Group, the largest fund manager in Vietnam overseeing some $1.5 billion in assets, expected more companies will lift their foreign ownership limits (FOLs) and the government will quicken the equitization process of state-owned enterprises (SOEs) to capitalize on foreigners’ interest.
Slow Pace of Foreign Ownership Expansion
Six month after the government announced the easing of the FOL in local firms in June 2015, only brokerage house Saigon Securities (SSI) increased its foreign room to 100%. In the first quarter of 2016, two other companies namely pangasius exporter Vinh Hoan Corp (VHC) and bedding manufacturer Everpia (EVE) joined the club.
According to VinaCapital, the factors that have contributed to the slow removal of foreign holdings are:
First, lack of clarity regarding allowed sectors. Companies operating in “strategic” or “conditional” sectors are limited in their ability to expand FOLs, of which there are 267 such sectors. Banks’ foreign ownership remains capped at 30%, while sectors such as telecommunications remain capped at 49%.
Second, uncertain/conflicting legal issues. While companies may have the legal right to expand their FOLs, other laws make it impractical or even impossible. While other reforms announced in 2015 allow foreign businesses to “own” a certain amount of property, there remain limits. As such, while real estate firms can open to 100%, such a move would limit their ability to build land banks.
Third, wait-and-see. Given some of the uncertainties, most companies would rather let others take the lead on the issue and see how those companies fare before committing to such a move themselves.
Fourth, loss of control. Many of Vietnam’s companies are family-owned and operated, and as much as they might welcome additional investment, concerns about losing control or outside meddling outweigh the desire for more capital.
In the “sensitive” banking sector, VietinBank (CTG) and Vietcombank (VCB) have reportedly proposed increasing their FOLs to the respective 35% and 40%, above the permitted 30%.
“While some exposure to particular bank stocks may be worthwhile, strategic foreign investors are unlikely to be interested in the sector unless FOLs are expanded beyond 50%,” said VinaCapital.
Dairy producer Vinamilk
(VNM), the country’s largest publicly-traded company with a market value of over $7 billion, last month announced that it would completely eliminate its FOL.
A production line of Vinamilk. (Photo: Internet)
“VinaCapital applauded the move, and believes that it could be a positive catalyst for the market,” the fund said.
However, the government’s investment arm, State Capital Investment Corporation (SCIC), which holds a 45% stake in Vinamilk, has dropped the firm off the list of investee companies it plans to divest in the remainder of 2016.
In total, fewer than 20 companies have taken any action on FOLs at this point. While any movement is encouraging, these companies represent a fraction of the 689 companies listed on Vietnam’s two stock exchanges, and are mostly small- or mid-caps.
Foreign Investors Disappointed with SOE Privatization Progress
Despite the government’s progress in reducing the number of SOEs, foreign investors are somewhat disappointed with the pace as “the stakes sold have been minute, valuations too high and the process too slow.”
The initial public offerings (IPOs) of the largest companies in the country, including retailer Saigon Trading Group (Satra), real estate developer Ben Thanh Group and telecommunications provider MobiFone are on the radar of domestic and overseas investors.
However, delays and unfulfilled promises in the privatization process have left many foreign players skeptical as to whether some parts of the government are fully committed to seeing these through, VinaCapital commented.
Investors are waiting for the IPO of MobiFone, the second largest mobile network operator in Vietnam. (Photo: Internet)
The fund manager deemed that the country’s growing fiscal deficit will put the government under pressure to take actions regarding IPO, secondary offerings or expansion of foreign room.
Vietnam’s public debt has exceeded 62% of GDP, or just 3% below the safety line, limiting funding for infrastructure projects, which are needed if the country is to continue to be attractive for foreign investment and continued development.
In addition, as Vietnam is moving toward a lower-middle income country, the World Bank is set to halt providing official development assistance (ODA) as of July 2017 and the Asian Development Bank (ADB) will likely do the same in early 2019.
Finally, continued low oil prices and a drought that has decimated large parts of the agriculture sector will bring in less revenue for the foreseeable future.
At a time when the government plans to borrow more than $20 billion, foreign ownership expansion would seem to be an expeditious way for the state to exit ownership stakes in non-strategic companies and raise much-needed capital.
Continued reliance on still-strong FDI
is an easy path to take, but one that will reach a dead-end at some point, VinaCapital warned.
Foreign investors have once again turned their attention to Vietnam, which has positive economic momentum, with some of the highest GDP growth in the world. But for the country to capitalize on that, and benefit from the “risk-on” money that seems to be coming back to frontier and emerging markets, it needs to act now, VinaCapital said.