Uncertainties around Vinalines’ IPO

Many signs contribute to the concerns about the IPO of Vietnam’s state-owned shipping giant Vinalines Photo: Le Toan

Last week, the leaders of Vinalines had a busy day meeting with SM Group, which wanted to learn about the upcoming initial public offering (IPO), scheduled to take place in the first week of September. SM Group, which is a South Korean construction conglomerate and sea vessel operator, is moving quickly to expand its fleet through a series of acquisitions.

“SM Group is one of several foreign investors, including some from South Korea and Japan, showing great interest in the IPO. We are preparing to work with other potential investors in the coming days,” Le Quang Trung, vice chairman of Vinalines, told VIR.

High engagement on the way

Like any powerful state-owned enterprise (SOE), the long-awaited IPO of Vinalines is garnering interest from foreign investors who want to tap into the giant’s available assets in its two attractive core business lines, seaports and logistics, to reduce costs and expedite their expansion in the country.

With the involvement of SM Group, Vinalines’ IPO is once again proving its appeal to South Korean enterprises. SK Securities, which recently failed to satisfy the criteria to become a strategic investor of the Vietnamese shipping giant in a strategic state stake sale, is said to look for new opportunities in the IPO.

South Korean investors are among the most interested in mergers and acquisitions (M&A) deals in Vietnam in recent years, with logistics holding much of their attention.

Planning to conduct a road show this week to promote the share sale, Vinalines is pinning high hopes on the IPO’s success. Seaports remain the company’s most profitable and attractive segment to foreign investors, while logistics is attracting international logistics giants who are investing in Vietnam in anticipation of growing trade and loosened regulations.

The company is now the country’s largest port operator with 15 seaports, and also Vietnam’s largest shipping company with a fleet of 82 vessels, and a leading logistics services provider with a wide network of warehouses and modern inland container depots along influential seaports.

Vinalines is also the owner of many valuable land plots. It is also planning to invest heavily to increase operational efficiency in 2018-2020.

“With the long-standing interest of foreign investors such as Hyundai Motor, SK Group, and SCG, we believe the IPO will be successful,” said Vo Van Cuong, head of equity research (Ho Chi Minh City) at KB Securities.

The likelihood of success

Despite high expectations among insiders, many outsiders have a dim outlook for the share sale, blaming the unfavourable timing and unattractive financial indexes.

“This time is not favourable for Vinalines to conduct the IPO, as the shares of several state-owned conglomerates have become less attractive to investors. The share prices at several SOEs became unstable after their IPO,” Tran Dinh Dzung, manager of the Underwriting and Financial Advisory Department at Saigon-Hanoi Securities JSC, told VIR.

What is more, the shareholder structure, with the state holding 65 per cent, is believed to be an impediment to convincing investors.

“It means that the remaining 35 per cent can be sold to small investors or financial investors. To lure investors, Vinalines must have attractive profit commitments and profitability indexes in future plans of the equitisation scheme. Although Vinalines owns a huge number of seaports and subsidiaries, their operational efficiency and financial indexes are not convincing enough,” Dzung added.

As shown in the audited financial statements for 2015-2017, Vinalines’ return on assets (ROA) was 5.5 per cent in 2015, 13.7 per cent in 2016, and 1.9 per cent in 2017, while return on equity (ROE) was 9.5, 21, and 2.5 per cent, respectively, from 2015 to 2017.

An official of Vinalines admitted that the ratios remained lower than the industry average, as in this period, the giant’s profit dropped to the break-even point as it focused on restructuring.

In addition, in its equitisation plan, Vinalines has no scenario to divest state holdings to below 51 per cent, while future profit plans are not persuasive enough.

Vaibhav Saxena, lawyer at Vietnam International Law Firm, said that with the poor business results, investors who want to earn profit immediately after investment will not be interested in this IPO. “Also, there are analysts forecasting that investors will not want to join Vinalines’ equitisation process, as they want to hold a controlling stake of over 51 per cent in the group,” Saxena added.

