GLOBAL INVESTMENT RESEARCH
GLOBAL INVESTMENT RESEARCH
REPORT ON
THE EQUITIZATION PROCESS IN VIETNAM
RESEARCHED AND WRITTEN BY:
CHRIS FREUND
NOVEMBER 1994
TABLE OF CONTENTS:
Introduction:
The current state of Vietnam’s economy. 2
The status of the stock exchange. 4
The unreliability of information on the formation of capital markets in Vietnam. 4
Part A: The Stock Exchange:
Why they are equitizing. 5
The three basic types of companies to sell equity. 6
Requirements for issuing equity and debt. 7
The proposed structure of the stock exchange. 7
The legal framework for the stock exchange. 9
Thee sovereignty of the shareholders of equitized companies. 10
Limitations on foreign shareholders 10
The problem of accuracy in financial accounting. 11
Other risk promoting factors in Vietnamese firms. 12
Capital gains taxes and other fees related to the sale of equity shares. 13
Convertibility of the Vietnamese dong. 13
The focus of foreign capital in direct investments. 14
Some large specific foreign investors and projects. 15
The attractive aspects of equity investment at this time. 16
The bond market. 16
Part B: Thee Prominent Companies in Vietnam:
Four State owned enterprises have already been equitized. 17
Problems with equitization so far. 17
Other companies are also under evaluation for equitization. 18
Leading State owned enterprises. 18
Leading joint-stock banks and finance companies. 21
Leading private companies. 22
Part C: Influence and Power in the Vietnamese Business World:
The roles of government ministries. 24
Important government ministries in capital and financial markets. 24
Some influential people in government ministries. 25
The nature of influence in the private sector. 26
Key influential people and the companies they are involved with. 26
Foreign investment funds. 28
Foreign capital financing and consulting companies. 28
Appendix: Miscellaneous Information:
Trends and observations. 29
Citations: 31
INTRODUCTION
THE CURRENT STATE OF VIETNAM'S ECONONY
Vital statistics:
Doi moi, the process of transforming Vietnams centrally-planned economy into a market-driven economy, began in 1986 after the near collapse of their economic system The positive results of this difficult transition are evidenced in higher GDP growth rates, significantly lower inflation, increased foreign investment, and increasingly market determined capital flow. The conditions are rapidly improving for the establishment of a liquid capital market in Vietnam.
* GDP: With a population of 70 million and estimates of this year's GDP between US $14 billion and $17.5 billion, the per capita GDP is around $220. However there is a large gap between urban and rural. standards of living as 80% of the population is employed in agriculture, and the urban per capita GDP is closer to $450. The current GDP growth rate is 8.5% and they aim to maintain it above 8% through the year 2000.
* Industrial output: In the first nine months, industrial output is up 13.3% over 1993 levels.
* Trade balance: In the same period, imports amounted to $2.9 billion and exports totaled $2.5 billion, resulting in a $400 million trade deficit.
* Inflation: Although the government was aiming to contain this year's inflation rate to the single digits, inflation for the first nine months of 1994 was 9.9%. Half of this rise in prices can be accounted for by the annual January and February spending frenzy due to the popular Tet holiday season. This is a significant improvement from the 700% inflation rate in 1988.
Maior industries and exports:
The major export commodities of Vietnam include crude oil, rice, sea products, and coffee. Agricultural and handicraft products account for 65% of Vietnam’s exports.
* Oil: Crude oil production is valued at $500 million this year as output is expected to reach 7 million tonnes by the end of 1994, up 15% from 1993 levels. Crude oil production is expected to hit 20 million tonnes per year by 2000 as there are some major oil fields in the South China Sea. Currently 2 refineries are being planned which will process a total of 11.5 million tonnes/year.
* Rice: Vietnam is the world's 3rd largest exporter of rice. They produced 23 million tons of rice this year and sold $450 to $500 million of rice for export.
* Sea Products: Sea products accounted for $369 million in export turnover last year, and by the year 2000, sea products are expected to bring in $1 billion in export revenues and employ over 4 million workers.
* Coffee: 1994's total coffee output is expected to be 200,000 tons with estimates of export turnover ranging from $200 to $400 million. (Exporters sold near the low in the coffee futures market this year.)
* Tourism: Tourism is also an important source of foreign currency and growing rapidly.
* Manufacturing: Garments, shoes and handicrafts are generally the only manufactured goods which are competitive enough in terms of price and quality to be exported into international markets. The 1994 export value of garments and textiles is expected to be $400 to $450 million. This industry is positioned to surpass $1.5 billion in export turnover by 2000. In the coming years, electronics components will also likely become a major export.
Current trends: real estate and propertv development:
Besides a general orientation towards import-export (hence all the companies whose names end 13,11EX"), very many Vietnamese companies seem to have a substantial desire to be involved in real estate and property development in addition to their "main" business. The model of the overseas Chinese real-estate, property development, trading, and manufacturing conglomerates seems to underlie many Vietnamese business plans. However, there are still ambiguities in the legal definitions of land rights and ownership which makes this area all the more risky.
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Economic reforms and changes in the role of government:
The economic reforms initiated by the doi moi policy have necessitated a changing role for many government ministries from an emphasis on politics to an emphasis on economics. Many government ministries are beginning to resemble private economic entities which hold interests or complete ownership of the state owned enterprises (SOE) in their field. It is becoming their business and interest to promote and encourage the selfsufficiency, economic vitality and entrepreneurial spirit in those companies as a means of assuring their position in the future market economy. In this way, government ministries are guarantying their own power and importance as owners and managers of businesses while their roles in a centrally planned and subsidized economy come to an end.
Joint Ventures:
Joint Ventures (JV's) are the driving force behind Vietnam's business world today. The common perspective among foreign investors is that the Vietnamese IV partner usually has little or no cash, little or no technical skills and know-how, and little or no experience managing internationally competitive and profitable businesses. So when joint ventures are signed, the foreign side provides the capital, equipment, technology, training, and management expertise whereas the Vietnamese side usually provides the labor and land rights, which are commonly overvalued due to an arbitrary land valuation process. However, there are exceptions to this and some of the Vietnamese partners are more influential and powerful in terms of getting things running smoothly (i.e. overcoming government related obstacles and enforcing contract obligations). For instance, some joint ventures which are closely linked to the Ho Chi Minh City (HCMC) People's Committee have faced less obstacles and have overcome others more easily1.
Membership in international trading groups:
Vietnam is seriously pursuing membership in ASEAN (expected sometime in 1995) which reflects a considerable commitment to rapid economic development in Vietnam. Membership would place significant pressure on Vietnamese firms to become very competitive very quickly. The consumer market is already flooded with cheap products from China which are produced more inexpensively and efficiently in China. Most of the high quality consumer goods come from Thailand and Japan. Membership in ASEAN will force Vietnam to become much more efficient or else face a huge trade deficit. Due to the sink-or-swim effect, ASEAN membership will virtually force industries to adapt to free-market principles to enhance efficiency.
Vietnam is also pursuing membership in APEC as well as GATT (WTO). Vietnam currently has enthusiastic international support to join these organizations but actual membership is contingent upon the endorsement of the United States, and is unlikely to be approved until full diplomatic ties are restored between the two countries.
Value of the currency:
Finally, the valuation of the Vietnamese dong, although relatively stable against the dollar for 2 years, is expected by some investors, economists, and politicians to be devalued eventually2. Vietnam is generally considered very expensive compared to other countries at a similar stage of development. Some economists and foreign businessmen argue that the dong could be devalued 20 to 50% over the next 2 years (the print-and-spend approach is being considered3) in order to encourage foreign investment and increase the international competitiveness of Vietnamese products. In fact the Governor of the State Bank asserts "Our policy is to slightly devalue the Vietnamese dong against foreign currencies because we want to encourage exports." 4 Membership in ASEAN and increased international trade links in general will allow international markets to have more of an influence on the value of the dong through more substantial supply and demand pressures.
Inflation is also a looming presence considering that Vietnam is attempting for industrial output growth of over 14% per year, GDP growth of 11 - 12% and that they are competing with, trading with, and influenced by China which has a 27% inflation rate this year as urban incomes are growing rapidly. In Vietnam, this years total inflation rate is estimated at roughly 12% and food prices have been rising sharply.
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STATUS OF THE STOCK EXCHANGE
The schedule:
Originally the National Securities Exchange of Vietnam (NSEV) was planned to open in early 1995, however the official estimate has been pushed back to late 1995. They have already selected a building, but many foreign investors predict it may not open until as late as the end of 1996 due to numerous technical obstacles which must be sorted out. The Governor of the State Bank has said "The current conditions are not yet adequate to support an economic environment involving company shares and the sale of shares and bonds... A system of economic, civil and commercial laws must first be in place.5
It is also necessary to get the inter-bank foreign exchange market in Hanoi running smoothly. The forex opened on October 15, but the turnover has been very light. The forex includes state, private, and foreign banks. At first the NSEV will only trade government bonds until a semi-liquid market is established and all the bugs worked out. Then it will begin to trade a few equitized SOE's and joint-stock companies. Gradually private companies will begin to be traded as they begin to satisfy the public equitization and listing requirements of the NSEV. It is likely to be as long as 4 to 6 years until there is a wide range of traded securities.
The current status of trading equities:
At this time, foreign investors living in Vietnam are allowed to buy equitized SOE's and shares of jointstock banks, but they can not sell until the NSEV is established. Even if they could sell, they can not convert their dong into dollars under the current law. Therefore, anyone who invests now is here to stay. Currently, there are only four equitized companies to choose from.
UNRELIABILITY OF INFORMATION ON THE FORMATION OF CAPITAL MARKETS IN VIETNAM
Economists. foreigners and politicians:
At this stage in the equitization of companies and the creation of the stock market, there are many opinions and few answers. The Vietnamese economists tend to espouse the best case scenario as they tell you what they think you want to bear but tend to avoid important technical details. The foreigners have the experience and the money so their concerns do carry some weight. But the politicians have the last word - and the last word is they are not going to compromise their position of power. Integrating these three perspectives can be challenging, yet it is absolutely prerequisite to the successful development of liquid capital markets in Vietnam. Although there seem to be no insurmountable obstacles, in reading any proposal it is always obvious whose opinion it reflects.
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PART A: THE STOCK EXCHANGE
WHY THEY ARE EQUITIZING
The mobilization of capital:
Currently the banking system of Vietnam has a very low level of capital reserves. It is estimated that there is around $2 billion hidden under various mattresses in Vietnam - money that may find its way into the capital flow as soon as safe, liquid vehicles of investment make themselves available. Historically people hold US dollars outside of the bank because they are scarred of forced conversion into dong which is much more susceptible to devaluation and/or inflation. They are also weary that withdrawal restrictions may be forcefully imposed.
Equitization is part of an effort to attract strong capital flows from abroad, as they see the sale of debt and equity as a good way to attract relatively large amounts of capital to finance businesses and investments6. However, it is still generally unclear if the proceeds from the sale of equity go to the issuer or go to the state. Although unresolved, it seems that it is at the states discretion whether or not to contribute the proceeds of the sale to the company. The catch (and the thing to watch out for) is the Vietnamese want capital but they don't want to give away ownership and control of their companies.
