Vagueness of government divestment plan could discourage investors

By Ngan Anh, Thanh Nien News

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A milk production line at a Vinamilk factory. Photo: Hoa Quynh A milk production line at a Vinamilk factory. Photo: Hoa Quynh

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Foreign investors are possibly looking forward to the government’s disinvestment in 10 major companies including dairy giant Vinamilk and information technology leader FPT.
But economists say it is too early to say if they would buy large numbers of shares in these firms since the government has not yet announced the time frame for the stake sale or foreign ownership cap in the companies.
Sovereign fund State Capital Investment Corporation (SCIC) has been instructed to draft detailed plans for the divestment, including the time frame involved, and submit them to the government for approval.
The stakes are estimated to be worth at least US$4 billion, more than half of it in Vinamilk, in which the government owns 45.1 percent.
Vinamilk dominates the local dairy market and is one of the most sought-after equities in the country. Its value has climbed 10 times in the past decade, making it a rare success story in a state sector plagued by bad debts, inefficiency and low profitability.
Dominic Scriven, general director of Dragon Capital, the country’s first and largest foreign investment fund, said the move is a breakthrough for the stock market, which is failing to attract foreign investors because of many barriers and a meager supply of attractive stocks.
Overseas remittances and FDI actually disbursed were both worth $12 billion last year, while foreign investment in the stock market fell to a mere $122 million from $234 million the previous year.
The government’s disinvestment from some of its best firms like Vinamilk and FPT would mean more opportunities for foreign investors to acquire blue chips, he said.
They are expected to be the choice of foreign investors also because many of the other good firms are too small to make them viable investments for large institutional funds.
Talking about the disinvestment road map, Lai Van Dao, the general director of SCIC, said it has not been decided yet.
The fund would have to carefully assess things to get the best prices, he said.
But this is precisely the sticking point for investors especially since plans for selling the government’s stakes in many firms have been delayed for years.
Investors had to wait for six years for an initial public offering by Vietnam Airlines. Finally the IPO was held last November, but attracted little interest from foreign investors. Of 49 million shares, equivalent to a 3.5 percent stake in the company and valued at about $1.5 billion, only over 120,000 were bought by foreign investors. Two local banks bought some 48 million.
Foreign investors’ interest in a company will also depend on the foreign ownership cap.
The current 49 percent foreign shareholding ceiling in Vinamilk has long been reached, and new rules allowing 100 percent foreign ownership in many sectors remain unclear, with investors awaiting clarity on definitions and regulations.
The government has recently allowed the elimination of the cap in listed companies. Some sectors will however continue to have restrictions.
Restrictions still apply in sectors where foreign investment is conditional. However, the government has yet to spell out which companies or sectors will be excluded from this, aside from banking, where foreign ownership is still limited to 30 percent. This could be a hurdle to foreign investment inflows into the market.
In most well-run companies like Vinamilk and FPT, the limit has been reached. Strong demand from foreign investors for attractive companies has created an alternative off-market system in Vietnam: foreign investors charge other overseas investors a premium of up to 15 percent for them.
Another issue that could affect foreign investors’ decision to buy is the size of the stake on offer.
They may be reluctant to invest if it is too small since they cannot then influence strategic decisions in the company.
Foreign investment is considered one of the keys to growing the Vietnamese stock market, which is around one-eighth the size of the Singapore bourse, Southeast Asia’s largest.
A vaunted program to equitize, or partially privatize, hundreds of state-owned enterprises (SOEs) has consistently failed to reach its targets, and many investors have been put off by poor transparency, the small stakes on offer and unrealistic valuations.
Administrative procedures are also a hassle for foreign investors, according to insiders. To trade, foreign funds need to be locally registered, which can take months, leaving many reliant on specialist funds already established in Vietnam or looking to gain exposure through indirect investment products such as exchange-traded funds.
This year the government planned to equitize nearly 300 SOEs, but only managed 109 to date.
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Deputy Minister of Finance Truong Chi Trung said the divestment would help the major firms attract new investors, which could improve their corporate management.
SCIC, which was set up in 2005, had sold government stakes in 724 businesses for more than VND6.25 trillion ($276.82 million) as of 2014, according to its latest report.
It manages assets worth around VND69 trillion ($3.05 billion).
To get the best prices for their shares, the 10 major firms should be widely marketed abroad.
Vietnam has had experience with such programs. To issue US$1 billion worth global sovereign last year, the country hired three foreign banks, Deutsche Bank, HSBC, and Standard Chartered Bank, to help attract international investors.
Meetings are scheduled with potential investors in Singapore, Hong Kong, London and three cities in the US, the finance ministry has said.
The banks will organize road shows.
The more investors evince interest in the government’s divestment plans, the more likely the 10 firms’ shares will fetch high prices.
Vietnam is trying to speed up a share sale program that began in the 1990s as it seeks to spur economic growth to a four-year high of 6.2 percent this year.

 

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