vietnamese equities - hsbc review

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Vietnam is likely to achieve economic growth similar to China’s and India’s in the next five years

So far, few institutional investors have looked at its stock market, judging it too small and illiquid

But that’s changing. Tradable stocks now have market cap of USD9bn, and the market is open to foreigners. It’s time for investors to dip their toes

Increasingly investible Our economists today published a report arguing that

Vietnam can achieve its target of 7.5%-8% annual real GDP

growth over the next five years.

International institutional investors, hearing that, will want a

piece of the action. But most have been deterred up to now

by what they perceive to be the small size and lack of

liquidity of the stock market.

In fact, the Vietnamese market is becoming increasingly

accessible to international investors. Foreigners can own up

to 49% of stocks; trading, FX and tax rules are favourable.

Market cap (if the OTC market is included) has risen to

USD9bn, and turnover to perhaps USD20m a day. With five

or six IPOs, each for USD1bn plus, likely in the next 12

months, the market will continue to grow. PE, based on

historic earnings, of 16x is not particularly high.

Vietnam’s entry into the WTO in October and the APEC

meeting being hosted in Hanoi in November will bring

Vietnam into the headlines, and could be the catalysts for

fund managers to look at the market for the first time.

The stock market remains too small for large institutions to

gain meaningful exposure, but we think many will want to

dip their toes into the water by opening a trading account

and buying a few stocks. Now is the time to move.

This report does not aim to identify which stocks investors

should buy. Rather, it intends to be useful guide to how to

get exposure to this promising market.

Macro Pan-Asian Equity Strategy

Vietnamese EquitiesTime to go in

1 September 2006 Garry Evans*

The Hongkong and Shanghai Banking Corporation Limited (HK) Pan-Asian Equity Strategist +852 2996 6916 [email protected]

*Employed by non-US affiliate of HSBC Securities (USA) Inc, and is not registered/qualified pursuant to NYSE and/or NASD regulations.

Disclaimer & Disclosures. This report must be read with the disclosures and the analyst certifications in the Disclosure appendix, and with the Disclaimer, that form part of it.

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Macro Pan-Asian Equity Strategy 1 September 2006

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A compelling economic story Our economists today published a comprehensive

report entitled Vietnam: Going for the next level,

surveying the Vietnamese economy. In summary,

their arguments are that:

The odds are high that Vietnam can achieve

its target of 7.5-8% real GDP growth over the

next five years.

The factors that can make this possible

include: favourable demographics; rising, and

sustainable, fixed asset investment; and

increases in productivity caused partly by a

continuing shift out of agriculture into

industry and services.

Management of monetary and fiscal policy

has been cautious and supportive of stable

growth with acceptable inflation, fiscal and

current account balances, and debt ratios.

Capital demands to achieve this growth will

be large, with investment/GDP expected to

rise from 33% to 41-42% by 2010. The

government’s plan projects that USD49.5-

51.5bn of this capital will come from abroad,

with USD9bn expected to come from foreign

portfolio investment.

Most investors, hearing this story, will want

exposure to it. Vietnam has a population of 82

million, growth rates likely to be similar to those

in India and China over the next few years,

healthy economic fundamentals, and is playing a

growing role in the global economy.

But, until recently, few international institutional

investors had as much as glanced at the

Vietnamese market. That is not surprising since,

at the end of 2005, the Ho Chi Minh City

Securities Trading Center (HCMCSTC, the main

stock market, which opened in 2000) had only 32

listed stocks and a market capitalisation of

USD460m.

Much has changed this year. With two large new

listings of privatised companies (Vinamilk and

Sacombank), the market cap of the HCMCSTC

has risen to USD2.9bn (as of 25 August). Average

daily turnover has increased from USD680,000 in

2005 to USD5.1m in the past three months. Add

the Hanoi market and OTC stocks, and market cap

may be as big as USD9bn. The Vietnam Stock

Index has risen by 55.3% y-t-d – and that despite

Vietnam now

With Vietnam’s economy set to grow 7.5-8% a year, investors will

want to have exposure to this market

The stock market is small (total market cap USD9bn) but, with

forthcoming privatisations, it will grow rapidly

Vietnam’s WTO entry in October could be a catalyst. Institutional

investors need to get familiar with this market now

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correcting 38% between May and July. A couple

of international brokers published their first

reports on the market and the Vietnamese

economy.

But still the market has not come on to most

global fund managers’ radar screens. Total foreign

investment in listed stocks is only USD840m (and

perhaps the same again in unlisted, OTC-traded

stocks, for which little data is available). Most of

this comes from listed Vietnam country funds,

which have a total of USD1,376m in net assets.

Given the small size of the market and limited

liquidity, few major institutions have yet looked at

this market.

Time to look at Vietnamese equities

We think they will have to start soon. A number

of catalysts will emerge over the next few months,

which will bring Vietnamese stocks into the

headlines.

After 10 years of negotiations, Vietnam is set

to gain accession to the WTO at its meeting

on October 10-11. It is unclear whether the

US Congress will pass “unconditional most

favoured nation status” for Vietnam ahead of

the mid-term elections, which would mean

the US will have to opt out of WTO

agreements with Vietnam. While this is a

drawback, it would not derail Vietnam’s

accession to the body.

The annual Asia-Pacific Economic

Cooperation (APEC) meeting will take place

in Vietnam for the first time on November 12-

19. President George Bush is likely to visit

Vietnam for the meeting – only the second

time a US president has visited the country

(following President Clinton’s 2000 visit).

A number of large privatised companies are

expected to list over the coming year. These

include at least two banks, an insurance

company, the electricity utility and two or

more mobile phone companies, each of which

could be capitalised at USD1bn or more. This

would increase HCMCSTC market cap to

USD9-10bn and for the first time raise the

possibility of Vietnam being included in the

MSCI and FTSE indices.

A new Securities Law will come into force in

January 2007. Among other changes, this will

allow the clumsily named Ho Chi Minh City

Securities Trading Center to call itself the

“Vietnam Stock Exchange” for the first time.

The limit on foreign ownership of stocks

(currently 49%, except for banks and unlisted

companies, for which it is 30%) could be

raised to 100% as early as the end of the year

– although the government may retain limits

for sensitive sectors such as finance,

resources and telecoms.

Even if the Vietnamese market is still too small

for most institutional investors to be able to gain

meaningful exposure, we believe that many will

want to at least become familiar with its dynamics

and to start to dip their toes into the water by

opening a trading account and buying a few

stocks.

Over time, Vietnam’s market should grow to

reach a percentage of GDP similar to that in other

Asian countries. As shown in Table 1, market

cap/GDP for Vietnam is currently only 5%,

compared to an average of 71% for the

Philippines, Thailand and Indonesia. If Vietnam’s

market were a similar proportion of GDP it would

be worth USD37bn. In five years’ time, if it were

to grow at 8% a year, it would reach USD55bn.

That would still be smaller than Indonesia’s

current market cap of USD102bn but Vietnam’s

growth rates would probably make it an

interesting (and investible) market for

international investors.

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1. Market cap/GDP for Asian markets (end July 2006)

Country Market cap/GDP

Hong Kong 711% Singapore 234% Taiwan 152% Malaysia 141% Australia 124% Japan 115% Philippines 114% Korea 86% India 81% Thailand 67% Indonesia 31% China 24% Vietnam 5%

Sources: HSBC, Bloomberg

The aim of this report is not to identify which

Vietnamese stocks investors should buy. The

more difficult question is how to buy into the

Vietnam story. Not only is the stock market small,

but three out of the 48 listed stocks (including

Sacombank, the second largest by market cap) hit

their foreign holding limits in August. This report,

therefore, focuses on how to get exposure to the

market. We take the positive economic story as a

given. (We would advise readers who are not yet

convinced to look at the report from our

economics team, published concurrently with this

report.)

It is also difficult to get reliable information on

how the Vietnamese equity market works. For

example, the turnover of unlisted stocks is several

times bigger than that of the listed names, and

many of the most interesting investments are not

listed (although they can easily be traded via an

informal OTC market). Data is also hard to find,

even for the listed market – Bloomberg, for

example, provides basic stock prices but virtually

nothing else. Part of this report’s purpose,

therefore, is to explain the details and dynamics of

the market.

But, from a point of view of regulations and

structure, Vietnam is not a difficult market to

invest in. Foreigners have free access to the

market (subject to the ownership limits mentioned

above), with no FX controls and no dividend or

capital gains tax (just a transaction tax of 10 bps

on gross sale amount). Opening a trading account

is a little time-consuming, but not particularly

onerous: investors do not need approval, only a

trading code. Regulators are open to proposals on

how to improve market mechanisms and have

already introduced a number of reforms after

investor suggestions. This openness contrasts with

most other Asian markets (for example, Korea,

Taiwan or China) which were much more

restrictive on foreign access in their early days –

and, in the case of China, still are.

The last section of this report provides a practical

guide to opening a securities account in Vietnam

and trading and settling stocks. It includes a guide

to finding corporate and market information.

Dynamics of the equity market There are three markets on which stocks can be

traded in Vietnam.

Ho Chi Minh

The Ho Chi Minh City Securities Trading Center

(HCMCSTC) was founded in 2000, and currently

lists 48 stocks and one investment fund. As shown

in Table 2, which ranks the stocks by market cap,

two stocks, Sacombank and Vietnam Dairy

Product (commonly known as Vinamilk) together

comprise 53% of market cap and 43% of turnover.

