Commentary: Lifting Of Vietnam’s Foreign Ownership Limits

Andy Ho, Chief Investment Officer of VinaCapital

On Friday (26 June 2015) the Ministry of Finance (MOF) confirmed that Decree 60, the revised Decree 58, has been signed and will become effective on the 1st September 2015. A key part of Decree 60 is the lifting of foreign ownership restrictions for Vietnamese listed equity. Details of the decree are still being finalised but we expect that the foreign caps will move from 49% to 100%, with exceptions to select sectors such as banking.

After a difficult period, Vietnam has established a sustainable growth rate of 6% and Decree 60 allows foreign investors to take a greater role in future growth. It is a game-changer, brings Vietnam closer to fulfilling its WTO commitments, and may serve as a catalyst for ascension to MSCI’s Emerging Market Index.

Foreign ownership limits on listed companies have been a major hurdle to capital markets, deterring many foreign investors. The limits have effectively capped the level of foreign participation and depressed valuations, so there has been much anticipation regarding the lifting of these limits. Rarely has the world seen such a young market make such change at this stage of its development.

South Africa is the closest example but that was twenty years ago and they possessed a properly functioning domestic market. In other cases whenever the rights of foreigners were allowed to exceed 50% it has typically been only in restricted or non-voting shares. Examples include Korea (1992-1998) and Taiwan (1966-2005).

What can investors expect with the lifting of foreign limits?

We analyse the potential impact on the market and investment flows. Market re-rating and rally Vietnam has historically suffered from a liquidity discount compared to its regional peers. Measured on a simple PE basis, the market currently trades at 13 times trailing PE, with a liquidity discount in recent years of between 25% and 35%. With the market opened, a greater level of participation from both local and foreign investors is expected. This increased liquidity will go some way to narrowing the discount. A catalyst for SOE equitisation As markets re-rate and liquidity increases we expect a more exciting period of increased valuation to encourage greater participation from state-owned enterprises and private companies.

As the government starts to clear the backlog in its privatisation program, the options for investors through public listing, the sale to strategic investors and a likely increase in consolidation through M&A activity is exciting, especially in high-growth sectors such as food & beverage, property and infrastructure.

The sectors that the government considers strategic and in which they will not sell controlling stakes are expected to include banking, telecommunications, airlines, and defence companies. However, given that the government wants to reduce the number of banks by half by 2017, we could see more relaxation in this sector.

One such example, despite being in a restricted sector, is MobiFone, the second largest mobile operator slated for sale for the past 10 years, and which now has until June 2016 to be privatized within sector limits as mandated by the Prime Minster. The company generated approximately USD2 billion of revenue in 2014, with an expected market valuation in the region of USD3 - 3.5 billion.

Development of a properly functioning stock market Vietnam’s market capitalisation is currently USD60 billion, with daily trading volume averaging USD100 million, and foreign participation at less than 15% largely due to foreign limits. 26 companies are currently at the foreign room limit, with combined market capitalisation of USD10.2 billion or 17% of total market capitalisation.

This lack of depth in the market, and the resulting domestic investor bias, assisted by margin lending levels, has featured as predominant reasons for market volatility. Greater foreign investment and the depth created by new listings will aid in reducing this volatility.

One of the key criteria for MSCI Emerging Markets inclusion is having a capital market open to foreign investment. Decree 60 now clears the way for Vietnam to qualify for Emerging Market status, and given the MSCI Emerging Markets Index attracts USD1.4 trillion of investment, Vietnam’s eventual inclusion could provide further upside of 15-20% to investors. Conclusion Decree 60 is an exciting development and of great importance as it will open Vietnam up to the world making the market more competitive, accessible and investor friendly.

Furthermore the market will benefit from a re-rating and a bigger allocation by global fund managers. The liquidity gap will close, volatility will reduce, and renewed interest in the privatisation program will deepen the market. Longer term, Vietnam also becomes a strong candidate for MSCI Emerging Markets inclusion. At VinaCapital we believe this dramatic lifting of foreign ownership limits will immediately make Vietnam the most attractive Asian frontier market.




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