SOE IPOs are lagging far behind targets
After experiencing an aggressive period 2011-2015, the privatization process of SOEs lost its strong momentum. With on 33 of 127 required IPOs, the government has only achieved 26%
of the set plan for the period 2017-2020.
Figure 39: Number of successful IPO 2011-1H2019
Source: Fiingroup
In an effort to attract private investments and improve the competitiveness of SOEs, the Vietnamese government has fully committed to equitization of these enterprises. However, the process has suddenly slowed down over the last few years. After peaking at 122 in 2015, the number of successful IPOs slumped by half to 66 in 2016 before descending exponentially throughout 2017-1H2019. Accumulated from 2016 up to June 2019, the country has equitized 176 SOEs, a very modest figure compared to the numbers (331) completed between 2013-2015 and equal to ẵ of the total number of IPOs achieved during 2011-2015.
Figure 40: Number of IPOs 2016-2020: Plan vs Actual
Source: Fiingroup, Government’s report on the progress of SOE equitization for the period 2016-2020 as of Nov 2018
The progress of SOE IPOs have been far behind the government’s schedule. According to the set plan at Prime Minister’s Official Dispatch No 991/TTg-DMDN (“plan 991”), during 2017-2020, 127 SOEs are required to be equitized, progressively 44 SOEs in 2017, 64 SOEs in 2018, 18 SOEs in 2019 and 1 SOE in 2020. In practice, up to June 2019, only 33 SOEs completed IPOs, translating into 26% of the target. In particular, in 2016, the state equitized 66 enterprises including 7 SOEs under plan 991. In 2017, 69 SOEs completed IPOs, but only 17 belong to the given plan.
Throughout 2018 and 6M2019, only 9 IPOs have been completed, meaning only 1 successful auction every two months. Therefore, the remaining number of enterprises to be equitized is 94/127 enterprises, accounting for 74% of the plan.
SOE IPOs achieved 26% of the plan for 2017-2020
33 IPOs
• Enterprises completing IPOs during 2018- 1H2019 are almost small businesses such as Phuoc An Coffee, Dak Lak Rubber, Van Tuong, and provincial water supply companies.
• On the contrary, a series of big names waited for IPOs such as MobiFone (telecommunication), EVNGenco1, EVNGenco (Power generation), SJC (Jewelry) have so far missed the initial IPO plan and were transfered to the next period from 2H2019 for many reasons, mostly from challenged in implementing regulations on equitization of 100% state- owned enterprises.
Notable IPOs 2018-1H2019
16 13
66 143
122
66 69
32 9 0
40 80 120 160 200
2011 2012 2013 2014 2015 2016 2017 2018 2019
0
44 64 18
1
127
7 17 5 4 0
33
2016 2017 2018 1H2019 2020 Total
Actual Plan
Vietnam M&A 2019 Research Report| Issue 9 | August 2019
Many bottlenecks are holding back SOE IPOs & divestments
Figure 41: Divestment volume 2017-2020: Plan vs Actual
Source: FiinGroup, Government’s Report on the progress of SOE divestments for the period 2016-2020 as of Nov 2018
The progress of SOE divestments also fell behind the government’s divestment plan. In particular, Decision No 1232/2017/QD-TTg requires the completion of divestments in 406 SOEs between 2017 and 2020. The progress for each year should be 135 SOEs in 2017, 181 SOEs in 2018, 62 SOEs in 2019 and 28 SOEs in 2020. However, only 13 divestments was implemented in 2017. In 2018, the state divested its capital in 18 enterprises, but only 2 of which were under the divestment plan for 2018, the remaining 16 were set for 2017. The first half of 2019 only recorded 10 SOE
divestments under Decision No 1232. Overall, the state has fulfilled only 10% of the initial plan, and it seems infeasible to complete divesting in 406 SOEs by 2020.
The target set in Decision No 1322 for the period of 2017-2020 is to divest about VND60,000bn (US$2,606mn) of the state-owned charter capital in enterprises. However, according to the Ministry of Finance, the state only achieved US$62.4mn from 13 divestments in 2017, US$56.3mn from 18 capital withdrawals in 2018 and US$32.8mn from 10 deals completed in 1H2019. Overall, the accumulated divestment value stood at US151.5bn, accounting for less than 6% of the target, pushing the burden to divest the
remaining of US2,455mn to the period 2019-2020.
• To speed up divestment, the government issued Directive 01/CT-TTg stipulating SOEs that have not divested from 2016-2018 period under Decision 1232/QD-TTg to complete the transfer assigned to SCIC to carry on divestment IPOs
• IPOs will be widely informed so that investment opportunities can be analyzed carefully and private investors have more chance to
participate, especially when SCIC implements selling the method of the entire lots of shares
• Many enterprises under equitization and divestment in this period such as EVN, Hapro, Vinafood1 are large-scaled, have operating network spreading over many premium land areas, so they suffered from long reviewing and approval process of land use. Meanwhile, decrees guiding the implementation of the above contents are still inadequate, infeasible, and sometimes overlapping.
• In some enterprises, major shareholders with controlling stakes are reluctant to disclose information for valuation, which makes the Asset Method less transparent; thus unreliable to investors.