The top six or seven stocks are generally

considered to be investible by foreign investors.

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2. Stocks listed on Ho Chi Minh City Securities Trading Center

Code Name Short name Sector Mkt cap (USD mn) % of total mkt cap

Ave daily trading val (USD)

VNM Vietnam Dairy Product Co Vinamilk Beverages 804.3 27.3% 682,181STB Sacombank Sacombank Commer Banks Non-US 753.3 25.6% 2,294,568VSH Vinh Son - Song Hinh Hydropo VSHPC Electric utility 277.1 9.4% 370,972GMD General Forwarding & Agency Gemadept Transport-Services 153.2 5.2% 244,428KDC Kinhdo Corporation Kinhdo Confectionery 148.0 5.0% 45,296REE Refrigeration Electrical Eng REE Appliances 142.5 4.8% 450,145SAM Cables And Telecom Material Sacom Wire&Cable Products 127.1 4.3% 275,817CII HCM City Infrastructure Inv CII Special Purpose Entity 63.0 2.1% 168,651BMP Binh Minh Plastics Joint Sto Bmplasco Plastics 48.5 1.6% 319,908VFMVF1 Vietnam Sec Investment Fund VF1 Closed-end Funds 46.1 1.6% 342,826SJS Songda Urban & Industrial Zo Sudico Property 41.2 1.4% 358,929NKD North Kinhdo Food Joint Stoc North.Kinhdo Food 38.3 1.3% 32,305AGF An Giang Fisheries Agifish Fisheries 27.1 0.9% 58,076SSC Southern Seed Corporation SSC Agricultural Operations 22.3 0.8% 26,659BT6 620 Chau Thoi Concrete Corp 620CCC Bldg Prod-Cement/Aggreg 16.9 0.6% 41,109SAV Savimex Corporation Savimex Home Furnishings 16.0 0.5% 45,078DHA Hoa An Joint Stock Company Hoaan Mining Services 15.0 0.5% 99,823TYA Taya Vietnam Electric Wire Taya Vietnam Materials 13.8 0.5% 190,171BBC Bien Ho Confectionery Corp Bibica Food-Confectionery 13.3 0.5% 93,952TMS Transforwarding Warehousing Transimex Saigon Transport-Services 12.8 0.4% 26,271GIL Binh Thanh Import Export Pro Gilimex Diversified 12.2 0.4% 45,489MHC Hanoi Maritime Holding Compa Marina Hanoi Food 12.1 0.4% 55,593VFC Vinafco Joint Stock Corporat Vinafco Diversified 10.4 0.4% 60,177COM Comeco Joint Stock Company Comeco Oil & gas 9.7 0.3% 41,536HAP Hai Phong Paper Company Hapaco Paper&Related Products 8.2 0.3% 78,299HTV Ha Tien Transport Joint Sto Hatien Transco Transportation 8.0 0.3% 31,546TRI Saigon Beverages Joint Stock Tribeco Berverages 7.5 0.3% 25,009RHC Ry Ninh Ii Hydroelectric Joi RNII Electric utility 7.0 0.2% 5,952BBT Bach Tuyet Cotton Corp Cobovina Consumer Products-Misc 6.2 0.2% 53,536VTC VTC Telecommunications Co VTC Telecoms 6.2 0.2% 19,017CAN Halong Canned Food Stock Canfoco Food-Canned 5.7 0.2% 12,760BPC Bim Son Packing Company BPC Containers-Paper/Plastic 5.7 0.2% 15,634PMS Petroleum Mechanical Stock PMSC Oil & gas 5.3 0.2% 23,396TTC Thanh Thanh Ceramic Joint St TTC Materials 5.3 0.2% 29,854TS4 Seafood Joint Stock Co No.4 Seapriexco No.4 Food 5.2 0.2% 5,461HAS Hanoi P&T Construction Hacisco Construction 4.8 0.2% 22,385FPC Full Power Joint Stock Co Full Power Electric utility 4.8 0.2% 22,247PNC Phuong Nam Cultural Joint St PNC Leisure 4.8 0.2% 6,530KHA Khanh Hoi Import Export Co Khahomex Home Furnishings 4.7 0.2% 53,121SFC Saigon Fuel Company SFC Oil & gas 4.2 0.1% 19,216LAF Long An Food Processing Lafooco Food 4.2 0.1% 32,182SGH Saigon Hotel Corporation Saigon Hotel Leisure 3.8 0.1% 9,900TNA Thien Nam Trading Import Exp Tenimex Trade 3.5 0.1% 1,820NHC Nhi Hiep Brick-Tile Joint St Brico Materials 3.2 0.1% 3,942CYC Chang Yih Ceramic Joint Stoc Chang Yih Ceramic Materials 3.0 0.1% 64,366SHC Saigon Maritime Joint Stock SHC Food 2.8 0.1% 58,076UNI Vien Lien Joint Stock Compan Unico Diversified 1.8 0.1% 16,949DPC Da Nang Plastic Joint Stock Danaplast Rubber/Plastic Products 1.8 0.1% 9,779BTC Binh Trieu Construction BTC Machinery-Constr&Mining 1.2 0.0% 4,206

Source: HCMCSTC

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Turnover on the market has picked up significantly this year (see Chart 3), averaging USD5.1m a day over the past three months, and reaching an average of as much as USD10m in April.

3. Daily turnover on the Ho Chi Minh City Securities Trading Center

0

5

10

15

20

Jan-

05

Apr-0

5

Jul-0

5

Oct-0

5

Jan-

06

Apr-0

6

Jul-0

6

Daily traded v alue (USD mn)

Source: Ho Chi Minh City Securities Trading Center

Hanoi The Hanoi Securities Trading Center is only a marginal player for equities. Only 11 stocks are listed (see Table 4) with a total market cap of USD664m. One stock, Pha Lai Thermal Power (PPC) comprises 83% of market cap and almost 90% of turnover. Power company Vinh Son (VSH) in June switched its listing from Hanoi to Ho Chi Minh, where it is now the third largest stock by market cap.

4. Stocks listed in Hanoi

Code Company Mkt cap (USD mn)

PPC Pha Lai Thermal Power 554.5VNR Vietnam National Reinsurance Corp 70.7KHP Khanh Hoa Power 16.4DXP Doan Xa Port 5.9TKU Tung Kuang Industrial 5.3BBS But Son Cement Packing 3.6VTL Thanglong 2.6GHA Haiau Paper 2.2HSC Hacinco 1.4ILC International Labour & Services 1.4CID Construction & Infrastructure Development 0.5Source: Hanoi Securities Trading Center

The authorities are re-considering what role the Hanoi Center should play: it may be turned into a market for bonds and/or small-cap stocks.

Over the counter market Most foreign writers on the Vietnamese market have missed the fact that the OTC market for unlisted stocks is far more liquid, and contains more interesting stocks, than the listed market. By way of evidence, some of the biggest Vietnam country funds have 70% or more of their portfolios in unlisted stocks.

Since 2001, the Vietnamese government has “equitised” more than 3,000 companies – i.e. turned them into joint-stock companies (more on this process below). In theory, shares in any of these companies can be traded. Most have a free float of less than 5% so, in practice, are closed. But brokers and fund managers in Ho Chi Minh City reckon that some 200 are traded openly.

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It is difficult to know how many of these trade

regularly. Saigon Securities and ACB Securities

post indicative prices on 35 and 16 (overlapping)

stocks, respectively, in the HCMCSTC’s daily

bulletin. But fund managers report that, even for

these names, doing deals can be difficult. Perhaps

another 50-60 stocks can be located if an investor

wants to buy.

Although reliable data is hard to find, it seems

clear that many interesting names are traded OTC.

Table 5 shows the list of stocks for which Saigon

Securities publishes prices. The total

capitalisation of these stocks is USD3.9bn, i.e.

about one-third larger than the HCMCSTC. If the

other regularly traded stocks are added, it is likely

that the capitalisation of the OTC market is about

USD5-6bn. There are nine OTC stocks (mostly

banks) with market cap of USD100m or more,

compared to only seven in Ho Chi Minh.

There is even less data on turnover, but various

brokers and investors we spoke to estimate that

turnover of OTC stocks is between 1.5x and 6x

that of the HCMCSTC, i.e. between USD7.5m

and USD30m. At the top end of that range,

Vietnam’s total turnover would be similar to that

of the Philippines (which had a daily average of

USD38m in January to June 2006).

What can investors buy?

