By Jake Maxwell Watts And Vu Trong Khanh
Vietnam's reputation as a fast-growing frontier market with a
stable regime--the Holy Grail for adventurous investors--is being
threatened by the government's squeamishness about selling off
state-owned companies.
Enthusiasm earlier this year had been high for the communist
nation's efforts to restructure the country's debt-laden state
enterprises through the privatization of more than 400 companies.
But worries are growing after the government only sold minority
stakes in a small number of the companies originally earmarked for
public listing, while foreign-ownership restrictions have kept out
big institutional funds and prompted overseas money managers to
look to private deals instead.
The most recent flop was the highly anticipated initial public
offering of flag carrier Vietnam Airlines this month, which
attracted zero interest from foreign investors, with most of the
3.5% stake up for grabs sold to two local banks, according to a
person familiar with the deal. The sale was seen as a test of the
government's commitment to change and its ability to promote the
Southeast Asian nation's economic prospects.
"Foreign investors had been waiting six years for the Vietnam
Airlines IPO to occur but when it did finally list...it was a mere
US$51.3 million capital raise--not enough to even buy a new plane,"
said David Wickham, director of global frontier and emerging
markets at HSBC Global Asset Management.
Mr. Wickham said HSBC has about US$45 million invested in
Vietnam but hasn't bought in to any IPOs in Vietnam because it has
"been difficult to increase exposure due to foreign ownership
restrictions" and high valuations.
A further deterrent is that the stock still isn't publicly
traded. Vietnamese companies raising funds in an IPO often take
months or even years to start trading on the stock market, making
it difficult to sell in a hurry, compared with hours or days in
developed markets.
When taken together, these problems have created incentives for
foreign investors to look to private companies for returns, where
they can own 100% in some circumstances, compared with just 49% of
a public company. Officials have sought to increase the proportion
of public companies to 60%; as yet no changes have been
implemented.
"What is the point of having a stock market if the rules are
more restrictive than those for nonpublic companies?" said Kevin
Snowball, chief executive of PXP Asset Management, which manages
US$152 million in the country. He said he hasn't participated in
any initial public offerings.
The recent gloom has helped send the country's stock market, one
of the world's top performers earlier this year, down 8.6% from a
six-year high hit in early September. It is still up 15.4% year to
date but has fallen behind benchmark stock indexes in Thailand,
Indonesia and the Philippines.
Vietnam's outlook is still seen as positive and remains one of
the world's most attractive frontier markets, with strong economic
growth and a promising young generation and rising middle class.
Foreign direct investment is surging, up 6.2% on the year in the 11
months to November. Yields on government bonds have fallen this
year, indicating confidence in the country's finances, while a US$1
billion sale of government bonds this month was more than 10 times
oversubscribed.
Still, the difficulties associated with investing in the public
stock market have prompted several foreign companies seeking
exposure in Vietnam to avoid it entirely. Early this month, U.S.
snack maker Mondelez International Inc. said it planned to acquire
80% of Kinh Do Corp.'s snacks business, one of Vietnam's largest.
Thai Beverage PCL, a Bangkok-listed company owned by Thailand's
third-richest man, has approached the Vietnamese government to buy
a stake in the country's largest brewer.
"Vietnam is wasting its chance to attract foreign indirect
investment," said Cao Sy Kiem, economist and former central-bank
governor. "We need to further extend the room for foreign ownership
in domestic companies."
Dominic Scriven, chief executive of Dragon Capital Group Ltd.,
which manages around US$1.3 billion, said it was understandable
that Vietnam doesn't want to indiscriminately sell state assets,
but that the regulations on foreign ownership have been
circumvented in some deals and are broadly counterproductive if the
country wants to develop its publicly traded stock market.
Mr. Scriven said that there are legal loopholes which allow
foreign investors who are unable to access controlling stakes in
businesses through the public stock market to do so in private
markets. Losing state assets by selling them too cheaply "is a
seriously punishable offense and [with] this corollary of
inexperienced people in charge of the equitization process, nobody
really knows what things are worth."
The result, Mr. Scriven said, is that privatizations have often
been overvalued in the eyes of investors, while the stakes on offer
have been small and most often minorities, leaving investors with
little say in how the companies are run. There are some exceptions,
such as the September IPO of state-owned apparel manufacturer
Vinatex, which sold a 49% stake with about half of that to
foreigners.
Nevertheless, the offerings are small and foreign investors say
they are starved for choice.
"We certainly are disappointed that more has not been done in
Vietnam regarding privatization," said Mark Mobius, executive
chairman of Templeton Emerging Markets Group, which manages more
than US$40 billion. Growth in Vietnamese capital markets "has been
hindered because of the lack of large company shares to buy and
sell," he said.
Dan Keeler contributed to this article.
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