The need for restructuring of SOE's:
Major restructuring is needed at virtually all state owned enterprises as Vietnam's economy embraces market reforms. Equitization will virtually force these companies to become more efficient, self-sufficient, and profitable (as employees will be more motivated by the incentives of their share holdings and dividends whereas unproductive employees are more likely to be fired). Much resistance comes from the fact that in this restructuring many jobs are at stake and unprofitable businesses will be closed altogether. Half of the 12,000 SOE's that existed 5 years ago have been closed or consolidated into bigger companies already.
Employee ownership:
A major goal which is both in line with the socialist ideals of the Vietnamese government and the profit enhancing ideals of the capitalists is to put a large percentage of company ownership in employee hands. This is expected to have an obvious positive effect on company performance.
The tax incentive:
Companies are exempted from the corporate tax (currently a staggering 50%) for the first two years after they equitize. This is a valuable incentive especially considering that local companies have to compete with foreign invested projects which have lower income tax rates at present (25% and lower beginning the first year the enterprise becomes profitable).
The following industries will be prioritized for equitization7
* trade;
* tourism;
* transport;
* consumer-goods;
* service industries.
The following industries will be prohibited or discouraged from equitization:
* utilities and infrastructure (telecommunications, electricity, steel, cement);
* national defense;
* petroleum;
* highly profitable businesses.
SOE's that are currently highly profitable, such as petroleum and even certain beer and tobacco companies, may continue to be held by the state. Equitization of banks is a complicated issue because the State Bank doesn't want to give up control of the banks, yet banks need to generate a substantial capital base most of all.
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THE THREE BASIC TYPES OF COMIPANIES TO SELL EQUITY
Former state owned enterprises:
Although SOE's control 75% of Vietnam's assets and are responsible for 40% of its GDP, they are usually in dire need of major restructuring and lacking modem capital equipment and experience. SOE's still have monopolies in exporting rice, timber, and rubber as well as importing gasoline, fertilizer, iron, steel and cement. They also often have exclusive distribution rights over cement, gasoline, electric power and telecommunications. They will often be equitized in order to raise capital for the state and perhaps for the company, to create incentives through employee ownership and to weed out inept management and employees.
The government will retain a minimum of 30% of the total capital in the company. The government’s shares will either be held by the ministry responsible for the SOE or else an impartial government body will specifically be established to hold state assets. Their representation and power on the board of the company win only reflect the proportion of their equity share. The government will have no special veto powers, however they obviously have the power to significantly influence the workings of the company through legislative and executive actions involving such things as distribution rights, land rights, tariffs, taxes, legal issues, judicial protection, government contracts, etc.
Employees of the company will usually be offered about 40% ownership. Roughly half of their shares can be bought on credit (owed to the company at a 0 to 3.5% annual interest rate which is substantially less than the 21 % market rate) and must be paid back before the shares are transferable. However some employees are wary of buying shares after having been subjected to forced bond sales (at low rates) in the past. For instance, people were forced to buy bonds with negative real interest rates in order to finance the construction of the north-south powerline. There is another instance of employees at a cement company having been forced to finance their company's project at poor rates.
The remaining shares (20 to 30%) will usually be held by domestic and foreign investors. Simple mathematics reveal that roughly only half of the initial market capitalization will be immediately substantiated by cash proceeds from the sale (i.e. 20% from the employees and 30% from outside investors).
Former private companies:
These businesses originate in the private sector and are usually only marginally profitable as far as public disclosure goes (despite the numerous Mercedes in Vietnam which are purchased on top of a 200% luxury tax). They are generally very small (in relation to some SOE's) and are unlikely to be equitized in the next few years. Although they probably have more efficient management (their family) than the SOE's, their capital equipment is often just as outdated and they may see the issuing of equity as a way to raise capital as well as the value of their own remaining shares in the company. Among these companies are likely to be found a few miniature versions of overseas Chinese style real-estate, trading, manufacturing conglomerates with influential links to the Chinese business world. Certain garment manufacturers seem to be at the forefront of these.
Joint-stock companies:
A joint stock company is one that is privately held by a number of shareholders. These companies, which seem to be legally similar to partnerships, are established for the purpose of mobilizing and distributing capital in the Vietnamese economy. Most joint stock companies are very small, but there are currently 43 joint stock banks with a combined total working capital above $320 million. These joint stock banks already have an equity structure so they are leading candidates to be traded on the stock market. They currently have a small number of shareholders (a minimum of 25 to 35), the largest of which is usually various government ministries (the state must hold a minimum of 10%). The founding members must hold at least 20% of the equity and the other available shares can be sold to the public. In joint stock banks, much of the capital is often distributed as loans to small businesses. They play an important role in encouraging the liquid flow of capital and the development of a market economy by making loans where the capital is best utilized. Joint stock banks often specialize in certain sectors such as financing import-export, agricultural projects, or industrial production and they seem to be among the most well-run companies in Vietnam. Joint stock companies can also enter into joint ventures. At the present time, foreigners can be members of the board and even CEO of any joint-stock company8.
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REQUIREMENTS FOR ISSUING EQUITY AND DEBT
Requirements on behalf of the issuer include9:
• Demonstrating continuous profitability for the prior 3 years;
• Having a well formulated project or plan for utilizing the capital;
• Having a guarantee from the MoF or a "prestigious" bank;
• Receiving approval from the MoF and the ministry responsible for the company;
• Truthful disclosure of relevant financial information needed to make an informed assessment of the
assets and liabilities, profits and losses, financial position and general plan of the issuing company.
So far, out of 21 SOE's which applied for equitization, 9 have been approved and 12 have been rejected.
Requirements on behalf of ministry responsible for the issuer include:
• Reviewing the financial plans of the issuer;
• Supervising the issuance and utilization of capital;
• Supervising repayment of debt.
THE PROPOSED STRUCTURE OF THE STOCK EXCHANGE
Trading structure:
Trading will most likely be based on a computerized, order-driven system similar to the Central Limit Order Book (CLOB) of Singapore and operational procedures will parallel the Shenzhen Stock Exchange in China. However, they see the Chinese market as too chaotic and speculative so they will include (as yet undefined) measures to encourage long term investment.
The International Finance Corporation (EFC) prepared a draft of The Structure and Operational Procedures for the Vietnam Securities Market in September 1993. This proposal is a clear and well organized approach for setting up a simple and efficient exchange in Vietnam. It is claimed that the IFC was advised by Vietnamese in preparing this document, but it is unclear to what extent this document reflects the views of the Vietnamese authorities. However, the various Vietnamese proposals do generally approach this plan and there are few overt conflicts of opinion (but there may be covert ones that go unwritten). Certain cynics believe that if these proposals were followed, there wouldn't be enough confusion and disorganization.
Securities dealers:
In the beginning, the four leading commercial banks (Vietcombank, Agribank, Incombank, and the Investment and Development Bank) as well as finance companies will act as brokers until independent brokerage houses are set up. (Note: The Saigon Finance Company may prove to be the most professional brokerage operation due to their involvement with Indochina Partners of New York.) One economist states that the banks won't be allowed to trade shares for themselves10. However, if banks acting as brokerage houses are not allowed to take positions, that would place additional liquidity pressure and increase volatility since they won't be able to take the other side of the trade to suit their client's needs. Another factor to consider is that the banks will often have access to inside information about the equitized companies when those companies hold accounts at or receive loans from the respective banks.
In order for independent securities dealers to be established, they must meet minimum financial requirements as prescribed by the National Securities Commission (NSC). Foreign securities dealers will also be allowed to operate in Vietnam. However, securities dealers can not carry on any other type of business except securities dealing.
Proposed trading rules include the following:
* All securities must be traded at the exchange.
* All transactions must be made in Vietnamese dong.
* All transactions must be made through a registered broker. Brokerage fees have a proposed limit of I %
* Foreign investors will generally be able to freely trade securities without permission.
* Foreign investors may need permission (from the State Bank?) to trade equities in the banking sector.
* Foreign investors will need permission from the National Securities Commission (NSC) and the board
of the relevant company to buy more than the preapproved ownership limit for a single foreign institution.
* Short selling and trading in derivative instruments will not be allowed until the NSC changes the rules.
* When a single economic entity holds 5% or more of the total shares of a company, a report must be filed
with the NSC and disclosed to the public.
* Legal disputes involving the trading of securities can be brought up in the Peoples Courts.
The management of the exchange:
The board of the NSEV will consist of
-A vice-president of the Ho Chi Minh City People's Committee;
-A representative from the Ministry of Finance (MoF);
-The Governor of the State Bank of Vietnam (SBV);
-A representative from the Ministry of Justice;
-A representative from the Office of the Prime Minister;
-A Vice-Chairman of the State Committee for Cooperation and Investment (SCCI);
-A Vice-Chairman of the State Planning Committee;
-A vice-president of the Hanoi People's Committee;
-3 or 4 independent specialists in finance, banking, law, etc.
The representative from the Ho Chi Minh City People's Committee will be president of the board. The board determines all regulations pertaining to the operation of the Stock Exchange11.
The Ministry of Finance is responsible for regulating equitized companies. Their responsibilities include:
• Identifying SOE's to be equitized;
• Establishing procedures for equitization;
• Verifying financial information of issuing companies;
• Supervising the proper flow of investment capital and profits of companies;
• Enforcing the regulations.
The State Bank is responsible for overseeing the bank's involvement with tradable securities. Their responsibilities include:
* Overseeing commercial banks, finance companies, and other financial institutions which will
act as agents and underwriters for the issuing companies;
• Providing guidance to banks and finance companies on the equitization process;
• Regulating the purchasing of equity and debt from the banking and financing sector;
• Creating regulations on the use of bond and share holdings as collateral security.
The MoF and the SBV will work together to:
• Determine the interest rates on bonds (rating corporate debt?);
• Determine the fee structure for brokers and other financial agents involved in securities
transactions.
The MoF will have a leading role in setting up and establishing of the NSEV. This replaces many of the former responsibilities of the State Bank. The Institute of Economics in HCMC has a primary advisory role.
The National Securities Commission (NSC):
The NSC will be an independent regulatory body to oversee that the equitized companies conform to standards for listed companies. The NSC will have the ability to12
* Prescribe rules in relation to the financial management of listed companies;
* Exclude certain economic entities from issuing and/or buying debt or equities;
* Limit the amount of bonds than can be issued in proportion to assets;
*Formulate and revise accounting standards for listed companies;
Approve the acquisition of securities over the prescribed limit for a single economic entity.
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When the market first opens, it will be regulated by the Ministry of Finance and the State Bank until they can adequately set up an independent NSC.