The three markets together have four stocks with

5. Frequently traded OTC stocks

Code Company Sector Mkt cap (USD mn)

ACB Asia Commercial Bank Banks & insurance 937.7 TCB Vietnam Technological And Commercial Joint Stock Bank Banks & insurance 466.5 EXB Vietnam Import-export Commercial Joint-stock bank (Eximbank) Banks & insurance 375.4 EAB Eastern Asia Commercial Bank Banks & insurance 350.4 PVDRILLING CTCP Khoan & D�ch v� Khoan D�u Khí Petroleum Industry 214.5 PNB Southern Commercial Joint Stock Bank Banks & insurance 197.7 VPB Vietnam Commercial Joint Stock Bank For Private Enterprises Banks & insurance 182.7 MB Military Commercial Joint-stock Bank Banks & insurance 144.7 BMI Baominh Insurance Corporation Banks & insurance 135.5 SCB Saigon Commercial Joint Stock Bank Banks & insurance 94.9 VITACO Vietnam Tanker JSC Transportation 84.9 TDH Thu Duc Housing Development JSC Real Estate & Construction Material 65.3 AGPP An Giang Plant Protection JSC Others 45.9 VAS Vien Dong Assurance Company Banks & insurance 45.0 PGC CTCP PETROLIMEX GAS Petroleum Industry 42.2 TAOIL Tuong An Vegetable Oil JSC Food/Beverages 41.5 TPP Tien phong Plastics JSC Plastic Industry 40.9 HORUCO Hoa Binh Rubber JSC Rubber Industry 39.0 HGP Hau Giang Pharmaceutical Joint-Stock Company Pharmaceutical 35.0 WSB Western Sai Gon Beverages JSC Food/Beverages 34.4 IMEXPHARM Imexpharm Pharmaceutical joint - stock Company Pharmaceutical 33.3 DOMESCO Domesco Medical Import Export JSC Pharmaceutical 30.2 VOSA Vosa Group of Companies Transportation 29.1 VINACAFE BienHoa Coffee Company (Vinacafe BienHoa) Food/Beverages 26.0 TAPACK Tan Tien Plastics and Package JSC Plastic Industry 25.9 TNR Thong Nhat Rubber Company Rubber Industry 24.0 RDL Rangdong Light source and Vacuum flask Joint stock Company Electronic 22.7 PINACO Dry Cell and Storage Battery JSC Electronic 20.8 TIE Telecommunication and Electronics Industry JSC Electronic 20.6 FIMEX Sao Ta Foods JSC Sea Products 20.0 CDBECO Chuong Duong Beverages JSC Food/Beverages 15.4 CASUMINA Southern Rubber Industry Joint Stock Company Rubber Industry 15.2 AQUATEX Ben Tre Aquaproduct Import and Export JSC Sea Products 8.4 BTH Pharmaceutical JSC of Feb 3rd Pharmaceutical 7.9 VITALY VITALY JSC Real Estate & Construction Material 4.3 SFN Saigon Fishing Net Joint Stock Company Others 2.9

Source: Saigon Securities

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a market cap of more than USD500m, and a

further five with market caps between USD200m

and USD500m. We show these in Table 6,

together with a handle of other names that large

investors consider representative stocks. These

are, if you like, Vietnam’s “blue-chips”. The most

interesting sectors in this market in the long run

are likely to be: banks, food and beverages,

telecoms, oil and gas, mineral resources, utilities

and textiles/footwear.

One increasing problem is that a number of the

most interesting stocks have recently hit their

foreign limits, most notably Sacombank, REE and

(it is rumoured, although no public data is

available) the OTC-traded Asia Commercial

Bank.

Foreigners currently own about 26% of the stocks

on the HCMCSTC; their share of trading has also

averaged about 27% so far this year (see Chart 7).

(No data is available on the foreign ownership

level of OTC stocks. The companies themselves

are responsible for ensuring that they do not

register shareholders that would take foreign

ownership over 30%.)

7. Foreign share of trading by month

0%

10%

20%

30%

40%

50%

60%

Sep-

05

Oct

-05

Nov

-05

Dec

-05

Jan-

06

Feb-

06

Mar

-06

Apr-0

6

May

-06

Jun-

06

Jul-0

6

Aug-

06


Debate has started about how to treat stocks that

have hit their foreign limits. Some international

investment banks offer Vietnamese stocks to their

clients via participatory notes, and there are

suggestions that these might trade at a premium

offshore. Some investors have suggested the

authorities create a foreign board, as in Thailand,

with a portion of securities specifically reserved

for foreign investors. Since the HCMCSTC uses

the Stock Exchange of Thailand’s trading system,

this should be fairly straightforward to set up.

6. Vietnam’s blue-chips

Code Company Where traded Sector Mkt cap (USD mn)

Foreignownership

Foreign limit

ACB Asia Commercial Bank Unlisted Financials 937.7 30%? 30% VNM Vinamilk Ho Chi Minh Beverages 804.3 34.5% 49% STB Sacombank Ho Chi Minh Financials 753.3 30.0% 30% PPC Pha Lai Thermal Power Hanoi Power 554.5 n/a 49% TCB Vietnam Technological And Commercial Bank Unlisted Financials 466.5 n/a 30% EXB Vietnam Import-export Commercial Joint-stock

bank (Eximbank)Unlisted Financials 375.4 n/a 30%

EAB Eastern Asia Commercial Bank Unlisted Financials 350.4 n/a 30% VSH Vinh Son - Song Hinh Hydropo Ho Chi Minh Power 277.1 10.0% 49% PV Drilling CTCP Khoan & D�ch v� Khoan D�u Khí Unlisted Oil & gas 214.5 n/a 30% VPB Vietnam Commercial Joint Stock Bank For

Private EnterprisesUnlisted Financials 182.7 n/a 30%

GMD Gemadept Ho Chi Minh Logistics 153.2 22.9% 49% KDC Kinh Do Ho Chi Minh Confectionary 148.0 26.6% 49% REE REE Ho Chi Minh Air conditioning 142.5 49.0% 49% TDH Thu Duc Housing Development JSC Unlisted Financials 65.3 n/a 30% BMP Binh Minh Plastics Joint Sto Ho Chi Minh Plastics 48.5 10.2% 49%

Source: HSBC, HCMCSTC, Saigon Securities, Hanoi Securities Trading Cneter

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For the moment, though, there are probably still

12 of the 15 stocks in our blue-chip list that are

open to foreigners to buy.

What about valuations?

Overall valuations for the HCMCSTC are not

unreasonable (Table 8). PE is 22.1x 2005 earnings

and 16.1x the past four quarters’ EPS. That is

higher than the average 2005 PE for Asia ex Japan

of 14.3x, but similar to India’s 21.8x. There are no

systematic forecasts for earnings but fund

managers in Vietnam believe that net profit

should grow 20-25% this year and next and EPS

10-15% (less than NP because of a probable large

amount of new equity issuance). Price/book ratio

of 3.8x is also a little high by regional standards

(the next highest, India, is on 3.2x), but this can

partly be justified by Vietnam’s almost 24% ROE.

8. Key valuation metrics – Ho Chi Minh

Market cap (USD mn) 2,943 PE (past 4Q) x 16.1 PE 2005 x 22.1 P/B x 3.81 DY 2.1% Div payout ratio 33.8% ROE 23.6%

Source: HSBC, HCMCTC

Some individual stocks look rather more

expensive – particularly those that foreigners

might like to buy. Valuations for the 13 stocks on

HCMCSTC with market cap of USD 20m or more

are shown in Table 9, ranked in descending PE

order. Most of the blue-chip stocks are trading on

PEs of 20x or more.

9. Valuation metrics of largest Ho Chi Minh stocks

Code Short name M cap (USD mn)

PE P/B DY Payout ratio

VSH VSHPC 277.1 50.4 3.5 0.0% 0.0%CII CII 63.0 35.4 n/a 3.6%127.5%REE REE 142.5 33.6 4.5 1.6% 53.8%STB SACOMBANK 753.3 27.9 4.2 2.2% 61.4%KDC KINHDO 148.0 23.9 7.3 2.0% 47.8%VNM VINAMILK 804.3 21.3 6.0 2.1% 44.7%SAM SACOM 127.1 19.7 3.1 2.2% 43.4%NKD NORTH.KINHDO 38.3 18.1 3.1 1.2% 21.7%GMD GEMADEPT 153.2 18.0 2.8 1.7% 30.6%AGF AGIFISH 27.1 14.8 3.0 1.2% 17.8%SSC SSC 22.3 12.2 3.4 3.4% 41.3%BMP BMPLASCO 48.5 11.6 4.3 2.5% 29.0%SJS SUDICO 41.2 4.0 1.6 1.9% 7.6%


Earnings data for the OTC stocks are hard to

come by. But VinaCapital recently published a

report on the banks, with some earnings forecasts

and valuations (Table 10). On its forecasts, the

average forward PE for banks is 29x, and the

average PB 6x. That sounds expensive by

comparison with other Asian markets – Chinese

listed banks, for example, have an average PB of

2.6x. But Vietnamese bank ROEs are decent –

ranging from 13% to 31% – and profits are

growing by 50% a year, so that could probably

justify a premium. 10. Valuations of traded Vietnamese banks

2006F PE 2005 PB 2006F ROE

Sacombank 38.2 6 13%Asia Commercial Bank 36.7 11 25%Habubank 32.9 11 18%Eastern Asia Commercial Bank 31.3 7 19%Saigon Commercial Bank 24.6 5 17%Eximbank 22.8 6 23%Techcombank 21.2 9 31%

Source: VinaCapital

Market set to grow further

The number of tradable stocks is likely to grow

rapidly over the next year or two.

The government has already equitised almost

3,000 companies (Chart 11), with the amount

growing each year: it has done 600 already this

year. It plans to complete this process, including

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the equitisation of all the state-owned banks, by

the end of 2009.

