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History repeats

Released at: 07:30, 27/10/2014 SOE Equitisation

History repeats

With a further delay perhaps on the cards, investors may begin to wonder what is actually going on at the garment and textile giant Vinatex.

by Minh Tien

The initial public offering (IPO) of the Vietnam National Textile and Garment Group (Vinatex) first appeared in the blueprints of the government’s State-owned enterprise (SOE) equitisation process many years ago. It was initially planned to be conducted on July 1, 2013, before Mr Vu Duc Giang, who was Chairman of the Board of Members at the time, announced a two-month delay.

At a press conference back then Mr Giang said that they were forced to delay the IPO after many investors that expressed interest were found to lack substance and could not be truly supportive of the group’s post-IPO management process. The then-Chairman claimed that the root cause of the delay was Vinatex’s strict requirements on investors. In addition to capital, the group insisted on three other selection criteria: investors must come from the same industry with advanced management levels and market expertise; be able to provide flexible and appropriate financial management solutions; and not be restricted by any investment regulations.

The criteria now in place for investor selection ensures that each can contribute to the group in different ways, as regards technology, management, and market expansion, among others, as a springboard for Vinatex to speed up its operations after the IPO. The proportion of the shares offered to strategic investors had been cut to 24 per cent but the selection criteria remains unchanged. What has changed, and is worth noting, is that the government is extremely determined to carry out SOE equitisation in general and the Vinatex IPO in particular, regardless of the results of strategic investor selection.

On the one hand, the lack of information on strategic shareholders may make it more difficult for financial and other strategic investors to evaluate their potential and decide to invest. On the other hand, the strategic partner selection process simply can’t last forever. An exclusive source of VET said that the list of potential strategic partners has been submitted to the Ministry of Industry and Trade (MoIT) and the selection process compelled to be completed simultaneously with the IPO. The identity of potential partners is yet to be revealed, indicating a possibility that the IPO may be postponed yet again, though this is unlikely to be given as the reason. 

The newly-appointed General Director of Vinatex, Mr Le Tien Truong, said that the reason for the delay was that Vinatex acts as a holding company rather than a production company, with 37 affiliates and 18 subsidiaries. It takes longer, therefore, for investors to fully understand the group and assess the investment potential. With IPO plans for Vinatex being announced publicly many years ago, investors have certainly had enough time to do their homework. Mr Andy Ho, Managing Director and Chief Investment Officer at VinaCapital, believes that the lack of quality information shared with investors is largely to blame.

Experts in the field are doubtful that Vinatex’s IPO will happen this year. Whether conducted this year or the next, Vinatex must clean up its portfolios by fostering divestment from other businesses and concentrate on its core business, in order to improve information quality on net revenue and after-tax profits, and consequently come up with a better share price.

Preparing for equitisation

Auditors KPMG Vietnam have announced that Vinatex’s 2013 consolidated revenue was VND10,953 billion ($517 million), down 11.9 per cent compared with 2012, consolidated net after-tax profit VND233.5 billion ($11.03 million), down more than 50 per cent, and gross profit VND1,335 billion ($63 million), down 11 per cent. Gross profit margins reached 12.2 per cent, up slightly from 12.1 per cent in 2012. 
Consolidated business figures over the last few years can be divided into two phases. The first was a growth phase, with compound annual growth rate (CAGR) in consolidated net revenue of 17 per cent during the 2008-2011 period. Then came a decline phase, in 2012 and 2013, with consolidated revenue falling 37 and 12 per cent, respectively, due to a number of factors.

In 2013, Vinatex recorded significant losses primarily because of falls in its net profits, as lower interest rates resulted in lower interest income. Mr Truong explained that profits were lower but production managed to remain the same, but VET’s own research showed that a large number of companies in the group were operating inefficiently last year. 

The group is currently in the middle of a transformation process, with a focus on restructuring to prepare for the equitisation and it is understandable that it should face difficulties for a certain period of time. Nevertheless, its revenue has also fallen sharply because of declines in the revenue contribution from Phong Phu Textiles (its largest subsidiary), as the group reduced its stake in the company to less than 50 per cent. Vinatex also made some poor moves by withdrawing from well-performing affiliates and subsidiaries.

The group also divested strongly from other businesses other than its core business during a tough 2013, selling its investments to domestic investors. As at May this year, Vinatex had divested VND916 billion ($43 million), or 84.6 per cent, of its total investments in 21 non-core businesses. It is expected to finish divesting the remaining 15.4 per cent by the end of 2015. Total earnings from such divestments, however, were disappointingly lower than the initial investment.