Looking back a few weeks ago, when Vinalines looked for a strategic investor, the 14.8-per-cent deal on offer was believed to be attractive to private domestic and foreign investors, as the giant has seaports, logistics, and shipping as three attractive core business lines.

However, the response was smaller than expected, as SK Securities was the only one to register as a potential strategic investor. Meanwhile, many potential foreign investors, including Belgian firm Rent-A-Port and others from Japan, the US, and South Korea, did not join the sale, which was considered one of the hottest M&A deals in the shipping industry in 2018.

It is worth noting that Rent-A-Port signed a Memorandum of Understanding with Vinalines in 2017 in the hope of acquiring 10 per cent of the latter’s chartered capital upon its equitisation. Many reasons have been named for the disappointing outcome, but much of the blame must go to time constraints.

Vinalines left less than one month after the prime minister’s approval of its equitisation plan in late June 2018 for potential investors to register. It is likely that the period was too short for many conglomerates to study the firm thoroughly as well as to analyse and assess risks. Now, Vinalines is not only betting it all on the upcoming IPO, but foreign investors in joint venture ports with the giant are also expecting to have a capable partner after the IPO.

The shipping giant will auction off nearly 281 million shares or 20 per cent of its stake at a starting price of VND10,000 ($0.44) per share under the ticker MVN, and unload an additional 14.8 per cent left from the first stake sale.

Looking back only a few years ago shows how important the long-delayed approval of Vinalines’ equitisation plan was. At the time, the delays caused a dilemma for foreign investors, including APMT, SSA, and PSA, as to whether or not they should invest further in their joint venture ports. They anxiously expected to work with a new partner of Vinalines.

According to foreign port operators, strong privatisation is the optimal choice to increase the operational efficiency of joint venture terminals and to attract foreign investors. They cited T&T Group’s acquisition of Quang Ninh Port from Vinalines as an example.

Another failed IPO?

Industry insiders are now raising doubts about the success of Vinalines’ IPO, wondering whether it could become another in a string of failed IPOs of local conglomerates.

The reality is that, while a number of initial public sales by SOEs indeed lured in big capital, there are also many that failed, including well-publicised major deals.

Recent high-profile cases include Song Da Corporation and Becamex IDC, a property and township development giant in the southern province of Binh Duong with close ties to the lucrative Vietnam-Singapore Industrial Park. In late November 2017, Becamex IDC only managed to sell 6 per cent of the stake on offer in its IPO. The company conducted another public sale two months later, which suffered the same fate, as only 1.7 per cent of the shares were sold. In both auctions, Becamex IDC only raised VND745 billion ($33 million), much lower than the expected figure.

There have been many explanations for Becamex IDC’s unsuccessful IPO. The first one were high valuation, as at VND31,000 ($1.37) per share, the company’s price-per-earnings ratio stood at 51x, much higher than its peers such as IDICO or Viglacera.

Moreover, Becamex IDC’s colossal amount of debt also added to investors’ concerns. According to a recent report from KIS Vietnam Securities, the company is heavily indebted, as debts take up 40 per cent of its assets, much higher than the market average of 30 per cent. More than half of the loans at Becamex IDC are short-term borrowings, sparking worries about the company’s liquidity and repayment abilities.

However, it is notable that despite lacklustre share sales, Becamex IDC was still able to strike up a deal with US investor Warburg Pincus, in which the two partners set up a $200 million joint venture for logistics and industrial development.

Another unfortunate example is VTVCab, which had to cancel its IPO in April as only one investor joined the auction. The main reason, again, were sky-high valuations, as VTVCab’s price, at VND140,900 ($6.23) a share, was 168 times higher than the company’s forecasted earnings for 2018.

Less dismal but still disappointing was the IPO of Vietnam Rubber Group (VRG) in February 2018. The company sold 21.2 per cent of the stake it put on offer. However, VRG had refused to let foreign investors join the auction, but changed its tune after the sale and said that it would welcome overseas shareholders.