11. Number of equitisations by year

0

200

400

600

800

1000

2001 2002 2003 2004 2005 2006

Source: IMF, with HSBC projection for 2006

Companies with net assets of VND10bn or more

are equitised via an auction on the HCMCSTC

(those below that are sold by brokers). Typically,

the company will sell 30% of its equity to

outsiders via the auction, and allocate 30% to

directors and employees (at 60% of the public sale

price), and 10% to associates and strategic

partners (at 80% of the price). The state usually

retains a stake of about 30% (although it can be as

high as 50%). Once the shares have been

auctioned, they often trade actively on the OTC

market for a few weeks as initial buyers take

profits.

Equitised companies do not automatically list on

one of the trading centres. In other words, the

process of the IPO and listing is separate.

However, in future equitisations of large

companies, particularly the state-owned banks,

companies may equitise and list simultaneously.

Vietcombank, for example, is reportedly planning

to do this in mid-2007. The bank has chartered

capital of USD600m, and so, at a PBR of 2.5 or

3x, this could be close to a USD2bn deal.

Until recently, the privatised companies have been

reluctant to list. Listing would require them to

disclose financials (something they do not need to

do when traded only on the OTC market) and

accept a higher degree of outside surveillance.

But this reluctance is fading. Listed companies

receive a 50% tax break for the first two years

after listing. This incentive will expire at the end

of 2006, which partly explains why there has been

a big increase in new listings this year (Chart 12).

There are a number of other drivers that suggest

listings should continue to grow over coming

years:

The new Securities Law, which comes into

force next January, will oblige all joint-stock

companies to dematerialise their shares at the

Vietnam Securities Depository. This will

make it easier for investors to settle trades

after buying the stocks OTC, but it will also

reduce the cost of listing, since shares will

already be in the necessary form.

The government is putting pressure on the

largest 200 or so unlisted companies in which

it retains a stake to list over the next few

years. It believes that their efficiency will be

improved by having to answer more explicitly

to outside shareholders.

Some listed companies have this year

successfully issued new shares. Unlisted

companies are beginning to see that the listed

market is a useful source of new capital.

12. New listings on the Ho Chi Minh Trading Center

0

5

10

15

20

2000 2001 2002 2003 2004 2005 2006*

Source: Ho Chi Minh City Securities Trading Center (*Jan-Aug annualised)

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This all means that many big companies will likely be equitised and list over the next three to four years, increasing the market size enormously. A partial list of candidates is shown in Table 13.

13. Forthcoming equitisations and listings

Company Sector

Bank for Foreign Trade of Vietnam Financial servicesBao Viet Insurance Financial servicesBao Viet Securities Financial servicesBIDV Financial servicesBinh Thuan Hydro Power Plant UtilitiesDa Nhim Hydro Power Plant UtilitiesDau Tieng Rubber MaterialsEVN UtilitiesHa Noi Beverage, Beer & Alcoholic Co BeveragesHa Tien No 1 Cement Co MaterialsHa Tien No 2 Cement Co MaterialsHabeco Consumer goodsImexpharm PharmaceuticalsMekong Delta Housing Development Bank Financial servicesMobilfone TelecomsPhu My Nitrogenous Fertiliser Plant materialsPTSC Oil servicesSabeco Consumer goodsSai Gon Beverage, Beer & Alcoholic Co BeveragesThac Mo Hydro Power Plant UtilitiesTransport & Chartering Co TransportationViet Nam Construction & Im-ex Co ConstructionViet Nam Electronics & Informatics ITViet Tien Garment Corp Consumer goodsVietcombank Financial servicesVietnam Airlines TransportationVietnam Shipping TransportationViettel TelecomsVinafone TelecomsVMS Mobifone TelecomsSources: Vietnam Holdings, HSBC

Why Vietnam is an opportunity The Vietnamese market has been very volatile since it opened in 2000 – and not least this year. The index (Chart 14) fell, for example, by 72% between June 2001 and September 2003 (although it should be remembered that there were only 20 listed stocks then). This year it rose by 106% between January and May, then corrected by 38%, but has rebounded by 24% since August.

14. Vietnam Stock Index – month-end level

0

100

200

300

400

500

600

2001

2002

2003

2004

2005

2006

Source: CEIC

With little information on earnings, the market is very much driven by sentiment and momentum. As can be seen from recent performance, it does tend to track global equities, with a particularly high beta. The lack of liquidity means that, when foreign funds start to sell, the negative impact is exaggerated. The resultant correction causes local individual investors to panic, exacerbating the fall. This is, of course, typical early-stage emerging market behaviour.

So what – besides the fundamental story – makes Vietnamese equities attractive? We would point to a number of attractions for this market.

Openness to foreign investment. The initial limit on foreign ownership was 30%, but this was raised to 49% for listed stocks (except banks) last October, and may be scrapped completely late this year or in early 2007 (although there are suggestions that the government will retain restrictions for strategic sectors such as banks, telecoms and resources). Foreign investors say they sense no anti-foreign sentiment. On the contrary, the Vietnamese authorities and companies understand they need foreign capital to finance future growth.

Low state ownership. The state owns only 26% of listed stocks (less than foreigners’ share). In only four of the 48 stocks does the

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state still own a majority of shares (but even

the largest state stake, in Vinh Son, is only

60%). In a number of the largest companies,

state ownership has fallen to 0% (see Table

15, which is limited to companies with market

cap over USD20m). Investors report that,

even when the state does own a significant

stake, it tends to be a silent partner and does

not seek to control management. The state

also plans to sell many of its stakes down

further. This situation is unlike China, where

the state almost invariably retains majority

ownership.

15. State ownership of larger cap stocks

Code Name Mkt cap (USD mn)

State ownership

VNM Vinamilk 804.3 50.1% STB Sacombank 753.3 0.0% VSH VSHPC 277.1 60.0% GMD Gemadept 153.2 18.2% KDC Kinhdo 148.0 0.0% REE REE 142.5 10.0% SAM Sacom 127.1 49.0% CII CII 63.0 0.0% BMP Bmplasco 48.5 39.0% VFMVF1 VF1 46.1 0.0% SJS Sudico 41.2 51.0% NKD North.Kinhdo 38.3 0.0% AGF Agifish 27.1 20.0% SSC SSC 22.3 20.0%

Sources: Ho Chi Minh City Securities Trading Center, Saigon Securities

Managements have a significant stake in their

own businesses. As explained above, in the

equitisation process, employees generally end

up owning 30% of so of the shares. This

incentivises the management, generally

retained from those running the firm when it

was state-owned, to focus on increasing

profitability. In many cases, the company has

been run so inefficiently in the past that

management is able to generate an explosive

increase in profits relatively easily.

The lack of dominating shareholder groups.

With shares in most companies spread evenly

between management, strategic partners,

foreign investors, local retail buyers and the

state, there are few vested interests: everyone

is a minority shareholder. Unlike the situation

in most Asian countries, there are no powerful

families, no state holding companies (as in

Singapore or Malaysia), and no

chaebol/zaibatsu groups (at least not yet).

Balance sheets are greatly understated.

Equitisations have to be done with a

price/NAV of more than 1.0. But investors

report that balance-sheets are understated,

with real estate assets in particular being

recorded at book. With the rise in land prices

in the past few years and the possibility of

developing property holdings, this implies

that many companies have significant under-

realised value.

Possibility of inclusion in the MSCI and other

international indexes. MSCI does not disclose

the criteria it uses in deciding whether to add

16. Other small emerging markets included in MSCI indexes

(USD bn) No of Mkt cap of MSCI stocks Free float adjusted mkt cap of MSCI stocks Country companies in

MSCI indexCountry

Weight (%)Total Min Max Total Min Max

INDONESIA 24 0.24 76.1 0.6 17.8 31.8 0.2 8.9ARGENTINA 12 0.10 32.4 0.2 21.8 14.5 0.1 8.7PHILIPPINES 17 0.09 29.3 0.2 7.0 9.2 0.1 2.1MOROCCO 11 0.09 29.2 0.3 12.2 5.2 0.1 1.8HUNGARY 5 0.09 28.1 1.0 11.1 19.8 0.6 7.2PAKISTAN 15 0.08 26.5 0.2 9.7 4.3 0.1 0.7PERU 5 0.07 21.6 0.6 13.4 9.5 0.5 4.0JORDAN 14 0.06 19.1 0.1 11.4 3.9 0.1 1.1COLOMBIA 6 0.05 17.5 1.6 4.1 7.0 0.6 1.6

Source: MSCI, Datastream

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a country to its indexes. But Table 16 shows

details of small emerging markets already in

MSCI to give an idea of what the index

compiler considers minimum criteria.

Colombia, for example, has only six stocks in

the MSCI index, with the largest having a

free-float adjusted market cap of only

USD1.6bn. The total adjusted market cap of

Jordan is only USD3.9bn. Pakistan has 15

stocks, but the largest has an adjusted market

cap of just USD0.7bn. It seems likely,

therefore, that if Vietnam were to have five or

six stocks each with free float market cap of

USD1bn or more, MSCI would likely

consider its inclusion. Vietnam’s market

procedures and regulations are unlikely to be

an obstacle in our opinion.

The attitude of the regulators. Investors have

a very positive impression of the stance of the

State Securities Commission (SSC). It is very

willing to listen to suggestions from brokers,

custodians and foreign investors on how

procedures can be improved, and has

frequently acted on these. It recently, for

example, allowed applications for a securities

trading code to be submitted in English.

