Eight years ago, Nomura Securities, a subsidiary of the Nomura financial group, arrived in HCM City with hopes of buying stocks in Savimex, a producer and exporter of wooden products to Japan.

After several failed negotiations, largely due to problems related to the company’s equitisation process, Nomura Securities left Vietnam. Recently, the firm returned and joined the market by signing an agent’s contract with the Securities Trading Company of Asia Commercial Joint Stock Bank (ACBS).

Nomura Securities is not the sole example of such a move. There are have been significant changes related to the participation of banks and other foreign funds in the domestic market, even before it has resolved its rooting issues.

Big companies targeted

On April 27, 2006, a financial seminar entitled “Discover Vietnam” organized by Citigroup and ACBS in HCM City. Participants were mostly foreign financial investors and enterprises that have been listed or are about to list their shares on the bourse. These include the Saigon Commercial Bank (Sacombank), REE, Sacom, SSC, Vinamilk, Kinh Do, Hau Giang Pharma, and VF1.

According to organizers, two companies in which Citigroup was interested were Sacombank and Vinamilk. Vinamilk’s value has reached US$1bil, and it is approximately $1bil for Sacombank. Vinamilk is the engine of the HCM City Securities Trading Centre, and its capability to list in foreign stock market is feasible. Meanwhile, shares in Sacombank will go to the bourse in mid-2006 as the listed first bank in Vietnam. Sacombank’s listing is considered an experiment prior to the listing of two other banks, the Bank for Foreign Trade of Vietnam (Vietcombank) and the Bank for Investment and Development of Vietnam (BIDV).

On May 18, 2006, a similar workshop will be held in Hanoi and on the agenda, apart from meeting with officials of the State Bank of Vietnam and the Ministry of Finance, Citigroup representatives will spend most of their time discussing the equitisation process of Vietcombank and BIDV.

This is not the first time Citigroup has appeared on the financial market of Vietnam. Previously, they several times expressed the wish to become a strategic partner of Vietcombank. They also signed an agent contract with ACBS (Accordingly, ASBS provides them with information, analyses of enterprise financial situation, and performing investment transactions under Citigroup’s requests) and bought government bonds and shares of some listed firms.

Citigroup is focusing their attention on Vinamilk and banks, as these businesses international transactions are of large values. Citigroup doesn’t want to invest in small companies like some investment funds do.

Speeding up

When big groups like Citigroup come to Vietnam, foreign investment funds don’t have any measure except for speeding up disbursement and continuing to expanding capital scale.

Dragon Capital-managed VEIL fund’s increasing its capital from $250mil to $350mil is now only the issue of time. The Indochina Capital Fund, at a financial investment conference it organized last week, stated that after 15 years working in Vietnam, it has invested nearly $1bil in 16 projects and several listed companies. The fund is calling for around $150-200mil for the Indochina Land fund, a real estate and securities investment fund worth around $70-100mil, which is scheduled to be inaugurated in the next several months.

Other funds like Temasek and Arisaig have not limited their investment capital in Vietnam. For them, it is important to seek effective projects and enterprises.

A new investment trend of funds is participating in securities trading companies. US group Vietnam Partners has bought shares in the Saigon Securities Trading Company; Dragon Capital contributes capital to the HCM City Securities Trading Company (HSC); while Indochina Capital owns 30% of the capital in the Mekong Securities Trading Company.

With a non-stop increase in the number of investors, securities trading companies are under serious pressure to expand their scale and raise capital to perform new operations and invest in technical infrastructure. Participating in securities trading companies, foreign investment funds not only contribute capital but also prepare for business in the future, when the scale of the Vietnamese stock market increases by two, three or even five times its current value in the future.

Interest rates and assessment

Foreign investors are asking authorities to solve two core problems in the financial market: interest rates and defining corporate value. The Hong Kong and Shanghai Banking Corporation has become the consulter and issuer of BIDV shares to help the bank increase capital.

According to Tran Bac Ha, BIDV General Director, the interest rate on bonds is proving a problem for banks. Vietnam has no standard market interest rate for bonds. HCM City faced difficulties in issuing VND2tril of urban bonds recently due to interest rate problems. In the auction organized in late April 2006, the city found the bonds were a difficult sell. The interest rate the city offered was less than 9%/annum, while the lowest interest rate submitted by tender was 9.15%.

The interest rate on city bonds is set based on the interest rate of government bonds of the same term, plus some fluctuation permitted by the Ministry of Finance. However, even the interest rate on government bonds is not a market rate, although it is defined at auction. The interest rate on government bonds is still mainly defined by the Ministry of Finance. As a result, in many auctions, government bonds go unsold because of the gap between the fixed interest rate and the negotiation interest rate of the buyer.

Assessment of corporate value is more complicated. The speed of equitisation of major companies is slow because of this task. Some said that to define the value of specialized enterprises like oil and gas, power and water supply, telecom, banking, insurance, construction and aviation companies, it is necessary to invite foreign assessment companies.

Vinamilk is one example. The capital of this company was defined at VND1.59tril ($100mil) at the time of equitisation. Its market value is now ten times higher, so is the value defined in the past is correct? Some others suggest changing the method of value assessment of enterprises, including the value of their brand-names, customers, distribution network, technology investment and the contingent of staff, not only simply capital, assets and machinery.

As discussion continues, the equitisation process can’t catch up with the urgent demands for haste in the renovation process of state-owned enterprises as the nation integrates into world markets.

Wastage

So far, the future of the Vietnamese financial market is still unclear. The stock market is being closely managed by the state, mainly by administrative tools and orders. Meanwhile, the market needs to make moves that can help it develop in a stable manner.

For example, while supply-demand is seriously imbalanced like present, the state should create faster, stronger sources of supply by increasing the number of listed firms, and by selling more state capital in enterprises. But the state can’t do those things, why? Because the state only closely manages enterprises during the equitisation process, then loses control after that.

At present the state owns 20-30% of capital of 2,900 equitised companies on average, equivalent to hundreds of billions of dong. This sum of money can help regulate the stock market through the sales of state-owned shares when the demand rises on stock market and re-purchasing when the demand falls. The state should also benefit from the shares it holds. Regretfully, there is no state body responsible for managing state capital in equitised companies, which leads to great wastage.

Reviewing the case of Vinamilk, in which the state still owns 50.1% of capital, equivalent to VND795bil. If it sells this volume of stock now, the state can collect nearly VND8,000bil ($500mil), equivalent to the annual budget revenue collected from many provinces. The funds from Vinamilk can be invested effectively into many projects.

In another aspect, it is clear that the sources of foreign indirect investment into Vietnam will increase. The significance of a national financial investment company is a must, not at the role of managing state capital in companies, but also a competitor with foreign groups and funds to both regulate the market and most effectively use state budget capital. The state can ill afford to waste money and opportunities as it is at present.

Source: Saigon Economic Times