THE LEGAL FRAMEWORK FOR THE STOCK EXCHANGE
The securities law:
The draft National Securities Law prepared by the International Finance Corporation (IFQ in September 1993 provides clear, simple and fair principles for regulating securities transactions in Vietnam. It was prepared in consultation with Vietnamese economists and claims to borrow from the securities laws of Singapore, Canada, Hong Kong, and Australia. However, the official securities law has not yet been passed by the government. There seems to be an informal consensus among many economists that it will be quite similar to the draft.
Proposed laws for financial disclosure on behalf of 2guity issuers:
* Within 120 days after the end of the financial year, a report must be filed with the NSC, the securities
exchange and disclosed to the public, which includes the professionally audited balance sheet, profit and
loss account, cash flow analysis, and changes in the rights of shareholders.
* Within 30 days after the end of each quarter, a report must be filed with the NSC, the securities
exchange and disclosed to the public, which includes the un-audited consolidated financial statement. Unusual items which must be immediately disclosed include:
* Any information that can reasonably be expected to significantly effect the valuation of the
security;
• Any contract which has a significant effect on the assets, liabilities, or rights of the company;
• Any material investments which exceed 20% of the value of existing assets;
• Any incurring of debt exceeding 20% of the value of existing debt;
• Any trading or non-trading losses exceeding 20% of the value of existing debt.
Control of the State's equity assets:
Currently when a SOE is equitized, the ministry that formerly oversaw the enterprise continues to oversee the government's share in the company. However, some important politicians believe that the overseeing ministries should not hold the shares because of the conflict of interest that can arise in the mixing of business and politics -especially because the overseeing ministries usually have legislative and executive jurisdiction over the business sector of the company. These politicians, who want to create a professional business structure for those equitized SOE's, aim to create a central organization to manage the state's equity holdings. However, this issue has not yet been resolved, and is likely to encounter strong resistance from ministries that want to maintain their control over the companies as nobody likes to have power taken away from them.
On the problem of overseas investors receiving up-to-date financial information:
Reuters has won a contract to supply economic information to Vietnam, and Dow Jones Telerate is also hoping to supply information on worldwide securities markets, exchange rates, and other economic news by satellite. It is likely that Dow-Jones Telerate will also eventually carry detailed news of Vietnam's financial markets into other countries.
THE SOVEREIGNTY OF THE SHAREHOLDERS OF EQUITIZED CONUPANIEES
Rights of shareholders:
* All shareholders will have the right to vote in proportion to the size of their share holdings.
* The Government's direct control of management extends only as far as its shares permit.
* Shareholders can vote to change the company charter statement.
* A 2/3 shareholder majority is necessary to effect change in the company.
* Each share carries equal rights in the case of liquidation.
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The board of directors:
* There will be 3 to 12 board members.
* Each member of the board (except the CEO) must be elected by the shareholders at least once every
three years.
• The board can include foreigners in proportion to the size of foreign shareholdings (maximum 30%).
• A 2/3 majority is necessary to effect change in the company.
• Any director (including the CEO) can be removed from office by a majority vote of shareholders.
• The size of the equity holdings of members of the board will be publicly disclosed.
• Board members can not sell or transfer their shares while and for two years after they are on the board.
• A general director (a member of the board) must be appointed to manage day to day business activities.
Restrictions on shareholder sovereignty:
Commercial banking sector shares will be more tightly regulated by the State Bank. There is not yet agreement on this issue, but foreign shareholders can't reasonably expect to take a dominant role in the management of commercial banks. They will be allowed to sit on the board but can't represent more than 1/3 of the board. The appointment and dismissal of chairmen, board members and directors of banks must be approved by the State Bank. This tight government control suggests the continuing presence of certain controls on the flow of capital for the financing of certain industries or companies. On the other hand, foreigners can take a much more active role in the management of joint-stock banks.
LIMITATIONS ON FOREIGN SHAREHOLDERS
Who can trade:
As of September the government permits the sale of securities to13:
* Foreigners resident in Vietnam;
* Foreign-invested enterprises in Vietnam;
* Vietnamese individuals living in Vietnam and abroad;
* Vietnamese enterprises.
It is expected that when the NSEV opens, foreign economic entities with no affiliations to Vietnam will be permitted to trade securities without having an office in or other business relationships with Vietnam, but that has yet to be written into law.
Maximum foreign ownership:
It is proposed that total foreign ownership will be limited to 30% of the outstanding equity of a listed company. It is currently undecided how this will be enforced - but the most likely scenario is the issuance of A and B shares for each company or else registered shares for foreigners.
Maximum ownership levels for single economic entities:
Any individual will be restricted to a 5% stake in equity shares and any institution will be limited to a 10% stake of a listed company, or less if specified otherwise in the company charter. In order to buy more than the 5% - 10% limit, an investor needs approval from the NSC and the company itself. Considering a low overall market capitalization, this 10% limit restricts foreign investors to impractically low levels of investment.
Restrictions on commercial banking stocks:
Commercial banking stocks must be held for a minimum of 5 years until they can be sold. Foreigners can sit on the board but can not exceed 1/3 of the total number of board members.
Total market capitalization:
The initial market capitalization of the equitized companies will generally range from $500,000 to $25 million. Most companies such as manufacturing enterprises will be on the lower end of that scale whereas some banks and a few (relatively) large exceptions will be on the upper end. Over 60% of the 6,264 state enterprises have less than 200 workers and assets less than $91,000. Only 500 of these SOE's have assets over $910,000.
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Currently the total capital base in all SOE's amounts to a mere $4.1 billion14. Considering that many of these SOE's will not be equitized for a while, the overall capitalization of the whole stock market will remain quite small even by regional standards for years to come. This fact, combined with a 30% ownership limit for foreigners as a whole will result in limited investment opportunities as well extreme illiquidity in the market.
THE PROBLEM OF ACCURACY IN FINANCIAL ACCOUNTING
Different accounting standards:
The Vietnamese traditionally use the Vietnamese accounting system (VAS). These standards are not suitable by International Accounting Standards (IAS) - especially in that they do not adequately assess provisions such as deferred taxation and contingent liabilities15. Currently companies can choose to use VAS or IAS, but the Ministry of Finance is revamping the VAS so that it will basically parallel the IAS plus a few relevant regulations reflecting Vietnamese socialist law.
The current land entitlement system is ambiguously defined in terms of legal rights. For instance:
* Unclear land rights and obligations makes valuation of assets and liabilities more uncertain16. Mr. Hoang Van Nghien, General Director of Hanoi Electronics (HANEL), says about his company: '"We can hardly identify the State capital. No one dares to evaluate State real estate. Our headquarters was constructed with funding from HANEL's budget but we can't say who it belongs to."
* Although the right to mortgage is guaranteed by law, land use rights are often difficult to mortgage because the rights of foreclosure and transferability are ill-defined and contingent upon the deliberations of the State government. Therefore, bank financing is more difficult which restricts the optimal utilization and leveraging of capital by companies17.
* Restrictions on transferability of land and changes in the approved purpose of land use may make liquidation more difficult.
The three step process to insure accuracy in accounting at the time of equitization of a SOE:
Determination of the financial standing of a candidate for equitization will occur in a three stages18:
1. The company will prepare an un-audited document of financial standing.
2. An auditing company will assess the validity of that statement and if necessary prepare their own.
3. The Evaluation Committee will examine the company and the statements and give final approval. The Evaluation Committee consists of the MoF, the ministry in charge, the SOE, and a few "experts".
Independent Inspectors:
In order to help assure accurate accounting, the board of directors must also hire two full-time inspector-auditors will overlook the accounting and financial reporting standards of the company and report to the shareholders at the annual meeting. It wouldn't be a bad idea for prospective buyers to meet these two inspectors before purchasing shares in order to gauge their skills at discriminating critical analysis as well as adequate comprehension of relevant financial concepts.
The General Department of Taxes:
The General Department of Taxes will also re-audit the equitized companies on a yearly basis in order to insure that the reported taxable profits are in line with the tax office's independent assessment.
Choice of accounting firms and their Rowers:
There are currently 3 foreign and 8 domestic accounting firms licensed to operate in Vietnam. The foreign firms include Ernst & Young, KPMG - Peat Marwick, and Price Waterhouse. Deloitte Touche Tomatsu, Arthur Anderson, and Coopers & Lybrand also have representative offices. The board of directors of an equitized company can decide which accounting firm to use regardless of the opinion of the management. The accounting firms are guaranteed by law to have complete access to all the financial records of the company.
Conscious attempts at misleading financial disclosures:
Private companies often hide their profits to avoid taxes and other questionable fees that they are afraid they would be charged if they released truthful figures. It is common practice for private companies and foreign run joint ventures to falsify their books from the beginning in such a way that even a detailed audit may be unable to ascertain the true figures. However, many companies are said to use very crude and unsophisticated techniques at altering their books. Either way, no one is making high profile profits, because if they were... they wouldn't be for long! Private companies in Vietnam are very hidden and reveal as little as possible.
On the other hand, SOE's may try to cover up losses due to poor management and embezzlement. Unfortunately it may be so common to falsify the records in Vietnam that the practice may carry over into equitized companies for one reason or another - embezzlement being a big one.
Valuation of assets and liabilities is difficult for legal reasons:
Corporate laws are unclearly defined or lacking altogether. Ambiguously defined legal rights involving such issues as land rights, intellectual property rights, and contract laws make it very difficult to assess the value of certain assets and liabilities. Vietnam is developing a more sophisticated legal structure which should more adequately assure fairness in business and financial transparency in the matter of a few years.
The undervaluation of assets of equitized companies:
If the primary issue of equity is mostly controlled by and offered to insiders, there may be an attempt to undervalue assets in order to buy the equity for themselves and their fan-Lilies at favorable prices. Also, because land value is assessed differently based upon the circumstances of what purpose and who it is being assessed for, Vietnamese companies have access to land at significantly lower prices than foreigners who acquire land use rights by entering into joint venture contracts or by leasing it through a state run real-estate business. In effect, the value of real-estate is not particularly influenced by market forces in as much as it is arbitrarily determined by the deliberations and connections of the assessor and leasing-agency. Hence, the opportunity will arise for foreigners to make real-estate plays by buying companies that they believe to be undervalued on the basis of their real-estate holdings (although the foreigners could never actually take ownership of the land). This allows foreign investors a way around not being allowed to make direct real-estate investments.
Difficulty in getting accurate statistics:
Much of Vietnam's economy goes unreported. This black economy involves smuggling, second jobs, and unofficial payments to public servants. Therefore, even statistics about the macro economy can be severely flawed. No one knows how many US dollars cash are circulating throughout Vietnam but estimates often range from $800 million to $2 billion. The US dollar economy in Vietnam was outlawed as of October 1, 1994. This will make accurate reporting even more difficult. One leading foreign investor estimates that 40% of all business deals in Vietnam are done under the table.
To complicate the matter, statistical collection techniques are of questionable validity and reliability. Some simple and obvious mistakes are routinely made in widely circulated publications, such as getting the number of zero's wrong or mixing up which numbers go with which graph. It often seems that they are doing no better than guessing which numbers go where.
