Equitization and listing of vinamilk in Vietnamese stock market

MMVCFB PROGRAMME DE MAITRIES EN MANAGEMENT VIETNAM COMMUNAUTE FRANCAISE DE BELGIQUE NGUYEÃN QUANG QUYEÀN EQUITIZATION AND LISTING OF VINAMILK’S STOCK ON VIETNAMESE STOCK MARKET MASTER

MMVCFB PROGRAMME DE MAITRIES EN MANAGEMENT VIETNAM

COMMUNAUTE FRANCAISE DE BELGIQUE

NGUYEÃN QUANG QUYEÀN

EQUITIZATION AND LISTING OF VINAMILK’S STOCK

ON VIETNAMESE STOCK MARKET

MASTER OF MANAGEMENT THESIS

ADVISOR: DR TRAÀN ÑAÉC SINH

Ho Chi Minh City, Viet Nam

2007

TABLE OF CONTENT

ABBREVIATION 4

LIST OF TABLES AND CHARTS 4

FOREWORDS 5

CHAPTER 1: VINAMILK’S EQUITIZATION 8

1.1 Fundamentals of equitization 8

1.1.1 Concept of SOE equitization 8

1.1.2 The necessity and indispensability of equitization 8

1.1.3 Role of equitization in the economic integration 9

1.2 Vinamilk’s Equitization 9

1.2.1 Vietnam Government’s policy of SOE equitization 9

1.2.2 Legal environment 10

1.2.3 Vinamilk’s Equitization 10

Conclusion 1 13

CHAPTER 2: VINAMILK’S LISTING IN THE SECURITIES MARKET 14

2.1 Vietnam Securities Market’s Overview 14

2.1.1 Vietnam Securities Market 14

2.1.2 Assessments of the securities market 16

2.2 Listing targets 17

2.3 Benefits from listing 18

2.3.1 State’s benifit 18

2.3.2 Benefits of employees and shareholders 18

2.4 Process of equitization and listing in the securities market 19

2.5 Company’s achievements after equitization and listing 20

2.5.1 Business activities 20

2.5.2 Vinamilk’s shares in the securities market 21

2.6 Vinamilk’s impacts to the securities market 22

2.6.1 Psychological effect to investors 22

2.6.2 Pioneer in share auction through the securities market 22

2.6.3 Double the market size 22

2.6.4 Positive impact on equitization process and listing of other businesses 23

2.7 Vinamilk’s experiences on equitization and listing 23

2.7.1 Setting up overall and detail plans for equitization and listing 23 2.7.2 Making presentation to employees and investors about the Company’s direction 23

2.7.3 Selecting the consultancy firm 23

2.7.4 Deciding the timing for equitization and listing 24

Conclusion 2 25

CHAPTER 3: VINAMILK’S DEVELOPMENT STRATEGIES AFTER LISTING AND SOME PROPOSALS 26

3.1 Government Strategies on SOE equitization and development of Vietnam Securities market 26

3.2 Vinamilk’s development strategies 26

3.2.1 Business 26

3.2.2 Finance 29

3.3 Policy proposals on equitization and business operation after listing 30

3.3.1 Solving the benefit conflicts between the Board and the shareholder 30

3.3.2 Reducing the State’s share ownership 31

3.3.3 Increasing the ownership of foreigners and strategic shareholders 31

3.3.4 Restructuring the company management model 32

3.3.5 Taxation policy 33

Final Conclusion 34

LIST OF REFERENCE 35

ABBREVIATION

SOE(s): State-owned enterprise(s)

STC(s): Securities Trading Center(s)

SSC: State Securities Commission

WTO: The World Trade Organization

APEC: Asia-Pacific Economic Co-operation

LIST OF TABLES AND CHARTS

Chart 1: Chartered Capital Structure ……… 13

Chart 2: Total Sales for period 1999 – 2007 20

Chart 3: Total Domestic Sales for period 1999 – 2007 .20

Chart 4: Total Net incomes for period 1999 – 2007 20

Chart 5: VNIndex and trading volume for 18 months (Jul 05 – Dec 06) 21

Table 1: Securities market highlights for period 2000-2005 ……… 15

Table 2: Summary of state income from Vinamilk’s equitization 18

FOREWORDS

Vietnam economic transformation to the market economy from the central planned economy has been conducted on various areas step-by-step and in a practical way in order to strike for the end of building up a State with “rich people, strong nation, democratic and civilized society” The two decades of renovation has brought about to Vietnam a number of prominent achievements in policy-making as well as implementing right solutions relevant to the Vietnam’s specific economic characteristics

