Sunday, December 23, 2007

The World Is Watching Vietnam's Big IPO

Hopes are riding high, but lackluster interest in Vietcombank's privatization means there could be trouble ahead

The long-awaited and oft-delayed initial public offering of Vietnam's largest state-owned bank is finally under way. The deal for Vietcombank is expected to raise $600 million—or more than the entire market capitalization of the Ho Chi Minh Stock Exchange just two years ago.

While the partial privatization will only see 6.5% of the bank's shares sold, the deal is being watched closely by foreign and local investors alike. Its success or failure will play a big part in determining whether other coveted state assets will follow. "The sentiment is this is the gate in front of the flood of central state privatizations," says Tung Kim, a managing director at Indochina Capital, a investment bank in Ho Chi Minh City. "Symbolically and politically this is true."

To date, few Vietnamese companies have had enough heft for foreign investment funds to consider. More than $9 billion has been raised globally for investment in Vietnam—from high-net-worth clients in Zurich, hedge funds in New York, retail buyers of mutual funds in Hong Kong, and more—but some $2 billion of this still hasn't been deployed, for lack of investment opportunities. Foreigners are restricted from holding more than half of listed companies, and they can own just 30% of banks such as Vietcombank.

Price is Unjustifiably High

Initial indications suggest the Vietcombank deal is proving a tough sell. The issue was only oversubscribed by 1.25 times according to preliminary figures—compared with recent Chinese debuts that have seen demand exceed the shares on offer by 100 times. Shares in Vietnam are sold in a Dutch auction process, where investors first pay a deposit to participate. Then once the level of interest has been determined, investors make bids for lots of shares at a given price. The highest bidder gets the first lot of shares, then lower bids are fulfilled until all shares are sold.

The problem with Vietcombank is that the government has set a price floor of $0.62 per share that many seasoned investors find unacceptable. "We are content to let that [IPO] go by," says Andrew Leahy, a director of Dragon Capital in Ho Chi Minh City, a fund manager that has more than $2 billion under management. He says Vietcombank's price-earnings ratio of 78 based on 2007 results is unjustifiably high. Sacombank, a smaller listed commercial bank, is trading at just 19.7 times earnings.

Others point out that in many countries, bellwether privatizations are generally priced so IPO investors can make money once trading begins. That paves the way for successive privatizations, says Garry Evans, an HSBC Asia equity strategist in Hong Kong. "In this one, they are trying to take all the money off the table at stage one," he says. "This could derail privatization." Evans is also worried investors may forfeit the 10% deposits required to participate in the auction and never take delivery of their shares. During a botched IPO by Vietnam Insurance, or Bao Viet, more than 30% of investors did just that. Results of the auction will be published on Dec. 26.

Put Off By Vietnamese System

The lackluster demand may be partly due to a government clampdown on the banks. Bao Viet, for instance, was oversubscribed by 6.6 times earlier this year, but at the time, banks were willing to loan investors as much as 70% of the value of the shares they bought. The government has since tightened regulations on banks and brokerages, allowing them to lend no more than 3% on margin. The interest in Vietcombank "is quite impressive, since demand is not as reliant on credit as in the past," says Jonathan Waugh, director at PXP Vietnam Asset Management. "We all hope that those successful at this auction will go on to take ownership of their shares."

The Vietcombank deal underscores another peculiarity of the Vietnamese system—the way the price strategic investors will pay for a stake in an enterprise is determined. Rather than sell such stakes before an IPO, as China has done during its state bank privatizations, prospective investors in Vietnam must agree in advance to pay an average of the auction price. Earlier this year, several possible strategic investors in Vietcombank—including GE Money (GE) and Nomura Holdings of Japan —were reported to have shown interest but were unwilling to pay more than about 42¢s; per share.

Despite the worries over Vietcombank, the longer term prospects for Vietnam's stock market look strong. GDP growth has averaged more than 8% for the past few years. Multinational heavyweights such as Intel (INTC), Canon, and Compal have poured billions into manufacturing to take advantage of Vietnam's industrious workforce. And in January, Vietnam was admitted to the WTO. Although growing inflation could be a concern, Vietnam's population of 84 million, half under the age of 30, could still make it Asia's next economic tiger.

Balfour is Asia Correspondent for BusinessWeek

Balfour is Asia Correspondent for BusinessWeek based in Hong Kong .