OTHER RISK PROMOTING FACTORS IN VIETNAMESE FIRMS
Outdated capital equipment:
Many public and private firms can not be internationally competitive considering the poor quality of their capital equipment19. A major reason they are seeking capital from abroad is to modernize and renovate that equipment. In Ho Chi Minh City, 10% of the equipment is considered "modem", 38% is considered "average", and 52% is considered "obsolete". The electronics industry has the highest ratio of modem equipment with 28% being modem and only 14% obsolete. Garments are also on the leading edge in Vietnam with 20% of their production facilities being modem and only 28% obsolete. On the opposite end of the spectrum is the building materials industry, with 2% of their facilities and equipment modem and 80% obsolete. Also lagging is the food industry, textiles and dying, plastics and rubber.
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Inefficient management and corruption:
Although labor in Vietnam is as cheap as in China with most workers getting between $35 and $60 a month, there is often much higher overhead in Vietnam due to high set up costs, gross mismanagement, and a large number of tickets being purchased for the various fireman's balls. Smuggling and waste on capital projects has been estimated at 20 to 30%. Government bureaucracy and widespread corruption is a serious drag on Vietnamese businesses. Also, many business managers have been caught misappropriating company funds into their own pockets and parking garages.
Vietnamese firms tend to have a low level of reinvestment:
Every year about 10% of the machinery and equipment in Ho Chi Minh City is upgrade20. There is currently an upsurge in reinvestment trends. A problem that has occurred with the equitized companies to date is that many of the shareholders (especially employees) demand a high dividend which considerably weakens the potential for appreciation in the underlying value of the equity when there is a high return on assets. However, when profits are reinvested for three years, the tax on those profits are refunded as an incentive.
Resisting change:
Many managers and employees resist change and attempts at reorganization for the simple reason that they don't want to lose their jobs. In the days of central planning, the security of their jobs wasn't related to performance, but soon it will be. Restructuring and weeding out inefficient managers won't happen overnight.
The absence of MFN status:
The absence of 1VIFN trading status with the US means that Vietnamese exports to the US are taxed 20% to 30% higher than Chinese products. This effectively cuts off a potentially large market for Vietnamese goods.
Insufficient legal structure:
One of the biggest obstacles to overcome before the business world can effectively flourish is the absence of a comprehensive legal framework to deal with such issues as land rights, corporate and contract law, intellectual property rights, etc...
CAIRITAL GAINS TAXIES AND OTHER FEES RELATED TO SALE OF EQUITY SHARES
Current withholding taxes and future capital gains taxes:
There is currently no capital gains tax because investors are not yet allowed to sell shares. There is a 5% to 10% withholding tax on the repatriation of profits from direct investment business ventures. It is not established what the capital gains tax rate will be, but regulations stipulated in Decree 120\CP state that shareholders will be entitled to "favorable conditions" towards taxation on dividend income. Capital gains may just be treated as normal income subject to personal or corporate income taxes, but the capital gains tax could potentially be steep in order to keep investors tied into the market and to create a large source of tax revenue for the government. Income tax rates for foreigners currently reach as high as 50%21.
CONVERTIBILITY OF THE VIETNAMESE DONG
Security purchases:
All securities transactions must be made in Vietnamese dong.
No convertibility at present:
The Vietnamese dong is currently not convertible except through special permission. State held foreign currency reserves are also quite low at around $1 billion. However, every year around $1 billion is injected into the country by overseas Vietnamese sending money home to their families. Petroleum exports and tourism are the largest economic sources of foreign capital, but Vietnam faces a trade deficit of around $400 million this year and considering their need to import more capital equipment from abroad, the drain on their foreign currency reserves
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is likely to increase in the near future. This poses a very tangible obstacle to the convertibility of the dong in the near future.
The prospects of convertibility in the future:
The aim of making the Vietnamese dong fully convertible seems to be agreed upon. Although the conditions are not yet satisfactory for this policy to take effect, economists contend that by the time the stock market opens, the dong will be convertible - at least for equity investors. (That is up for debate.)
In the meantime:
"Until the dong ii fully convertible, foreign investors must reinvest their money or else engage in indirect repatriation such as buying a few containers of some export commodity and selling it on international markets. This is known to happen in practice, especially with Russian business-people, but the legality of it is not yet clear22. However, coffee and rice are suitable commodities as their quality meets international export standards and they can easily be sold on international commodity markets. The more adventuresome could try exporting Vietnamese snake wine or "High Protein Silkworm Pupa Sauce". This delicious sounding sauce was invented in Vietnam and it even says in the Vietnam Economic News that "This is a great profit making opportunity for sauce producers and traders to invest in the production of this sauce."
THE FOCUS OF FOREIGN CAPITAL IN DIRECT INVESTMENTS
Commitment of multinationals to the economy of Vietnam:
Many foreign multinationals are putting their feet in the mysterious, tropical waters of Vietnam. Some of their toes have been bitten off but others are already down to their knees. Every day some new project is announced. The presence of every new project serves to strengthen the position of all the others because each one represents one more commitment to the development of the Vietnamese economy. Vietnam has recently surpassed $10 billion in signed deals for foreign investment. However, less than 40% of that capital has actually showed up in Vietnam so far.
The foreign countries with the largest total investment in Vietnam (as of November23):
Rank Country No. of projects Total investment capital
I Taiwan 172 $1.9 billion
2 Hong Kong 208 $1.8 billion
3 South Korea 93 $825 million
4 Australia 46 $763 million
8 Japan 68 $538 million
13 United States 22 $187 million
The industries attracting the highest level of foreign investment (as of Nov.):
Rank Industry No. of projects Total investment capital
I Gen. industry and manufacturing 481 $3.8 billion
2 Hotels and Tourism 104 $2.0 billion
3 Oil & Gas 27 $1.3 billion
4 Services 127 $730 million
5 Transport, communications, post 21 $637 million
6 Agriculture 74 $368 million
7 Export processing zones 20 $349 million
Joint ventures:
Although many joint ventures are characterized as forced partnership with a passive Vietnamese partner whose capital contribution is the land rights and semi-skilled labor that they can provide, there have been a few relatively successful joint ventures. Some of this success may attributable to the ability of the Vietnamese partners
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to avoid or overcome certain obstacles as well as genuine ability to contribute to the productivity of the joint venture itself.
SOME LARGE SPECIFIC FOREIGN INVESTORS AND PROJECTS:
Ching Fong Group:
Ching Fong group is the largest foreign investor in Vietnam. The Taiwanese conglomerate owns a bank in Hanoi, two motorbike assembly plants, and is currently building a cement plant in Hai Phong. They recently signed a deal for a liquefied petroleum gas plant. They have invested about $360 million so far.
Daewoo:
The Korean giant has 11 licensed investment projects in Vietnam (with 2 more pending) and aims to become the largest investor in Vietnam by investing over $1 billion through 1995. Daewoo expects to invest $300 million to build a comprehensive home appliance complex in Vietnam. In addition to the $33 million JV with HANEL to produce electronic components, the complex will include a $250 million factory for the manufacture of VCR's, washing machines, and microwave ovens. Daewoo has also invested in a $170 million JV with HANEL to produce picture tubes and well as the $134 million Dai Ha office and hotel complex with HANEL. They also have a joint banking investment program with Vietcombank, and even a car assembly JV. Many of these projects suggest that Daewoo is aiming to build an economy of scale towards the production of televisions and other electronic consumer goods. Daewoo has the highest sales of any Korean company in Vietnam and is rapidly expanding its ability to distribute and sell electronic components and home appliances in the future.
BBI:
The BBI Investment Group from the USA is teaming up with the Non Nouc tourist company to build a $243 million resort complex at Non Nouc Beach (China Beach) in Central Vietnam. Covering 217 hectares, they will build four hotel complexes with 1,600 rooms and 300 villas.
Krupp:
The German steel maker is planning to invest $1.3 billion over 30 years to mine iron ore from the Thach Khe mine in Northern Vietnam which has estimated reserves of 500 million tons. Krupp will work in conjunction with the Vietnam Steel Corporation.
Tan Thuan Export Processing Zone:
Jointly owned by the Central Trading and Development Group of Taiwan and the HCMC People's Committee, The Tan Thuan Export Processing Zone (EPZ) is a 750 acre industrial park and free trade zone near Saigon. They hope that many companies will be attracted to set up factories there because of the four year tax holiday and subsequent 10% tax rate, the one-step investment process, and the guaranteed utility and telecommunications support. So far, over 39 foreign investors have paid for a 50-year lease, most of them from Taiwan. The strength in this partnership lies in the fact that HCMC People's Committee can assure the favorable treatment of companies that set up factories in the EPZ and the Taiwanese side is well connected to attract Taiwanese investors who want to produce cheap goods.
Samsung Electronics Co.:
Samsung and the Trade Import Export Co. have a $79 million JV to produce household electrical products such as color TV's, refrigerators, air-conditioners, video-cassettes, telecommunications equipment, and electrical components.
Mitsubishi Materials Co. and Nihon Cement Co.:
These two Japanese firms are planning a JV cement factory involving a $340 million investment.
Saieon South.:
The Phu My Hung project, commonly known as Saigon South, is a JV between Taiwan's Central Trading and Development Corp. and the Ho Chi Minh City People's Committee. This $242 million project consists of a 2,600 hectare urban development near the Tan Thuan Export Processing Zone.
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Swiss Cement Production Project:
A $232 million cement production JV.
THE ATTRACTIVE ASPECTS OF EQUITY INVESTMENT AT TMS MEE
Extremely low P/E ratios:
The average P/E ratio of two equitized stocks in Vietnam is 3.8. That is extremely low by any standards24.
Extremely high yields:
The average yield of the same two stocks is 22% so far this year - and potentially higher by year end25. Compare that to a 21 % interest rate on bonds.
The undervaluation of net asset value:
These same companies may have significantly undervalued land assets - perhaps doubling the disclosed net asset value in the case of one equity so far.
An overstated risk/reward ratio considering the risks may be lower than many people expect:
The macro economic and political risks that are keeping buyers out of the market may be less threatening, than they seem, considering the governments commitment to getting this market up and running. Then again, maybe not. Some people at some of these companies are dragging their big, heavy feet - as the concept of efficient management is threatening to them in one way or another.
THE BOND MARKET
Government debt:
The national government as well as ministries and municipalities can issue debt in the form of bonds. For example, Ho Chi Minh City recently issued $3 million in municipal bonds for road repair. Their duration is 3 years and their annual yield is 15% tax free. When the stock market opens, bonds will be the first form of security to be transacted.
Corporate debt:
SOE's and private companies can also issue debt once they have submitted themselves to an auditing process similar to the process for issuing equity. Once they have a financial institution to guarantee their debts, they are subject to approval from the relevant ministry and the MoF. For instance, the Vietnam Cement Corp. (VCC) has plans to raise $700 million by the year 2000 through the issuing of bonds (and shares eventually). The Investment and Development bank recently offered one, two, and five year dong denominated bonds with a one year rate of 21 %. The IDB also offered one year dollar denominated bonds at 6%.