The restructuring in state-owned enterprise (SOE) sector during the last time has not only realized the objective that “SOE equitization must not become SOE privatization” but has created also a new vitality to the economy with an average growth rate of 7.5 percent per annum, streamlining the number of SOEs

to 2,000 by August 2006 from previous 12,300, increasing the average size of an SOE from 3.3 billion VND to 22 billion VND etc… This proves that the Party and the government’s guidelines and polices are right and profound In addition, the SOE equitization has made up a strong base for the establishment and development of Vietnam securities market And in turn, in the securities market, Vietnam in general and enterprises in particular will be able to mobilize fund from the domestic and the foreign investors with the highest volume at quickest time and cheapest cost

In order to performing the policy of SOE renovation and restructuring, Vinamilk equitized itself at the end 2003 Though it faced a lot of difficulties during the equitization such as the legal procedures, the business revaluation etc…, the case was seen as a success and was set an example and basis for Vietnam to speed up the equitization in general corporations and big state-owned banks This proclaims the SOE renovation and restructuring, with Vinamilk as a

typification, a lucid policy in the cause of national industrialization and modernization as well as integrating into the world’s economy As such, with the purpose of giving more information to the public on the benefits of the equitzation and then listing in the securities market, I would like to choose the topic of “Vinamilk’s equitization and listing in the securities market” as my study for the final essay in a wish that this may somehow contribute to fostering those processes in Vietnam Though having gone through a long road for more than 10 years, the equitization as well as the listing in the securities market are still practical and topical questions and are being studied by various authors

The essay was prepared in the context of economic renovation when Vietnam has just achieved important economic and diplomatic success in domestic as well as in international arena Vietnam has officially admitted as the WTO’s 150th member, hosted successfully APEC 14 Summit and is the only Asia’s candidate for the non permanent member at the United Nation

By choosing this topic, I would like to assess the effectiveness of the equitization and listing in the securities market by the SOEs through the typical case of Vinamilk Then, I would like to propose proper solutions to promote those processes in SOEs in the coming years

Due to the short time of studying while this topic is quite extensive and new to Vietnam’s economy, I would like to focus on analyzing the effectiveness from Vinamilk’s equitization and listing in the securities market in a effort to give an unbiased view over the company’s success when implementing the Party and the government’s policy

To reach the end goal of the essay, I have used different methodologies for studying and collecting the data such as synthetization, comparison, statistics, assessment and analysis etc… As one of the members responsible for the

equitization and listing for Vinamilk, I used all the data practically, adequately and correctly Moreover, the secondary data were also gathered in order to make the essay more vivid

Beside the forewords, conclusion, table of contents, list of reference, the main content in the essay are as following:

Chapter 1: Vinamilk’s Equitization

Chapter 2: Vinamilk’s listing in the securities market

Chapter 3: Vinamilk’s development Strategies after listing and some Proposals

CHAPTER 1

VINAMILK EQUITIZATION

1.1 Fundamentals of equitization

1.1.1 Concept of SOE equitization

The transfer of ownership in SOEs to the business individuals and private entities is defined as the privatization in other countries, however, it is called the equitization in Vietnam Practically, the concept of equitization still implies the state’s role because even when the SOEs are equitized, the state is still holding a certain part, and in some case, a crucial part in the equitized companies Thus, the state-owned capital is not absolutely withdrawn and the investment role played by the government is still there

After more than 10 years of implementation of both pilot program as well

as expanding the equitization on a large scale, that concept has gradually been elaborated in order to correctly capture the practices in Vietnam Recently, the Central Party’s 3rd Resolution of the IXth Session has reviewed it as follows: The SOE equitization is a process of changing a business from one stakeholder which

is the government into a multi-shareholder business with the majority of shareholders are the employees and private individuals Obviously, this definition

is more generalized and reflects correctly and adequately the nature of the SOE equitization process during the last time

1.1.2 The necessity and indispensability of equitization

The orientation of building a socialist economy in Vietnam based on the state-owned and the co-operative ownership in the 80s and earlier had created a huge number of SOEs (more than 12,300 SOEs), most of which were small size, technologically backward and even lack of capital for operation This situation

put the Party and the State under a pressure to find out a solution to restructure the SOE system and enhance the competitiveness of the SOEs as well as strengthen the public sector’s role in the economy In this circumstance, the policy of SOE equitization was enacted and implemented in Vietnam

