~ Le Vięt Nam, aujourd'hui. ~
The Vietnam News

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In emerging Vietnam, BMWs replace bicycles

Vietnamese stocks are a good bet over the coming decade as an improving economy spurs consumer spending and new listings help draw interest from a wider pool of investors, strategists at Merrill Lynch said. "Wealth is being created at a turbo-charged rate," said strategists based in Hong Kong, including Spencer White, the chief Asian equity strategist for Merrill Lynch. "Bicycles have been swapped for BMWs in the streets of Hanoi and Ho Chi Minh City."

The Merrill strategists rated Vietnamese shares a "10-year buy" in a note dated Feb. 2, pointing to the economic growth rate last year of 8.4 percent, the highest in the region after China. They recommended investors hold up to 3 percent of their Asian holdings in Vietnamese shares, citing the country's growing access to the global economy, an increasing number of publicly listed companies, and "cheap" price-to-earnings ratios of 8 to 10.

Lenders like Saigon Thuong Tin Commercial Joint Stock Bank, which could list shares in the first half of this year, are preferred as companies borrow more to finance an expansion. The strategists also recommended companies like Vietnam Dairy Products Joint-Stock that stand to benefit from rising domestic demand. "Vietnam is one of the last frontier emerging economies in the region that will demand serious investor attention," White, Stephen Corry, Willie Chan and Alistair Scarff said.

The VN index has risen 33 percent since the end of 2004, beating a 25 percent gain in the Morgan Stanley Capital International Asia-Pacific index. Vietnam's economy last year grew at its fastest pace in almost a decade. The government aims to move the country out of the ranks of the world's lower-income nations by 2010. Vietnam Dairy, the nation's top milk producer and biggest listed company by market value, and Kinh Do, a maker of confectionary items, listed shares in the past two months, lifting the number of stocks traded on the Ho Chi Minh City Stock Exchange to 34. The exchange started five and a half years ago.

The majority of those companies had been state-controlled. In December, the United States, the European Union and the International Monetary Fund urged Vietnam to reduce its support for state-owned companies. As of September, Vietnam had cut the number of government-owned companies to fewer than 3,200, from more than 5,600 in 2001, based on World Bank figures. Recent listings could inspire other large companies to sell shares. On Feb. 15, the first foreign-controlled company, Taya (Vietnam) Electric Wires & Cable Joint Stock, will trade for the first time, said Thach Hoang Lan, an administrative official at the Ho Chi Minh City Securities Trading Center. Its parent company, Taya Electric Wires & Cable, is based in Taiwan. The first bank, Saigon Thuong Tin Commercial Joint Stock Bank, may list shares as soon as May.

"There is no shortage of expressions of appetite in Vietnam by international funds," said John Shrimpton, a director of Dragon Capital in Ho Chi Minh City. "From a fundamental point of view, there's not a great deal of downside. Vietnam is an underinvested, high-growth economy, and there is negligible risk to reforms being reversed." White of Merrill Lynch points out that the market remains "one of the smallest and least liquid in the region," with about $1 million in shares trading a day.

Angus Tulloch, manager of the First State Global Emerging Markets Fund in Edinburgh, described Vietnam as one of the world's "most exciting emerging markets," but said it would not gain overseas investors in bulk until the market expanded.

By Stuart Kelly and Jason Folkmanis - Bloomberg News - February 8, 2006.


Merrill Lynch touts the virtues of Vietnam

Merrill Lynch explains why investors should seriously look to Vietnam as an emerging market option.

Merrill Lynch leads the bandwagon of banks and investors who are bullish on Vietnam these days. The title of its latest Asian Insights report says it all: Buy Vietnam – The Emerging Frontier of ASEAN. The gist of the bank’s argument is that “the pace of economic growth, policy reform and development in Vietnam’s capital markets now demand attention. One of the last frontier markets to emerge in Asia, we see Vietnam as a ten-year buy.”

Some of the pro-Vietnam macro-main arguments include the fact that the economy has shown growth of above 7% since 2002, boasts annual foreign direct investment of about $5 billion and $4 billion of inward remittances. Its population is amongst the youngest in Asia and boasts a literacy rate are above 96% making them a highly-employable group.

There are risks, of course. This is a communist government, so policy makers could always put a break on reforms if they felt they were losing control. And, as Merrill Lynch points out in its 52-page report, if growth falls below 7% there could be social unrest given the high numbers entering the workforce each year. And while corporate governance and transparency is improving, this is from a very low base, so investors need to be skeptical, well-informed and risk-tolerant. If you fit that description, read on.

State-owned enterprises are planning privatizations over the next two years, and the government is backing this effort, which will up the number of companies on the stockmarket in which to invest. But that may take some time. As a result, investors may want to look at some of the bigger banks. Merrill Lynch analysts write: “The bank sector is one of the most interesting ways to play the growth of Vietnam Inc. as the consumer gains appetite for credit, infrastructure needs are addressed and the private sector looks to fund its capital expenditure. We liked ACB and Sacom Bank.” For now, the five-year-old Ho Chi Minh Exchange is still small, but the recent listing of the nation’s top dairy company, Vinamilk, may mark the start of something bigger. As Merrill Lynch notes, Vinamilk’s listing added $513 million worth of market capitalization to the VN Index, taking its total value to $1.1 billion in the twenty minute trading session that occurs each weekday morning.

This is undisputably an embryonic market: with only thirty five listed companies, plus one fund, the Southern Exchange remains one of the smallest and least liquid markets in the region. There’s also a Hanoi exchange, but that’s even smaller. Average trading volume in the listed market is only about $1 million and the regulator, the Securities Stock Commission, estimates that retail investors account for 90% of this. Typically, many Vietnamese investors look to the pre-listed over-the-counter market, which boasts more than 2,000 mostly private companies and total daily volumes are estimated to be in the range of $5 million to $6 million, but transparency is about as clear as the skies above Chinese factory cities.

In one of the more accurate summaries of this OTC market, Merrill Lynch describes it this way: “Ultimately, however, the transaction price is determined by an opaque agreement (by international standards, at least) between the specific buyers and sellers, and this can take place anywhere, at anytime. Think of this as the Starbucks trade – terms and conditions can be settled in local coffee shops and simply reported to the company registrar as the pile of certificates is re-registered to the buyer. As for brokered deals, commission rates can be extremely high – ranging from anything between 5% and 20%.”

So it suggests looking at banks that may want to formally list and operate by international standards– Vietnamese banks are in the early days of capitalist-style development in a communist nation. For years, credit was based on state-policy and directed lending, but that has given way to more market-driven forces as the government recognizes that a strong business community helps the overall health of the nation. That means banks now make for a growth market: with only an estimated 5% of the population use banking services, there iscertainly a market to be captured.

While the current legal and regulatory framework in Vietnam is heavily biased towards the local banks and financial institutions – restrictions on foreign banks include that they cannot establish local subsidiaries, and thus most operate through branches and representative offices. However, the government has said it will lift these regulations – as it fairly well must, in order to comply with the requirements of the 2001 US-Vietnamese Bilateral Trade Agreement (BTA) and to live up to the requirements for entry into the World Trade Organization.

Nonetheless, home grown banks will have home-field advantages, even when regulations make for a more level playing field. Merrill Lynch notes several banks are expected to list sometime during the second half of this year, including: Vietcombank (the largest of the State Banks), Asia Commercial Bank (Standard Chartered has a 8.6% stake) and Sacombank (where ANZ has recently taken a 10% stake). How regulatory changes unfold, and these listings go, will be a test for Vietnam and a signal for investor confidence.

By Lara Wozniak - FinanceAsia.com - February 9, 2006.