With economic growth, solid corporate earnings and a rising need for financing among domestic companies boosting stock markets and stimulating private equity activity, Vietnam’s capital markets have grown steadily in recent years. A wave of equitisation of state-owned enterprises (SOEs) is boosting the sector further, while a growing range of indices are broadening options for investors. A new unified index for both of Vietnam’s bourses – the Ho Chi Minh City Stock Exchange (HOSE) and Hanoi Stock Exchange (HNX) – may presage a long-awaited merger, and support further product diversification.
Following the launch of the HOSE in 2000 and HNX in 2005, the market hit a peak in 2007, and then saw a sharp drop in 2008, with around $16bn wiped off valuations amid concerns over inflation, the US slowdown and tightening monetary policy. The recovery was slow at first, but has been gaining pace in recent years. Despite international headwinds, and the impact of Vietnam’s 2012 banking crunch, the market has been growing steadily, with lessons learnt from the 2008 dip. “Stock markets in Vietnam go up and down, but are not as volatile as in many other countries,” Nguyen Thanh Long, chairman of the HNX, told OBG. “One reason is the relatively small share of foreign portfolio investment, another is the better macroeconomic situation.”
Foreign interest is growing, with investors from South Korea, Japan and Thailand among those increasingly active. Singapore and Hong Kong are some of the top sources of portfolio investment. “There’s a growing sense among Japanese portfolio investors that this is a market to be in,” Katsuro Nagai, minister and chief of the economic section at the Japanese Embassy in Hanoi, told OBG. “Major Japanese banks and securities companies are already here.”
For Thai investors, parallels between Thailand’s development path and Vietnam’s, as well as similarities in culture, deal-making attitudes and consumption patterns, make this an obvious market to move into.
“Many Vietnamese stocks also offer relatively good value compared to Thai stock market, with price-to-earnings ratios around 14x, compared to around 20x in Thailand, with some small- to mid-cap companies as low as 10,” Giang Tran, general manager of Thai brokerage KT Zmico Securities in Vietnam, told OBG.
Foreign investors have been put off investing in the market by factors including low liquidity and poor standards of financial reporting, with only a few mostly blue-chip companies publishing financial information in English and adhering to international standards of public disclosure. Investor-relation functions tend to be under-developed. However, standards are improving, partly as the regulator, the State Securities Commission (SSC), more firmly enforces compliance.
International participation in the market is likely to grow following the 2015 Law on Investment, which allowed companies not on a “conditional sectors” list to remove the foreign ownership limit (FOL) subject to the approval of a company’s board, abolishing a previous cap of 49%. Initial interest in raising foreign ownership was somewhat limited, however, in July 2016 Vinamilk, one of the country’s biggest companies, announced that it would be removing its FOL. The company is valued at nearly $8bn and was 49% foreign-owned, with the state owning most of the remaining share. The decision is expected to prompt a flow of FOL changes and prove a major fillip for the market, opening a wider range of stocks to overseas exchange-traded funds and other investors.
As of end-2016 Vietnam’s total market equitisation was $80bn, equal to 42% of GDP, while liquidity rose 39% on the year. There were 590 listed bonds with a total value of VND934trn ($41.8bn), up 22.5% on the previous year. Of the country’s two exchanges, the HOSE is the larger, accounting for 84% of trading value in 2016, and preferred by major domestic private companies, while the HNX sees more activity from SOEs and small and medium-sized enterprises (SMEs).
The HOSE has five main indices: the VNA llshare, VN30, VNMidcap, VN100 and VNSmallcap. The VNA llshare index is the HOSE’s most all-encompassing share index, comprising all listed companies that have fulfilled four basic criteria for inclusion. Indexed companies must have been listed and traded on the exchange for at least six months before the relevant review date. They must also not have violated disclosure requirements or have been subject to control, special control or have been suspended in the three months prior to the review. Companies must also have a free-float ratio of at least 10%, and a turnover ratio of at least 0.05%. As of the end of December 2015 the index had 222 constituents, total market capitalisation of VND1200trn ($53.7bn), and free-float adjusted market capitalisation of VND436trn ($19.5bn). The largest company, Vinamilk, accounts for 18.82% of capitalisation, and the top 10 make up 57.58%.
The VNA llshare rose 9.45% in full-year 2016, following a 4.21% rise in 2015. It has averaged 7.02% growth over the past three years, and 12.25% over the past five.