1.1.3 Role of equitization in the economic integration

multi-sector economy and to socialize production It not only reduces the state subsidy

of capital in the enterprises but also pays the way for the state to concentrate to invest and manage in the SOEs in key sectors Equitization will bring income to the state budget as the number of tax payers are not cut down but increase Equitization will minimize the administration apparatus, avoid waste if investment, create the transparency in the ownership, balance benefits and play

as the driven to promote social development

improving their financial capability in order to expand their production and business Moreover, equitization will create multi-ownership businesses which include the state, the employees, and outside individuals and institutions

the market economy, so that their production and business effectiveness are improved

1.2 Vinamilk’s Equitization

1.2.1 Vietnam Government’s policy of SOE equitization

Based on the result of pilot program of equitization between 1992 and

1996, the Government promulgated the Decree No.28/ CP dated on May 7, 1996

on transferring some SOEs into the equitized companies 2 years later, it was

replaced by Decree 44/CP dated on 29 June, 1998 which gave more advantages

to the equitized business as well as its employees However, as the equitization progress was still low and in an effort to accelerate the number of equitized SOEs, the Prime Minister enforced the Decree 64/ND-CP dated on 19 June,

2002 on transferring the SOE into the joint stock company which replaced the Decree 44/CP

Up to date, the latest documents on equitization is the Decree 187/2004/NÑ-CP dated on 16 November, 2004 on transferring the SOEs into the joint stock companies and its instruction document which is the Circular 126/2004/TT-BTC dated on 16 November, 2004 Those documents basically solves the weak points remainning in Decree 64

1.2.2 Legal environment

Legal basis for Vinamilk’s equitization are included as follows:

- Government’s Decree 64/2002/NÑ-CP dated on 19 June, 2002 on transferring the SOEs into joint stock companies

- Circular 79/2002/TT-BTC dated on 12 September, 2002 by the Ministry of Finance on guiding the revaluation of business when transferring from SOEs into the joint stock company

- Government’s Decree 187/2004/NÑ-CP dated on 16 November, 2004 on transferring the SOEs into the joint stock company

- Circular 126/2004/TT-BTC by the Ministry of Finance on guiding the Decree 187/2004/NÑ-CP

1.2.3 Vinamilk’s Equitization

1.2.3.1 Overview of Vinamilk

The establishment and development (before equitization)

The company was founded in 1976 with the orginal name as Southern Coffee-Dairy Company (a subsidiary of General Food Directorate) and was renamed as Vinamilk in 1992 Before equitization, Vinamilk was upon the Ministry of Industry, specializing in dairy and dairy products processing

Principal business activities

- Producing and trading canned milk, milk powder, cereal, pastries, fresh milk, Soya milk, soft drinks and other dairy products,

- Trading food processing equipment, parts and accessories, materials, chemicals and raw materials,

- Real estate trading, lease brokerage; trading in warehouses and yards; products delivering and transporting by trucks, products handling,

- Producing, buying and selling alcohols, beers, beverages, processed foods, teas, coffee (roasted, ground, filtered and instant),

- Producing, trading packs/bags; pack printing,

- Producing, buying and selling plastic products,

- Polyclinics

Products and Market

Vinamilk produces more than 200 kind of products of milk and from milk

In the domestic, Vinamilk’s market share is in the lead, occupying about 35% - 75%, based on the kind of products However, 90% of Vinamilk revenue come from Middle East and the rest are Cambodia, American and Australia… The export revenue is about 100 – 140 million USD per year

1.2.3.2 Equitization content

Targets

- Transferring the business from single ownership into multi-ownership;

- Collecting money (budget) for the government;

- Creating opportunity to companies to mobilize the fund as well as driven for them to do effective business;

- Lessening the company’s dependence on government

- Creating opportunity to employees to own the company’s shares, increasing their income and duties;

- Attracting intelligence and technology from strategic shareholders;

- Creates the goods for stock market

Equitization form

Basis on the feature and fact, Vinamilk decided to equitize and sell a part

of state capital in the company to investors according to article 3, Decree No 64/2002/NÑ-CP dated 19/06/2002 of the government about transferring the company to joint stock company

Beneficiary and buying share conditions

Under the approval by the Ministry of Industry, the company sold 20 per cent

of its shares to its employees, milk cow farmer (the supplier) and outside investors (at equitization) at price as regulated by the related legal document The capital structure after equitization as:

Chart 1: Chartered Capital Structure (At equitization)

