The SOE equitization process has yielded mixed results over recent months. 

Vietnam has come a long way since 1986, when it first launched the reform process that gradually and successfully shifted the country to a market-oriented economy. But loosening government control over some 4,500 State owned enterprises (SOEs), many of which dominate key economic sectors such as energy and petroleum, is still unfinished business. 

Embarking on a staggered equitization drive over the last decade which has, thus far, failed to raise Vietnam the funds it has been looking for to reduce its debt burden, the government now finds itself up against a wall, leaving only a quick sell-off of State assets as the easiest way to bring in capital. Foreign investors and bankers, who flocked to Vietnam over recent decades seeking to cash in on government plans to sell State assets but have been left frustrated by reality falling short of promises, are finally seeing grounds for optimism.

The good

In a series of recent moves, authorities have indicated that 2018 will be the peak year for equitization. 

After raising $6 billion from sales in 2017, with $5 billion going straight into the foreign exchange reserve thanks to the disposal of the country’s top brewer, the Saigon Beer Alcohol and Beverage Corp. (Sabeco), the government plans to sell 6.5 times more shares than it offered last year. 

Stakes in 245 SOEs are up for grabs in 2018, including five leading companies in energy, power, rubber, and petroleum in the first quarter, Deputy Prime Minister Vuong Dinh Hue said in a January interview with foreign media.

At the time of writing, the first batch of sales has been completed. The government successfully raised VND5.57 trillion ($245 million) from selling a 7.79 per cent stake in the Binh Son Refining and Petrochemical Co. (BSR), which operates Vietnam’s first oil refinery, the $3-billion Dung Quat, in a January 17 IPO, with proceeds well exceeding the planned $155 million. 

Demand at BSR’s IPO outpaced supply by 2.7 times, with overseas investors buying a total of 4.77 per cent IPO. 

The company was supposed to launch its IPO on November 7 but it was pushed back not only for it to sell a larger stake but also to obtain a better return.

The next step is to find global partners. A further 49 per cent will be sold to strategic investors, both domestic and foreign. 

Even though its foreign ownership is capped at 49 per cent, “the list of potential investors includes Spain’s Repsol Group, two major oil and gas corporations from the US, South Africa’s Macron Petroleum, and an investor from Brunei,” BSR CEO Mr. Tran Ngoc Nguyen told VET, adding that the company has sent an invitation to investors on filing applications to become strategic investors. 

“If more than three investors meet the criteria, BSR will hold an auction,” Mr. Nguyen said.

Second in line for divestment was PetroVietnam Oil Corp. (PV Oil), another unit of the State-owned oil and gas group PetroVietnam. 

With a gas network stretching through Vietnam and Laos, the country’s sole crude oil exporter raised VND4.1 trillion ($185 million) on January 25 from the sale of a 20 per cent stake. 

PV Oil CEO Mr. Cao Hoai Duong told VET that the IPO attracted 3,000 investors and the amount raised was almost double expectations. 

A further 44.72 per cent will be sold to strategic investors, both domestic and foreign, with Anglo-Dutch oil giant Royal Dutch Shell, Japan’s Idemitsu Kosan, a founding shareholder of Vietnam’s private low-cost airline Vietjet Air, and five other companies reportedly coming forward as possible strategic investors in PV Oil, which plans to raise its market share in the country’s retail fuel distribution to 35 per cent from 22 per cent from now. 

The bad

While it’s true that the equitization process has picked up pace since Vietnam’s leadership transition in April 2016 and that Decision No. 58, stipulating which SOEs will be equitized and by how much and which was signed by Prime Minister Nguyen Xuan Phuc in December, provided an additional boost, BMI Research, a Fitch Group company, highlighted in a February report that SOE reform has focused chiefly on targeting the sale of minority stakes, while the government remains reluctant to cede majority control, even in cases when there is no restriction on foreign ownership.

One specific area in dire need of extensive equitization is the energy sector. The issue of power shortages could come to a head over the next three years, with forecasts predicting that annual growth in electricity consumption will start to match and then possibly outpace installed capacity growth. This gloomy scenario is looking increasingly likely, considering that foreign direct investment (FDI) into the manufacturing sector, which accounts for 50 per cent of total electricity consumption, has doubled over the past four years, reaching $63.1 billion. Luckily for businesses, the government is keen on keeping this development trend going and on having the electricity to power it. 

