Drawn-out affairs

Mr Mac Quang Huy, Deputy CEO of Thang Long Securities (TLS), discusses Vietnam’s SOE reform with VET’s Ha Anh.

Vietnam’s State-owned enterprise (SOE) reform is said to have slowed over the last two years. Why do you believe this has happened?

The delay in SOE reform, especially as regards IPOs, is mainly attributable to the impact of the global economic crisis as well as Vietnam’s macro-economic instability, which caused a long-term fall in the equity market. Given the low sentiment for equity, the government has had to delay the IPOs of large SOEs such as the Bank for Investment and Development of Vietnam (BIDV), VMS MobiFone, Vinaphone, and the Mekong Housing Bank, even though IPO advisors had been selected for these assignments.

Furthermore, the IPO mechanics of SOEs still have bottlenecks to be resolved, making the IPOs less attractive to both local and international investors. The Vinashin incident also highlighted the problems in management at SOEs, which concern investors.

Do you think the slowing down in SOE reform was one of the major reasons behind the fall in Vietnam’s equity market?

I don’t think so. But it does have an impact on the general macro economy and investor sentiment. The delay in SOE reform means that it takes a longer time to correct the inherent problems at SOEs such as ineffective use of resources, uneven playing fields and lack of transparency.

We have seen disappointment among international investors at the speed of SOE reform as they expect the size of the capital market to grow and for there to be more attractive investment opportunities. In reality, both the size and depth of Vietnam’s stock market have fallen significantly, making it extremely difficult to invest in or exit an investment.

What is the outlook for the SOE reform process over the next 12 months?

I am quite positive. We have seen Prime Ministerial Decision 352/QD-Ttg requesting a pilot count/revaluation of SOE assets and capital as at June 30, 2011. We have also seen the resumption of IPOs of SOEs such as PVGas, VinaSteel, the Mekong Housing Bank and Petrolimex. Chief among these is the IPO of Petrolimex, as it will enhance transparency over the pricing mechanism and subsidies from the government on the petrol price. However, as we have seen, most of these IPOs proved to be unsuccessful due to the low demand and the sale of minor shares to external investors. I expect more IPOs to be conducted over the next 12 months but I doubt that they will be successful unless there is a significant change in the IPO mechanics.

The government has recently is in the process of amending issued a new set of the IPO regulation (i.e. Decree 59/2011/ND-CP, which replaced Decree 109/2009/ND-CP) and I hope that some key issues will be improvedbut in my personal opinion, major issues remain unresolved.

What are the key issues that could speed up the process?

In addition to unfavourable market conditions, SOE reform could be slowed down due to the deliberate intentions of certain interest groups, who benefit from the old system, and/or due to the IPO mechanics. Both issues will need to be resolved in order to speed up SOE reform. While the former can be resolved though an administrative order from the government, the latter needs education and a change in mindset among the various stakeholders involved in the process.

Traditional issues with a Vietnamese IPO such as valuation, improper deal structure (i.e. selling only minor shares to external investors), high valuations, Dutch auctions, and return of share premium to the State budget are major road blocks on the way.

The government should be more comfortable with selling a decent stake of shares to external investors in order to hope for real improvements in the operations and effectiveness of SOEs post equitisation. If the government remains the only major shareholder, it will be difficult to attract investors to the IPO. From international experience, an IPO is best handled by an independent external party, such as an investment bank, through underwriting.

What are your thoughts on foreign investor attention to SOE reform?

International investors always look for good IPOs, which can bring them good future values. The key considerations for a good IPO are the size of the share sale (and, hence, the voice of outsiders and the expected improvement to corporate governance post equitisation), and reasonable valuation and liquidity (for e.g. clear commitment to listing). If these concerns are fully addressed, international fund managers will have a good story to sell to their investors and international funds will flow to Vietnam’s IPOs. This is really Vietnam’s call.

What do you think of the fund raising prospects for Vietnamese SOEs within the next five years?

I think the prospects have become much more difficult following the Vinashin incident, especially for debt financing. International investors have become more risk averse when they look at Vietnamese SOEs. In addition to the need to stabilise the macro-economy, SOEs need to boost reform to build trust among investors through improving transparency, corporate governance and operational effectiveness. Equitisation is one means to this end.