Conclusion 1

From the practical demand during the economic renovation, the equitization policy was introduced and has been implemented in a large scale for more than 10 years As a production business subject to equitization, Vinamilk took the initiative to equitize itself in order to follow up with the Party and the Government’s policy, be self controlled and strengthen its production capacity and competitiveness at the threshold of the economic integration The equitization result at Vinamilk were highly appreciated by the State and the Government Vinamilk was the 1st equitized SOE whose capital is over 1,000 billion VND It is asserted that Vinamilk equitization has contributed to getting the equitization more speedy in the following years

CHAPTER 2

VINAMILK’ LISTING IN THE SECURITIES MARKET

2.1 Vietnam Securities Market’s Overview

2.1.1 Vietnam Securities Market

2.1.1.1 During 2000-2005

With only 2 listing companies at the launch date on 28 July, 2000, the Hochiminh City Securities Trading Center (HOSTC) has hosted for 35 kinds of shares and 1 unit trust by the end of 2005 with the total par value (exclusive of unit trust) of nearly 2,000 billion VND and the market value of 7,500 billion VND Except the year 2003 when the total market value was shrunk, the market capitalization grew by 60 per cent year-on-year

For bond market, beyond the expectation of the market regulator, bond trading was “frozen” for a long time Only after the trading mechanism for bond were changed, together with the securities businesses began their repurchase transaction for bonds (repos) did bond trading activities become more exciting In the last 2 year of 2004 and 2005, the bond trading value at the HOSTC was 41.7 trillion VND with the average of over 80 billion VND per session

Together with the securities market coming into operation, the financial intermediary institutions was also set up and developed By the end of 2005, there were 18 custodians, 13 brokerage houses and a designated settlement bank The number of investors also increased to 31,300 accounts in 2005 from just nearly 3,000 in the very first year In addition to the local investors, the foreigner trading is considered to play a crucial role in accelerating the market trading scale The limit on foreign ownership was raised from an initial 20 per cent to 30 per cent and has now been raised to 49 per cent for industrial

companies (however, the limit on ownership of financial sector remains at 30 per cent) However, the equity market capitalization was quite small, making up made up less than 1 per cent of the GDP in 2005

Table 1: Securities market highlights for period of 2000 - 2005

Year Index

high

Index low

Index closing

Index average

Market capitalization

(bil VND)

Market cap./Listing

At the end of 2006, there were 106 listed companies at the HOSTC with the total listed par value of over 14 trillion VND and their market capitalization of 145,5 trillion VND Besides, there were 2 securities investment funds which listed its fund certificates in the market with the listed par value of 1 trillion VND In bond market, the listed value (including the government and corporate bonds) at the HOSTC in 2006 was 57.51 trillion VND In addition, the mobilizing fund in 2006 was totally 1.361 trillion dong, 3 times higher than that in 2005 Beside that, the shares prices were moved positively during this period The index closed at 751.77 points, up more than 444 points or 2.5 times from the previous year

The total trading volume in this year were 643.3 million shares and unit trusts, equivalent to 38,175 trillion VND, up by 5 times in volume and 12 times in value compared to the previous year On average, 2.57 million shares and unit trust were executed every day which resulted in a daily trading value of 152.7 billion VND However, if bonds were counted in, the daily trading turnover would be 4.4 million securities, and worth 340 billion VND in 2006 The trading accounts at the brokerage houses in 2006 were around 107,000, 3 times higher than those in the previous year, 98 per cent out of which were the individual accounts, and there were over 1,300 foreign account (up 4 times compared to those in 2005)

2.1.2 Assessments of the securities market

- The demand was limited due to the lack of awareness of the securities market

- The strong determination by the government to to push forward the equitization in big SOEs in order to create the supply to the stock market

- The world leading financial groups such as MerryLynch, Citigroup, HSBC… have continuously issued good reports on Vietnam’s good investment environment and economic development potential

- The government is considering to reduce the State’s stake in equitizing SOEs and just hold their ownership in some important sectors with an aim to bring about the actual self-control to the businesses and lessen the subsidizing burden from the state budget

- The Securities Law would become effective in 2007 that drew much attention from the investors

- Most of the listing companies were doing their business quite well and profitable

- The Ministry of Finance decreed that those who would be listed after December 31, 2006 would no longer be enjoyed income tax holiday which created a wave of new listing during the year

- etc

2.2 Listing targets

Value added for the company and for the shareholders

The company’s market value is increased and as a result, the ownership value by each shareholder is increased, too Beside that, company’s name or brand is advertised without charges on various means of mass media and communications which means that the company can save a big budget for advertising

Increase of share liquidity

Shares can be exchanged easily through stock market