The VN30 includes the top 20 companies by market capitalisation, with another 10 from those ranked 21st to 40th, selected on the basis of liquidity determined by a six-month average of daily trading volume, but with priority given to existing constituents of the index. As of end-2016 the index had full market capitalisation of VND955.1trn ($42.7bn), with free-float adjusted capitalisation of VND318.54trn ($14.2bn). The index is dominated by its top-10 constituents, which accounted for 78.27% of weighted capitalisation, with Vinamilk alone accounting for 25.75%. The VN30 rose 5.48% in 2016, following a 1.01% drop in 2015.
The VNM idcap index is a market capitalisation-weighted index which measures the performance of 70 medium market-capitalisation companies from the VNA llshare. The VN30 companies are automatically excluded, and the next 40 by market capitalisation are included. The remaining 30 are selected based on market capitalisation, weighted towards current constituents of the index. As of end-2016 the VNM idcap had total market capitalisation of VND186.79tn ($8.4bn), with free-float capitalisation of VND87.49trn ($3.9bn).
The largest 10 companies accounted for 44.2% of weighted capitalisation, and the single biggest for 9.49%. The VNM idcap has been the best-performing of HOSE’s indices in recent years, averaging 18.6% growth in 2012-16 inclusive, and 15.17% in the 2014-16 period. Its pace slowed somewhat in 2016, rising 8.24%, following 17.19% growth in 2015 and 20.42% in 2014. The index’s performance is indicative of the growing opportunities for mid-sized companies in Vietnam.
The VN100 combines the VN30 and the VNM idcap, with 100 firms with total market capitalisation of VND1141.87trn ($51.1bn) and free-float capitalisation of VND406.03trn ($18.2bn) as of end-2016. While a more all-encompassing index, the VN100’s top-10 companies still accounted for 61.82% of weighted market capitalisation, with Vinamilk comprising 20.2%. The index has performed solidly over the past five years, rising by an annual average 12.12%, and more modest 6.61% over the past three years. In 2016 it rose by 7%.
The VNS mallcap index includes all constituents of the VNA llshare outside the VN100 – a total of 122 firms with market capitalisation of VND58.28trn ($2.6bn) and free float capitalisation of VND29.96trn ($1.3bn) as of end-2016. As a large and diffuse index, the top-10 firms account for 27.5% of weighted market cap. The index has clocked up double-digit growth over the past few years, averaging an annual rise of 15.49% over the past five years, and 12.13% in the last three. The average is boosted by a bumper year in 2014, when the VNS mallcap rose 26.64%; in 2016, it was up 8.94%.
Hanoi Stock Exchange
The HNX, Vietnam’s second bourse, was set up in 2005. It has two main markets, the listed exchange and the Unlisted Public Company Market (UPCoM), where investors can trade the stocks and convertible bonds of unlisted public companies. UPCoM is increasingly used as a waiting-room to prepare equitised SOEs until they are ready to be shifted onto the main listed market (see analysis).
To qualify for the listed market, companies must have charter capital of VND30bn ($1.3m) or more, return on equity in the year prior to the application for listing of at least 5%, no overdue debts for at least one year, and no accumulated loss for the application year. They must also have at least 100 investors holding at least 15% shares between them, with voting rights. For listing bonds on the main market, companies must have charter capital of VND10bn ($447,000) or more.
Over the past few years the HNX has introduced a number of indices, starting in 2012 with the HNX30, the top-30 stocks by free float-adjusted market capitalisation. In December 2013 the HNX launched the HNX FF Index, a price index that is based on free float-adjusted market capitalisation, with all listed companies with a minimum free float of 5% included. That same month saw the introduction of several size- and sector-based indices, including the HNX Large Cap Index, the HNX Mid/Small Cap Index, the HNX Manufacturing Index, the HNX Construction Index and the HNX Financials Index.
The HNX listed exchange included 375 companies as of mid-January 2017, with a total market capitalisation of VND156.1trn ($7bn), up from VND151.81trn ($6.79bn) at end-2016. Market capitalisation increased slightly in 2016, from VND151.61trn ($6.78bn) in 2015, but has generally grown strongly in recent years, from VND106.87trn ($4.8bn) in 2013. Total trading value was VND129.65bn ($5.8bn) in 2016, down from VND135.04trn ($6bn) in 2015.
