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Factors at play

Released at: 11:06, 12/02/2018

Factors at play

Photo: Viet Tuan

All stakeholders have a great deal to think about as the equitization of PV Oil nears.

by Duy Anh

With a need to balance the books by opening up the economy, the government has put renewed emphasis on its equitization agenda, with equity capital markets set to provide the avenue for a high volume of stake sales to be conducted. Beyond this, Vietnam’s equitization wave is being focused on the oil and gas sector, with the float of a PetroVietnam subsidiary hitting the market in January and a number of companies looking to become a strategic partner of PV Oil, with its gas station network stretching through Vietnam and Laos.

Seeking M&A success

Part of the government’s plan to equitize hundreds of State-owned enterprises (SOEs) to boost their performance, PV Oil, Vietnam’s only crude oil exporter, plans to offer nearly 207 million shares, or 20 per cent, at an initial public offering (IPO) on January 25 at the Ho Chi Minh Stock Exchange, which is expected to raise at least $122 million. It will also offer an additional 44.72 per cent, or 462 million shares, to strategic investors, reducing State ownership to 35.1 per cent post-equitization; just enough for veto power. The company plans to float shares on a local stock exchange a year after its equitization, with IPOs and listing being two separate processes in Vietnam.

Three years and numerous delays have only given this IPO more worth. “The most important factors in attracting major investors are the sale price and the proportion of stake up for sale,” Chief Economist and Market Strategist at Bao Viet Securities Co., Mr. Nguyen Xuan Binh, told VET, pointing out that some previous IPOs failed because of the small size of the offering, at less than 5 per cent. Regarding the involvement of strategic investors in the company’s decision-making after equitization, “strategic investors would be actively involved in the company’s operations, which would be a positive for PV Oil over the long term,” he added. 

Some bankers believe the sale will inject private investment into the State-controlled petroleum industry and accelerate government plans to open up the oil and gas sector, a market that’s worth $5.9 billion, according to the Hanoi-based Research Manager at the Ho Chi Minh City Securities Corp. (HSC), Ms. My Truong. While the company’s market share of 22 per cent is much lower than the share of the Vietnam National Petroleum Group (Petrolimex), which has about half, its IPO would be well received because shares in its State-owned rival are capped at 51 per cent. “Almost all financial investors, both institutions and individuals, are looking forward to a piece of the cake,” she said.

Eight investors, including a founding shareholder of Vietnam’s private low-cost airline Vietjet Air, and major oil companies such as the Anglo-Dutch concern Shell, Japan’s Idemitsu Kosan, Kuwait Petroleum International (KPI), and South Korea’s SK, have registered to become strategic investors of PV Oil. One foreign investor has expressed an interest in capturing the entire ownership cap of 49 per cent, while others are vying for 25 to 35 per cent, PV Oil CEO Mr. Cao Hoai Duong told VET. The company is inviting these potential strategic investors to evaluate the actual capability of PV Oil and submit tender documents for bidding. If there are still more than two investors left, auctions will be held to ensure transparency. “We are looking for good strategic partners and to have a successful M&A,” Mr. Duong said.

Pros & Cons

With the current petroleum consumption rate in Vietnam being among the lowest in ASEAN, at 16 million tons per year, 65 per cent of which come from imports, “we still have room to move,” Mr. Duong said. Vietnam’s demand for refined oil products, including gasoline, diesel, fuel oil, and A1 jet fuel, is expected to see compound annual growth of 4.3 per cent in the 2014-2025 period, according to BMI Research, as it feeds industrial growth, increased road haulage, and growth in passenger transport and annual car sales.

Established ten years ago with 82 gas stations, PV Oil now has 540 and over 30 storage facilities with a capacity of 1.3 million cu m. Last year, it recorded an estimated consolidated pre-tax profit of VND405 billion ($17.9 million), down 30 per cent against 2016, but consolidated revenue during the year rose sharply, by 65 per cent, to VND56 trillion ($2.47 billion); both surpassing the full-year targets. The company aims to triple its nationwide gas station network to 1,550 outlets by 2022, while also planning $280 million in acquisitions over the next five years, Mr. Duong said. About $170 million will come from its cash holdings, with the remainder being bank borrowings. “We are big enough to buy smaller competitors to expand market share,” he said. 

As the market share held by imports will most likely decline over the next five years, when three domestic oil refineries - Long Son, Nghi Son, and Nam Van Phong - come into operation, what is most significant is that apart from Nam Van Phong, in which Petrolimex contributed investment of $8 billion and which has a capacity of 10 million tons per year, the remainder are PetroVietnam projects. PV Oil, as a subsidiary of PetroVietnam and also Petrolimex’s biggest competitor, will then hold more advantages in terms of material resources, creating a shift in the market and the competitive environment.

