GLOBAL Investment Research Equitization in Vietnam
GLOBAL INVESTMENT RESEARCH
REPORT ON
THE EQUITIZATION PROCESS IN VIETNAM
RESEARCHED AND WRITTEN BY:
CHRIS FREUND
NOVEMBER 1994
TABLE OF CONTENTS:
Introduction:
The current state of Vietnam’s economy.2
The status of the stock exchange.4
The unreliability of information on the formation of capital markets in Vietnam.4
Part A: The Stock Exchange:
Why they are equitizing.5
The three basic types of companies to sell equity.6
Requirements for issuing equity and debt.7
The proposed structure of the stock exchange.7
The legal framework for the stock exchange.9
Thee sovereignty of the shareholders of equitized companies.10
Limitations on foreign shareholders10
The problem of accuracy in financial accounting.11
Other risk promoting factors in Vietnamese firms.12
Capital gains taxes and other fees related to the sale of equity shares.13
Convertibility of the Vietnamese dong.13
The focus of foreign capital in direct investments.14
Some large specific foreign investors and projects.15
The attractive aspects of equity investment at this time.16
The bond market.16
Part B: Thee Prominent Companies in Vietnam:
Four State owned enterprises have already been equitized.17
Problems with equitization so far.17
Other companies are also under evaluation for equitization.18
Leading State owned enterprises.18
Leading jointstock banks and finance companies.21
Leading private companies.22
Part C: Influence and Power in the Vietnamese Business World:
The roles of government ministries.24
Important government ministries in capital and financial markets.24
Some influential people in government ministries.25
The nature of influence in the private sector.26
Key influential people and the companies they are involved with.26
Foreign investment funds.28
Foreign capital financing and consulting companies.28
Appendix: Miscellaneous Information:
Trends and observations.29
Citations:31
INTRODUCTION
THE CURRENT STATE OF VIETNAM'S ECONONY
Vital statistics:
Doi moi, the process of transforming Vietnams centrallyplanned economy into a marketdriven economy, began in 1986 after the near collapse of their economic system The positive results of this difficult transition are evidenced in higher GDP growth rates, significantly lower inflation, increased foreign investment, and increasingly market determined capital flow. The conditions are rapidly improving for the establishment of a liquid capital market in Vietnam.
* GDP: With a population of 70 million and estimates of this year's GDP between US $14 billion and $17.5 billion, the per capita GDP is around $220. However there is a large gap between urban and rural. standards of living as 80% of the population is employed in agriculture, and the urban per capita GDP is closer to $450. The current GDP growth rate is 8.5% and they aim to maintain it above 8% through the year 2000.
* Industrial output: In the first nine months, industrial output is up 13.3% over 1993 levels.
* Trade balance: In the same period, imports amounted to $2.9 billion and exports totaled $2.5 billion, resulting in a $400 million trade deficit.
* Inflation: Although the government was aiming to contain this year's inflation rate to the single digits, inflation for the first nine months of 1994 was 9.9%. Half of this rise in prices can be accounted for by the annual January and February spending frenzy due to the popular Tet holiday season. This is a significant improvement from the 700% inflation rate in 1988.
Maior industries and exports:
The major export commodities of Vietnam include crude oil, rice, sea products, and coffee. Agricultural and handicraft products account for 65% of Vietnam’s exports.
* Oil: Crude oil production is valued at $500 million this year as output is expected to reach 7 million tonnes by the end of 1994, up 15% from 1993 levels. Crude oil production is expected to hit 20 million tonnes per year by 2000 as there are some major oil fields in the South China Sea. Currently 2 refineries are being planned which will process a total of 11.5 million tonnes/year.
* Rice: Vietnam is the world's 3rd largest exporter of rice. They produced 23 million tons of rice this year and sold $450 to $500 million of rice for export.
* Sea Products: Sea products accounted for $369 million in export turnover last year, and by the year 2000, sea products are expected to bring in $1 billion in export revenues and employ over 4 million workers.
* Coffee: 1994's total coffee output is expected to be 200,000 tons with estimates of export turnover ranging from $200 to $400 million. (Exporters sold near the low in the coffee futures market this year.)
* Tourism: Tourism is also an important source of foreign currency and growing rapidly.
* Manufacturing: Garments, shoes and handicrafts are generally the only manufactured goods which are competitive enough in terms of price and quality to be exported into international markets. The 1994 export value of garments and textiles is expected to be $400 to $450 million. This industry is positioned to surpass $1.5 billion in export turnover by 2000. In the coming years, electronics components will also likely become a major export.
Current trends: real estate and propertv development:
Besides a general orientation towards importexport (hence all the companies whose names end 13,11EX"), very many Vietnamese companies seem to have a substantial desire to be involved in real estate and property development in addition to their "main" business. The model of the overseas Chinese realestate, property development, trading, and manufacturing conglomerates seems to underlie many Vietnamese business plans. However, there are still ambiguities in the legal definitions of land rights and ownership which makes this area all the more risky.