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PART B: THE PROMINENT COMPANIES IN VIETNAM AND THOSE FACING EOUITIZATION:
FOUR SOE’S HAVE ALREADY BEEN EQUITIZED
Union of Transportation Agencies (GEMADEPT):
GEMADEPT, also known as General Forwarding & Agency Co., is a holding company for smaller shipping and transportation agencies. It was the first company to be successfully equitized in Vietnam, although it took a year to evaluate that their assets were worth $574,000. The Ministry of Transport continues to hold 18% of the shares, ministry staff bought 40% of the equity, and the company employees bought the remaining 42%. No shares are held buy outsiders.
Refrigeration-Electric Engineering Co. (REE):
With a total shareholder capital of $1.5 million, REE was the first SOE to be privatized. They manufacture and install refrigeration and air-conditioning systems. They have a joint venture going with Carrier. REE estimates their industrial growth in Ho Chi Minh City at 18% in 1994. They also own a lot of land around HCMC. With a P/E of 2.25 and a dividend yield of 29% in the first 9 months, this seems like a very attractive stock26 . However, each outside investor is limited to a 0.5% stake (as stated in the company charter) which is roughly a $7,000 investment. Although exceptions can be made for shareholding limits, it would be unlikely to be able to purchase more than 5% to 10% of the outstanding shares of REE.
Hiep An Shoe Co.:
With a total shareholder capital of W2,000, this company seems to be more of a real-estate play than anything else. However, it may be a relatively efficient company as it exports all of its products (a good sign in Vietnam), its factories are running at 100% capacity, sales have tripled in three years, and it's opening a new $600,000 factory. According to a leading international investment firm in Vietnam27, a revaluation of land assets and purchasing options could yield as much as $9.00 per share of unrealized gains, contributing to a NAV of around $17. All this considering that a share can supposedly be bought for $9.10.
The Honey Bee Company:
The Ho Chi Minh City's Honey Bee Company has a registered capital of $227,000, with 50% owned by the employees, 30% owned by the Ministry of Agriculture, and 20% reserved for private financial institutions.
PROBLEMS WITH EQUITIZATION SO FAR
It is unclear if all the proceeds from the sale of equity goes to the company:
Most people, including government officials, say that all the money raised from the sale of stock goes to the issuer. However, the belief exists among some foreign investors that some or perhaps all of the money goes to the state who officially owned the company before it was equitized. It is important that this issue is adequately resolved so that companies can effectively mobilize fixed capital in order to modernize. (Note: Both sides insist upon their perspective and although this issue is unresolved, it may be safe to assume that the proceeds are going to the state. However, it seems that once a company is autonomous, they could opt for a new issue of shares in order to raise capital for themselves.)
Immediate payoff hurts long term prospects:
Shareholding employees have demanded high dividends at the expense of reinvestment. For instance REE has paid out $4.26 in dividends on $5.68 of earnings per share this year. With an estimated return on assets of 89%, it is safe to say the money would be better spent if it was reinvested. The return on assets under the mattress isn't quite as high.
Also, there is a full tax refund on profits if they are fully reinvested for three years. Therefore, the long term value of capital appreciation through full reinvestment should be much more attractive than immediate dividend payouts.
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Undervaluing assets to make insiders rich quick:
The equitization of Hiep An Shoe Co. may demonstrate a case of a company's shares being issued on the primary market at an absurdly low price - especially if insiders have purchasing priority on the primary market. Then again, if the government gets the proceeds from the sale of stock, the management has every interest in undervaluing the shares so that they can buy as much as possible and it doesn't hurt the company any because they aren't getting any money from the equitization.
Gross mismanagement of funds:
A leather garments manufacturer called Legamex was originally slated to be the star example of the successful equitization of a SOE, but after the equitization process began it had to be subsequently aborted because of "irregularities" in the internal finances of the company. The former General Director and her relatives were arrested for wrongfully expropriating assets from the company. She had used Legamex's assets to set up private enterprises for her relatives and had given them priority in purchasing shares during the equitization. The company looked strong on the surface when they began equitization, but the auditing revealed that it was near insolvency due to gross mismanagement. Legamex was said to have had assets worth nearly $15 million but now nobody really knows.
OTHER COMPANIES ARE ALSO UNDER EVALUATION FOR EQUITIZATION
At least five to eight companies have completed their audits and are planning to sell shares pending final approval:
All of these companies are fairly small:
* Passenger Car Joint-Stock Co. - under Hai Phong City
* Thach Ban Brick Factory - under the Ministry of Construction
* Binh Minh Plastics Company - under Ministry of Light Industry
* The Gia Dinh Trading Co. - under HCM People's Committee
* The Construction Factory #3 - under Ministry of Construction
* Long An Export Processing Enterprise - under Long An Province
* Long An Cashew Nut Processing Factory - under Long An Province
* The Animal Feed Processing Enterprise
LEADING STATE OWNED ENTERPRISES
About these SOE's:
The following is a list of some of the more high profile state owned enterprises in Vietnam. Some of these companies are likely to equitized sooner or later than others and some not at all. Companies which are predicted by a leading economist28 as especially likely to be equitized are marked with an
*Saigon Jewelry Co. (SJC):
Vietnam's leading Jewelry company is actually involved in much more than jewelry. In addition to producing and selling jewelry, their interests include banking, financing, property development, trading and manufacturing. The $65 million Saigon Diamond Plaza will be Saigon's tallest building and most up-market retail center. Their partner is Harmony Property Group who will put up 60% of the capital but only hold 50% of the equity. Harmony, a foreign joint venture itself (including a 15% stake by Indochina Partners Ltd. of New York), is also collaborating with SJC to build the Saigon Emerald Suites. This bodes well for SJC as Harmony may have extensive capital resources, they are interested in property development, and they seem to like SJC as a partner. In addition, SJC holds a 20% interest in both INCOMBANK and MUMBANIC, 60% of the Saigon Finance Company, 35% of International Beverage Co. (IBC) which bottles Pepsi and is run by a very well respected and progressive manager (Mr. Pham Phu Ngoc Trai), and 50% of Saigon General Production & Business Corp. which will make video-cassettes. They also own a bankrupt stone cutting enterprise and produce instant noodles. Their jewelry stores have 26 branches and their gold bars have become an second form of currency in Vietnam. Owned
by the HCMC people's committee and under the leadership of Mr. Nguyen Huu Dinh, this is a very powerful young conglomerate.
*Saigontourist:
Saigontourist owns and manages 17 middle to upper market hotels and has a reputation for high quality tourist services. In the first nine months of 1994, it had a turnover of $46 million - on target for their projected annual budget of $61 million this year. Their holdings in Saigon include the Rex, the Palace, the Caravelle, the Century Saigon, the Kim Do, the (new) Majestic, the Metropole, the Bong Sen, the Arc-en-Ciel, and Chains First Hotel.
*Seaprodex:
Danang based Seaprodex is exporting an estimated $25 million of seafood in 1994 and expects $1.5 million in gross profits. They have a series of joint ventures going with H.K., Japanese and American companies to produce and export seafood. The General Director, Mr. Nguyen Chuoc, firmly believes in reinvesting profits (in such facilities as refrigeration on board ships) and he claims his long term focus is in developing a sustainable aqua-culture industry. Officially, he is known as a shrewd business man who can steer clear of government imposed obstacles. However, the ex-general director and his two sons have been implicated in embezzlement scandals with two affiliates of Seaprodex, (which were run by the two sons who are now in prison). Seaprodex, also has about 20 to 30 subsidiary companies, including one of Saigon's only two finance companies. (However, serious doubts exist as to how well they manage their businesses.)
*Vietnam Cement Corporation - (VCC):
With a current production capacity of 4 million tons of cement per year, they hope to raise their production to 18 million tons per year by 2000. Even this level of output will not satiate Vietnam's projected cement needs. They hope to raise $2.1 billion to upgrade and build production facilities and $523 million to pay off outstanding debts. They currently have 5 joint ventures planned with foreign partners and are building a number of factories but may be delayed because of a severe capital shortage.
*Incombank:
The Industrial and Commercial Bank is a former State Bank branch, but is now somehow 20% owned by the Saigon Jewelry Company. This commercial bank can undertake any regular credit, banking, and brokerage services. They are especially oriented towards the industrial, transportation, shipping, trading, and service sectors. They claim over 150 branches throughout Vietnam.
*The Cigarette Co.:
Known as Cong Ty Thouc La, this company produces many brands of popular cigarettes in Vietnam and is said to be quite profitable.
*The Textile Co.:
Known as Cong Ty Det Vietnam this is one of many textile companies in Vietnam. The industry in general is known to have very poor capital equipment.
*The Wine and Beer Co.:
Known as Cong Ty Ruou Bia, this company produces the popular 333 brand beer which is vigorously consumed by many satisfied customers.
*Quang Ninh Coal Co.:
Vietcombank - Bank for Foreign Trade of Vietnam:
With $57 million in savings, Vietcombank has the strongest footing of any bank in Vietnam involved in foreign trade. 80% of all foreign exchange transactions are settled through Vietcombank. It has membership in the Asian Bankers Association and is the primary issuer of guarantees for both foreign and domestic businesses. A major fraction of the capital flow in Vietnam passes through Vietcombank. The Government is thoroughly promoting Vietcombank's business activities but it is not likely to be equitized in the foreseeable future.
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Vietnam Bank for Agriculture (Agribank):
Maybe the Vietnamese version of the Thai Farmers Bank, The Vietnam Bank of Agriculture is the largest commercial bank in Vietnam. With almost 2000 branches, the bank was the first in Vietnam to be selected by the World Bank to be internationally accredited. They have strong relations to the Bank of New York. They have four subsidiary companies involved in foreign exchange; gold, silver and gemstones trading; leasing; and brokerage and investment advisory services.
The Investment and Development Bank (Vietindebank. BIDV):
This bank has too many names. Based in Hanoi, it specializes in infrastructure projects which are approved by the State Planning Committee. They make long-term loans and most of their funding comes from the state. Last years income amounted to $33 million and they retained $7 million as profits. They claim to have at, least $600 million loaned out for development financing. The bank also provides unusual services such as "Regular performances by the Bank's singers on important conferences or festivals." Managers assert that this bank will not be equitized.
HANEL - The Hanoi Electronics Company:
HANEL is a leader in the assembly of high-grade electronics products in Vietnam, although they are also involved in such areas as property development. HANEL is expecting a turnover of $21 million in 1994, up from $14 million in 1993. It has a strong network of distribution and sales agents, but its largest asset may be its strong contacts with Daewoo, Sony, JVC, Goldstar, Samsung, and NEC. It currently has six production and service enterprises. The $170 million Joint-Venture with Daewoo will produce 600,000 television picture tubes a year when it opens in late 1995 - HANEL owns 30%. In another project with Daewoo, they are developing a $134 million business, hotel, and residential complex - HANEL owns 30%. They have a $33 million electronic and refrigerator components JV with Daewoo which will produce 200,000 color television sets, 300,000 refrigerators, 100,000 washing machines, and I million electronics parts per year - HANEL also owns 30%. They also have a plastic factory which produces EPS foam (extended polystyrene). They say they are planing many other projects with Korean, Japanese, American, and Singaporean partners. HANEL's formidable foreign business partners may suggest something about the kind of future it has ahead of it.