The new Securities Law, which comes into

effect next year, will clarify the legal position

of the market. Sensibly, it is in the form of

umbrella enabling legislation, with the

various responsible bodies (the SSC or

Ministry of Finance) empowered to draw up

regulations under a general framework. These

regulations will be published over the next

few months. Among changes that the law will

introduce: the Ho Chi Minh City Securities

Trading Center becoming a full stock

exchange with jurisdiction over listings; the

separation of securities brokers and asset

management companies; and the requirement

that any public company with 50 or more

shareholders, whether listed or not, must

disclose financial information.

Risks Besides the obvious risks – an economic

downturn, high beta in the event of a global equity

correction, and the Vietnamese equity market

being derated from its current somewhat elevated

valuation level – there are a number of structural

risks that investors in Vietnamese stocks need to

be aware of.

Reliability of financial statements. Listed

companies disclose quarterly financials,

which are audited (but only by local auditing

firms). Statements are fairly basic, usually

without detailed notes or the sort of

breakdown found in more developed markets.

Unlisted stocks do not publish any financials,

although most will provide data to investors

who ask. Fund managers say they do not pay

much attention to financials. For most

companies, the quality of management and its

ability to grow the business are far more

important. The significance of good financial

data, rather, say fund managers, is that it

shows the company has effective

management information systems, which

allow executives to monitor whether

execution is proceeding according to plan.

Excess capital raising. After the rise in the

market this year, many listed companies are

planning large new share issues. Sacombank,

for example, intended to issue 30 million new

shares (representing dilution of 16%) this

summer, but had to postpone the deal after the

market fell. The potential magnitude of large

listings over the next year is positive for the

market in the sense that it will increase

capitalisation, but it might take some time for

such a volume of paper to be digested.

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The negative impacts of rapid change. There

is always the risk of a backlash against

economic reforms. Like China, Vietnam

remains a socialist country, with a clash of

ideology between hard-line communists and a

new generation who are concerned with

making the country wealthier. The gap

between rich and poor will inevitably widen,

and outside a few main cities, infrastructure

remains poor and could generate disaffection

towards the government. Vietnam does not,

however, seem to suffer as much as China

from over-zealous development by local

governments that results in inhabitants being

removed from their land or houses. The

opposite risk, of corporate managers in charge

of state-owned companies becoming

excessively greedy, should also be borne in

mind.

Corruption is often pointed out as a hurdle to

Vietnam’s development, including by the

government itself. While corruption clearly is

a problem, it mainly exists at a petty level,

and examples of scandals at large companies

are rare. Investors say corruption doesn’t

affect them. On Transparency International’s

Global Corruption Perception Index, an

annual survey of international executives,

Vietnam ranks 114 out of 159 countries but,

in Asia, it is perceived to be less corrupt than

the Philippines, Indonesia or Pakistan, and is

not much worse than India (see Table 17).

17. Corruption perceptions for emerging Asia

2005 2003 vs 2003

Taiwan 5.9 5.7 2% Malaysia 5.1 5.2 -3% South Korea 5.0 4.3 15% Thailand 3.8 3.3 17% China 3.2 3.4 -6% India 2.9 2.8 5% Vietnam 2.6 2.4 9% Philippines 2.5 2.5 3% Indonesia 2.2 1.9 16% Pakistan 2.1 2.5 -16%

Source: Transparency International (Higher score=less corruption)

Could Vietnam end up like China in the early

days of its stock market? Many investors will

remember that the Shenzhen B share index

fell by 52% between 1993 and 1998 (Chart

18), despite China’s GDP growing by an

average 10.6% a year during that time.

However, we do not believe this is a valid

comparison. As described earlier, the

equitisation process in Vietnam has been

much more thorough and resulted in real

privatisations. Foreign investors have much

easier access to the market. There is no

complicated set-up with H, A and B shares.

Individual wealth in Vietnam is much more

limited than in China, and so there is unlikely

to be the same speculative scramble to buy

shares. And, perhaps most importantly,

Vietnam has been able to learn from China’s

mistakes.

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18. Chinese B share indexes 1993-2000

0

50

100

150

200

1993

1994

1995

1996

1997

1998

1999

Shenzhen B Shanghai B

Source: Bloomberg

Bird flu. Vietnam has had by far the largest

number of bird flu cases (93 – 45% of the

world total) and deaths (42 – 37%) of any

country, according to the WHO. If a

pandemic were to break out, investors might

perceive that Vietnam was particularly at risk.

On the other hand, Vietnam has not reported a

single new case this year (when globally there

have been 61 cases and 37 deaths). One could

also argue that the higher numbers are

because its reporting of bird flu cases has

been more honest than other countries’.

Other ways to get exposure We believe that direct purchases of equities –

notwithstanding the illiquidity of the market and

somewhat expensive valuations – are the best way

to gain exposure to Vietnam. But there are other

methods which investors can consider.

Country funds

The first Vietnam country funds were set up in

1994, with the first wave of interest in the

country. But many of these funds, which were

private equity focused since the stock market did

not open until 2000, lost much of their value as

the Asia crisis hit Vietnam in 1997-8.

Table 19 shows a full list of all 12 Vietnam

country funds. The key publicly traded funds are

as follows:

Dragon Capital’s three Dublin-listed funds:

Vietnam Enterprise Investment Limited

(VEIL), with funds of USD346m, Vietnam

Growth (USD193m) and Vietnam Dragon

Fund (USD96bn). The last of these is targeted

purely at Japanese investors.

PXP Asset Management’s two Dublin-listed

funds from: the PXP Vietnam Fund (assets

USD49m), and the PXP Vietnam Emerging

Equity Fund (USD48m). The latter fund has a

bias towards pre-listing stocks (which can be

up to 60% of the portfolio) and offshore

Vietnam-related names (up to 30%). The PXP

Vietnam Fund must have 70% of its

19. Vietnam country funds

BBG code Fund Management Co Incept Date

Country PrimaryExchange

Premium to NAV

(%)

Chg Pct Ytd

Fund NAV

(USD mn)

VIETENI KY Equity Vietnam Enterprise Inv Ltd Dragon Capital 11/8/1995 Cayman Dublin n/a 65.1 346.0VOF LN Equity Vietnam Opportunity Fund Ltd VinaCapital 9/30/2003 Cayman London 34 35.0 229.4VNL LN Equity Vinaland Ltd Vinaland 3/22/2006 Cayman London 12 n/a 198.7VIETNGF KY Equity Vietnam Growth Fund Ltd Dragon Capital 9/15/2004 Cayman Dublin n/a 36.5 192.8VNH LN Equity Vietnam Holding Ltd VNH n/a Vietnam London n/a n/a 113.3VIETVDF BH Equity Vietnam Dragon Fund Dragon Capital 12/16/2005 Bermuda Dublin n/a 15.0 96.0PXPVIET KY Equity PXP Vietnam Fund Ltd PXP Vietnam Asset Mant. 12/31/2003 Cayman Dublin n/a 41.8 49.4PXPVEEF KY Equity PXP Vietnam Emerging Equity PXP Vietnam Asset Mant. 11/3/2005 Cayman Dublin n/a 24.8 48.0TVF US Equity Templeton Vietnam SE Asia Fund Templeton 9/15/1994 US n/a -2 n/a 42.4VFMVF1 VN Equity Vietnam Sec Investment Fund VietFund Management n/a Vietnam Vietnam 13 125.7 42.3VIETNAP KY Equity Vietnam Frontier Fund Finansa 7/31/1994 Cayman n/a n/a n/a 9.9BVF LN Equity Beta Viet Nam Fund Limited Williams De Broe 8/3/1995 UK n/a n/a n/a 8.0LAZVFLI OS Equity Lazard Vietnam Fund Limited Lazard n/a Jersey n/a n/a n/a n/a

Source: Bloomberg

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investment in listed stocks. PXP is planning a

third fund for launch later this year.

The VF1 Investment Fund, managed by

VietFund Management and listed on the Ho

Chi Minh City Securities Trading Center.

This too has a strong skew to unlisted stocks:

as of June 30, 77% of the portfolio was in

unlisted companies, 19% in listed and 4% in

cash. VietFund Management is planning to

increase the size of the fund (currently

USD42m) and perhaps to split it in two. It

will also soon start to pre-market three new

funds, and is interested in open-ended funds

when these are allowed, possibly in 2007.

The Vietnam Opportunities Fund, run by

VinaCapital and listed on the AIM board of

the London Stock Exchange. This has assets

of USD229bn, and trades at a premium of

34% to NAV. It is perceived to be more

conservative than the other funds, with less

volatile performance. Vina also runs a

USD199m fund investing in Vietnamese

property.

Other funds are likely to be launched over the

next few months. Prudential is said to be planning

to list a closed-end fund on the HCMCSTC in

October. There are also many domestic “member

funds”, essentially privately placed mutual funds.

These are used by local institutions, such as

insurers and banks, as well as by companies as

proxy pension schemes (there are no pure pension

funds in Vietnam yet). They can potentially also

be used by foreign investors as an effective way to

buy into Vietnamese stocks.

