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More speed, less haste

Released at: 02:20, 27/10/2014 SOE Equitisation

More speed, less haste

With foreign investors virtually ignoring the first batch of SOEs to carry out IPOs this year it is important that those planning to list shortly go about it in the right way.

by Thong Dat

2014 is set to be one of the busiest years for IPO activities by State-owned enterprises (SOEs). Already the market has had in excess of 30 new listings and analysts predict the next batch to happen in the near future, possibly early next year. And even though the idea behind these quick IPOs sounds solid - to speed up the SOEs equitisation process - most of the new IPOs are not performing up to expectations. Investors, especially foreign ones, are likely to be more selective about which IPOs they subscribe to and as such SOEs will need to do more to drum up interest and convince investors of their credibility.

Authorities are now pushing up stake sales at SOEs in a bid to conclude the equitisation of 432 SOEs by the end of 2015. With such an ambitious plan, the pressure placed on the shoulders of SOEs and their leaders is great. Consequently, a number of SOEs have rushed into carrying out IPOs and have largely failed to generate interest from foreign investors. Authorities had raised just $64.7 million from nearly 30 IPOs as at April this year, or about 35 per cent of the $185.7 million they targeted for the offerings, according to figures from the country’s stock exchanges in Ho Chi Minh City and Hanoi.

Losers outweigh winners

Of the wave of IPOs that hit the market in the first half of this year, there are some that stand out as indicators of what investors find interesting and are willing to buy. Transport Engineering Design Inc. (TEDI) was one, as the company was successful in selling 2.6 million shares at twice the initial price, bringing in $2.7 million. The Vietnam Waterway Construction Corporation (Vinawaco) sold 9 million shares worth $4.3 million while the Thang Long Construction Corporation sold all 12.3 million shares for $12.2 million.

However, it’s clear that losers from recent IPOs outnumber the winners. Of SOEs that could not sell their shares, the Transportation and Unloading Company of Inland Waterway (Tranciwa) suffered the most, with almost all shares going unsold. The company, which has charter capital of $2.8 million, put up 5.85 million shares for sale but sold just 24,200, worth $11,500. Others such as the Hanoi Construction Corporation (Hancorp), the Vietnam Motors Industry Corporation (Vinamotor), the Viwaseen Infrastructure Construction Investment JSC (Viwaseen), the Civil Engineering Construction Corporation No 6 (Cienco 6), and the Waterway Transportation Co. (Vivaso), also had unsold rates in the 96-97 per cent range. 

Analysts believe that a number of IPOs were simply too rushed, as the SOEs were forced to find any way to cut their level of State ownership. IPOs this year, according to Mr Michel Tosto, Head of Sales and Brokerage at Viet Capital Securities, have been pushed through by authorities worried about missing the 2015 deadline. He also pointed out that there was very little effort made to properly market these IPOs.

Indeed, the poor results of a number of IPOs this year were due to inadequate preparation. Mr Pham Ngoc Dich, Chairman of Vivaso, told local media that his company did not have enough time to plan for the IPO or even complete the official website, as required. This may partly explain why Vivaso could only raise $261,904, or about 4 per cent of its $7.2 million target. In the case of Vinawaco, though the company was able to sell all of its shares in the IPO a representative admitted that the company did not have time to look for strategic investors.

It is widely believed that the generally weak response of foreign investors to recent IPOs also has something to do with the health of the SOEs in question. For example, Tranciwa and Hancorp saw profits decline in the three years prior to launching their IPOs and this no doubt discouraged at least some potential investors. The equitisation of SOEs will bring in a source of revenue for the State so it’s desirable from the authorities’ point of view to sell State assets at the highest possible price. And because nobody wants to sell State assets at low price, some IPOs were simply priced too high. While many are regarded as attractive, not all SOEs are running well and cautious investors will only ever choose names that are large enough to warrant the investment.

Big names to come

For many years the SOE sector has been performing less efficiently than private enterprises and foreign invested enterprises (FIEs). But now, as the timing of the SOE equitisation programme is important, Mr Andy Ho, Managing Director and Chief Investment Officer at VinaCapital, believes that 2014 presents an opportunity that should not be missed. “Vietnam’s capital markets are moving up and foreign investor interest in Vietnam is at its highest level for many years,” he told an M&A Forum held in Ho Chi Minh City last month. “The external market environment as well as the internal structural features of the 2014-2015 reform programme are favourable for its implementation.” He also noted, however, that Vietnam should not underestimate the amount of effort and determination required across ministries and agencies to achieve this plan.

From the apparel exporter Vinatex and telecom giant MobiFone to the national flag carrier Vietnam Airlines, the “untouchable” SOEs of the past are now beginning to revive their share-sale plans, seeking to divest State capital via IPOs. While these large offerings will undoubtedly boost the size and stability of the stock market, uncertainty about how many of these prospective SOEs will be allowed to actually list, and how soon, appears to have tested the patience of foreign investors. 

Vinatex, for example, announced it would delay its IPO until this month. It is believed that after listing the State would still retain 51 per cent of the group while 24 per cent would be offered to strategic investors, 24.4 per cent put up for public tenders and 0.6 per cent sold to employees. It is also worth noting that the garment giant wants to find three foreign strategic partners, including a financier and two investors who are operating in the garment and textile field, as part of its equitisation process.

Meanwhile, MobiFone appears to be drawing the most attention among foreign investors, despite the number of shares to be offered to the public remaining unclear. In the latest move, Comvik, a Swedish mobile phone operator that engaged in developing the MobiFone network from 1990 to 2005, expressed a keen interest in buying shares. At a recent meeting with leaders from the Ministry of Information and Communications, the Chairman of Comvik International Vietnam expressed a desire to invest in MobiFone and become a strategic partner of the Vietnamese telecom giant as it is set to be equitised in the near future. 

If Vietnam wants to attract more foreign capital to their SOEs it needs to quickly remove the many stumbling blocks that foreign investors come up against. The greatest consideration of most foreign investors is determining the quality of the SOE, or, in other words, whether they are worth it. Opinion is still divided on whether to delay the IPOs of large SOEs that have been previously planned to do so. Pessimists may believe that if a number of IPOs are made at the same time it will cause a loss to the State, because investors could spend all their available capital on just one IPO and not have the funds for others. However, as more SOEs list, argued Mr Sean Lynch, Global Investment Strategist at Wells Fargo Private Bank, this will alleviate some of those fears. He revealed that Wells Fargo Private Bank’s funds aim to invest 2 per cent of its $170 billion in assets in frontier economies and would potentially buy newly-floated shares of Vietnam’s garment, automobile and airline enterprises when they hit the market. 

VinaCapital also believes that the lack of quality information shared with investors is largely to blame. Mr Ho believes that there is currently a lack of quality marketing, investor relations, or even proper roadshows and at times it is left to the brokerage houses to lead the process. “Only through transparency can investors feel confident that SOE operations are conducted for the benefit of shareholders,” he said. “With these methods the interests of management and shareholders can be aligned.” The lack of information on strategic shareholders, he went on, makes it difficult for financial or other strategic investors to evaluate their participation and exit strategy.

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