• After divestment, the State still hold a major amount of stakes; making the target company less attractive to investors.
Barriers to SOE divestments and IPOs
Notable divestments
Government Action
▪ Although the SOE divestment has been slow, the capital market was sometimes stirred up with megadeals such as the successful auction to sell 4.2 million shares (15% of charter capital) owned by Vinachem in SaoVang Rubber at US$1.8/share
▪ SCIC’s sales of state capital in Vinaconex also attracted great attention. Noticeably, 10 days before the auction, Vinaconex unexpectedly blocked the foreign room, limiting the participation of inbound investors. Moreover, there were 3 domestic investors including an individual buyer registering for the deal offered at US$233mn (US$0.9/share). Eventually, An Quy Hung paid US$317 (US$1.24/share) to purchase all the entire share lot.
In terms of divestment value
Section 5: Key themes| SOE IPOs & Divestment
135 181 62
28
406
13 18 10 0
41
0 100 200 300 400 500
2017 2018 1H2019 2020 Total
Actual divestments Planned divestments
Vinamilk Food &
Beverage 749 270 36%
Subject to direction of Prime Minister
FPT Corp Technology 264 16 6%
Hai Phong Thermal
Power JSC Utilities 215 19 9%
Quang Ninh Thermal Power JSC
Utilities 194 22 11%
Bao Minh
Corporation Insurance 39 20 51%
LICOGI Construction
& Materials 39 16 41%
Vietnam Electronics and Informatics Corp
Industrial Goods &
Services
19 17 88%
Vietnam Infrastructure Investment &
Development
Real Estate 18 8 48%
An Giang Agriculture and Foods Import Export JSC
Food &
Beverage 15 8 51%
State owned capital
% owned by State
Note Sector Charter
capital (US$mn) Company name
As mandated by the government, SCIC will continue to sell a large volume of state-owned capital in the years to come. In June 2019, State Capital Investment Corporation (SCIC) announced a list of 108 businesses that are expected to divest in 2019, including notable names such as Bao Minh Jsc (51%
owned by the State), Vietnam Real Estate Infrastructure JSC (48%), FPT Corporation (6%), Vietnam Vegetable Oils Industry Joint Stock Corporation (36%) and Licogi Corporation (41%). Especially for Vietnam Dairy Products JSC (Vinamilk), the divestment of 36% state-owned capital will be subject to the direction of the Prime Minister.
The result of equitization and divestment set for the period 2017-2020 was seen far below the government’s goals. Therefore, the list of SOEs to be divested and equitized is still large. This is, however, a great potential for M&A deals that take place in the coming time
Figure 42: Top upcoming SOE Divestments under SCIC’s portfolio
Big deals expected to come along with SCIC’s upcoming sales
Vietnam M&A 2019 Research Report| Issue 9 | August 2019
Construction & Materials, Utilities dominated upcoming IPOs
Source: FiinGroup
▪ Constructions & Materials sector is expected to be the main contributor for upcoming IPOs deals, in terms of both charter capital and deals volume. The majority of large construction groups are still owned by MOC.
In contrast to private companies, these SOEs suffered from continuous losses, forcing the government to equitize them.
▪ Propelled by rising demand for
infrastructure and housing development amid the emerging period of Vietnam, construction companies are forecasted to enjoy high growth trajectory. As such, upcoming IPOs in this sector will likely gain attention and attract huge capital from investors. Major upcoming deals involve Becamex, Vietnam Cement Industry Corp and Housing & Urban Development Corp, who are expected to raise over US$1.6bn for state’s budget.
▪ However, given the difficulty in valuation and determination of land use rights, stringent regulations need to be imposed to facilitate the IPOs process.
Figure 43: Charter capital (US$mn) of upcoming IPOs Figure 44: Number of upcoming IPOs by sector
▪ SOEs in Utilities sector are on the rise with second-highest volume of upcoming IPOs. In particular, water supply companies are forecasted to be the main driver as the majority are still managed and operated by People’s Committee. With high ratio of divested funds to charter capital ranging from 60%-90%, water supply companies are expected to raise significant funds from equitization. Notable upcoming IPOs include Saigon Water Corp and Hanoi Water Co., Ltd, raising around US$326mn
combined fund.
▪ However, the number of unequitized companies within this sector is still high as strategic investors are hesitant due to the interference of the State with management activities. In addition, from a financial perspective, investment into water supply sector is not really attractive. In some regions, clean water prices are controlled and capped by the authorities, preventing companies from generating breakthrough returns for investors. As a result, IPOs process of water supply sector is behind schedule of 2020.
Section 5: Key themes| SOE IPOs & Divestment
2,759 1,574
1,279 853 652 415 398 293 237 139 59 25 5 Construction & Materials
Basic Resources Banks Chemicals Telecommunications Retail Utilities Travel & Leisure Food & Beverage Real Estate Media Personal & Household Goods Health Care
55 12
7 6 6 5 2 2 2 2 1 1 1 Construction & Materials
Utilities Basic Resources Food & Beverage Media Travel & Leisure Telecommunications Retail Personal & Household Goods Health Care Banks Chemicals Real Estate Source: FiinGroup
5.1 Valuation Review