Conversely, the target revenue of the parent company in 2014 is expected to increase significantly. Confidence in such a result stems from the cotton procurement operations of all subsidiaries being transferred to the parent company. The parent company is importing 15 per cent of cotton demand for the group this year and the proportion is to reach more than 70 per cent in 2017 and subsequent years. The group can therefore take advantage of economies of scale and improve its negotiating position with suppliers while cutting delivery and lead time.
Vinatex has also gradually increased its use of raw materials from domestic suppliers, to approximately 60 per cent in 2013, and this localisation rate is expected to reach 80 per cent by the end of 2015. This also assists the group in transforming from primarily “cut, make and trim” (CMT) contracts, with added value coming mostly from low-cost labour and imported raw materials, to carrying out “original-design-manufacturer” (ODM) contracts, which currently account for a modest 10 per cent of export turnover. It plans to increase the proportion of ODM in export turnover to 12-14 per cent after the IPO and even higher afterwards.

Right strategies and long-term planning are essential for the group to guarantee the success of its equitisation. The total investment for capital construction in the four years after the IPO is expected to be VND11,581 billion (more than half a billion US dollars), according to the Ho Chi Minh City Securities Corporation (HSC). Of this, VND4,445 billion ($210 million) is owner equity while VND7,146 billion ($337 million) is external finance. The funds will be used to invest in 25 new projects (including eight spinning projects, nine textile and dying projects, two sewing projects and six projects on developing input materials), to ensure a self-contained production and value chain. The ultimate purpose of these projects is to increase the proportion of premium textile products, in order to be at the front in accessing opportunities presented by the Trans-Pacific Partnership (TPP), which is just around the corner, and enhance export turnover.

The right price?

Based on consolidated business results for 2013, Vinatex’s earnings per share (EPS) should be around VND396 (about 2 US cents). With an offering price of VND11,000 ($0.52), the price-earnings ratio (P/E) would stand at 27.8, which is some 75 per cent higher than the industry average in Southeast Asia of 15.9. However, the price-to-book ratio (P/B) is just 11 per cent higher than the regional average. Nevertheless, the 2013 consolidated pre-tax profit margin of 3 per cent still indicates that Vinatex has a lot to do regarding efficiency, given the figure for TCM (a major listed domestic enterprise in the industry) is 5.3 per cent against the average of 15.4 per cent for the East Asia region.

The consolidated net after-tax profit is the maximum limit Vinatex can use to pay dividends. Even if the group finished 2014 with a CAGR resembling its halcyon days, of 17 per cent, it would still not be enough since the 2013 figure was a modest VND233.5 billion ($11.03 million). The mission becomes even more impossible when considering consolidated net after-tax profit was put at VND197.8 billion ($9.3 million) by a securities corporation, which preferred to remain anonymous. Conversely, BSC (a securities company under BIDV, the Bank for Investment and Development of Vietnam), revealed analysis of Vinatex shows 2013 consolidated net after-tax profit of VND273.6 billion (nearly $13 million), which is just enough for dividend payments.

One of the most notable points of Vinatex’s IPO is that most of the periodic data provided by the group appears to not be consolidated. Consolidated figures only show up in a few pages of their prospectus. It is also important to note that the group has had plenty of time to generate a consolidated financial report, given the IPO has been delayed for a number of years. 
Without a consolidated report, the two methods used by Vinatex (the Dividend Discount Model and P/B Model), will result in inaccurate profits being stated. With nominal profit higher than the actual figure, owner equity and the offering price will also be higher than the actual value, the dividends will be much lower when the actual profit is revealed, and the current offering price will not be as reasonable as it now appears.

It is clear that Vinatex wants more time, as the group’s restructuring process is not yet complete. It will continue to make changes to the ownership of its subsidiaries and affiliates to streamline its business operations, divest from businesses outside of its core business and improve its operational efficiency and profitability. The group has expressed a desire to postpone the listing for three more years, until 2017, to complete the restructuring process.
But it will have to keep a close eye on the TPP negotiations as the agreement is expected to be signed sometime in 2015 and the group may want to raise capital and expand sooner. This would be a decisive factor in the final listing timeline, making 2017 the latest possible time. Nevertheless, everything can definitely take place much sooner than that.

For small investors, the two valuation methods mentioned above may give them pause. However, for long-term investors not looking for significant profits in the first one or two years there is more for them to consider, but the first things to look at are a more reasonable offering price and more quality information.

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