US embassy cable - 04HOCHIMINHCITY280

UNCLAS SECTION 01 OF 04 HO CHI MINH CITY 000280 
 
SIPDIS 
 
State for EAP/BCLTV; State Please Pass to USTR EBryan 
USDOC for 6500 and 4431/MAC/AP/OPB/VLC/HPPHO 
Treasury pass to IA/ASIA 
 
E.O. 12958: N/A 
TAGS: ECON, EFIN, VM, FINREF 
SUBJECT: VIETNAM'S STOCK MARKET:  A VIEW FROM THE FLOOR LOOKING UP 
 
REF:  A) 02 HCMC 1213   B) Hanoi 0719 
 
Summary 
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1.  Vietnam's stock market has stirred recently.  Since last fall, 
the market index has more than doubled.  This comes, however, 
after a two-and-a-half year decline, during which the HCMC stock 
market lost more than three-fourths of its value.  Much of the 
recent run up in prices is attributed to the loosening of 
restrictions on foreign investors in the market, which may have 
also stimulated local demand.  Still the market is tiny - with an 
overall capitalization of about US$240 million and only 23 listed 
companies.  There are only 106 registered foreign investors.  With 
liberalization of investment caps on foreigners, new investment 
funds entering the market, and promises of a rash of new listings, 
some government officials and local analysts have high hopes for 
rising values and a developing market.  The "smart money" from 
wealthy private sector businesspeople is still sitting on the 
sidelines, however.  They prefer to invest in unlisted firms or 
their own businesses where, they believe, potential profits are 
much higher.  They do not see the Stock Market as a viable 
investment vehicle for a few more years.  On the contrary: Beware 
the local stock market, they say.  End summary. 
 
Bull Market or Just Plain Bull? 
------------------------------- 
2.  With an overall market capitalization of only about US$240 
million and 23 listed companies, the Ho Chi Minh City Stock Market 
has been a huge disappointment.  After an initial flurry of 
speculative increases when the stock index peaked at 571 points in 
early summer 2001, stock prices had been on a grim march to the 
bottom.  The index reached a low of 130 last autumn.  Since 
hitting bottom, however, the market index has more than doubled to 
over 260 points. 
 
3.  The Ho Chi Minh City Stock Trading Center (HSTC) opened its 
doors in July 2000 as Vietnam's first and only stock market.  It 
was a modest start with only two companies listed on the Vietnam 
Index, worth a combined US$31.5 million (Ref A).  In this rapidly 
developing economy, the bourse has been something of a nonentity. 
It has thus far failed to draw significant numbers of investors or 
listed companies.  Even today after the dramatic run up in values, 
there are fewer than 16,000 Vietnamese investors, mostly inactive, 
and only 106 registered foreign investors.  The number of listed 
companies has grown slowly to the current 23 companies with 
overall capitalization of about US$240 million.  The pace of new 
listings has been glacial -- 4 new listings since November 2002. 
 
4.  Besides being the venue for trading listed equities, HSTC is 
also the nation's official bond-trading center.  The bond market 
in Vietnam, now valued at about US$800 million, is currently 
limited to government bonds.  These bonds, however, are thinly 
traded on the exchange, as banks, insurance companies, and other 
long-term investors typically hold bonds from the initial auction 
to maturity. 
 
5.  The lack of growth in the stock market contrasts dramatically 
with what has happened with other investments here.  Local 
investors have been snapping up shares in companies in the largely 
unregulated over-the-counter market.  No one seems to know for 
sure, but estimates range from one thousand to fifteen hundred 
companies with a value of about US$1.5 billion.  Buying and 
selling in this market offers none of the relative transparency 
and protection of trading listed companies on the stock market. 
These stocks are typically sold by word of mouth, making it 
difficult to know a true "market price."  Nonetheless, local 
investors apparently prefer the grey market where they have more 
investment choices and where they can buy into firms that they 
feel they understand, but which are not necessarily ready to make 
all of the disclosures required for listed companies.   Investors 
in this market are not typically stock traders, but have followed 
a "buy and hold" strategy.  At the same time, many of Vietnam's 
wealthy invest in their own businesses or the businesses of their 
friends.  And at least until recently, property was also seen as a 
good, safe investment, and thus real estate prices, especially in 
Vietnam's large cities, have risen to speculative levels. 
 
No Irrational Exuberance, But Things are Looking Up 
--------------------------------------------- ------ 
6.  There are a variety of stimuli that may have triggered the 
recent price rise.  Foremost may be increased foreign buying. 
Until last summer, by law foreigners were limited to an aggregate 
20 percent ownership of any given stock and 7 percent ownership by 
any single foreign owner.  Last summer, however, the market 
regulator State Securities Commission (SSC) raised the bar to 30 
percent aggregate foreign ownership in any one stock and removed 
the 7 percent limit.  Foreigners once again began buying.  Already 
5 of the 23 listed companies have reached the 30 percent cap.  One 
expat working in the local securities industry stated his view 
that a few actively trading foreigners triggered the run up, which 
was relatively easy to do with such a small market.  This 
attracted other foreign investors and in turn even stimulated 
local Vietnamese investors, who started buying when they saw the 
market begin to rise and foreigners returning to the market.  It 
is not clear how much is left of the current market rally, but two 
foreigners active in the securities industry here claim there is 
still a strong upside potential in the market. 
 
