Foreign investors show interest, will Vietjet's shares fly high?

As Vietnam's largest private airline nears its landmark initial public offering, foreign investors contemplate buying the remaining 25 per cent of the 49 per cent foreign ownership limit. As previously reported by VIR, only 24.39 per cent of foreign ownership has been reached as of January 12.

The IPO will be a test on how much foreign capital Vietjet can rally by promising continued expansions and rising profit, banking on the past few years of impressive growth that turned Vietjet from a start-up to a major carrier that is expected to soon own the biggest market share in Vietnam.

At the VND90,000 ($3.9) price, which values Vietjet at $1.2 billion, the airline will join the ranks of Vietnam's biggest publicly-traded companies by market capitalisation. With only a few days before the listing, Vietjet's shares in over-the-counter markets reportedly reached even VND110,000 ($4.81) at times.

The airline originally planned an overseas listing in Hong Kong or Singapore to attract more capital at higher share prices but eventually decided to gauge investors' appetite in the local market first. Vietjet founder and CEO Nguyen Thi Phuong Thao told Reuters news agency that the airline will definitely consider listing overseas, without citing a timeline.

For now, foreign investors' interest seems strong. In December, Vietjet completed an offering of 44.8 million shares to institutional investors, an executive from VietCapital Securities told Nhip Cau Dau Tu newspaper. (VietCapital was one of the coordinators of that share offering.)

The executive was pleased with the 30 international investors subscribing to Vietjet's offerring, including Singaporean sovereign fund GIC, US bank Morgan Stanley, and major asset managers, such as Mirae Asset, Dragon Capital, and VinaCapital.

The shares were oversubscribed by 1.8 times and were worth $265 million at the biddings. Vietjet did not disclose the final price of the share sale, but Reuters news agency had reported that it could have been VND84,400 ($3.69) per share, estimating that the airline could have raised $170 million from investors.

In comparison, $170 million is more than the proceeds from last year’s biggest IPO in Vietnam, when the Vietnam Engine and Agricultural Machinery Corporation raised VND2.136 trillion ($93.5 million), according to Vietstock, a website that tracks the Vietnamese financial market.

Vietjet only started to sell its stakes to foreign investors in mere months ahead of its long-awaited IPO. In a short time foreign ownership in the firm has increased from almost zero to 24.39 per cent, a sign that shows foreign investors are keen on partaking in the airline's promising future.

After the IPO, CEO Nguyen Thi Phuong Thao will also become the first female billionaire in Vietnam, according to Bloomberg.

Vietjet lifted the veil on its highly anticipated initial public offering in a January 12 listing prospectus, revealing a business that is growing by many measures but also has other considerations for investors.

Just five years after its first take-off in December 2011, Vietjet ended 2016 with a net profit almost double that of 2015. Over the 2014-2016 period, Vietjet's after-tax profit grew six-fold to VND2.29 trillion ($100.2 million) as the airline expanded its network, offered flights at a discount, and convinced many passengers who had never been on an airplane that flights were indeed affordable.

Low gas prices in recent years as well as favourable corporate tax policies for startups were also cited as contributing to Vietjet's profits.

The budget airline entered the year with 37 domestic and 23 international routes, based out of five Vietnamese cities, mostly within 1-3 hour flight distance to nearby destinations. The total number of passengers increased by 51 per cent on-year to 14.05 million in 2016. The average seat occupancy in 2016 also stood at a successful 88 per cent.

Gaining more and more ground on the domestic market every year to get to the current 41 per cent, Vietjet is neck and neck with 60-year-old national carrier Vietnam Airlines (42 per cent). If current trends continue, Vietjet is poised to dethrone its rival to become the top airline in Vietnam, according to data in its prospectus.

Not to mention Vietjet is also expanding its fleet of 41 airplanes by placing an order of 100 Boeing 737 jets and 20 Airbus A321 planes, worth a total of $13.7 billion.

All these advances are taking place in the context of excellent external conditions. The Vietnamese airline market in 2016 was among the five fastest-growers in the world, according to the International Air Transport Association. There were 18 million international and 45 million domestic passengers in 2015, which is expected to reach 122 million in total by 2020, according to the Civil Aviation Administration of Vietnam.

However, Vietjet made it clear in the prospectus that there will be challenges in maintaining steady profit growth. Its income growth forecasts declined from 64 per cent in 2017 to 30 per cent and then 12 per cent in 2018 and 2019.

Among the risks, competition might intensify after the ASEAN Open Skies policy, also known as the ASEAN Single Aviation Market, came into effect in 2015. If implemented completely, airlines from ASEAN member states might fly freely throughout the region in a unified air transport market. It will also be more difficult to gain market share now that Vietjet has reached 41 per cent through several years of continuous expansion.

Alternatively, oil prices, one of Vietjet's key inputs, might increase as the world's oil producers agreed in November to cut output for six months, with a possible extension. Foreign currency fluctuations, the expiry of tax subsidies in 2019 as well as dependency on many third-parties are other risks cited in Vietjet's prospectus.

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