Private Equity Dives Into Vietnam As It Becomes “Hot”Rupert Hargreaves
At the end of last year, Bloomberg reported an interesting statistic from Vietnam. After four years of explosive volume growth, trading on the Ho Chi Minh City Stock Exchange had reached nearly $200 million a day, its highest ever reported level.
This might not be much in comparison to developed equity markets which trade millions of shares every day, but it’s a substantial increase from the total of $50 million average daily trading volume reported four years ago (traded volumes have since gone on to hit $390 million for the first few weeks of 2018).
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The increasing number of deals reflects the positive sentiment surrounding Vietnam’s economic outlook. The country has changed significantly over the past decade thanks in no small part to a banking sector recovery. Vietnam’s banks were the weakest in Southeast Asia in 2012 but have since cleaned up their balance sheets and dramatically increased the size of their loan books. Bloomberg highlights one lender, Saigon-Hanoi Commercial Joint Stock Bank, which has managed to push down its non-performing asset ratio to 1.4% from 5% in 2013 while expanding the size of its loan book to $12 billion from $5 billion.
Banks are not the only ones experiencing a boom. Earnings growth is expected to be around 20% to 25% of this year across the market as the region’s economy is predicted to expand at a rate of 6.7%.
International investors are diving in. Since the beginning of 2018 foreign investors have acquired $432 million of local shares, compared to last year’s total of $1 billion. At this rate, inflows are on track to surpass last year’s total before the end of the first half. Vietnam’s benchmark VN-Index added 14% for the year to February 28.
Private equity is also diving in. The Financial Times reported last week that buyout specialist Warburg Pincus is investing $370 million for a minority stake in Vietnam Technological and Commercial Joint Stock Bank (Techcombank). This is set to become the most massive private equity deal in the country. Last year the firm generated a pre-tax profit of $373 million and a return on equity of 28%, making it one of the best performing banks in the world.
One of the biggest investment catalysts going forward is the state’s “equalization” programme according to Christopher Wood, an analyst at CLSA. Equalisation or privatization as it is known around rest of the world, has been a cornerstone of Vietnam policymakers’ reform agenda for some years, but it has been slow to get underway. Now, however, policymakers are making good progress with $8 billion of deals conducted since 2014 and the most significant deal, $4.8 billion raised from the sale of a 54% stake in state-owned Brewer Sabeco last December, shows that the sell-off is exhilarating. The privatization pipeline is predicting an estimated $12.5 billion of further deals in 2018 and 2019 and as well as these; there are also $3 billion of private sector IPOs in the works.
While there is some risk that this additional supply could push prices down, ” the critical point is Vietnam’s capital markets are finally beginning to catch up with the dynamism of the macroeconomics story” Wood notes. Increased foreign direct investment from a more receptive economy, as well as the consumption story represented by a growing middle class, makes Vietnam ” by some distance the best macroeconomic story in Asean.”