2
Economic reforms and changes in the role of government:
The economic reforms initiated by the doi moi policy have necessitated a changing role for many government ministries from an emphasis on politics to an emphasis on economics. Many government ministries are beginning to resemble private economic entities which hold interests or complete ownership of the state owned enterprises (SOE) in their field. It is becoming their business and interest to promote and encourage the selfsufficiency, economic vitality and entrepreneurial spirit in those companies as a means of assuring their position in the future market economy. In this way, government ministries are guarantying their own power and importance as owners and managers of businesses while their roles in a centrally planned and subsidized economy come to an end.
Joint Ventures:
Joint Ventures (JV's) are the driving force behind Vietnam's business world today. The common perspective among foreign investors is that the Vietnamese IV partner usually has little or no cash, little or no technical skills and knowhow, and little or no experience managing internationally competitive and profitable businesses. So when joint ventures are signed, the foreign side provides the capital, equipment, technology, training, and management expertise whereas the Vietnamese side usually provides the labor and land rights, which are commonly overvalued due to an arbitrary land valuation process. However, there are exceptions to this and some of the Vietnamese partners are more influential and powerful in terms of getting things running smoothly (i.e. overcoming government related obstacles and enforcing contract obligations). For instance, some joint ventures which are closely linked to the Ho Chi Minh City (HCMC) People's Committee have faced less obstacles and have overcome others more easily1.
Membership in international trading groups:
Vietnam is seriously pursuing membership in ASEAN (expected sometime in 1995) which reflects a considerable commitment to rapid economic development in Vietnam. Membership would place significant pressure on Vietnamese firms to become very competitive very quickly. The consumer market is already flooded with cheap products from China which are produced more inexpensively and efficiently in China. Most of the high quality consumer goods come from Thailand and Japan. Membership in ASEAN will force Vietnam to become much more efficient or else face a huge trade deficit. Due to the sinkorswim effect, ASEAN membership will virtually force industries to adapt to freemarket principles to enhance efficiency.
Vietnam is also pursuing membership in APEC as well as GATT (WTO). Vietnam currently has enthusiastic international support to join these organizations but actual membership is contingent upon the endorsement of the United States, and is unlikely to be approved until full diplomatic ties are restored between the two countries.
Value of the currency:
Finally, the valuation of the Vietnamese dong, although relatively stable against the dollar for 2 years, is expected by some investors, economists, and politicians to be devalued eventually2. Vietnam is generally considered very expensive compared to other countries at a similar stage of development. Some economists and foreign businessmen argue that the dong could be devalued 20 to 50% over the next 2 years (the printandspend approach is being considered3) in order to encourage foreign investment and increase the international competitiveness of Vietnamese products. In fact the Governor of the State Bank asserts "Our policy is to slightly devalue the Vietnamese dong against foreign currencies because we want to encourage exports." 4 Membership in ASEAN and increased international trade links in general will allow international markets to have more of an influence on the value of the dong through more substantial supply and demand pressures.
Inflation is also a looming presence considering that Vietnam is attempting for industrial output growth of over 14% per year, GDP growth of 11 12% and that they are competing with, trading with, and influenced by China which has a 27% inflation rate this year as urban incomes are growing rapidly. In Vietnam, this years total inflation rate is estimated at roughly 12% and food prices have been rising sharply.
3
STATUS OF THE STOCK EXCHANGE
The schedule:
Originally the National Securities Exchange of Vietnam (NSEV) was planned to open in early 1995, however the official estimate has been pushed back to late 1995. They have already selected a building, but many foreign investors predict it may not open until as late as the end of 1996 due to numerous technical obstacles which must be sorted out. The Governor of the State Bank has said "The current conditions are not yet adequate to support an economic environment involving company shares and the sale of shares and bonds... A system of economic, civil and commercial laws must first be in place.5
It is also necessary to get the interbank foreign exchange market in Hanoi running smoothly. The forex opened on October 15, but the turnover has been very light. The forex includes state, private, and foreign banks. At first the NSEV will only trade government bonds until a semiliquid market is established and all the bugs worked out. Then it will begin to trade a few equitized SOE's and jointstock companies. Gradually private companies will begin to be traded as they begin to satisfy the public equitization and listing requirements of the NSEV. It is likely to be as long as 4 to 6 years until there is a wide range of traded securities.
The current status of trading equities:
At this time, foreign investors living in Vietnam are allowed to buy equitized SOE's and shares of jointstock banks, but they can not sell until the NSEV is established. Even if they could sell, they can not convert their dong into dollars under the current law. Therefore, anyone who invests now is here to stay. Currently, there are only four equitized companies to choose from.
UNRELIABILITY OF INFORMATION ON THE FORMATION OF CAPITAL MARKETS IN VIETNAM
Economists. foreigners and politicians:
At this stage in the equitization of companies and the creation of the stock market, there are many opinions and few answers. The Vietnamese economists tend to espouse the best case scenario as they tell you what they think you want to bear but tend to avoid important technical details. The foreigners have the experience and the money so their concerns do carry some weight. But the politicians have the last word and the last word is they are not going to compromise their position of power. Integrating these three perspectives can be challenging, yet it is absolutely prerequisite to the successful development of liquid capital markets in Vietnam. Although there seem to be no insurmountable obstacles, in reading any proposal it is always obvious whose opinion it reflects.
