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The one most likely

Released at: 02:35, 27/10/2014 SOE Equitisation

The one most likely

The equitisation of Vietnam Airlines has been much smoother than at other SOEs and interest in its IPO is sure to be high.

by Minh Tien

Vietnam Airlines (VNA) has received more than one offer from other airlines and financial institutions to become strategic partners. Whoever they are, they must not have looked too deeply into the national flag carrier’s recent business results but focused instead on the opportunities the future may present, including dividends and the benefits that arise from being a partner. “All potential strategic partners would have carefully considered VNA’s development plan for the five years after equitisation,” said Mr Tran Thanh Hien, Head of VNA’s Finance & Accounting Department.

In good shape

China’s illegal placing of an oil rig in the East Sea during the summer resulted in a significant loss in revenue for VNA. It revealed at the beginning of August that it has lost around VND700 billion ($33 million) in only three months due to cancellations on bookings made for flights between Vietnam and China, Hong Kong and Taiwan.
The Malaysian Airlines tragedy over Ukraine also brought about the reroute of VNA’s flights between Vietnam and Paris, London and Frankfurt, costing it three tons of fuel on each trip and a reduction in cargo of 500 kilograms. Monthly losses are estimated at more than VND10 billion (nearly $500,000). As a consequence, VNA only achieved a modest after-tax profit of less than VND100 billion ($5 million) in the first half of 2014.

Despite the recent unfavourable business results, the post-equitisation business picture for VNA is expected to be bright. The return on sales (ROS) ratio for 2014 is forecast at 0.57 per cent, 1.96 per cent for 2015, and then 4.81 per cent for 2017. The expected return on assets (ROA) is 0.52 per cent, 1.62 and 4.54 per cent, respectively, for the three periods. “The return on equity (ROE) ratio in 2016 is likely be from 14.42 to 18.97 per cent, so VNA will definitely be able to pay dividends to shareholders at a preferable yield,” said Mr Pham Viet Thanh, Chairman of VNA.

With the initial public offering (IPO) price set at a high VND22,300 (just over $1), VNA will need more than healthy forecasts to prove it’s a share worth investing in. Mr Hien said the price was determined after careful consideration of calculations by Morgan Stanley and Citigroup, which were based on the carrier’s book value, demand and supply in the financial market and, most importantly, the potential of VNA in the future.

The book value on December 31, 2013 was VND57,156.5 billion ($2.7 billion) after financial adjustments were made at the behest of the State Audit Office of Vietnam. The national flag carrier has a large fleet of nearly 100 aircraft, with a face value of around VND53,000 billion ($2.5 billion) and a discounted value of VND37,600 ($1.8 billion) as at March 31, 2014, as determined by Vietnam Valuation and Finance Consultancy (VVFC), previously known as the Vietnam Valuation Centre under the Ministry of Finance (MoF). In addition to its fleet, VNA also has technical land infrastructure on 301,902 square metres, 90 per cent of which is in Hanoi and Ho Chi Minh City.

VNA’s business results in the first half of 2014 may not be overly remarkable but it is important to note that it is doing better than the other domestic airlines despite the fact that the market is yet to escape the clutches of the global economic crisis. VNA was the only airline to report a profit for the 2013 financial year, with after-tax profit of VND157 billion ($7.5 million) and an ROE of 1.7 per cent. Despite whatever issues there may be, it is still one of the hottest State-owned enterprises (SOEs) to undergo equitisation.

Favoured son

The national flag carrier was viewed kindly by the Ministry of Transport (MoT), with it approving the 43-page equitisation plan and three appendices after just 14 days before sending it off to the Prime Minister for approval. “VNA’s equitisation plan was prepared scientifically with sound methodology and, most importantly, it is highly feasible,” said Deputy Minister of Transport Nguyen Hong Truong. Minister Dinh La Thang even urged the PM to approve the VNA valuation soon, so that the airline can take the next steps to prepare for the IPO.

VNA General Director Pham Ngoc Minh revealed that the State may still hold a controlling stake of 75 per cent in an equitised VNA, with 20 per cent being offered to strategic partners, 3.465 per cent being available in the IPO, and the remainder going to staff. “In the second stage, the controlling stake of the State will fall but be no less than 65 per cent,” VNA Chairman Mr Thanh added, but this proportion will need to be approved by the PM. Mr Minh said that if the PM gave the green light to the valuation plan, VNA would be able to quickly complete its draft equitisation plan for submission to the government. “It is highly possible that the holding company will do the IPO and organise its first shareholder meeting in the second half of 2014,” he said.

Mr Minh’s expectations may be thwarted, however, by differences of opinion between VNA and the government. VNA wants to preserve the entire surplus obtained from the additional share issuance, which would be used to buy more aircraft and increase investment. The amount of additional shares to be issued is equal to the State’s capital in the carrier, or 75 per cent of charter capital. VNA also wants the government to come forward and provide a free guarantee on all loans to purchase aircraft and engines. It plans to propose the government allow it borrow money without having to offer any assets as collateral, if it were to buy Boeing B787s and Airbus A350s.

Despite Mr Hien’s explanation that VNA will open an escrow account and record the surplus as a loan, Mr Nguyen Dinh Cung, Head of the Central Institute for Economic Management (CIEM), still believes the proposal is “unacceptable”. Equitisation, by its nature, aims to change an enterprise’s business strategy and reform corporate governance, to help it develop more strongly. VNA’s equitisation, meanwhile, would require more preferences from the State. Mr Do Thien Anh Tuan from the Fulbright Economics Teaching Program noted that this is an attempt by Vietnam Airlines to “haggle” with the State. VNA has said it will equitise in accordance with the plan, but in exchange for this it wants more privileges. Mr Tuan said that VNA’s proposed equitisation plan will only benefit VNA’s non-State shareholders.

Therefore, if the equitisation plan is approved by the government investors will rush to secure a stake in VNA. Besides the dividends, the attraction of VNA comes from its position as a dominant market leader, with a market share double its nearest competitor, VietJet Air. VNA is currently well ahead of all the other players, with a complete logistics systems that generates good profits, and if the favours it seeks in the plan are granted then a competitive market would be unlikely and VNA would reign for a long time to come.

Obviously, the hurdle for VNA this year and subsequent years is not just competing with VietJet Air or Jetstar Pacific. Vietnam must open up its skies to carriers from other countries in 2015. But VNA still stands as a good investment and can establish a set of selection criteria for deciding on its strategic partners. Regardless of the mooted idea of choosing three strategic partners at most, a member of VNA’s equitisation steering committee, who preferred to remain anonymous, told VET that the priority of the carrier is to choose only one international airline or a strong financial institution, to take advantage of market integration or advanced management methods. The opening for strategic investors is therefore narrower, and investors may have to fight hard to get through it.

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