Cost questions over foreign IPO intents

Nick Ainsworth - Chief marketing officer, Dragon Capital

As one of the largest conglomerates in the country, Masan is now making some big bets on its strategic approach towards the largest consumer ecosystem in Vietnam.Last week it said it was mulling over a potential initial public offering (IPO) for The CrownX – the integrated consumer retail arm that consolidates its interests in both Masan Consumer Holdings and VinCommerce.

Masan’s shares have roared to a high on the eve of Alibaba Group’s reported interest to invest in The CrownX. On May 18, Masan and a consortium led by Alibaba and Baring Private Equity Asia announced the signing of definitive agreements for acquisition of 5.5 per cent in The CrownX for a total of $400 million.

TheCrownX model is online to offline, a bit like Amazon, and its purchase of Walmart and jet.com places Masan at both ends of the supply/demand chain.

The transaction implies a pre-money valuation of $6.9 billion for 100 per cent of its equity, an equivalent of $93.50 per share. Masan will own 80.2 per cent of the company after the consortium’s investment.

It is actually hard to say if the deal is overpriced or not. These businesses command high valuations as potential consolidators and high growth opportunities. Ho Chi Minh Securities Corporation (in which we own about 35 per cent) sees 2020-2023 compound annual growth rate at about 77 per cent.

The close-knit partnership with the Chinese behemoth offers Masan a favourable development, in our opinion. The CrownX provides additional cash inflow which will help Masan to deleverage its balance sheet. And with the support of Lazada, which is backed by Alibaba, VinCommerce will acquire additional distribution capacity.

On May 17, Masan was approved by the State Securities Commission (SSC) to raise its foreign ownership limit (FOL) to 100 per cent. Masan is operating in retail and mining which are both restricted sectors for foreigners.

Having foreign ownership over 50 per cent might restrain the company from expanding into the bigger store format. But Masan has suggested having foreigners hold a majority stake at it is unlikely despite stating the FOL change. Masan is a key player in the national consumer and now retailing sector, and as such, they do have some natural appeal to foreign investors given the importance of domestic consumption in the economy.

Some foreign investors however might question whether consumer and mining businesses are a good fit and prefer a clean separation of the two. According to the group’s 2020 annual report, as of December 31, 2020, the FOL of the company was 33.59 per cent.

The largest foreign institutional shareholder of Masan is SK Investment Vina I Pte., Ltd., which holds 109.9 million shares, equivalent to 9.35 per cent, following by Ardolis Investment under the Singapore Government Fund holding 8.93 per cent.

Recently, we also noticed that a slew of Vietnamese conglomerates have shown interest in overseas listings, such as VinFast and Bamboo Airways, and eagerness to tap into the US equity market. Regarding Masan’s potential IPO, some might ask if this conglomerate would apply for an overseas listing, or would it be a domestically-focused IPO.

However, we have not heard anything on overseas listing, and we do not believe that overseas listing is a good or natural option for Masan to raise capital since their brand identity outside Vietnam is largely unknown. The group has managed to raise capital effectively just being listed in Vietnam.

Vietnamese companies are relatively small in size compared to international companies, so the cost of listing, raising capital, and maintaining that listing overseas will not be economically viable.

Furthermore, a foreign listing creates a mismatch in foreign exchange as the company’s assets are denominated in VND and the security in another currency. As the VND is not openly traded, the opportunity to hedge foreign exchange risks is not available.

And whether we like it or not, Vietnam remains a frontier market and off-index for the majority of financial investors which could limit the take up of any offer and perhaps the quality of investors.