IPOs of Vietnam’s State Owned Enterprises Get Off to Slow Start

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By Edward Barbour-Lacey

HANOI – Initial public offerings (IPOs) of Vietnam’s state owned enterprises (SOEs) are off to a slow start in 2014. According to recently released reports, only a small amount of the shares offered have been purchased, and the majority of those shares have been acquired by local investors rather than the hoped for foreign investors.

The IPOs are intended to revitalize the SOEs and make them more efficient and competitive against the privately held companies that are flowering throughout the country. In particular, it is hoped that foreign investors will bring, along with their money, an influx of modern business practices that will boost the performance of the SOEs.

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In the latest IPO round lasting from January to March, SOEs offered 304.5 million shares. Currently, only 27.4 percent (83.5 million) of the shares have actually been sold. Foreign investors accounted for the purchase of just 10.1 million shares.

Partly explaining the difficulty in selling the shares, the majority of the recent IPOs have been from companies engaged in public works and the property sector – two areas with poor financial performance currently. The government has announced plans to curtail spending in some areas of the public works sector and the property sector remains weak with an oversupply of housing and falling prices.

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Perhaps the biggest cause of the poor showing of the IPOs has been the fact that, along with much of the rest of the world, Vietnam’s economic recovery has yet to really take off. The country’s slow return to growth (GDP growth of 5.6 percent is predicted for 2014) may account for some of the hesitancy of foreign investors.

Sell, sell, sell

The equitization process has been ongoing for some time now, from 2011 to 2013, almost 100 SOEs were equitized. Fifty percent of these companies were owned by the Ministry of Transport.

The Vietnamese government has announced the goal of selling shares in 432 SOEs by the end of 2015. Showing its seriousness, the country is pushing ahead aggressively with this goal, the government recently announced that local authorities, ministries and council chairmen will be held accountable if the equitization process continues to run slowly.

RELATED: Vietnam Predicted to See Rise in IPOs for 2014 as Equitization Continues

The government hopes that the IPOs will reduce the financial burden that the SOEs place upon the country’s finances. Chief executive of investment firm Dragon Capital, Dominic Scriven, was quoted in a recent interview with the New York Times as saying that “the overhaul of state-owned companies could eventually help the government reduce net borrowing but that a more immediate effect would be raising investor confidence.”

A sky-high test for IPOs

An important upcoming IPO is Vietnam Airlines; the company has been tentatively scheduled to offer shares for sale sometime in the second quarter of 2014. Competition has been taking off in Vietnam’s air industry and Vietnam Airlines, once dominant, is quickly losing market share. The privately owned budget airline, VietJet, is quickly becoming a serious contender in the country’s air market.

RELATED: Sky-High Competition: Vietnam’s Budget Airlines

Government owned airlines tend to struggle because of government meddling and it is hoped that foreign investors will bring some much needed expertise and proficiency to the lumbering SOEs.

According to Edmund J. Malesky, a professor at Duke University, “an IPO by Vietnam Airlines might be a trial balloon that leads to systemic economic changes by Vietnamese leaders.” However, investors should watch what happens carefully and be aware that state influence over these companies will be strong for some time to come.

It is possible that Vietnam is currently sitting at the beginning of an upward sloping growth trend that investors can ride to strong returns. GDP predictions for the next few years all show positive growth and there is an energy in the air throughout the country that was missing even just a few years ago. Investors with strong nerves could be well advised to look for opportunities now before prices rise higher.

Dezan Shira & Associates is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in emerging Asia. Since its establishment in 1992, the firm has grown into one of Asia’s most versatile full-service consultancies with operational offices across China, Hong Kong, India, Singapore and Vietnam in addition to alliances in Indonesia, Malaysia, Philippines and Thailand as well as liaison offices in Italy and the United States.

For further details or to contact the firm, please email vietnam@dezshira.com, visit www.dezshira.com, or download our brochure.

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