7.  Much of the recent growth generated by foreign investors has 
come by way of investment funds taking larger stakes in the local 
market.  Dragon Capital, a U.K. based investment bank, which has 
been working in Vietnam for the past decade, continues to buy 
listed and unlisted stocks for its VEIL (Vietnam Enterprise 
Investments Limited) Fund on the Irish stock exchange.  Dragon 
Capital is currently the largest single investor in the market 
outside of the GVN.  Phan Xi Pan Investment Fund, named after the 
Vietnam's highest mountain peak, also listed on the Irish 
exchange, has recently invested US$5 million and is planning to 
invest another US$5 million soon.  The German fund DEG is actively 
buying shares on the exchange and the Swiss fund FMO has expressed 
an interest in entering the market.  The foreign funds are joined 
by the locally based VietFund, a partnership of Dragon Capital and 
Sacom Bank, which is preparing to raise and invest 250 billion VND 
(about US$16 million) of registered capital in the exchange.  This 
fund, which will list itself on the exchange and trade as a closed- 
end fund, will be open to both foreign and Vietnamese investors. 
 
8.  Another factor in this run up may have been that stock prices 
fell so low that bottom feeders also began to bite.  The average 
P/E ratio for listed firms, which reached 40 at its peak, was well 
in the single digits when the run up started, and average 
dividends were in the double digits.  At the same time, other 
places to put away money were looking increasingly less 
attractive.  Bank deposit rates were near historic lows, while 
property, a traditional investment in this part of the world, had 
reached all-time highs in Vietnam's major cities.  Gold prices had 
also risen considerably. 
 
9.  Credit may also go to the Vietnamese Government, which has 
renewed its commitment to creating new listings on the market. 
This was reinforced by the recent decision to move the SSC, which 
had been under the Office of the Prime Minister, to the Ministry 
of Finance (ref B).  The stock index rose after this decision 
became public.  Local press reports as well as our contacts in the 
securities industry believe that with the backing of the ministry, 
the SSC will draw more state-owned enterprises (SOEs) undergoing 
`equitization' to list shares on the exchange.  One such company 
listed just this week.  The government may also be closer to 
allowing foreign-invested enterprises (FIEs) to list on the 
market.  According to an SSC official speaking at an HCMC seminar 
on the stock market, 20 FIEs would be allowed to list on the 
market as part of a pilot program. 
 
10.  The banking sector also offers potential fuel for the 
market's continued rise.  At least three leading joint stock banks 
(Sacom Bank, Asia Commercial Bank, and East Asia Bank) have begun 
the application process to list their shares, currently traded 
over the counter, on the exchange.  Entry of even one of these 
banks would significantly increase the market's capitalization. 
ACB hopes that it will be able to list this year or next.  The 
bank estimates that their market capitalization alone would be in 
the range of US$90 million. 
 
But Will the Momentum Continue? 
------------------------------- 
11.  The local securities industry and even the government is 
actively touting the stock market and there does seem to be some 
interest.  Earlier this month, the HCMC government and the SSC 
hosted a seminar on "Opportunities for Foreign Investors: 
Securities and the Stock Market."  The seminar drew about 240 
participants.  About half the attendees were foreigners, the 
majority from Asia, while the remainder were representatives from 
listed companies and a few local investors.  Foreign buyers will 
probably continue to provide support to the market as investment 
funds expand and new funds are established, especially if good 
companies get listed.  Five of the 23 listed companies, however, 
have already reached their maximum foreign holding level of 30 
percent. 
 
12.  At the seminar, a theme hit on repeatedly was the low profile 
of the listed companies.  They are not big name companies, even by 
Vietnamese standards.  A Western financial reporter quoting 
conversations he has had with overseas investors said, "We've 
never heard of these companies," and went on to ask when investors 
would see flagship companies on the exchange -- like Vietnam 
Airlines and Vinamilk.  Officials waffled on the big names and 
merely said that many SOEs were slated for equitization and each 
would be considered for listing.   But the First Vice Chairman of 
the HCMC People's Committee quipped that although the city was 
working to equitize SOEs, he thought some would still be around in 
his granddaughter's day.  It may also take some time before the 
market grows large enough to be able to absorb a company the size 
of Vietnam Airlines.  Investors may have to wait for the market to 
grow a bit before they get a shot at the big names. 
 
