Investors are waiting to swoop down and pick up Vietnam Airlines’ new shares on HSX

The Ho Chi Minh City Stock Exchange (HSX) has approved the listing of 1.4 billion shares of Vietnam Airlines (VNA) (ticker: HVN) at the price of VND10,000 ($0.43) per share. Total assets are at VND82.4 trillion ($3.58 billion), and chartered capital is nearly VND14.2 trillion ($617.4 million), with the state holding 86.19 per cent.

This information pushed HVN up on the unlisted public company market (UPCoM) on April 12 by 4.6 per cent, reaching VND40,900 ($1.78) per share. As planned, the airline will stop listing on UPCoM on April 22.

Short-term effects

Analysts are upbeat about the listing, although they believed that the good news can only bring short-term effects. Researchers at Ho Chi Minh Securities were positive about the HSX debut for Vietnam’s flag-carrier, stating that stock is likely to enter the VN30 Index for the 30 biggest Vietnamese stocks. Inclusion in the VN30 is important as it enables the airline to join in the investment list of various backers, from active ones to exchange-traded funds.

“The HSX listing will improve the liquidity of the airline’s stocks and financiers can borrow money to invest in the stock six months afterwards,” stated the analysts.

Evidently, VNA is appealing to investors thanks to its solid performance in 2018, and future growth potential of the aviation industry, which saw an on-year increase of 12.9 per cent in passengers and a 7.7 per cent on-year rise in cargo volume in 2018. It is also forecast to gain an average growth rate of nearly 14 per cent in the next five years, reaching 150 million passengers by 2035.

According to analyst Che Thi Mai Trang at Bao Viet Securities, the Hanoi-based airline improved profitability in 2018 thanks to better management of the cash flow and a lower ratio of debt over owner’s equity, at only 2.07 compared to 5.13 in 2015. Although fuel costs went up by 25 per cent in 2018, the airline still made profit thanks to hiking fare rates. Another strong point for VNA is that its low-cost subsidiary Jetstar finally reached break-even point last year, building a strong foundation for the years ahead.

“VNA is likely to receive strong attention from overseas investors when they make a listing debut on the HSX. This is a positive point for the airline in the short term,” said Trang. She forecast that the after-tax profit of the parent company in 2019 will raise 15 per cent on-year to reach VND2.9 trillion ($126.1 million).

Thomas J. Treutler, partner and managing director of Tilleke & Gibbins Consultants, said that foreign investors will certainly be interested in well-established airlines. Travel to Vietnam for business and tourism will continue to rise, as will outbound travel for home-grown businesses reaching out internationally and Vietnamese travellers. “Domestic travel within the country is also booming with more affordability. Thus, it certainly has the potential for continued development and can be a lucrative investment,” Treutler told VIR.

Industry insiders said that free trade agreements will likely have a positive effect on the Vietnamese aviation sector. As shown in the last several months, various European countries such as Spain and the Czech Republic have announced expanding co-operation with Vietnam in order to increase air travel.

Longer-term prospects

Experts, however, held that recent fleet expansions may bring challenges for VNA. The carrier is scheduled to receive 22 new planes in 2019, a record number compared to the previous five years. Although the airline is confident that passenger numbers will rise by around 14 per cent in 2019, Trang believed stiff competition, slow growth of Vietnam’s airline industry, and stagnating airfares may prevent this.

In addition, international investors might have to wait for more information until the Ministry of Transport finalises divestment plans for the airline, and for the draft amendments to Decree No.92/2016/ND-CP issued in July 2016 on governing conditional business lines in the civil aviation sector. The ceiling for foreign investment in an air carriage business may be raised to 49 per cent from the previous limitation of 30 per cent.

The current free-float rate of VNA is only 20 per cent, due to concentrations of stocks in the government’s hands and the strategic partner Japan’s ANA Holdings, leaving little room for investors to buy. This is similar to other equitised state-owned companies such as Sabeco, whose 90 per cent of shares a decade ago were held by the Ministry of Industry and Trade, and HEINEKEN. It was only in 2016 that overseas investors began to hear of the divestment, in which Thai Beverage emerged as the sole winner in 2017.

Another possible downside is the airline’s debt in foreign currencies, common for airlines. Analyst Pham Van Tuan at Phu Hung Securities pointed out that fluctuations in the exchange rate may hurt the carrier’s earnings, together with rising fuel costs. VNA, as a full-service carrier, also faces competition from low-cost airlines, although it may benefit from business travellers and wealthy passengers.

“The HSX debut may only affect stocks of VNA positively in the short term,” wrote Tuan. Phu Hung Securities advised investors to keep a close watch on the airline for its long-term prospects and consider whether it can manage its finance in a time of stronger oil prices. A conservative forecast for VNA’s stock price, according to Tuan, is VND36,000 ($1.56) per share.

In spite of the possible challenges, the HSX listing is expected to be optimal way for the airline to fulfil its divestment plan on time, as well as be a springboard for multinational corporations to penetrate into the burgeoning market.

VNA is to sell 35.16 per cent of its state stake in 2019, thus cutting state ownership in the airline to 51.03 per cent under the prime minister’s Decision No.1232/QD-TTg released in August 2017 on a list of state-owned enterprises in state capital divestment plans in the 2017-2020 period.

VNA gained a valuable partner in 2016 when ANA, Japan’s largest airline, bought an 8.8 per cent stake for VND2.38 trillion ($103.5 million). It is seen as possible ANA will move on the opportunity to increase its holding in VNA from its current stake.VIR