Vietnam Airlines:
With routes to 18 international destinations and 14 domestic destinations, and 1.5 million passengers this year, Vietnam Airlines is expecting a turnover of around $200 million and is quickly becoming one of the higher profile companies in Vietnam. Their domestic and international flights average 75% occupancy. Air passenger traffic has been increasing 30% per year in Vietnam since 1986. They are said to be considering raising money by offering a minority stake to domestic or foreign investors who can put up some cash for them to buy new planes. Boeing predicts Vietnam Airlines will need to spend $3 to $5 billion over the next 15 years to buy new planes.
PETROLIMEX - Vietnam National Petroleum Import-Export Corporation:
PETROLIMEX meets 65% to 75% of Vietnam's petroleum demand through its importing activities. It also provides services to the petroleum industry such as petroleum storage and transport. It owns over 1,000 gas stations and employs 9,000 people. It has plans to expand business operations into lubricant oil, liquefied gas, asphalt and chemicals. This company is actively trying to raise capital but is being discouraged from equitization because the government wants to maintain control of Vietnamese companies in the oil industry.
PETROVIETNAM:
Petrovietnam is Vietnam's oil exploration and drilling company. So far, they have had a basically passive role as they hold a nominal share (10% to 20%) of all production sharing contracts signed with foreign oil companies without having to make any capital or material contributions. As they generate more capital and actually learn how to explore and drill for oil, they will take a more active role in production. Eventually they win be able to explore and drill for oil themselves, and they plan to build a refinery to process 5 million tons/year. Petrovietnam is also getting involved in natural gas as well as an LPG plant joint venture. This company is not slated for equitization because of the potentially huge foreign currency revenues that it may earn.
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The Real Estate General Corporation:
Eight state owned real estate and construction companies have recently merged to form one consolidated company to more easily mobilize and utilize funds for property development. It has a registered capital base of $47 million.
Bao Viet Insurance Company:
Although they don't hold the monopoly they once had, they offer 30 insurance services through a network of 54 affiliated companies throughout Vietnam. The demand for insurance in Vietnam is growing rapidly -especially among businesses. They have many new business services including fire insurance, special risk insurance, construction and assembly related insurance, petroleum industry services, agricultural insurance, theft, etc... They are reinsured through international firms and are in a strong position to be involved with many international firms as they set up operations in Vietnam. In 1993, they supposedly paid out $36 million in claims for 290,000 accidents - not bad at $124 per accident if those figures are accurate!
SAVIMEX. SAVICO AND SUNIMEX:
These are three trading companies with large property holdings and a mission to develop their properties.
Proposed trading groups and conglomerates:
In response to decision 91/TTG, government ministries can merge small companies that they control into larger "conglomerates" or "trade groups" in order to reduce overhead and establish micro economies of scale. There are proposals to create seventeen trial conglomerates in such industries as gas and oil, power, coal, cement, post and telecommunications, rubber, and foodstuff sectors. Two of these have been established so far - Vietnam General Electric and Vietnam General Coal (VINACOAL). VINACOAL was established as a response to previous mismanagement by local administrators.
Ho Chi Minh city also proposed to create a conglomerate trading group called SATRA. It was to be made up of 22 companies in a variety of businesses. However, this project seems to have been canceled because of the difficulties inherent in managing a company which has 22 completely unrelated subsidiaries. The Prime Minister, Vo Van Kiet, has requested priority be given for establishing conglomerates in the industries of-
* Cane sugar and coffee - under the Ministry of Agriculture and Foodstuffs
* Aviation, ocean shipping, rail, and roads - under the Ministry of Transport
* General importlexport - under the Ministry of Commerce
* Textiles, garments and paper - under the Ministry of Light Industry
LEADING JOINT STOCK BANKS AND FINANCE COMPANIES
About these joint-stock companies:
Joint-stock companies already have an equity structure and sooner or later will be traded on the exchange. They are currently held by very few shareholders, the largest of which is usually the government (sometimes owning as much as 80%). These companies seem to be managed much more effectively than any other type of legitimate business in Vietnam. These will probably be the easiest for foreign investors to digest.
The Saigon Bank for Industry and Trade (Saigon Bank):
Claiming profits of $4 million last year and projected profits of $5 million this year, Saigon Bank is the most profitable joint-stock bank in Vietnam. Although they claim to have only about $50 million in loans outstanding, they seem to be involved in a lot of business activity in Saigon. Various state owned enterprises are the major shareholders, although this bank is known to have strong contacts with the ethnic Chinese community in Saigon as its head office is in Cholon (Chinatown). The shareholders equity is currently valued at $7 million and they plan to raise an additional $2.25 million through a new issue of equity in the near future. They look forward to being actively waded on the stock exchange and they have good reason because they seem to be one of the most modernized, well run, and professional banks in Vietnam.
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Viet Hoa Bank:
Most of the 53 shareholders of Viet Hoa (Vietnamese-Chinese) Bank are ethnic Chinese, as the bank is based in Cholon, the Chinese district of Saigon.. Viet Hoa bank was originally capitalized at $6 million and holds deposits over $20 million. Most of its activities involve financing construction projects but they are also financing manufacturing and import-export enterprises. They plan to establish a JV finance company with Japan's Sumitomo Corp. Mr. Tran Tuan Tai established the Bank after successfully financing a $5 million construction project -starting from scratch. As trust and reputation are very important in the world of Chinese financing, Viet Hoa bank has a very credible position as it is interwoven into the fabric of the Chinese community in Vietnam.
EXIMBANK - Vietnam Export and Import Joint-Stock Commercial Bank:
Established in 1989, EXIMEBANK's primary emphasis is extending credit, financing, and banking services to enterprises involved in the manufacturing and processing of export products as well as import-export trading businesses in general. It currently has registered capital of $12 million and plans to raise that to $24 minion this year by issuing new shares (priority given to current shareholders). Their net revenues were around $1 million in 1993.
Maritime Bank:
Maritime Bank, with a shareholder equity valued at around $8 million, specializes in financing shipping related projects. Last year 73% of their loans went to SOE's which is around the industry average. They claim $1.5 million in profits this year. On the board are many general directors of SOE's with interests in shipping, importexport and insurance.
Saigon Finance Company (SFC):
60% owned by Saigon Jewelry Co. and a minority stake by Indochina Partners, SFC plans to get involved in the brokerage business, as well as general financing with an emphasis on property development. The company is going to be restructured and the employees will be trained by Indochina Partners with the intention that SFC will eventually operate as an international standard finance company. This company is likely to be traded on the NSEV to some extenL (They've got their bases covered: property development, finance, and strong management!)
Segprodex Joint Stock Finance ComRany (SEAFIC):
Theoretically SEAFIC provides loans to the aquaculture industry - specifically their parent company (Seaprodex) and its subsidiaries. But they want to expand and they have a "Big Global Plan" according to one manager. They claim the shareholder's equity is $1 million and they have distributed 30 to $40 million in loans. However, after a meeting with one of the managers, this company appears to be a complete and total debacle, hence there is effectively only one financing company in Saigon, the Saigon Finance Company.
LEADING PRIVATE COMIPANIES
About private companies in Vietnam:
Private companies in Vietnam generally avoid being in the spotlight in order to protect whatever profits they may have. Most of them are quite new and small (even compared to the SOE's). Because they are so secretive, it is extremely difficult to get information about their financial situation. Also, it is too early to know which of them are likely to sell shares. Most of the larger and more successful private companies are known to have strong links to the Chinese business world and often the managers are of Chinese descent. At this time in HCM city, 80% of all retail businesses and 50% of the wholesale trade are privately held. The larger and more modem private companies are as follows:
Minh Phung Garment Co. Ltd.:
Minh Phung's management is known to have strong links to the Chinese business world. This company's name usually comes up in conversations about powerful private companies in Vietnam, and it seems that they have interests in areas such as real estate and property development in addition to garment manufacturing. Minh Phung reinvested over $7 million last year.
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Huy Hoang Garment and Embroidery Co. Ltd.:
This company also often comes up as an influential and powerful company which has strong links to the Chinese business world and is getting very involved in real estate and property development. Huy Hoang reinvested over $2 million last year.
The Bitis Corporation:
This shoes manufacturer has strong overseas Chinese links and management.
Thang Long:
This property and construction company has big plans to build a modem housing estate outside Hanoi as well as other construction projects in the center of Hanoi. It is run by the well connected Mr. Quoc: Dung who looks to domestic financing as the primary source of capital for his projects. It is said that directors of various SOE's and other well connected individuals have taken an active interest in Thang Long.
PART C: INFLUENCE AND POWER IN THE VIETNAMESE BUSINESS WORLD
THE ROLES OF GOVERNMOENT MINISTRIES
The future role of government ministries:
Government ministries are beginning to resemble economic entities instead of political entities as is evidenced in the formation of trading groups under the jurisdictions of various ministries. The extreme conclusion of this transition may be that the ministries become virtually commercialized as they hold and manage portfolios of investments and use their influence to promote their vested interests (such as equity holdings). However, they are not allowed to freely buy and sell transferable securities unless permitted by their constitution and approved by the NSC.
Ambiguous yet powerful responsibilities:
Some government offices in Vietnam have overlapping or ambiguously defined jurisdictions. What's more, decrees and regulations are often vague or contradictory29. Basically, nothing is written in stone - for better or for worse. This means that foreign investors are often not legally protected in ways that they assume they would be protected, and on the other band that special exceptions can be made for anyone. If one office says "no", another office might say "yes". Laws have been known to change to suit the needs of companies 30. If laws don't change, perhaps tariffs or land rental rates do. If those don't change, then perhaps the costs of subcontracting with SOE's does. Essentially, there is an unspeakable array of realms in which government ministries have profound influence and control. To try to accomplish something without their cooperation and approval is like trying to swim up a waterfall. Every foreign individual and foreign company in Vietnam is breaking some obscure law and if some government office wants to give you a bard time, they can. In Vietnam it is absolutely essential to have a good relationship with the relevant ministries and offices.
IMPORTANT GOVERNMENT MINISTRIES IN CAPITAL AND FINANCIAL MARKETS
The Ministry of Finance (MoF):
The MoF has the responsibility of overseeing the equitization process and the establishment of the stock exchange. Their functions include verifying and supervising corporate financial disclosures, utilization of funds, and interest and dividend payments. They can take action against issuers who violate regulations. The MoF also works in cooperation-operation with the State Bank to set the interest rate for bonds.