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PART A: THE STOCK EXCHANGE
WHY THEY ARE EQUITIZING
The mobilization of capital:
Currently the banking system of Vietnam has a very low level of capital reserves. It is estimated that there is around $2 billion hidden under various mattresses in Vietnam money that may find its way into the capital flow as soon as safe, liquid vehicles of investment make themselves available. Historically people hold US dollars outside of the bank because they are scarred of forced conversion into dong which is much more susceptible to devaluation and/or inflation. They are also weary that withdrawal restrictions may be forcefully imposed.
Equitization is part of an effort to attract strong capital flows from abroad, as they see the sale of debt and equity as a good way to attract relatively large amounts of capital to finance businesses and investments6. However, it is still generally unclear if the proceeds from the sale of equity go to the issuer or go to the state. Although unresolved, it seems that it is at the states discretion whether or not to contribute the proceeds of the sale to the company. The catch (and the thing to watch out for) is the Vietnamese want capital but they don't want to give away ownership and control of their companies.
The need for restructuring of SOE's:
Major restructuring is needed at virtually all state owned enterprises as Vietnam's economy embraces market reforms. Equitization will virtually force these companies to become more efficient, selfsufficient, and profitable (as employees will be more motivated by the incentives of their share holdings and dividends whereas unproductive employees are more likely to be fired). Much resistance comes from the fact that in this restructuring many jobs are at stake and unprofitable businesses will be closed altogether. Half of the 12,000 SOE's that existed 5 years ago have been closed or consolidated into bigger companies already.
Employee ownership:
A major goal which is both in line with the socialist ideals of the Vietnamese government and the profit enhancing ideals of the capitalists is to put a large percentage of company ownership in employee hands. This is expected to have an obvious positive effect on company performance.
The tax incentive:
Companies are exempted from the corporate tax (currently a staggering 50%) for the first two years after they equitize. This is a valuable incentive especially considering that local companies have to compete with foreign invested projects which have lower income tax rates at present (25% and lower beginning the first year the enterprise becomes profitable).
The following industries will be prioritized for equitization7
* trade;
* tourism;
* transport;
* consumergoods;
* service industries.
The following industries will be prohibited or discouraged from equitization:
* utilities and infrastructure (telecommunications, electricity, steel, cement);
* national defense;
* petroleum;
* highly profitable businesses.
SOE's that are currently highly profitable, such as petroleum and even certain beer and tobacco companies, may continue to be held by the state. Equitization of banks is a complicated issue because the State Bank doesn't want to give up control of the banks, yet banks need to generate a substantial capital base most of all.
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THE THREE BASIC TYPES OF COMIPANIES TO SELL EQUITY
Former state owned enterprises:
Although SOE's control 75% of Vietnam's assets and are responsible for 40% of its GDP, they are usually in dire need of major restructuring and lacking modem capital equipment and experience. SOE's still have monopolies in exporting rice, timber, and rubber as well as importing gasoline, fertilizer, iron, steel and cement. They also often have exclusive distribution rights over cement, gasoline, electric power and telecommunications. They will often be equitized in order to raise capital for the state and perhaps for the company, to create incentives through employee ownership and to weedout inept management and employees.
The government will retain a minimum of 30% of the total capital in the company. The government’s shares will either be held by the ministry responsible for the SOE or else an impartial government body will specifically be established to hold state assets. Their representation and power on the board of the company win only reflect the proportion of their equity share. The government will have no special veto powers, however they obviously have the power to significantly influence the workings of the company through legislative and executive actions involving such things as distribution rights, land rights, tariffs, taxes, legal issues, judicial protection, government contracts, etc.
Employees of the company will usually be offered about 40% ownership. Roughly half of their shares can be bought on credit (owed to the company at a 0 to 3.5% annual interest rate which is substantially less than the 21 % market rate) and must be paid back before the shares are transferable. However some employees are wary of buying shares after having been subjected to forced bond sales (at low rates) in the past. For instance, people were forced to buy bonds with negative real interest rates in order to finance the construction of the northsouth powerline. There is another instance of employees at a cement company having been forced to finance their company's project at poor rates.
The remaining shares (20 to 30%) will usually be held by domestic and foreign investors. Simple mathematics reveal that roughly only half of the initial market capitalization will be immediately substantiated by cash proceeds from the sale (i.e. 20% from the employees and 30% from outside investors).
Former private companies:
These businesses originate in the private sector and are usually only marginally profitable as far as public disclosure goes (despite the numerous Mercedes in Vietnam which are purchased on top of a 200% luxury tax). They are generally very small (in relation to some SOE's) and are unlikely to be equitized in the next few years. Although they probably have more efficient management (their family) than the SOE's, their capital equipment is often just as outdated and they may see the issuing of equity as a way to raise capital as well as the value of their own remaining shares in the company. Among these companies are likely to be found a few miniature versions of overseas Chinese style realestate, trading, manufacturing conglomerates with influential links to the Chinese business world. Certain garment manufacturers seem to be at the forefront of these.