Real estate

The property market is very underdeveloped and

therefore should offer some attractive

opportunities for long-term investment. For

example, Ho Chi Minh City has only five Grade

A office buildings, and Hanoi only nine,

according to CB Richard Ellis. Occupancy rates

for all types of office space in HCMC are close to

97% (see Chart 20). There are only 519 Grade A

serviced apartment units in HCMC, and only

3,400 5-star hotel rooms. Foreigners may not own

property outright, but can buy 50-year leaseholds.

20. Office occupancy rates in Ho Chi Minh City

0%

20%

40%

60%

80%

100%

1995 1997 1999 2001 2003 2005

Source: CB Richard Ellis

But, short-term, the market has already risen a lot.

There is no good official data, but investors say

that the price of land in the central business

district of HCMC has gone up by as much as 10

times since 2001, and now costs USD5,000 per

square metre. Since 2004, a large number of high-

end apartments have been built in central HCMC

and, with prices for the best apartments reaching

USD2,500 per square metre, are by no means

cheap by the standards of the rest of Asia. Large

new developments, such as the Taiwanese-

developed Phu My Hung in South Saigon, have

soaked up demand for now. Good land sites are

becoming hard to find (with state-owned

companies liable to hang onto the land they have

inherited) and banks may lend only up to

USD20m for each building project. As a result of

this, since last year, the property market has been

weak and most investors expect this to continue

for some time longer.

Proxy equity investment

With the rise in valuations of Vietnamese stocks

this year, many international investors have

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looked at overseas-listed companies with links to

Vietnam as a proxy way of gaining exposure.

Some of the Vietnam country funds (see above)

are allowed to hold a significant percentage of

their portfolios in such stocks. What these

investors have in mind is how exposure to

Chinese growth was, until recently, better gained

by buying Hong Kong, Taiwanese – or even

Japanese and Korean companies – than by direct

investment in Chinese ones.

In our view, however, this is not a good analogy.

Hong Kong and Taiwan have many large

companies with a significant proportion of their

business in mainland China. This is not the case

with Vietnam. In addition, the size of China’s

economy means that for some exporters (for

example, Japanese construction machinery

manufacturers or Australian commodities

producers) the Chinese market is the key driver of

profit growth. Vietnam is simply not big enough

to have the same effect. We would also argue that

most of the problems with investing in Chinese

equities, at least in the early stages (division into

A, B and H shares, limited access to the domestic

market, continuing high state ownership,

uncertainty about which of a company’s assets

had been listed and which remained with a

parent), do not exist in Vietnam.

Table 21 shows a list of companies which have

exposure to Vietnam and which could be bought

as proxies. There are some small-cap companies

in the list which do have significant exposure. The

main business of Toronto-listed Tiberon

Minerals’, for example, is its stake in the Nui

Phao mine, which produces tungsten, fluorspar

and bismuth. Olympus Pacific Minerals explores

for gold in Vietnam. Both of these are legitimate

Vietnam plays – but they have market caps of

21. Offshore-listed Vietnam proxy plays

BBG code

Name Industry Exchange Mkt cap

(USDm)

Ave daily trade

(USDm)

Chg Pct Ytd

Description

AMATA TB Amata Corp Public Co Ltd Real Estate Oper/Develop Bangkok 419 1.7 2.8Develops industrial zones APB SP Asia Pacific Breweries Ltd Brewery Singapore 2,530 1.1 72.2 Sells Tiger beer ASN CN Asian Mineral Resources Ltd Metal-Diversified Venture 25 0.0 57.1 Nickel/copper mine 162 HK China Golden Development Hol Cruise Lines Hong Kong 17 0.1 32.5 Cruise organiser 7877 JP Eidai Kako Co Ltd Rubber/Plastic Products JASDAQ 24 0.1 -47.0 Plant in Vietnam FSG PW Grupa Kapitalowa Fasing S.A. Metal Processors&Fabrica Warsaw 10 0.0 71.9 Plant in Vietnam 016450 KS Hansae Co Ltd Apparel Manufacturers Korea SE 67 0.1 6.2 Plant in Vietnam 6904 JP Harada Industry Co Ltd Auto/Trk Prts&Equip-Repl JASDAQ 76 0.1 -17.3 Plant in Vietnam 7279 JP Hi-Lex Corp Wire&Cable Products Osaka 486 0.3 -19.0 Plant in Vietnam HT TB Hua Thai Manufacturing Pcl Apparel Manufacturers Bangkok 26 0.0 -1.0 Plant in Vietnam 2332 HK Hutchison Telecommunications Cellular Telecom Hong Kong 8,297 6.5 21.3 Stake in mobile company 6440 JP Juki Corp Appliances Tokyo 718 8.2 13.8 Plant in Vietnam MINT TB Minor International Pcl Hotels&Motels Bangkok 744 0.6 50.4 Anantara hotels 7211 JP Mitsubishi Motors Corp Auto-Cars/Light Trucks Tokyo 9,693 50.6 -15.5 Plant in Vietnam 7230 JP Nissin Kogyo Co Ltd Auto/Trk Prts&Equip-Orig Tokyo 1,384 3.4 15.3 Plant in Vietnam NPX NZ Nuplex Industries Limited Chemicals-Plastics NZX 801 1.2 41.1 Plant in Vietnam ONGC IN Oil & Natural Gas Corp Ltd Oil Comp-Explor&Prodtn Mumbai 36,652 8.2 1.6 Oil exploration OYM CN Olympus Pacific Minerals Inc Gold Mining Toronto 68 0.0 27.8 Gold miner in Vietnam PDI TB Padaeng Industry Pub Co Ltd Non-Ferrous Metals Bangkok 214 1.0 104.3 Mines zinc ore SIP BB Sipef Nv Agricultural Operations EN 217 0.1 16.0 Plantations in Vietnam SIA LN Soco International Plc Oil Comp-Explor&Prodtn London 1,756 8.6 64.5 Oil exploration 1904 JP Taisei Oncho Co Ltd Engineering/R&D Services JASDAQ 61 0.1 -17.2 Engineering in Vietnam TBR CN Tiberon Minerals Ltd Metal-Diversified Toronto 178 0.2 -4.4 Stake in Nui Phao mine TPJ LN Triple Plate Junction Plc Gold Mining London 29 0.0 -28.9 Gold miner in Vietnam TRI GR Triumph International Ag Apparel Manufacturers Frankfurt 244 0.0 2.6 Plant in Vietnam 2597 JP Unicafe Inc Coffee Tokyo 99 0.1 -1.7 Coffee VII AU Vietnam Industrial Inv Ltd Metal Processors&Fabrica ASX 6 0.0 -20.0 Steel producer 551 HK Yue Yuen Industrial Hldg Athletic Footwear Hong Kong 4,393 3.9 -2.5 Plant in Vietnam ZIIC AB Zamil Industries Steel-Producers Saudi Arabia 1,449 32.4 -12.8 Plant in Vietnam

Source: HSBC, Bloomberg

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USD178m and USD68m respectively. Hutchison

Telecommunications (2332 HK, Overweight),

which will launch a mobile phone service in

Vietnam in either late 2006 or early 2007, is an

interesting option on the market although, even if

the business succeeds, it is unlikely to represent

more than 2% of HTIL’s enterprise value.

We are less convinced, however, that other

companies on the list represent real exposure to

Vietnam. Yue Yuen, for example, manufactures

31% of its shoes at its plants in Vietnam, but

almost all of these are for export. The same is true

of other manufacturers with plants in Vietnam.

Other investors go even further and include

companies like Air India, OCBC or Kepco, all of

which have some interests in Vietnam. We find it

hard to see how, even if Vietnam takes off, these

companies will see more than a minimal impact to

their profits.

Bonds

Foreigners can buy Vietnamese government debt

and other bonds, which trade mainly on the Hanoi

Securities Trading Center. But yields are not

particularly attractive: 5-year government bonds

yield around 8.3% and 10-year bonds yield 8.9%.

But, with inflation at 7.5%, real yields are low.

Foreign investors also face a 20% withholding tax

on interest income (and, confusingly, this could

soon be switched to a 0.1% tax on the principal

amount each time a bond is sold).

Vietnam issued its first foreign currency

sovereign bond last year, with a principal value of

USD750m maturing in January 2016. But this

trades at a spread of only 148 bp over US

Treasuries. That is significantly less than the

spreads on foreign currency bonds issued by the

two countries in Asia with similar credit ratings:

Indonesian USD debt of a similar maturity trades

at a spread of 179 bp and the Philippines at a

spread of 203 bp. All three have BB- ratings from

Moody’s. Our credit research team believes that

Vietnam’s fundamentals would justify an upgrade

to BB over the next six to nine months (see the

chapter on “Credit assessment” in our economics

report for a detailed explanation of why).

Private equity

A number of foreign funds – most notably Dragon

Capital – get involved with state-owned

companies prior to the equitisation process and

essentially offer free corporate finance advice in

the run-up to the IPO. This allows them to judge

which companies to bid for in the auction process.

It also allows them to buy into companies where

the management is just starting to gain autonomy

and where the immediate upside could therefore

be large. The eventual listing of the company

offers a simple exit strategy.

This is clearly an attractive business for private

equity firms willing to devote the resources to it.

But these resources, naturally, would be large,

including a local presence and the posting to

Vietnam of experienced foreign corporate

financiers. The local asset management

companies have already built strong businesses in

this area, and it would not be easy for a large

international private equity firm to break in

quickly.