The third of the quartet was PetroVietnam Power Corp. (PV Power), the country’s second-largest electricity producer after Electricity of Vietnam (EVN). The deal structure has been revised a number of times, but the government finally decided it will retain a 51 per cent stake, selling 28.9 per cent to strategic investors and 20 per cent through public equity markets. 

PV Power, which produces and distributes electricity and supplies coal, said it raised roughly VND7 trillion ($308.1 million) from the January 31 IPO, slightly exceeding the government’s target of $297 million. “PV Power is in a favored sector and had good assets, particularly on the gas-powered side,” one overseas investor among those that bought 12.15 per cent of the company at the IPO told VET.

But despite the government’s willingness to liberalize the sector, buyers shunned the IPO of Power Generation Corp. 3 (Genco 3), Vietnam’s second-largest power generator by installed capacity. While the government offered a sizeable 12.8 per cent in EVN’s power generation unit, investors bought less than 0.36 per cent at the IPO on February 9. The $8 million raised fell far short of the government’s target of $290 million, with local bankers citing a high valuation and a heavy balance sheet for what was previously considered an irresistible offer.

With a price-to-earnings valuation of 19 times compared to an average of 15 at its regional peers, Genco 3 is not only more expensive than PV Power, which is valued at a price-to-earnings of 13 times, but its prospects are also not as promising as PV Power, analyst Mr. Duong Trong Vinh from Saigon Securities Incorporation told VET, adding that the latter’s power plants were more efficient. 

Though Genco 3’s debt-to-equity ratio had fallen to 6.5 by September last year from 8.8 in 2016, debt remains a concern, particularly given the currency risk on its foreign lending. Others factors weighing on the Genco 3 share sale may have been the 36 per cent strategic investors were offered, which would still leave the State with a majority, and a shortage of investor funds after previous IPOs, Mr. Vinh said.

The ugly

When it comes to boosting revenue, the clock is ticking. Vietnam needs huge infrastructure investments, but State revenue is projected at $58 billion in the 2018 budget, with expenditure at $67 billion. The expected $9 billion deficit will have to be covered by borrowings, while payments on the principal will total $7 billion this year. The government can boost its coffers with smooth listings and IPOs of major SOEs and their affiliates, and by letting foreign strategic partners participate in the management of firms to make them more competitive globally.

But foreign ownership rules, a slew of upcoming IPOs, and ethical issues may have curbed investor appetite. 

The Vietnam Rubber Group (VRG), the country’s leading rubber plantation and processing company, was only able to sell 21 per cent of the shares offered in a February 2 IPO; a disappointing result that follows at least two unsatisfactory auctions of SOEs in the second half of 2017. 

A total of 100.7 million shares were sold out of the 475.1 million shares on offer at the auction at the Ho Chi Minh Stock Exchange (HoSE), with proceeds of $57 million being far below the government’s target of VND6.2 trillion ($273.4 million).

Given the contrasting IPO outcomes for energy-related companies and VRG, one analyst said the rubber company was not ready to go public. 

It already delayed its IPO last year, citing the decline in the global natural rubber price, while the group’s complicated corporate structure was another inhibitor. Ongoing investigations into the group’s losses have also discouraged investors. 

The company said following the auction that it will ask the government to change some of the conditions for investors, including raising the foreign ownership limit and allowing foreign investors to bid for a strategic stake later.

Market players said the IPO setbacks might not necessarily be a sign that investors were turning their backs on the equitization campaign, but it definitely means investors will be more choosy, as Vietnam wants foreign money to overhaul the economy this year. 

“There will be both IPO flops and triumphs this year,” Mr. Minh said. If the upcoming offerings prove successful and strategic investors come through, Vietnam’s SOE reforms will gather steam. Conversely, a failure to ensure transparency could prompt global companies to turn their backs. Either way, Vietnam is approaching a pivotal moment after years of talk.

VN Economic Times