Smart Money Not Buying 
---------------------- 
13.  While analysts and government officials are touting the stock 
market, the "smart money" remains wary.  ConGenoffs asked several 
local business contacts, each owning one or more companies and 
wealthy by any international standard, if they had or were 
planning to invest in the stock market.  Their across-the-board 
response, besides grim chuckles, was "No way."  Each pointed out 
the lack of dynamic companies on the exchange.  Listed enterprises 
are not business powerhouses and savvy investors know it.  All but 
one of the listed companies are former SOEs, and the government 
still retains a large stake in most.  Vietnam's most profitable 
and efficient firms are not on the exchange.  One contact said, 
"The day I see ACB (Asia Commercial Bank) go to the stock exchange 
I will go."  (Note: ACB is trying to list and believes it will be 
able to do so this year or the next. End note) 
 
14.  Some businessmen were also cautious about companies that 
might be listing in the future.  "Be careful, because many of the 
companies which are seeking to list in the near future are doing 
so not to raise capital to invest in the company, but to be able 
to sell out at an attractive price."  These business people were 
particularly concerned about some of the banks and FIEs that were 
interested in listing. 
 
15.  ConGen contacts bemoaned the lack of credible and independent 
information on listed companies and their industries.  There is no 
Wall Street Journal or Financial Times here, one pointed out. 
Without an unbiased third party to report on and analyze these 
companies, it is difficult to get the true picture of the listed 
firms, even with the stock market's disclosure requirements. 
These businessmen operate in a world where personal contacts and 
inside knowledge are key to success.   The bottom line - when it 
comes to companies they don't know, there is no source of 
information they can trust. 
 
16.  So, if they aren't investing in the market, who is?  These 
contacts described current Vietnamese stock market investors as 
small players -- people without enough money or access to 
participate in other arenas.  In their view, the stock market is 
for people who cannot afford HCMC's speculative real estate game, 
people who do not have the network of contacts to enable them to 
sufficiently vet grey market offerings, or individuals whose 
assets are not enough to buy into unlisted companies.  Basically, 
they do not see the HSTC as a place for serious investors. 
 
17.  In these businessmen's view, there is limited room for quick 
growth as the SSC caps the daily price movement and limits trading 
hours.  Two ConGen contacts likened the market to gambling, but 
without the possibility of a big win.  One also complained that he 
would be required to pay full market value of the shares up front 
as no margin trading is permitted -- in essence tying up his money 
and keeping it from better uses. 
 
18.  One businessman did admit that when the HSTC opened he 
enthusiastically dove right in.  He bought listed stocks and even 
set up a division in his company to track and analyze the market. 
But by the HSTC's second anniversary he "hated it."  He described 
the frustrations of investing in what he called "not a real stock 
market," unlike the Singapore market where he also invested. 
After just over two years in the market he sold out with a small 
loss.  He has no intention to return. 
 
19.  These businessmen are the movers and shakers in the local 
economy.  They have a proven ability to make money and a 
comprehensive understanding of how things work here.  Up to now, 
they remain unconvinced.  Their estimates of when the stock market 
would be a viable investment vehicle worthy of their consideration 
ranged from 3-10 years, 
 
Smart Money Not Listing 
----------------------- 
20.  Our contacts clearly do not trade on the exchange, but would 
they ever consider listing their companies to raise capital?  From 
their responses, that is even less likely.  As well-connected 
businesspeople, if they need to raise money for a business project 
they simply pass the word through their network of contacts and 
associates.  One contact had just launched a new company and 
claimed he had no shortage of people willing to buy stakes worth 1 
or 2 billion VND (about US$63-127,000).  They are also actively 
courted by a variety of local banks. 
 
21.  Each of these local tycoons also said they were unwilling or 
unable to meet the disclosure requirements mandated by the SSC. 
It was too much of a hassle and would open them to scrutiny, 
perhaps government scrutiny, which they would prefer to avoid. 
One contact also expressed the worry that, if listed, his company 
was open to slander in the press that could damage the share 
value.  He seemed more worried about the inability of the firm to 
defend itself against false allegations in the press.  Even if the 
allegations were untrue, he said, he had no real recourse under 
current Vietnamese law. 
 
COMMENT 
------- 
22.  Increased foreign involvement seems to be driving the recent 
stock market growth.  The advocates touting the market, with 
investment firms and brokerages leading the charge, point to 
Vietnam's overall economic growth and future potential and then 
try to draw a connection from that to the stock market.  They 
skate around the fact that the listed companies are not leading 
this economic charge.  Vietnam is growing and the stock market is 
one of few vehicles for foreigners to take a stake in that growth. 
Foreign investors lack the all-important network of contacts and 
do not have access to most stocks traded off the exchange.  So, 
unless they want to open a factory or take a large stake in a 
joint venture, the HSTC is the only game in town.  The current 
caps on foreign ownership coupled with the dearth of listings 
means room for foreign investment is limited. 
 
23.  The GVN needs to speed up the pace of new listings and 
implement the plan for listing joint venture firms -- a plan that 
has been under review for over 18 months.  These moves will 
continue to make room for additional foreign investment. 
Meanwhile, the lack of flagship companies, including banks, and 
the perceived opportunity cost of stock market investments will 
continue to drive away top tier Vietnamese investors who, unlike 
their foreign counterparts, have a wide range of other investment 
options in Vietnam.  They still advise avoiding Vietnam's stock 
market. 
 
 
YAMAUCHI