The State Bank of Vietnam (SBV):
As the central bank of Vietnam, the State Bank performs functions such as issuing currency, making loans to banks, and worrying about the country's foreign currency reserves. It is also the chief regulating body for all banks and credit institutions and must approve all investments in the banking industry (it is unclear if they oversee Joint-stock banks in addition to commercial banks). Every bank and credit institution needs a license from the State Bank in order to operate in Vietnam. Because of its role in regulating the banking sector and its controlling influence with Vietnam’s lending institutions, the State Banks responsibilities often carry over into the world of finance and securities (when those securities are banks).
The State Committee for Cooperation and Investment (SCCI):
The SCCI oversees all foreign direct investment in Vietnam. Business contracts are not considered binding under Vietnamese law until they have been approved by the SCCI. The SCCI is the only governmental office that directly monitors foreign investment. In many ways it is an inter-ministerial ministry in that it coordinates the activities of other ministries in relation to foreign investment. It may have little or no role in overseeing foreign equity investment.
The Board of Directors of the National Stock Exchange of Vietnam:
They will oversee the basic operations of the NSEV in Ho Chi Minh City. Their responsibilities include maintaining a fair, open, and equitable market.
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The National Securities Commission (NSC):
The NSC does not yet exist. When it does, it will consist of representatives from the MoF, the SBV and independent experts and will regulate the securities industry. Its responsibilities will include setting policy for securities exchanges, overseeing the compliance of listed securities with their obligations as listed securities, protecting investors by maintaining a fair, open and equitable market, and maintaining a public register of financial disclosures made by listed companies. They will also investigate, examine, and verify the official financial disclosures of listed companies.
The Local People’s Committees:
The People's Committees have very extensive yet ambiguous powers. They are the local administrative bodies of the state - something like a state and local government tied into one. People's Committees are usually extremely autonomous. They control such things as infrastructure development, education, police services, land rental fees, zoning, distribution of utility consumption, etc… Although their legislative power is vague and unclear (in the constitution), their influence is quite far reaching. Their approval is needed for just about anything that falls under their geographical jurisdiction and they are involved in just about everything that goes on there. It is said that the Ho Chi Minh City People's Committee is extremely powerful. They also have far reaching business interests as they control many State enterprises.
SOME INFLUENTIAL PEOPLE IN GOVERNMENT MWISTRIES
Mr. Truong Tan Sang:
Mr. Truong Tan Sang is Chairman of the Ho Chi Minh City People's Committee. After the Central Government, the HCMC People's Committee is said to be the second most powerful political body in Vietnam. He sees the establishment of the securities market in HCM and the presence of a strong network of investment banks as essential to the growth of long term capital markets in Vietnam. He believes in actively trying to induce foreign capital to invest in Vietnam.
Address: HCMC People's Committee, 86 Le Thanh Ton, Q. 1, HCMC, Vietnam.
Mr. Le At Hoi:
Mr. Le At Hoi is Chairman of the Hanoi People's Committee. Considering that the Hanoi People's Committee owns over 70% of the land in Hanoi, owns many state companies, and also has substantial political powers, it can be concluded that Mr. Le At Hoi is a very influential person.
Address: Hanoi People's Committee, 79 Dinh Tien Hoang, Hanoi, Vietnam.
Mr. Cao Sy Yiem:
Mr. Cao Sy Kiem is the Governor of the State Bank of Vietnam. He is the person responsible for monetary policy decisions as well as building up Vietnam's banking system.
Fax: (844)-258-385
Mr. Le Xuan Trinh:
Mr. Le Xuan Trinh is Chairman of the Office of the Government which represents the Central Government. He is said to have extensive contacts in the international business world. He has an important role in facilitating and regulating foreign investment in Vietnam.
Address: Office of the Government, Bach Thao, Hanoi, Vietnam.
Mr. Tran Xuan Gia:
Mr. Tran Xuan Gia is Vice-chairman of the State Planning Committee. He is one of the key advisors in Vietnam's monetary and banking system.
Fax: (844)-232-494
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Mr. Ho Te:
Mr. Ho Te is the Minister of Finance. Address: Ministry of Finance, 8 Phan Huy Chu, Hanoi, Vietnam
Mrs. Pham Chi Lan:
Mrs. Pham Chi Lan is the Secretary General of the Vietnam Chamber of Commerce in Hanoi and Chairperson of the Vietnam-America Business Committee. She is considered a reliable link between foreign investors and high ranking government officials and can help facilitate meetings. Fax: (844)-256446
Mr. Tran Du Lich:
Mr. Tran Du Lich is head of the HCMC Institute of Economics which has a key advisory role in the establishment of the Stock Exchange in Vietnam. Mr. Du Lich himself is taking a leading role in the establishment of the NSEV and may be considered a well-informed source on the theoretical foundations of the stock exchange. Address: Institute of Economics, 175 Hai Ba Trung, Q. 1., HCMC, Vietnam
Mr. Nguyen Dinh Mai:
Mr. Nguyen Dinh Mai is a vice-president of the HCMC People's Committee and he is taking a leading role in developing the NSEV. He has a clear understanding of the concerns of foreigners investing in Vietnamese equity and he has recently visited the NYSE on a visit to the U.S.
THE NATURE OF INFLUENCE IN THE PRIVATE SECTOR
The challenge of identifying influence in the private sector:
The private sector in Vietnam is still very small compared with the State enterprises. It has only been in the last few years that the government changed its policies to allow and encourage private businesses. In order to avoid steep tax rates and other fees that would effectively wipe out any trace of profit, these firms have a deeply ingrained habit of hiding their profits and under-reporting the scale of their businesses. Since so much takes place under the table, there are not many high profile private business figures.
Ethnic Chinese:
Some private businesses are owned and run by ethnic Chinese, especially in the Cholon area of Saigon. Ethnic Chinese living outside of China have a reputation throughout the world for sticking to their own trade and financing networks and supporting each others business activities in such a way that there is an extremely efficient yet informal flow of capital to where it is most needed, thus supporting the network as a whole. Ilese companies are more often than not involved in real-estate and property development, trading, simple manufacturing, and jewelry/gold. This sort of company is set to prosper in Vietnam in the near future due to the pre-technological state of Vietnamese industry. What's more, the ethnic Chinese in Vietnam have well organized domestic distribution networks as well as strong import/export ties overseas. It is also said that they have their own informal financing networks (maybe including some overseas money from Taiwan) which are potentially substantial yet quite anonymous. None of these companies are likely to sell equity shares in the foreseeable future.
KEY INFLUENTIAL PEOPLE AND THE COMEPANIES THEY ARE INVOLVED WITH
Hoang Van Nghien, General Director of HANEL:
Noted for his skills as a businessman and a politician, Mr. Nghien is a powerful business leader as well as a member of the central committee of the communist party. Starting from scratch 10 years ago, he has had great success building HANEL into Hanoi's largest company. He says the main objectives for HANEL are "production, wading, and marketing, through the possibilities given by joint ventures and foreign investments". He says they are looking for more projects but not necessarily in electronics. He is trying to form a conglomerate and considers that "a conglomerate is automatically formed if one company is very strong in terms of capital and it pours money in to buy shares of other companies."31 He has close contacts with Korean and Japanese conglomerates such as Daewoo
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and Sony. Although he says their main focus will be to upgrade their technology and facilities for the production of electronic components, HANEL is getting conspicuously involved in such things as property development. He is strongly pushing for the establishment of the capital and equity markets in order to form his conglomerate. Although he is looking for more capital, he says he has no immediate plans to equitize HANEL.
Nguyen Trung Truc. Managing Director of Peregrine Cgpital Vietnam (PCV):
Mr. Truc: moved to Australia in 1972 to study economics and returned to Vietnam 5 years ago. He and his wife now own 40% of Peregrine Capital Vietnam, with Hong Kong based Peregrine Capital International owning the other 60%. PCV has widespread business interests in Vietnam. He also controls 30% of the Dai Nam Bank, through family and business associates. In addition, he owns a fleet of 'old fashioned cars which are commonly seen in the streets of HCMC. He says his goal is to create a diversified business network in the style of the Chinese family conglomerates. He seems particularly interested in creating a strong position for himself in the world of financing, which certainly seems to be what Vietnam is in dire need of right now.
Nguyen Huu Dinh, Manager of Saigon Jewelry Co.:
Mr. Dinh set up SJC in 1989 for the HCMC People's Committee. Two years ago he set up the first finance company in Vietnam, the Saigon Finance Joint-Stock Company, of which SJC owns 60%. SJC also owns 20% of two HCMC banks, including the EXIMBANK and INCOMBANK. SJC is getting involved in extensive property development, including a 50% stake in the $65 million Saigon Diamond Plaza. It owns small stakes in a few other companies. He says "Our goal is to develop in diversified fields. "32 Mr. Dinh's remarkable success in a period of 5 years demonstrates that he knows what he is doing. Mr. Dinh is well connected and his close link with the HCMC People's Committee doesn't hurt either.
Nguyen Xuan Oanh. Vice-Chairman Frontier Fund:
Mr. Oanh was Deputy Prime Minister of the Saigon Government before 1975. He is a Harvard educated economist and was the Governor of the Central Bank of Saigon before the Saigon government fell. He was elected to the national assembly in 1987 and has served as an economic advisor to the present government and was director of the State owned Investment and Management Consultancy Group. He is now 74 and runs his own consulting firm, Nguyen Xuan Oanh Associates. He also manages the Frontier Fund.
Le Van Kiem, General Director of Huy Hoang Garment Company:
Mr. Kiern is said to be a very skilled businessman. He is Chairman of the V.P. Bank and seems to be very aggressive about getting Huy Hoang involved in construction and property development.
Minh Phung, General Director of Minh Phung Garment Company:
Mr. Minh Phung is said to be an extremely well-connected and aggressive businessman. He is also attempting to build a conglomerate, using construction and property development as the next step.
Doung Van Day, General Director of Saigontourist:
Mr. Day has the responsibility of managing Saigontourist, which is the company with the highest capital base in Vietnam. It seems that Saigontourist is quite well managed as they have built and operate many successful Hotels.
Cao Son Ngoc, General Director of Huu Nghi Tailoring Co.:
Mr. Ngoc is said to be well connected in the Chinese business world.
Phan Chanh Doung. Director of Tan Thuan Corp.:
Mr. Doung has strong connections with the HCMC People's Committee on one side, the Central Trading and Development Corp. of Taiwan on the other side, and Mr. Doung right in the middle.
Mr. Raymond Eaton, Chairman of Export Development Trading Corp.:
Although Mr. Eaton is based in Thailand, he is said to have the most extensive high level contacts of any western businessperson in Vietnam. His company buys Vietnamese garments and consumer goods for export. He currently recommends investments is oil exploration, oil refining, and infrastructure projects.
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FOREIGN INVESTMENT FUNDS
Templeton's Vietnam Opportunities Fund:
This closed end fund, managed by the legendary Mark Mobius, has about $100 million under management and will invest at least 65% of its assets in equity. At the estimated market capitalizations, they have a challenging job if they plan to invest in Vietnamese equities.
Keppel Corp.'s Vietnam Investment Fund:
This Singapore based direct investment fund currently has $90 million under management and has plans for projects worth up to $410 million. It currently is invested in an office building in Hanoi and a shipyard JV in HCMC.
