.
Terry Ting, founder of Valence Capital Asia, a growth private equity firm focused on China and Vietnam, says there is no lack of strategic investors for Vietnamese SOEs, particularly if there is a clear roadmap to full control.
| Company | Sector | Divestment schedule | Rumoured strategic interest |
|---|---|---|---|
| Sabeco | brewing | 2017 | Carlton & United Breweries, Kirin, Heineken |
| Habeco | brewing | 2017 | Carlsberg |
| Vinamilk | foods | 2017 | |
| Binh Son Refining | energy | 2017 | PTT, Kuwait Petroleum Corp |
| PV Oil | energy | 2017 |
But this has not worked out so well where Habeco is concerned. Carlsberg holds a 17% stake and has a written agreement giving it first right of refusal over future strategic sales.
On the one side is the Danish brewer, which wants to increase its stake 51%, but believes the government’s proposed divestment price is too high.
On the other side is Habeco’s management. SOEs wherever they are in the world, do not tend to relish losing control and gaining a new set of stakeholders to manage. But rumours are rife that tensions between Habeco and Carlsberg are running especially high in this particular case.
How to break the logjam? Dragon Capital’s Scriven believes the two brewers should be sold into the public equity markets, where they are both already listed. Clearly fund managers like him would benefit, while the two would have a combined market capitalisation of $8.67 billion.
“These two consumer companies are very successful at what they do and don’t take rocket science to run,” he argued.
“Why should they become part of someone else’s global supply chain?” he continued. “Let Vietnamese investors reap the benefit by increasing their freefloats.”
Some argue that the government does not have the expertise to value SOEs, or price the synergistic benefits that strategic investors can bring. This means they should initially sell off small chunks into public equity markets to find a clearing price that would then facilitate larger divestments.
However, others argue that this practice has created a second set of challenges.
Tiny freefloats distort valuations because demand tends to outstrip supply. This diminishes as larger chunks of stock come onto the market, but can create unrealistic pricing expectations about where the correct clearing level should be.
And as Terry Mahony, deputy chairman of VinaCapital, explained: “The law no longer says government officials can be executed if they sell at the wrong price. But the mentality that fostered lingers on.
“When the Chinese started privatising their SOEs they understood the need to leave a little bit on the table for investors,” he continued. “That message seems to be taking a longer time to get through to Vietnam.”
Spilt milk
The forthcoming sale of a 3.33% stake in Vietnam’s benchmark public sector jewel, Vinamilk, will provide an interesting test of the government’s ability to heed lessons from past failures. UBS and Saigon Securities will manage the sale, which will take place via auction on November 10.
Last December, the government attempted to divest a 9% stake through its favoured Dutch auction process via Morgan Stanley, VinaCapital and Saigon Securities (SSI). However, it only managed to sell 5.4% to two Frazer and Neave subsidiaries, which now hold a combined 18.74% stake.
Observers believe the government made three key mistakes. Firstly, it did not use a book building process, which would probably have resulted in a small discount to the stock’s existing market price, but would have cleared all the paper.
Instead, it sought to maximize proceeds and sold the stake at 7.7% above the market price. It achieved its aim, but at the expense of selling only half the shares it wanted. This time round it has set the price at VN155,000, which represents a 3.3% discount to the stock's close on Tuesday.
Secondly, it capped individual bidders at 2.7% a piece, which blocked the Thai company from taking more. This time it has said there is no cap.
Thirdly, it not only stipulated that prospective bidders had to put down a 10% deposit for any shares they wanted, but also told them they would automatically lose it if they failed to comply with all the “necessary conditions.” Unsurprisingly, this put many bidders off.
The challenges are legion, but bankers, analysts and fund managers do expect the pace to gather steam since the government has already learnt a number of lessons the hard way.
VietCapital’s Weisblatt concluded, “The government won’t achieve all of its objectives, but we do believe it will achieve a substantial amount.”
