The progress of Vietnam as an investment destination and a capital market has been among the most erratic in the region over the last 20 years, with fervour regularly replaced by bearishness and back again. But a string of deals suggest that the market may be developing a level of depth and stability.
The latest is the $708 million initial private offering by Vincom Retail, which priced near the top of its range on October 27. Vincom is the largest retail developer, owner and operator in Vietnam and holds 60% of the retail mall sector in Hanoi and Ho Chi Minh City combined.
With cornerstone investors including Franklin Templeton, HSBC Global Asset Management and funds managed by Singapore’s sovereign wealth fund, GIC, taking 59% of the deal, it looks every bit the successful modern capital markets deal.
It is the largest-ever share sale from Vietnam’s private sector. But it is not quite representative of a host of other Vietnamese issuers that might hope to come to the markets.
In particular, this is not officially an IPO, no matter how many times it has been described as such elsewhere. It represents a sale of stakes held by Warburg Pincus and Credit Suisse, both of which were early investors in the company.
“There is a confluence of a few one-off factors,” concedes one person close to the deal.
“It helped us dramatically that Warburg Pincus has been an investor for a number of years,” notes another. “Once a global PE is in there, investors can be sure certain governance structures will be in place. That’s a good backdrop upon which to build.”
Nevertheless, it is a highly important deal for an economy that is still classified as a frontier market, and therefore faces far bigger hurdles in attracting capital than an emerging market. For comparison, around $2 trillion of investable assets track the emerging markets and $20 billion the frontier markets.
“To be able to pull off a deal like Vincom, being primarily targeted to foreign investors, is going to be pretty huge for Vietnam,” says one observer.
It also uses a structure that will allow it to settle in a matter of days rather than the six to eight weeks commonplace in Vietnamese listings: the company lists first and then the equity offering is settled on market in the form of listed shares, which then settle in a standard T+2 timeframe. Formal listing happens on November 6 and the placement will cross the market a day or two thereafter.
“There’s no real magic in the structure,” says one close to the deal. “Effectively what’s happening is a company being listed and contemporaneously a large block of existing listed shares being sold by an investor. It’s something companies will have to think about: if this one goes well, investors will have a similar expectation of other deals.”
The preferred term for this structure is either an initial private offering or an initial equity offering.
It follows the $167 million IPO of VietJet in February.
Investor attitude to Vietnam tends to fly around a fair bit but has been consistently strong this year. Vietnam boasts one of the most impressive rates of growth in the world: 6.4% GDP growth year to date, with a full-year target of 6.7% and a target for 2018 in the same area.
|Natasha Ansell, Citi|
“The economy is growing on the back of sustained diversification of the economy over the last 20 years, from agriculture to industrial and now services.” (Citi is a bookrunner on Vincom, alongside Credit Suisse and Deutsche, but she was unable to comment on the deal as it had not priced.)
Foreign direct investment in Vietnam has been dominated by Japan and Korea, with companies from both countries setting up manufacturing hubs.
“That reflects three things,” says Ansell. “One is a country with 95 million well-educated, high work ethic people.”
Another is the distinctive nature of consumption trends in Vietnam, which she says belie the country’s modest per capita income: “Consumers here are willing to pay for quality. They are not shopping around to save 2 or 3 cents and showing no brand loyalty.”
That, in turn, means that a company setting up a manufacturing hub can do so in expectation of an attractive domestic market, as well as a comparatively low cost of labour.
The third point Ansell makes is that there is no immediate alternative to Vietnam for manufacturing. “The next frontier countries are much smaller and are really not coming up the curve any time soon. That gives an element of sustainability to Vietnam’s growth.”
Despite that impressive macro background, it would be hard to argue that the development of the country’s capital markets has kept pace, which is why the Vincom deal is being so closely watched. Foreign investors have been keen, but there is a lack of institutional strength in the domestic markets.
“One thing I would like to see is the building up of a domestic investor base,” says Ansell. “That hasn’t happened yet. But the interest of overseas investors is definitely on a rise and it is significantly contributing to the immediate support of the market.”
The deal helps to bolster a market with a higher capitalization than some nations, like Pakistan, that are now classified as emerging markets rather than frontier by MSCI, but Vietnam remains in frontier status because of corporate governance concerns and issues about the accessibility of Vietnam for foreign capital.
MSCI Emerging Markets status “is an aspirational goal for Vietnam, and they do see themselves getting there,” says Ansell. “But they feel that for now the matching of supply and demand, in terms of issuers and foreign financial investors, is fine without being in the [EM] index.”
Bankers tend to see more opportunity for potential issuance in the corporate sector than from banks, a sector that is overcrowded and rife with troubled loans.
“The corporate sector is a different story – it is many different stories,” says Ansell.In fact, more issuers have listed than is commonly realized – over 700, 23 of them with a market capitalization of over $1 billion.