The Vietnam Investment Fund:
This San Francisco based fund is attempting to raise $318 million from the sale of preferred and common stock. This fund is targeting direct investment projects in Vietnam.
The Vietnam Fund. Ltd:
At last reporting, this Irish listed fund has invested 23% of its $52 million.
The Beta Fund:
A UX based fund with $64 million.
The Vietnam Frontier Fund:
This $50 million fund is in the hands of the very intelligent and influential Mr. Nguyen Xuan Oanh.
FOREIGN CAPITAL FINANCING AND CONSULTING CONIPANIES
Ashta:
This American consulting firm is run by Eugene Matthews, a Harvard law school graduate who speaks Vietnamese and Japanese. Ashta is managing about $40 million and is interested in investing in food processing, business services, and real estate.
Vatico:
Vatico is another American consulting firm, yet its capital resources are smaller than Ashta's. It is run by James Rockwell.
Peregrine Capital Vietnam:
Peregrine Capital Vietnam has direct interests in auto distribution (the distribution, sales, and service franchise for Mercedes Benz), pharmaceutical product manufacturing and marketing (with Ciba Geigy and J & J.), real estate and consumer product agencies. They are also providing technical advice on the establishment of the stock market. Their interests are in "developing Vietnam's capital markets" such that they are helping the government set up a suitable framework to finance large-scale infrastructure and BOT projects.
Dragon Capital Ltd:
Hong Kong based Dragon Capital directly invests in and finances various projects in Vietnam. They plan to take an active role in investing in the stock exchange and have already purchased Vietnamese shares. They may be a very well informed source for the latest news on equitization in Vietnam and are a good contact to help orient foreign investors who are interested in buying Vietnamese equity.
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APPENDIX: MISCELLANEOUS INFORMATION
TRENDS AND OBSERVATIONS
(The author's personal opinions)
Consumer trends:
Vietnamese consumers are particularly inclined towards Mercedes automobiles (those who can afford the 200% luxury tax) and Honda motorcycles, especially the Dream II (Honda has 90% of the motorbike market in Vietnam). Televisions are much more common than telephones, and such luxury items as VCR's, karaoke machines, stereo equipment, refrigerators, washing machines, and air-conditioners are in high demand by those who can afford them as well as those who can't. To demonstrate that point, there are a number of families who live in straw huts yet they have a karaoke machine (including television) and drive Dream II Hondas ($2,600). Vietnamese seem to either vastly overspend their means or else have other sources of income which go unreported in the calculation of standard of living figures (perhaps a combination of both).
The role of overseas Vietnamese:
Viet Kieu (overseas Vietnamese) have an advantage over non-Vietnamese foreign investors not only because they can speak Vietnamese but also because of the importance of family and social contacts as well as their clearer understanding of Vietnamese social patterns. Overseas Vietnamese send home over $1 billion per year to their families in Vietnam. The Viet Kieu will play a crucial role in the economic development of Vietnam through their working experience and skills, their capital resources, trade contacts and their tight family relationships.
Cultural obstacles for foreigners doing business in Vietnam:
Cultural and educational differences can lead to problems for foreigners trying to conduct business in Vietnam. For instance, a lack of understanding on behalf of a business partner or employee often goes unexpressed. Similarly, bad news and other important information relevant to the effective running of a business is likely to never be brought up unless you really dig for it. A poor standard of training in such areas as business management and engineering are also difficult obstacles to overcome. On the positive side, Vietnamese people are usually very hard working, adaptable, persistent, resourceful, and very enthusiastic about working and learning.
On liquidity and market capitalization:
Vietnam's low market capitalization and illiquidity will not justify the presence of large institutional investors unless they want to make a very small but long-term investment. There will probably be a lot of red tape for years to come. Then again, if an investor wants to buy 5 to 10% of a bank for almost nothing and wait a few years, that investor may eventually hold a stake in a successful regional bank.
Political drawbacks:
The economy of Vietnam is often over-hyped in the International press. An 8.5% GDP growth rate doesn't mean much when it is based on an annual per capital GDP of US $220. Talk of Vietnam being Asia's next tiger is nonsense. Recently the Heritage Foundation ranked Vietnam as 99th out of 101 countries on a scale of economic freedom33. The indicator was based on considerations such as trade policy; taxation policy; government consumption of economic output; monetary policy; capital flows and foreign investment; banking policy; wage and price controls; property rights; regulations; and the black market. Cuba and North Korea were the only countries that scored as more economically repressed than Vietnam. Although the Socialist Vietnamese government presents themselves as trying to encourage foreign investment and economic liberalization, in actuality foreign investment has generally been very difficult and many foreign business people are quite discouraged. The government must drastically reduce its control and regulation of business activities if they harbor any hope of reproducing the economic progress of Vietnam's more developed neighbors.
A final comparison of joint-stock banks and equitized SOE's as potential investments:
Joint stock banks, starting with Saigon Bank in 1987, have generally been founded and managed in relatively competitive capital markets. It is likely that from the beginning, the joint-stock banks were managed more efficiently and profitably as the founders have been concerned with maintaining and increasing the value of
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their equity. Many of these banks are well positioned to play a vital role in financing the rapid economic development that Vietnam has ahead of it - due to the credibility of the banks and the connections of the major equity holders. In contrast, it seems that most SOE's are a mess and their only value is in the value of their underlying assets and rights - not in their value as an ongoing concern. It will be practically impossible to get reliable financial data about most of these companies. Of course, there are exceptions.
In summary: key companies to watch:
* Saigon Bank (J.S.B.)
* Viet Hoa Bank (J.S.B.)
* Saigon Jewelry Co. (SOE)
* Saigon Finance Co. (SOE)
* HANEL (SOE)
* Minh Phung (Private)
* Huy Hoang (Private)
Parting thoughts:
Private conversations aren't always so private in Vietnam.
Vietnam's economy is extremely over-hyped in the international press.
Contacts and reputation are more important than experience in the Vietnamese business world.
You learn more from drinking a few beers with someone than by meeting them in an office.
Financing and property development are the big themes - everyone wants in.
Garments and Electronics are poised to become big industries.
If the stock market behaves anything like the real-estate market, it will be speculated up into the clouds.
As lots of shady dealings go on, insider information and stock manipulation will be big problems.
Its advisable to have common interests with the HCMC People's Committee.
Many foreign businesspeople are discouraged about how difficult it is to overcome business obstacles here.
There are absolutely no guarantees in Vietnam.
Embezzlement is a huge problem with SOE's.
The VN Government wants to sell equity (raise capital) without giving up actual control to foreigners.
If something fishy can go on, it will.
There is a lot of construction and production going on as late as 11:00 at night.
Vietnamese families are usually much more generous and welcoming than their western counterparts.
Cyclo drivers represent a huge, well organized underworld network of social deviance and lechery.
Vietnam is a tease: companies, consultants, everything... a lot of promises, little follow-through.
If I was going to buy stocks, I would use a foreign broker who understood my concerns and skepticism.
A large number of very nice new stores and restaurants are opening up all the time.
There are very few Vietnamese here who have had any previous experience with security markets.
Poor infrastructure is a serious problem: Lots of plans but little action (so far).
If I was going to buy stocks, I'd buy SJC, SFC and Saigon Bank and Viet Hoa Bank.
-Those four companies are all aggressive companies on the move with a long term vision.
If I was going to avoid stocks I'd avoid Seaprodex, Seafic, VCC, and state organized trading groups.
Cambodia's policies are more welcoming to the presence of foreigners than Vietnam's policies are.
Vietnam is not an easygoing or relaxing tourist destination and the beaches are better in Thailand.
Japan's pachinko economy ($170 billion) is 11 times bigger than Vietnam's entire economy ($15 billion).
Vietnam is dwarfed by China which is MASSIVE and more competitive.
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CITATIONS:
1 An Early Bird. Vietnam Economic Times. P. 14, Issue 7. October 1994.
2 Various articles. Economic Development Review. No. 1, Sept. 1994. See article by Tran Hoang Ngan, P. 3.
3 Capital Mobilization and Investment. Economic Development Review. P. 9, No. 2. Oct. 1994.
4 Interview with Cao Sy Kiem. Vietnam Economic Times. P. 26, Issue 5. Aug. 1994.
5 Ibid.
6 Tran To Tu. Some Issues on Equitization of State Owned Business. HCMC Institute of Economics.
7 Decision 202-CT, issued June 8, 1992 and Instruction 84, issued March 4, 1993.
8 Finance and Banking. Business Vietnam. P. 20, Vol. 6, No. 9. Sept. - Oct. 1994.
9 Decree 120/CP, issued Sept. 17, 1994.
10 Le Tuyet Hoa. Banking System and Formation of Stock Exchange in Vietnam. Economic Development Review. P. 19, No. 3. Nov. 1994.
11 SOE's Can Now Issue Bonds & Shares. Vietnam Economic Times. Issue 8, Nov. 1994. Information provided by Sly & Weigall/Deacons; Graham & James; and Investconsult Legal Services.
12 National Securities Law. International Finance Corporation, Sept. 21, 1993.
13 Decree 120/CP, issued Sept. 17, 1994.
14 State Enterprise Reform a Victim of the System. Vietnam Investment Review. Nov. 14, 1994.
15 Accounting in Vietnam. Vietnam Today. Issue 3, Vol. 3. July 1994.
16 Dr. Bui Ha. Executive Report at Seminar on Equitization. Inst. of Economic Research. May 5, 1994.
17 VIETNAM. A Guide for the Foreign Investor, 2nd ed. Price-Waterhouse, May 1993. P. 34.
18 Nguyen Van Toung. State Owned Enterprise used as an Experimental Ground for Equitization.
19 Efficiency and Deficiency. The Saigon Times. P. 27, Oct. 6, 1994.
20 The Results of Reinvestment 1991-1993. Saigon Times. P. 19, Sept. 29, 1994.
21 Foreign Investment in Vietnam. SCCI and Phillips Fox, Sept. 1992.
22 VIETNAM. A Guide for the Foreign Investor. 2nd ed. Price-Waterhouse, May 1993. P. 45.
23 Foreign Investment. Vietnam Economic Times. Issue 8, November 1994.
24 Dominic Scriven. Inside View. Vietnam Economic Times. P. 16, Issue 6. Sept. 1994.
25 ibid.
26 Data courtesy of Dragon Capital Management.
27 Estimates courtesy of Dragon Capital Management.
28 Mr. Tran To Tu, HCMC Institute of Economics.
29 Michael J. Hagan of Coudert Brothers. IBA Conference Speech. Oct. 1994.
30 An Early Bird. Vietnam Economic Times. P. 14, Issue 7. Oct. 1994.
31 Drawn to the State. Vietnam Economic Times. P. 9, Issue 3. June 1994.
32 Do it Yourself. Far-Eastern Economic Review. Vol. 157, No. 13. March 31, 1994.
33 In Search of Free Markets. The Wall Street Journal. Dec. 12, 1994.
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