Vietnam’s IPO blues

When Hanoi-based lender Techcombank, whose full name is Vietnam Technological and Commercial Joint Stock Bank, went public in April 2018, raising US$922m, investors cheered. For a few short weeks, it was the largest new equity offering ever completed in the booming Southeast Asian market.

What impressed seasoned observers was not so much the size of the offering as the mix of investors convinced to take a punt on the sale. Nothing about it was modest, from the US$700m put up by a handful of big-ticket investors, including Fidelity Management & Research, fund manager Dragon Capital and Singaporean sovereign wealth fund GIC, to the fact that it was more than 10 times subscribed, to a roster of mandated lead arrangers that included Morgan Stanley and Deutsche Bank.

Investors willed themselves to forget where the bank is now, and to gaze ahead, at what it might become. They looked beyond its status as a mid-sized lender in an economy yet to make the jump to emerging-market status, according to index provider MSCI’s internal classifications. Yes, it had D234 trn (US$10bn) in assets on its books at the end of 2017, according to data from the State Bank of Vietnam, but nine other domestic commercial lenders beat it on that score.

Instead, they looked at its current finances and its long-term prospects. Techcombank posted a 53% year-on-year jump in net profits in the first half of 2018. It is widely seen as one of the country’s best banks, with a senior management team that cut its teeth at the likes of Morgan Stanley, Wells Fargo and McKinsey. It is investing heavily in digital and expanding into retail to meet the needs of millions of citizens pouring into the country’s great cities.

Moreover, the bank is positioned at the heart of a market often described as the last great, untapped emerging market, powered by a population that is overwhelmingly young, ambitious, well educated, entrepreneurial and hard-working. Barry Weisblatt, head of research at Viet Capital Securities, which also co-underwrote Techcombank’s stock sale, tips economic output to expand by 7% year-on-year in 2018. This June alone, US$10bn of new FDI projects were approved, led by East Asian manufacturers from the likes of South Korea and Japan, attracted by a stable political and business climate, and low labour costs.

Burst bubble

But it did not take long for the bank’s bubble to burst. Six weeks, to be precise. Vietnam’s stock markets are unusual, in terms of the elongated pause that exists between a sale being priced, and those shares being listed on the Hanoi Stock Exchange or Ho Chi Minh City Stock Exchange, or both.

It so happened that in the intervening period, global markets took a turn for the worse, compelling even risk-embracing investors to turn away from frontier markets. Techcombank’s stock fell 20% from its reference price of D128,000 on its first day of trading. And they continued to sink: as of September 10, its shares were trading more than 40% below their April offer price.

Vinhomes, the company that trumped that equity offering, fared a little better – but not by much. Unlike Techcombank, the high-end property developer opted for an initial equity offering, which it priced on May 7, raising US$1.35bn. The private placement-style structure has gained in traction and popularity in recent times, in part because, while they can only be marketed to qualified institutional buyers, they do narrow the time gap between pricing and trading.

Again, the sale, which was led by Citigroup, Credit Suisse, Deutsche Bank and Morgan Stanley, attracted its fair share of blue-chips. Singapore’s GIC came in as a pre-IPO investor, paying US$853m for a 7% stake in Vinhomes, which it bought from parent Vingroup and other shareholders. Other cornerstone investors included Korea’s Mirae Asset Financial Group and Los Angeles based Capital Group. Yet its shares also struggled on debut 10 days later. Amid wider market turbulence, they slid 3.8%, underperforming the benchmark VN-Index.

Part of Vietnam’s problem, impartial observers say, is that it suffers from elevated expectations. Its champions – and there are many – shake their heads in wonder when the subject of its enduring frontier-market status is raised.

“Even Pakistan is included in the MSCI Emerging Markets Index,” said one Ho Chi Minh City-based fund manager. So too is Argentina, which at the time of writing is seeking to expedite a record US$50bn bailout from the IMF amid a worsening economic crisis.

