Improvements in investor relations may be vital in Vietnam, where boom and bust has undermined investor confidence
If you wanted to explain stock market bubbles to the uninitiated, there are few better examples than what has happened in Vietnam over the last two years. In the first half of 2007, the nascent Vietnamese stock market soared to become the most expensive in the world, as excitable retail investors battled with eager foreign investors, all desperate to buy into the country’s enticing growth story.
With valuations having sky-rocketed, however, the market soon collapsed as the contagion from the US subprime mortgage crisis spread and inflation began to spiral out of control. For some Vietnamese retail investors who had borrowed heavily to play the market for the first time, it literally ended in tears: they wept in the streets of Ho Chi Minh City (formerly Saigon) as they pondered fortunes made and lost in the space of just a few months.
While the market appears to have stabilized for now, helped by a package of government measures designed to tackle inflation and the growing trade deficit, Vietnam’s 150 or so listed companies are facing an uphill struggle as they try to rebuild shattered investor confidence. The vast majority of Vietnamese listed companies are former state-owned enterprises that floated only within the last three years. As a result, levels of transparency and disclosure are basic, to say the least.
Backward thinking
As Don Lam, managing director of VinaCapital, which invests more than $1.8 bn of foreign money in Vietnam, puts it: ‘Standards of disclosure are terrible. Many of the companies suffer from backward thinking, believing that if they release more information it will hit their share price.
‘That’s the complete opposite of the approach in developed markets, where the belief is that the more transparent you are and the more information you give, the better your valuation.’
While the optimists are convinced standards will improve as Vietnamese companies and investors gain more direct experience of capital markets, the fear remains that the culture of secrecy perpetuated by the Communist government for so long will prove hard to dismantle.
Keep it to yourself
‘The starting point is the old Communist mentality of, Don’t tell anyone anything unless you really have to,’ explains Tony Foster, who heads up the Vietnamese operation of Freshfields Bruckhaus Deringer, the international law firm. ‘But I’m relatively hopeful Vietnam will move toward better governance. The listing process is helping to improve transparency and companies are slowly realizing they can get better valuations by giving out more information.’
Many investors have had their fingers burnt over the last two years, however, and a number of emerging market fund managers have pulled out of Vietnam altogether for the foreseeable future. These skeptics will want to see significant improvements in corporate governance and disclosure standards before they come back into the market.
Peter Taylor, head of corporate governance for Aberdeen Asset Management in Asia, sums up the problem for international investors. ‘Vietnamese companies do not provide enough reassurance at the moment,’ he says. ‘There is equally good value to be found elsewhere in Asian markets but with much better quality. We are interested in Vietnam but we have no holdings there because these are relatively young companies in an economy that is undergoing tremendous reforms.’
Wild wild East
Investors say the twin challenges for Vietnam’s main stock market – there is also a smaller, over-the-counter market in the capital, Hanoi – and its listed companies is to improve investor protection while also developing a better understanding of the benefits of good investor relations.
Vietnam came 176th in the World Bank’s latest global investor protection rankings, below countries such as the Democratic Republic of Congo, Rwanda and Venezuela. But the World Bank praised Vietnam’s recent attempts to strengthen investor protection, highlighting how the number of IPOs has grown rapidly over the last couple of years following the introduction of a new, more watertight securities law.
‘There are probably all sorts of behavior that do not comply with the law, such as insider trading and front-running, whereby brokers illegally execute securities orders for their own account – before fulfilling orders for clients,’ says Foster, who has been advising foreign companies on the vagaries of the Vietnamese legal system since 1994. ‘Very little gets punished, however. Are investors well protected? They shouldn’t assume so.’
Officials from the Hochiminh Stock Exchange (HOSE) admit many companies still struggle to meet relatively simple requirements, such as updating the market about price-sensitive information in a timely fashion. ‘Some listed companies provide information voluntarily and compliantly,’ says a spokesperson for the exchange. ‘However, most of them, though they admit the importance of proper information disclosure, do not comply in the appropriate manner.’
But experienced Vietnam investors point out that there is a massive gulf in standards between these laggards and Vietnam’s handful of blue chips, such as dairy giant Vinamilk, confectionery group Kinh Do Corporation, and Sacombank, the first Vietnamese bank to float on the stock market.
‘These companies have good standards of reporting and work with big international audit firms,’ notes Lam. Most foreign fund managers would feel reasonably comfortable investing in them, he adds.
Overseas opportunities
Established stock exchanges around the world are now trying to convince some of Vietnam’s blue chips to list overseas to further boost their profile with foreign investors.
The London Stock Exchange, which has already lured a number of Vietnam-focused funds to its Alternative Investment Market, has signed a memorandum of understanding with HOSE, and the Hong Kong Stock Exchange this summer launched its own depositary receipts, designed to attract secondary listings from countries such as Vietnam.
But it’s Singapore that leads the way in the chase for Vietnamese listings, with Vinamilk, Kinh Do and PVFC, the financial arm of state oil company Petrovietnam, all looking to float on Singapore Exchange.
In spite of this, Taylor warns Vietnamese companies not to view a foreign listing as some sort of panacea. ‘Listing abroad doesn’t change what companies are, although it would provide a small degree of reassurance to some investors,’ he points out.
‘If Vietnamese companies really want to improve their standing with foreign investors, they would be better off building up proper IR functions, which even the blue chips lack,’ adds one skeptical foreign investor. But, as one stock exchange spokesperson puts it (in a somewhat understated fashion): ‘IR is quite a new concept in Vietnam, and not all listed companies are ready for it.’
Only a couple of companies employ someone who could loosely be termed an IRO, according to Lam, and even these IR professionals ‘don’t know what to talk about; they merely hand out brochures at meetings. The CEOs are so worried about damage to their company’s image that they insist on being the only ones to meet investors.’
‘It will take time to convince companies of the value of investor relations,’ adds Nguyen Trung Thang, a director of Masso Group, a Ho Chi Minh City-based marketing communications firm, which held the first-ever seminar on IR in Vietnam earlier this year. ‘Most companies are just struggling to comply with the basic rules, let alone try to attract investors.’
