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Flawed planning

Released at: 02:46, 27/10/2014 SOE Equitisation

Flawed planning

Mr Attila Vajda, Managing Director at Project Asia Research & Consulting Pte Ltd, shared his thoughts with VET's Hai Bang on recent IPOs and the outlook for the SOE reform process over the next 12 months.

by Hai Bang

The government’s target to sell stakes in 432 State-owned enterprises (SOEs) by the end of next year is leading to premature IPOs that have been largely ignored by foreign investors. What comment would you care to make on this?

I think the government sees IPOs as a goal, something to check off as being done on a reform checklist, and not as just one of the available tools that can be deployed to make better and more efficient use of SOE assets to spur productivity and economic growth. After analysing the 33 IPOs that have happened so far this year, we can see many different reasons for failure, but for most of these companies we would have chosen quite different strategic paths. Indeed, we can conclude that the companies we have analysed were not ready for IPOs.

For example, 80 per cent of unsuccessful IPOs were companies with negative or low, single digit, revenue growth, and 50 per cent of them had debt to equity ratios above 3, so were highly leveraged. These companies need serious restructuring before they can be attractive to the average investor. Nevertheless, this restructuring can happen only if there is a strategic investor or the investors who do buy have a controlling stake, but at the analysed IPOs the shares offered were minority stakes. So either the government restructures or consolidates the companies first before the IPOs and either offers a majority stake for sale so an industry player/investor can have control, or sells off 100 per cent right away to some industry players in a merger if the companies are highly leveraged.

Another pattern we saw is that 60 per cent of these IPOs were in the construction and transportation sectors, which suffered the most during the recent crisis. As such the timing was poor due to the business cycle of the industries they are in. In addition, due to the high concentration of these IPOs in the same industry, they had to compete among themselves for the limited interest of investors. They really have to get the timing right and synchronise IPOs better in order to be successful.

Lastly, we have to highlight that none of the IPOs had marketing and information dissemination efforts at standards that could improve their odds of attracting foreign investors. We can scarcely find and collect relevant information for investment decision-making about these IPOs, despite the fact that we have daily enquiries from our clients on what is happening with SOEs in Vietnam.

Are the current market conditions favourable for IPOs? 

Our opinion is that the time is favourable for the IPOs of those companies who are prepared for such a change and especially if they are from industries that are not yet well represented by many large companies on Vietnam’s stock markets, such as services targeting the growth of middle class, consumer goods, retail, telecommunications, and agriculture, just to name a few. Nevertheless, only in a very strong late-stage bull market can unprepared companies in over-weighted sectors (such as real estate/construction or financials) succeed, which is not yet the case for Vietnam’s stock markets.

There is a view that many SOEs overpriced the listings because they didn’t want to sell State assets at a cheap price. How do you see such views?

Most SOE IPOs are priced based on what their assets are worth on a stand-alone basis (the NAV method). Nevertheless, investors look at what revenues and profits these assets generate and consequently what picture the company’s financial ratios paint, especially when they have no control over management or the company. In most cases the discrepancy between these views is large when expressed in pricing, and that is why the above views are held by investors. Both parties are right, we believe: (i) the State should not sell existing assets cheaply; and (ii) investors should evaluate and buy cash flows, not assets, when they are minority shareholders. The solution is for the State to close the gap between these views by either restructuring the companies to not only hold assets but to generate profits with them or in the worst case scenario sell the assets at a discount. Again, we are back to the question of how prepared these companies are for an IPO, as good preparations will solve the pricing issue.
 
With recent IPOs receiving a poor investor response, do you think that the remaining SOEs will learn from the experience of others or are the same problems to be repeated? Why is it important that these SOEs are well-received by foreign investors?

We are sceptical that the lessons will be learned from the 33 IPOs so far this year. Since 2000 there have been over 3,000 SOE IPOs in Vietnam but a successful formula has yet to be found and deployed for the remaining 400 or so. The statistics are really against the optimists, but we acknowledge that there were exceptions too and there were many successful stories that can be replicated eventually. Our opinion is that a bad IPO is still better than having those companies continuing to perform poorly under the protective umbrella of the State. 

It is important, though, to make the IPOs attractive and to have foreign participation at these IPOs for two reasons: (i) they can bring in much-needed new equity capital to the economy, which is already too dependent on debt; and (ii) they can bring in know-how and improve productivity. These two are essential if Vietnam wants to return to its historical growth rate of over 7 per cent. Otherwise it will continue to grow at only 5-6 per cent if it only taps internal resources for capital and productivity improvements.
 
With high-profile IPOs such as Vietnam Airlines, MobiFone and Vinatex in the pipeline, what is the outlook for the SOE reform process over the next 12 months?

Better-performing SOEs in more attractive industries, such as consumer goods and services, are yet to be equitised. As such, we expect that both the success rate and the interest of foreign investors will increase over the next 12 months. Nevertheless, we are sceptical that the Vietnam Airlines, MobiFone and even the Vinatex IPOs will go ahead according to the announced schedules, given the size and complex nature of these companies. This delay is not necessarily a bad thing in our view, if it means better preparation. Nevertheless, it is also true that they have been delayed way too many times in the past, so investors are naturally doubtful about every new schedule announced.
 
You said that none of the IPOs had marketing and information dissemination efforts at standards that could improve their odds of attracting foreign investors. So what would you like to suggest to SOEs in their preparation for upcoming IPOs?

SOEs can deploy multiple tools in order to attract foreign and local investors, but the basic ideas are as follows: (i) prepare in a timely manner highly transparent and informative documents about their company and the IPO in multiple languages while making it available to the public through as many channels as possible; (ii) set up a well-trained investor relations team or contract a consulting company that can engage with investors and analysts in a meaningful way, especially if the company currently faces some difficulties; (iii) conduct roadshows with the participation of senior management in key financial cities, at least in Asia, such as Singapore, Hong Kong, and Tokyo; (iv) actively engage brokerages with good institutional and retail market share to promote the IPO as a suitable investment opportunity for their client base; and (v) prepare tailored information packages and set up management meetings as soon as possible with financial analysts covering Vietnam in general and their industry in particular, so they can get early and continuous research coverage about their company. 

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