The HNX30 had market capitalisation of VND76.37trn ($3.4bn) at end-2016, up from VND64.11trn ($2.9bn) at the close of 2015. The index, launched with a base value of 100 points in 2012, reached 141.25 at the end of 2016. In 2016 trading value fell to VND62.44trn ($2.8bn) from VND74.93trn ($3.4bn) in 2015.
The HNX Large Cap Index includes up to 50 companies with designated capital of VND120bn ($5.4m) – as of January 2017 there were 48, with market capitalisation of VND100.66trn ($4.5bn) at end-2016, when the index reached 111.47, having been launched at 100 in December 2013. Market cap fell from VND101.74trn ($4.6bn) at end-2015, though was above the VND98.51trn ($4.4bn) registered at the end of 2014.The HNX Mid/Small Cap Index, meanwhile, has a large number of companies – 326 as of January 2017, with total market capitalisation of VND49.47trn ($2.2bn) at end-2016, up from VND41.07trn ($1.8bn) at end-2015. Launched at 100 in 2013, the index reached 150.84 points at the close of 2016.
The HNX Financials Index includes 24 financial services firms with total market cap of VND42.82trn ($1.9bn) as of end-2016, while the construction and manufacturing indices, respectively, included 71 tradeable stocks and total market cap of VND15.5trn ($693.4m), and 121 stocks with total market cap of VND43.05trn ($1.9bn). Launched in 2013, at end-2016 the financials index reached 110.03, the construction index 124.38 and the manufacturing index 192.15, indicative of the strength of Vietnam’s industrial sector.
A major driver of capital market growth is the listing of SOEs. Vietnam has an active programme of equitisation – the conversion of SOEs into joint-stock companies, often with a view to privatisation. The strategy has been to list state companies while retaining a majority shareholding, and then sell stakes off gradually in tranches. In many cases, the first step is inclusion on UPCoM, before the firm is prepared for listing on one of the main exchanges. In October 2016 brewer Hanoi Beer Alcohol Beverage Corporation (Habeco) was included on UPCoM, prior to its January 2017 launch on the HOSE. In January 2017 Vietnam Airlines also debuted on UPCoM (see analysis). Habeco’s Ho Chi Minh City-based counterpart, Sabeco, was listed on the HOSE in December 2016, with 641.3m shares priced initially at VND110,000 ($4.92) apiece. Widely regarded as one of Vietnam’s most promising companies, with 41% of the beer market in 2015 and a valuation of $2bn, Sabeco’s shares soared by the maximum-permitted 20% on the day of listing. A full sell-off is expected in April 2017.
The lifting of the 49% FOL in Vinamilk was expected to be another boost for the market, but the government’s progress on selling its 45% stake has been slower than anticipated. Its offering was capped at 9% of shares, and a decision to limit investors to a 2.7% stake each seems to have acted as a deterrent. In the end, only 5.4% was sold, two tranches to two entities owned by existing Thai shareholder TCC Group for a total of $500m.
Hold-ups to the privatisation process are caused by factors including the fact that it is illegal to sell state assets at a loss, and the associated difficulty of divesting before sale the non-core assets that many SOEs have built up over the years. “One reason that equitisation is not going quickly is valuation, and another is their debt relative to their value,” Alain Cany, country chairman at trading company Jardine Matheson Vietnam, told OBG. “There’s no real mechanism allowing for a haircut, so we need a bankruptcy law for SOEs. But investors have been put off by pricing of SOEs, but they need to see the long term; the value should represent partly the existing value, and partly its long-term potential.”
In October 2016 it was reported that a merger between the two exchanges was in the offing. A combined stock exchange would bring advantages, but has been held back by practical and political challenges. Reports suggest that the new stock exchange would be headquartered in the capital, partly to maintain proximity to government institutions, including the SSC. “A stock market merger would improve efficiency, expand the pool of capital and traders, and boost liquidity,” Anirban Lahiri, senior research manager at VietCapital Securities, an investment banking firm, told OBG. “It would make the stock exchange bigger than the sum of its parts, removing some redundancy for example by reducing back-office costs. There are some clear benefits to scale, and there could be a snowball effect, stimulating growth and drawing more investors.”
Some see the merger as inevitable if Vietnam is to achieve an upgrade to emerging market (EM) from frontier market (FM) status from organisations such as MSCI. Moving up to EM status would open the market to more institutional investors which are barred from FMs, or largely focus on EM exchanges. A reclassification entails increases in market cap and liquidity.