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How to buy Vietnamese stocks Custodian banks operating in Vietnam (of which

HSBC is the largest) and local brokers can

provide detailed, specific information on the rules

and procedures for foreigners to trade Vietnamese

stocks. But, to give a taste of the requirements and

issues, we provide here a brief guide.

Setting up

Listed stocks

The procedure for foreign institutional investors

to open a trading account in Vietnamese stocks is

fairly straightforward.

For listed stocks, the investor first needs to apply

for a securities trading code. This requires filling

in a four-page application form (in English) and

appending documents (e.g. the articles of

association and certificate of incorporation) that

describe the institution. These have to be

notarised and consularised by the Vietnamese

consulate in the home country. The supporting

documents have to be translated into Vietnamese

and notarised. The approval process is automatic

(no one can recall an institution being denied a

trading code) and generally takes about two

months. Custodian banks can help with the

application process.

Some investors complain that the process is

cumbersome, and that the authorities require

superfluous information. More seriously, the rules

require that each institution appoint one

“delegated person” who should sign off on each

trade ticket on the day of the trade. This person

does not need to be resident in Vietnam. Many

institutions are reluctant to do this (and custodians

cannot provide this service) and, in practice, trade

tickets tend to be signed in batches once a month

or so. Some institutions also balk at having to

provide a copy of the passport of their delegated

person, typically their CEO or CIO.

OTC stocks

The procedure is different for unlisted stocks. The

foreign institution needs to open a capital

contribution account with a commercial bank and

register this within two weeks with the State Bank

of Vietnam. There is no need to obtain a securities

trading code. Information required is less – the

investor need submit only its certificate of

incorporation.

Practical guide

Opening an account to trade Vietnamese stocks is straightforward

Restrictions on foreign investor activities are light

Procedures for trading listed stocks and OTC stocks are totally

different

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Trading

Listed stocks

Investors can open an account with only a single

broker; all trades must be done through this

broker. There are 16 brokers currently registered,

but the number is likely to increase over the next

12 months. Some international investors are

concerned with the tiny capitalisation of the

brokers – the largest has the equivalent of only

USD6m. No international investment banks have

broking licences yet in Vietnam, but it is expected

that a number of joint ventures (the only form

allowed) will be set up soon. The brokers are

shown in Table 22, ranked in order of the

percentage of foreign turnover they comprised in

2005.

Trades must be pre-funded, i.e. funds need to be

in the account before the order is placed. This is

unusual – in Asia, only Taiwan and China require

it – and market participants are lobbying the State

Securities Commission to lift the requirement for

institutional investors.

On the Ho Chi Minh City Securities Trading

Center (HCMCSTC), there are three matched

order sessions a day (at 8:40, 9:30 and 10.30) and

one negotiated or “put-through” session at 11:00.

Orders for 10,000 units (generally 10 shares per

unit) or more have to be executed via the put-

through system.

Over the past three months, the centre has traded

on average USD5.1m a day. Trading is done

exclusively through terminals on the floor of the

exchange (which is housed in a grand colonial

building that used to be the parliament of the

South Vietnamese regime). The Hanoi Securities

Trading Center trades only about USD250,000 a

day, with 80-90% of trading in one stock, Pha Lai

Thermal Power (PPC).

From Q2 2007, the HCMCSTC will move to a

continuous trading process by upgrading its

system (which was bought from the Stock

Exchange of Thailand). Details of this, including

the trading hours, have not been finalised. It is

likely that trading will then be permitted from

screens in brokers offices.

Listed stocks have been immobilised at the

Vietnam Securities Depository (VSD) and cash

settlement is entirely via the settlement bank

(BIDV). Settlement is T+3, but funds payment is

T+2. In other words, Vietnam does not have a

delivery versus payment system, and investors

22. Vietnamese stockbrokers

Abbreviation Broker Web site Capital (VND bn)

% equityturnover

% foreign equity

trading

ACBS ACB Securities Company Ltd. www.acbs.com.vn 43 12% 36% SSI Saigon Securities Incorporation www.ssi.com.vn 20 17% 34% BVSC Bao Viet Securities joint stock Company www.bvsc.com.vn 43 23% 24% VCBS Vietcombank Securities Company, Ltd. www.vcbs.com.vn 60 8% 3% AGRISECO Agribank Securities Company, Ltd 100 4% 2% FSC The First Securities Company www.fsc.com.vn 43 4% 1% HSC HoChiMinh City Securities Corporation www.hsc.com.vn 50 3% 1% DAS Eastern Asia Bank Securities Company, Ltd www.eabbank.com.vn 21 3% 0% MKS MeKong Securities Corporation www.mekongsecurities.com.vn 6 1% 0% BSC BIDV Security Company, Ltd www.bsc.com.vn 100 11% 0% ICBS Incombank Securities Company, Ltd 55 8% 0% TSC Thang Long Securities Company, Ltd 43 7% 0% HASECO Hai Phong Securities joint stock Company 22 1% 0%

HBBS Habubank Securities Company Ltd n/a n/a n/a DVSC Dai Viet Securities Corp n/a n/a n/a ABSC Anh Binh Securities Company Ltd n/a n/a n/a

Source: State Securities Commission, Ho Chi Minh Securities Trading Center

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must take overnight exposure to the settlement

bank. Once the trade has been executed,

communication takes place directly between the

depository and the investor’s custodian.

Commissions are capped at 50bp, but brokers

publicly advertise 25bp and large institutions say

they typically pay 20bp.

Restrictions on foreign investors are light.

Foreigners can buy up to 49% of listed stocks

(and the listed investment fund) except banks,

where the limit is 30% (and 10% per investor).

The trading system will not accept orders from

foreign investors that would take the ownership

level above the limit. (As mentioned earlier in this

note, discussion is ongoing about raising the limit

to 100%, except for sensitive sectors.) There are

no FX restrictions or limits on repatriating

capital, provided that the transactions were for

securities trading. The investor’s account may be

used only for securities.

The only tax on equities for overseas investors is

a securities transaction tax of 0.1% of gross sale

proceeds. There is no withholding tax on

dividends, or capital gains tax.

Short-selling and securities lending are not

permitted. Daily fluctuation of listed stock prices

is limited to ±5%.

Some international investment banks have begun

to sell participatory notes offshore, using their

own securities trading code. This is useful for

overseas investors who do not have direct access

to the Vietnamese market. However, the system is

not formally approved by the Vietnamese

authorities (trades don’t have to be reported, for

example) and some local fund managers are

lobbying to have it stopped. This will particularly

become an issue now that many of the largest cap

stocks have reached their foreign investor limits:

the notes in these names could start to trade at a

premium to the local-traded underlying stock.

OTC stocks

Trading in unlisted stocks is largely unregulated.

Two big brokers post indicative prices in the

HCMCSTC’s daily bulletin. Other brokers have

prices available on request. Not only brokers, but

other fixers and middlemen, are able to source

stocks.

Stock is still in the form of physical scrip

(although this should change next year when the

new Securities Law takes effect). The broker

controls the process of trading: some may require

a margin payment ahead of the trade but there is

no legal requirement for this.

Settlement can take between one and three

months. After registration of the change of

ownership (usually with the company itself), the

physical paper is transferred to the broker.

Custodians, including HSBC, will hold the paper

and arrange payments on behalf of investors.

Foreigners are limited to owning 30% of unlisted

stocks, but this is very hard to monitor and police

since most companies handle their own stock

registrations and the level of foreign ownership is

not publicly known. Market observers say that

some OTC stocks may well already be over their

limit, but foreigners have been allowed to

continue to buy.

Disclosure and corporate governance

Approval for listing is currently given by the

State Securities Commission, but this will switch

to the HCMCSTC (which will be renamed the

Vietnam Stock Exchange) when the new

Securities Law comes into effect next year.

Companies to list in Ho Chi Minh must have

authorised capital of at least VND5bn, two

consecutive years of net profit, and a healthy

financial situation. The authorities also look at the

composition of the board of directors. (The capital

required to list on the Hanoi Securities Trading

Center is less.)

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As for disclosure, after listing, companies are

required to post quarterly financials (including

P&L, balance-sheet and cash flow statement),

monthly trading updates (for example, sales data),

as well as to disclose any material information.

This is all posted on the HCMCSTC web site, and

most is translated into English.

OTC-traded stocks have no requirement on

disclosure. The only way to see their financials is

to ask the company (or get them from a broker

that has asked the company).

Investors have to make a disclosure filing to the

State Securities Commission if they buy 5% or

more of a listed company. After this, each trade

has to be reported, until ownership falls below 5%

again.

Useful resources Finding information on the Vietnamese equity

market is not a simple matter. The usual data

vendors have very limited coverage. Broker

research is almost non-existent. Even finding a

description of what a company does can be hard.

There are no published earnings forecasts, and so

no consensus data. Even figuring out the market

cap or historic PE of a stock can be very time-

consuming. The internet offers some information,

but most Vietnam-based sites are very slow and

badly designed.

Bloomberg carries basic price and turnover data

for the 48 stocks listed in Ho Chi Minh City, but

no earnings numbers. For the overall Ho Chi

Minh market, it also has index, turnover and

advances/declines data. Datastream has nothing

on Vietnamese stocks. CEIC carries only monthly

stock market price and turnover data (but a good

range of economic series).

