Equitisation should ensure that firms will have a sound corporate governance system

At last week’s Vietnam Access Day in Ho Chi Minh City, 350 participants from leading investment funds, financial institutions, and listed firms discussed the role of equitised state-owned enterprises (SOEs) in developing Vietnam’s stock market, among other pressing topics. The three-day event, organised annually by Viet Capital Securities, is a platform for market participants from Vietnam and overseas to exchange ideas and network.

During his speech, Aaron Batten, country economist at Asian Development Bank, called for the urgent need to restructure Vietnamese SOEs. According to Batten, Vietnam’s output per worker has actually fallen in recent decades, in counter-direction to the country’s fast economic development, due to low productivity at SOEs. The inefficient state firms have soaked up the majority of capital and enjoyed monopolistic rights, dragging down Vietnam’s productivity growth.

“Vietnam’s labour productivity gap with the US has risen from 89 per cent in 1990 to 97 per cent in 2014, while other emerging markets like China or Indonesia have reduced this gap. Equitising SOEs will help Vietnam make better use of its capital and human resources and focus on research and development, as well as encourage market competition,” said Batten. “This is crucial for a sustainable future, especially as Vietnam’s ‘golden population’ advantage is going to fade in the next two decades,” he added.

Meanwhile, Nguyen Xuan Thanh, director of the Fulbright Economics Teaching Programme, noted that Vietnam has accelerated SOE equitisation and state divestment to offset its growing fiscal deficit. SOEs are also important for the growing capital market.

Last December, the government issued Decree 58/2016, which specifies which SOEs are due for equitisation between now and 2020. This is considered an important guide in the equitisation process, and it also gives investors advance notice on which SOEs are slated to join the stock market.

Thanh predicted that in the coming years, Vietnam will prioritise selling state stakes in leading blue-chips such as Vinamilk, Sabeco, and Habeco. The next SOEs on the withdrawal list are those owned by the State Capital Investment Corporation, firms in infrastructure or utilities, and lastly, subsidiaries of the SOEs.

With the next batch of SOEs going on sale, foreign investors will have a wide range of opportunities.

Ngo Vinh Tuan, head of investment banking at Viet Capital Securities, noted that investors have been “very keen” on joining the sale of SOEs, especially those in energy, telecommunications, and infrastructure.

“Vietnam has strong macro-economic fundamentals and lower valuations than its peers. Foreign ownership limits are also being phased out, and we’ve indeed seen increased interest from large overseas investors in Vietnam. Notable SOE listings and equitisations in 2017 will include Saigon Trading Group, PV Oil, Vietnam Cement Industry Corporation, PV Power Corporation, and Mobifone,” Tuan said.

However, most experts agree that despite the great potential of SOEs, there is still a lot to do. Vietnam has reduced the number of SOEs from 6,000 in 2001 to 718 in 2016, but the state still holds 90 per cent of stakes in these equitised firms. As a result, little has been changed in terms of corporate governance, business performance, and competitiveness.

The speakers at Vietnam Access Day thus urged Vietnam to focus on quality when equitising SOEs, making sure that the firms are truly transformed into a competitive business with strong corporate governance standards.

According to Don Stokes, partner at law firm Freshfields Bruckhaus Deringer, some SOE leaders remain hesitant to let outsiders join in running the firm. Fear of losing their know-how and control to “strangers” has prevented these leaders from selling significant stakes to outside investors.

“Another issue is pricing. The government wants to maximise its profits via SOE sales, thus the price quote can be higher than what investors are willing to pay. Moreover, pricing remains opaque as valuation is carried out by local valuators and does not take into account the SOEs’ land use, monopoly rights, and other advantages,” Stokes said.

One recent example is Vinamilk’s 9 per cent share sale last December, which generated fiery interest from investors beforehand but left half of the shares on offer unsold. Experts have pointed out that Vinamilk’s pricing and the valuation process itself have flaws – which should be a good lesson for future SOE share auctions.