Launched in October 2016, VNX Allshare index includes stocks from both the HOSE and the HNX. At the time of launch, 451 companies accounted for 92% of the bourses’ combined market capitalisation. The index has a base level of 1000, rather than 100, which will allow investors better to monitor smaller fluctuations in the market. The authorities opted for fairly low barriers to inclusion on the VNX Allshare initially. There are currently three criteria: companies must have been listed for at least six months without breaking market rules, have a return ratio of least 0.02% and have a minimum free float of 5%.
The new combined index may also help the development of a derivatives market, which the HNX expects to open in the first quarter of 2017. The market will launch with stock index and government bond futures initially, before expanding to other products. The pace of development is likely to be gradual. The introduction of derivatives is expected to support the overall growth of the country’s stock markets through providing more instruments to hedge risk, attracting more investors.
There has been lively activity in the private equity (PE) space in recent years. Deals in 2016 included VinaCapital’s $9m acquisition of a controlling stake in Thai Hoa International Hospital in Ho Chi Minh City and a $30m investment from the fund and Germany’s DEG in woodworking firm An Cuong, in which VinaCapital contributed 70% and the German partner 30%. DEG, part of German government development bank KfW, is eyeing $100m of investment in Vietnam.
In November 2016 Standard Chartered Private Equity (SCPE) and Goldman Sachs invested $25m and $3m, respectively, in financial technology firm Momo, following a $5.7m injection from the former in 2013. The same month SCPE announced a $40m investment in children’s lifestyle company N Kid, which operates family entertainment centres and retails toys and baby products.
Exits are also picking up. In January 2016 US-based PE firm KKR announced that it had divested its stake in food and beverage company Masan Consumer Corporation through a sale to parent company Masan Group. The fund played a central role in Masan Consumer’s expansion. Masan Group announced in late 2015 that it had agreed a deal to sell a 25% stake in Masan Consumer to Singapore-based Singha Asia Holdings for $1.05bn. Mekong Capital’s Vietnam Azalea Fund also completed four exits in 2016, as it looks to wind up in 2017.
While Vietnam’s growth outlook, political stability and increasing openness to foreign ownership are all strong upsides, some perceive space for PE expansion as relatively limited. “Many big companies are already listed,” said Giang. “Other big domestic players are family-owned and owners are cash-rich and don’t see the need for capital – they want to pass their companies on to the next generation, or sell to a bigger market player. And finally, while SMEs are capital-scarce, they are often too small to be invested in. Few companies have both the ticket size for PE and an investable business.”
The bond market is relatively small, and government bonds (G-bonds) account for 90% the market, according to a July 2016 report by VinaCapital. The state uses bonds to restructure debt and finance infrastructure. Around 80% of G-bonds are bought by local banks, and securities and insurance firms, with the remainder purchased by foreign banks. The government issued VND281.7trn ($12.6bn) in bonds in 2016, 11% more than its target, and aims to raise the ratio of G-bonds to GDP from 21.5% in 2015 to 40% in 2020.
The corporate bond market is worth 2.8% of GDP, according to VinaCapital, having shrunk by half between 2009 and 2014. Companies have traditionally raised capital through bank lending, and the bankruptcy of state-owned shipbuilder Vinashin in 2010 led to a ratings downgrade, with an impact on the whole market. The secondary market has no liquidity, and a lack of a local ratings agency and concerns about corporate governance also crimp growth. However, the market is picking up again. In February 2016 property firm Vingroup raised VND3trn ($134.2m) from a fixed-rate unsecured offering, while banks VCB and ACB made issues worth VND8trn ($357.9m) and VND2.05trn ($91.7m), respectively. Developing the corporate bond market is part of the HNX’s long-term strategy. “Due to huge demand for financing, the corporate bond sector could be the big story of the next few years,” the HNX’s Long told OBG. “Other countries in the region have corporate bond markets worth 25% of GDP.”
After a recovery from the 2008 slump, there is a real sense that Vietnam’s capital markets are picking up the pace of development. Index performance in 2016 was solid, and strong growth should continue to push up earnings and valuations. The coming years should see more listings and a shift of major SOEs from UPCoM onto the main exchanges, where they will be opened to greater foreign investment. The economic logic of creating a single platform is as strong as ever. Even without a merger, efforts to build up the bond market, create a derivatives market and strengthen regulation are likely to continue, benefitting all players.
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