Vietnam”s Stock Surge Encourages IPOs

Vietnam Airlines aircraft at the Tan Son Nhat airport in Ho Chi Minh City. The flag carrier is one of many state-owned companies that could list domestically this year. Reuters



Rising share prices are encouraging the government, which owns many companies ranging from the country”s flagship airline to its largest brewery, to privatize by selling shares in Vietnam”s capital markets. Officials recently have signaled that they are proceeding with privatization plans, which has bolstered investors” optimism about the government”s intent to liberalize some sectors of the economy.



Some bullish investors say the anticipated wave of initial public offerings is a sign that Vietnam is developing as a so-called frontier market and could eventually appeal to a broader range of money managers. Frontier markets are considered among the riskiest places to invest.



Investors are increasingly turning to smaller economies like Vietnam as growth slows in better-traveled emerging markets such as Brazil and India. Vietnam”s government predicts its export-driven economy will grow 5.8% in 2014, according to local media reports, up from 5.4% last year.



But like most frontier markets, Vietnam”s stock market is small. The roughly 300 publicly traded companies on the Hochiminh Stock Exchange have a combined market capitalization of $43.6 billion, smaller than package-delivery company FedEx Corp. FDX +0.11% Many shares are thinly traded or have caps on foreign ownership, so it can be hard for investors to gain a foothold and even more difficult to leave during times of stress.



As more companies list, it will alleviate some of those fears, said Sean Lynch, global investment strategist at Wells Fargo Private Bank, with $170 billion in assets. "The IPOs in Vietnam this year are a positive" because it expands the options for money managers, Mr. Lynch said. "Deeper markets can absorb more investment dollars."



Shares of BIDV, whose workers are counting money, are to begin trading in Vietnam on Friday. Reuters



He said the bank”s most aggressive funds aim to invest 2% of assets in frontier economies and would potentially buy newly floated shares of Vietnam”s garment, automobile and airline companies when they hit the market.



The Hochiminh Stock Exchange”s VN Index is up 9.4% in January and touched a four-year high this week. MSCI Inc.”s index of Vietnamese shares is up more in 2014 than any other country tracked by the company.



Vietnam sets restrictions on foreign-ownership stakes in local firms, and at least 10 of the country”s 30 largest listed companies are already at their limits, according to data from Ho Chi Minh Securities Corp.



The government is starting to loosen some of those rules. It is set to raise the limit on foreign holdings of Vietnamese financial institutions to 20% from 15% starting Feb. 20. It will likely raise the cap on foreign ownership in other sectors to 60% from 49%.



Kevin Snowball, chief executive of PXP Vietnam Asset Management Ltd., which has $140 million in assets under management, said he may invest in some of this year”s IPOs. He is particularly interested in the planned listings of flag carrier Vietnam Airlines Corp. and apparel exporter Vietnam National Textile & Garment Group, or Vinatex.



"There is very little listed in the stock market that gives you access to [Vietnam”s] export story," Mr. Snowball said.



In this year”s first listing, shares in the Joint Stock Commercial Bank for Investment & Development of Vietnam, or BIDV, will begin trading on Friday. Other companies that have signaled their intention to list include building-materials supplier Viglacera Corp., telecom operator MobiFone and beer maker Saigon Beer Alcohol Beverage Corp., or Sabeco.



"The IPOs are opportunities for foreign investors, who have been waiting for some years for the local market to open further," said Nguyen Duy Hung, chief executive and chairman of Saigon Securities, a broker and asset manager.



Not everyone is prepared to jump in. Some Vietnam-based funds say the country hasn”t fully tackled a long-standing problem of bad debt, particularly among state-owned enterprises. BIDV held its IPO in December 2011 but delayed trading of its shares amid widespread mistrust of Vietnam”s finance sector.



For some foreign investors, Vietnam isn”t big enough to warrant a look. Small frontier markets, they say, could essentially shut down at times of stress, making it hard to take money out.



"Vietnam”s relatively small equity market…and its lack of liquidity make it an unattractive investment option for us," said Audrey Kaplan, senior portfolio manager of the $614.5 million Federated InterContinental Fund.



Others see signs that Vietnam is solving its banking-sector problems, while they predict the IPOs will boost the size and stability of the stock market. Analysts say 2014 will be a big test for Vietnam, particularly as soaring U.S. share prices and an improved outlook for most European economies lure investors back to developed markets.



Bad debt in the banking system was 3.8% of the total, down from nearly 8% at the end of 2012, though some independent analysts say it could be considerably higher. In July, Vietnam formed a state-owned bank to take on financial institutions” bad debt, and the country”s central bank aims to lower the figure to 3% by the end of 2015.



HSBC HSBA.LN -0.74% recently upgraded its outlook for Vietnam to "positive" from "neutral" but warned domestic demand is struggling due to "an overhang of bad debts."



"Foreign-capital inflows will find good opportunities" in Vietnam, said Giang Trung Kien, chief analyst with FPT Securities. "Economic indicators suggest the Vietnamese economic recovery is likely to continue to improve and stabilize this year."