Yet there are others who say that the MSCI is right to wait. It is easy to forget how narrow and shallow the onshore equity and debt markets are. Just five companies, include Vinhomes, Vingroup, Vietnam Dairy and PetroVietnam, make up more than 40% of the benchmark Ho Chi Minh City Stock Index – and two of those firms were founded by the same man, billionaire Pham Nhat Vuong.

When those stocks gyrate, so does the wider market. “It’s easy to forget how young and underdeveloped the capital markets are,” said Huynh Buu Quang, chief executive of Hanoi based Maritime Bank. US-Vietnamese relations were only normalised in 2001, and the flood of inward corporate capital, led by the likes of South Korea’s Samsung, only began in earnest this decade.

Vietnam’s vast potential can also cloud one’s thinking, making you forget how poor the country is, and how far it still has to go. Average GDP per capita, measured by purchasing power parity, was US$6,876 in 2017, according to IMF data. That ranks it 125^th, slightly behind its tiny, poor, landlocked neighbour Laos.

Upgrade hopes

The widely held expectation in the political capital Hanoi and the commercial hub of Ho Chi Minh City is that Vietnam will secure its long-awaited upgrade by 2020. But even this might be wishful thinking. Under MSCI rules, Vietnam falls short on eight metrics, including foreign ownerships of domestically listed securities, and a demand that financial disclosure also be published in English. While Hanoi has eased restrictions over the years, foreign investors can still collectively own a maximum of 49% of non-banking stocks and up to 30% of banking stocks.

The solution, as simple as its sounds, is for Vietnam’s technocratic government to continue to promote and boost the fortunes of its capital markets. Its bond markets are woefully underdeveloped: according to central bank data, commercial lenders accounted for 96% of financial sector assets last year, versus 3% for insurers and 1% for fund managers. That will change, of course – but it will take time.

In the meantime, the aim must be for more domestic corporates to complete stock sales. Despite the travails of Techcombank and, to a lesser extent, Vinhomes, local firms are still queuing up to go public. Maritime Bank’s attempt to complete its IPO in 2017 was stymied by its own shareholders, but it is hoping to revive its listing plans in 2019. Between four and nine commercial lenders are believed to be hoping to sell shares over the next five or six quarters. The list includes Orient Commercial Joint Stock Bank, which said in May 2018 it would aim to sell 750m shares on the HOSE index in the final quarter of the year.

Asked to identify the best offerings ahead, bankers point to FE Credit, a division of HOSE-listed VPBank, which dominates the country’s thriving consumer finance business, and Masan Nutri-Science, the branded meat division of Masan Group, both of which are part owned by global investment firm KKR.

“Both of those should be billion-dollar IPOs,” said a leading Ho Chi Minh City based investment banker. “And if they don’t happen, others will.”

Many of the big share sales ahead will result from the government attempts to divest stakes in at least 64 state-run firms. In 2017, Hanoi raised US$6.4bn in 2017 by selling stakes in the likes of brewer Sabeco and dairy giant Vinamilk.

But caveat emptor, and all that. Any buyer has to beware of the fact that Vietnam is likely to remain, for a little while yet, a frontier state. Transparency remains low, good corporate governance is scarcer than it should be, and there is, as the cautionary tales of Techcombank and Vinhomes prove, no such thing as a sure thing.

If proof of this were needed, look no further than the unfortunate case of Vietnam National Shipping Lines. In August, Vinalines, as the state-run ports-to-shipping firm is known, said it was planning a US$210m listing on the HSE, managed by Saigon Securities, a local broker. The government trumpeted its cause, keen to present its divestment programme as an unalloyed success.

Yet the sale sank like a stone. In fact, it might have been the worst stock offering ever to trouble the local markets.

Vinalines raised a paltry US$2.33m, selling 5.43m shares at D10,002 apiece, meaning the sale was 1.11% subscribed. Foreign investors bought just 6,200 shares.

Vietnam will join the MSCI Emerging Markets Index, and the time will come when investors can be reasonably certain that big-ticket IPOs will rise on their first day of trading, not fall. Just not quite yet.