The main source of corporate information is the

Ho Chi Minh City Securities Trading Centre

(www.vse.org.vn). This carries various price data

and all corporate announcements (although these

are not easily searchable by company). There are

comprehensive descriptions of the rules and

processes for trading stocks. Unfortunately, the

web site is excruciatingly slow and pages crash

more often than they load properly. The

HCMCTC’s daily bulletin, available on the web

site, is also essential reading for local brokers: it

carries official announcements, statistics, and

indicative prices for around 60-70 OTC stocks

posted by two brokers. It is only in Vietnamese

but most of the tables are easily decipherable for

non-Vietnamese speakers.

The web site of the Hanoi Securities Trading

Center (www.hastc.org.vn) is in Vietnamese only,

has only limited information, and is even slower

than its counterpart in Ho Chi Minh.

The web sites of the biggest local brokers are a

useful source of information. Saigon Securities

has probably the best of these. Its site

(www.ssi.com.vn) carries some basic research on

most of the Ho Chi Minh listed stocks, with

descriptions of what the company does, its history

and (often rather out of date) financials. It also

presents the securities trading centres’ data in a

slightly more user-friendly format. Vietcombank

Securities (www.vcbs.com.vn) has similar

information, and the best tables for market data.

Some of the large-cap companies that institutional

investors might want to invest in have good web

sites with some IR-type information. The web

sites of the following are worth referring to if you

are planning to meet or invest in the company:

Asia Commercial Bank (www.acb.com.vn)

Kinh Do (www.kinhdofood.com)

REE (www.reecorp.com)

Sacombank (www.sacombank.com.vn)

Vinamilk (www.vinamilk.com.vn)

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Government sites are generally not very useful.

The State Securities Commission web site

(www.ssc.gov.vn) has some legal documents not

available elsewhere, but is rather out of date. The

State Bank of Vietnam has a web site

(www.sbv.gov.vn) that is only in Vietnamese. The

Ministry of Finance site (www.mof.gov.vn), on

the other hand, carries a surprisingly wide range

of policy papers and has a searchable database of

regulations and laws. It is also fast.

There are a number of web-based news sites, but

all appear to be at least partly sponsored by the

government and therefore offer the bland official

news found in most communist countries. There

are, however, occasional technical reports on

industrial sectors which may be of use. The best

of these sites are:

Viet Nam News

(www.vietnamnews.vnagency.com.vn)

VietNamNet Bridge (english.vietnamnet.vn)

Thanh Nien News

(www.thanhniennews.com)

Vietnam Investment Review

(www.vir.com.vir).

In the end, there is no substitute for on-the-ground

research. Companies are generally willing to meet

investors – although the biggest ones which have

reached the foreign ownership limit are becoming

increasingly reluctant. Visits to government

officials, the securities trading centres, and local

brokers (who are well set up to deal with foreign

investors) are also worthwhile. The financial

community in Ho Chi Minh is small, and most of

its members are only too delighted to chat about

the market. HSBC is able to help arrange trips for

clients who want to go to Vietnam to “kick the

tyres”.

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Disclosure appendix This report is designed for, and should only be utilised by, institutional investors. Furthermore, HSBC believes an investor's decision to make an investment should depend on individual circumstances such as the investor's existing holdings and other considerations.

Analysts are paid in part by reference to the profitability of HSBC which includes investment banking revenues.

For disclosures in respect of any company other than the primary subject(s) of this research, please see the most recently published report on that company available at www.hsbcnet.com/research.

The following analyst(s), who is(are) primarily responsible for this report, certifies(y) that the views expressed herein accurately reflect their personal view(s) about the subject security(ies) and issuer(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report: Garry Evans

* HSBC Legal Entities are listed in the Disclaimer below.

Additional disclosures 1 This report is dated as at 1 September 2006. 2 All market data included in this report is dated as at close 30 August 2006, unless otherwise indicated in the report. 3 HSBC has procedures in place to identify and manage any potential conflicts of interest that arise in connection with its

Research business. HSBC's analysts and its other staff who are involved in the preparation and dissemination of Research operate and have a management reporting line independent of HSBC's Investment Banking business. Chinese Wall procedures are in place between the Investment Banking and Research businesses to ensure that any confidential and/or price sensitive information is handled in an appropriate manner.

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Disclaimer *Legal entities as at 25 August 2006 HSBC Bank Middle East Limited, Dubai; The Hongkong and Shanghai Banking Corporation Limited, Hong Kong; HSBC Securities (Asia) Limited, Taipei Branch; HSBC Securities (Canada) Inc, Toronto; HSBC Securities (France), Paris; HSBC Trinkaus & Burkhardt AG, Dusseldorf; 000 HSBC Bank (RR), Moscow; HSBC Securities and Capital Markets (India) Private Limited, Mumbai; HSBC Securities (Japan) Limited, Tokyo; HSBC Securities Egypt S.A.E., Cairo; HSBC Investment Bank Asia Limited, Beijing Representative Office; The Hongkong and Shanghai Banking Corporation Limited Singapore branch; The Hongkong and Shanghai Banking Corporation Limited, Seoul Securities Branch; HSBC Securities (South Africa) (Pty) Ltd, Johannesburg; HSBC Pantelakis Securities S.A., Athens; HSBC Bank plc, London, Madrid, Milan, Stockholm, Tel Aviv, HSBC Securities (USA) Inc, New York; HSBC Yatirim Menkul Degerler A.S., Istanbul; HSBC Stockbroking (Australia) Pty Limited.

Issuer of report The Hongkong and Shanghai Banking Corporation Limited Level 19, 1 Queen’s Road Central Hong Kong SAR Telephone: +852 2843 9111 Telex: 75100 CAPEL HX Fax: +852 2596 0200 Website: www.hsbcnet.com/research

This document has been issued by The Hongkong and Shanghai Banking Corporation Limited ("HSBC") in the conduct of its Hong Kong regulated business for the information of its institutional and professional customers; it is not intended for and should not be distributed to retail customers in Hong Kong. The Hongkong and Shanghai Banking Corporation Limited is regulated by the Securities and Futures Commission. All enquires by recipients in Hong Kong must be directed to your HSBC contact in Hong Kong. If it is received by a customer of an affiliate of HSBC, its provision to the recipient is subject to the terms of business in place between the recipient and such affiliate. This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. HSBC has based this document on information obtained from sources it believes to be reliable but which it has not independently verified; HSBC makes no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of the Research Division of HSBC only and are subject to change without notice. HSBC and its affiliates and/or their officers, directors and employees may have positions in any securities mentioned in this document (or in any related investment) and may from time to time add to or dispose of any such securities (or investment). HSBC and its affiliates may act as market maker or have assumed an underwriting commitment in the securities of companies discussed in this document (or in related investments), may sell them to or buy them from customers on a principal basis and may also perform or seek to perform investment banking or underwriting services for or relating to those companies. In the UK this report may only be distributed to persons of a kind described in Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2001. The protections afforded by the UK regulatory regime are available only to those dealing with a representative of HSBC Bank plc in the UK. HSBC Securities (USA) Inc. accepts responsibility for this research report prepared by its foreign affiliate. All U.S. persons receiving this report and wishing to effect transactions in any security discussed herein should do so with HSBC Securities (USA) Inc. in the United States and not with the foreign affiliate, the issuer of this report. Note, however, that HSBC Securities (USA) Inc. is not distributing this report, has not contributed to or participated in its preparation, and does not take responsibility for its contents. In Singapore, this publication is distributed by The Hongkong and Shanghai Banking Corporation Limited, Singapore Branch for the general information of institutional investors or other persons specified in Sections 274 and 304 of the Securities and Futures Act (Chapter 289) (“SFA”) and accredited investors and other persons in accordance with the conditions specified in Sections 275 and 305 of the SFA. This publication is not a prospectus as defined in the SFA. It may not be further distributed in whole or in part for any purpose. The Hongkong and Shanghai Banking Corporation Limited Singapore Branch is regulated by the Monetary Authority of Singapore. In Australia, this publication has been distributed by HSBC Stockbroking (Australia) Pty Limited (ABN 60 007 114 605) for the general information of its “wholesale” customers (as defined in the Corporations Act 2001). It makes no representations that the products or services mentioned in this document are available to persons in Australia or are necessarily suitable for any particular person or appropriate in accordance with local law. No consideration has been given to the particular investment objectives, financial situation or particular needs of any recipient. In Japan, this publication has been distributed by HSBC Securities (Japan) Limited. It may not be further distributed in whole or in part for any purpose. © Copyright. The Hongkong and Shanghai Banking Corporation Limited 2006, ALL RIGHTS RESERVED. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, on any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of The Hongkong and Shanghai Banking Corporation Limited. MICA (P) 137/08/2006

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Global Equities Kevin Gardiner Head of Global Equity Strategy +44 20 7991 6714 [email protected]

Robert Parkes +44 20 7991 6716 [email protected]

Patrik Schöwitz +44 20 7991 6702 [email protected]

Asia Pacific Equities Garry Evans Head of Pan-Asian Equity Strategy +852 2996 6916 [email protected]

Steven Sun +852 2822 4298 [email protected]

Akane Nishizaki +813 5203 3943 [email protected]

Jeffrey Fang +852 2996 6602 [email protected]

Emerging Equities John Lomax +44 20 7991 5204 [email protected]

Global Equity Strategy Team

vietnamese equities - hsbc review

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