Key attractions for potential foreign investors include dilution of State control, the company’s growing market share and distribution network, and growing consumer confidence, according to Ms. Dinh Thi Thuy Duong, an analyst at VietCapital Securities. However, risks for potential strategic investors stem from the commitments they must make, including retaining their holding for at least ten years and realizing commitments in terms of market, technology, and management development while prioritizing the purchase of petroleum products from Dung the Quat and Nghi Son refineries, the latter of which is due to begin commercial operations this year, at a minimum volume that corresponds to the market share of the two refineries in Vietnam’s total demand. 

The negative impact of this obligation was illustrated in 2016, when petroleum distributors, including Petrolimex, benefited from cheap inputs from South Korea because there was a difference between the actual import rate, thanks to a lower import tax from South Korea of 10 per cent from the implementation of the Vietnam-South Korea Free Trade Agreement, and the weighted average rate used in the base price calculation, while the positive impact on PVOil has been less to some extent given that imports account for only 25-30 per cent of its total sales volume.

Going forward, the import tariff will fall to 0 per cent starting in 2024, under the ASEAN FTA, while import tariffs imposed on diesel oil will come down from 5 per cent to 0 per cent this year under the Vietnam-South Korea FTA. Even though the government adjusted the import tax mechanism, to make Dung Quat’s products more competitive than imported products, in January 2017, “prioritizing the buying of petroleum products from Dung Quat and Nghi Son may affect input management at PV Oil and make it less active in input control when petroleum prices are unfavorable,” Ms. Tram Ngo, an Oil & Gas Analyst at VietCapital Securities, told VET. 

Reputable names

Current regulations make it clear that a foreign investor is only allowed to participate in the petroleum retail market by purchasing shares in a domestic retailer and if it also invests in a domestic refinery. As the conditions of the stake sale suggest that only foreign investors with an interest in refineries in Vietnam or commit to invest in a Vietnamese refinery project can participate, only three foreign investors - Idemitsu, KPI, and Japan’s Mitsui Chemicals - make the cut.

Of the three, Mitsui Chemicals, with no expertise in the petroleum distribution business and a stake of just 4.7 per cent in the Nghi Son Oil Refinery, has the least incentive to become PV Oil’s strategic investor and is indeed absent from the sale. Meanwhile, both Idemitsu and KPI, with a 35.1 per cent stake each in Nghi Son, understand PV Oil’s low and stable rental costs from its sizeable land bank, the company’s nationwide distribution network, and strong facilities are an absolute advantage for their Idemitsu Q8 Petroleum joint venture, the first wholly foreign-owned firm to acquire a license to distribute and trade petroleum in Vietnam, issued in April 2016, using Nghi Son refinery’s products. 

Sovico Holding, a conglomerate known for investing in a wide range of businesses, including real estate and aviation, with some 52 per cent held by Vietjet Air CEO Ms. Nguyen Thi Phuong Thao, is an interesting pick. Driven by a switch from road transport to aviation, a desire to spend as the middle-class surges, and the double-digit growth in Vietnam’s airline industry in recent years, it has recorded stellar performance, with the low-cost carrier being accompanied by uncertainty in global oil prices and fuel costs, which now account for approximately 40 per cent of its operating costs, according to estimates by the Ho Chi Minh City-based RongViet Securities.  

While aviation fuel consumption grew 10.4 per cent over the last five years and is expected to grow 8.5 per cent annually during the 2018-2022 period, according to Wood Mackenzie, such strong demand growth is presently met by only two suppliers: the Petrolimex Aviation Fuel JSC, a subsidiary of Petrolimex, and the Vietnam Air Petrol Co., a subsidiary of the national flag carrier Vietnam Airlines.

Industry observers note that PV Oil’s retail network could support Vietjet Air’s expansion strategy in both domestic and regional markets. And even though the company does not distribute aviation fuel, “this desirable segment opens up a great opportunity given its robust growth potential and very few players, especially after PV Oil succeeds in selling a stake to strategic investors,” Mr. Duong said.

PV Oil - Key highlights

Establishment: June 6, 2008 
Existing capacity: 540 gas stations and over 30 storage facilities with a capacity of 1.3 million cu m. 
2017 business performance: Consolidated pre-tax profit of VND405 billion ($17.9 million), down 30 per cent against 2016, while consolidated revenue rose sharply, by 65 per cent to VND56 trillion ($2.47 billion).
Targets by 2022: Compound annual growth of 17.8 per cent in revenue and 32.4 per cent in after-tax profit during the 2018-2022 period.
IPO plan: Starting price at VND13,400 ($0.6) per share at IPO on January 25, with 206,845,900 shares on offer.
Potential strategic investors: Sovico Holdings, Sacom Investment Fund, Shell, Idemitsu Kosan, Puma, Kuwait Petroleum International, Thailand’s PTT, and South Korea’s SK.

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