Vietnam's Spotty IPO Record

Government overpricing of offerings by Vietcombank and other companies has hampered fundraising and the performance of Vietnam's stock market

A monitor flashes mainly red, representing the price of shares going down, as investors look at a stock board, 09 November 2007. The local stock market has been on a downward trend for a number of weeks. HOANG DINH NAM/AFP/Getty Images

by Frederik Balfour

This time a year ago Vietnam was one of the world's hottest frontier markets. Billions of dollars in foreign money were pouring into the country from hedge funds, private equity investors, and mutual funds from New York, London, Tokyo, and Hong Kong. When the Ho Chi Minh stock exchange closed for the Tet Lunar New Year holiday on Feb. 15 last year, the market was up 46%.

But on the eve of the Year of the Golden Mouse—or Year of the Rat, as it is less euphemistically known—which starts Feb. 7, Vietnamese equities seem to have lost much of their luster. Sure, the specter of a U.S. recession is hovering over faltering equity markets across the globe, and the Ho Chi Minh index fell as much as 17% in late January before regaining some ground to close down 7.25% so far this year. (The markets closed on Feb. 1 for the weeklong Tet holiday.) While in the short term Vietnam is sure to continue feeling the impact of market turmoil in the U.S. and Asia (BusinessWeek.com, 2/5/08), the biggest weight on the Vietnamese stock market's performance ultimately will be the uncertainty over the country's herky-jerky initial public offering process.

If the recent record is anything to go by, things don't look too auspicious for the Lunar New Year. Take the case of Saigon Beer Alcohol Beverage, or Sabeco. The nation's largest brewer by volume, Sabeco would seem like an attractive company for investors looking to leverage Vietnam's economic growth, which has exceeded 8% annually for the past five years. But the IPO fell flat, with the company raising less than two-thirds of its targeted $557 million worth of shares sold in the privatization on Jan. 29.

The Problem with Overpricing

The problem? The deal was priced at a frothy 72 times 2007 earnings. By comparison, Anheuser-Busch (BUD), which does not brew in Vietnam, trades at about 17 times 2008 earnings, while Carlsberg, which does sell its beer there, trades at 19 times. IPO pricing is determined by Dutch auction in Vietnam, with a price floor set by the state; in Sabeco's case, that was $4.40 per share. "We have seen the trend of the government trying to push the [pricing] envelope, and this time the envelope fell off the table," says Nguyen Tung Kim, managing director of Indochina Capital, which manages Indochina Capital Vietnam Holdings, which did not participate in the auction. "The government didn't leave a penny on the table."

Another long-anticipated debut by Vietcombank on Dec. 21 didn't fare much better. Priced at 78 times 2007 earnings, the issue was oversubscribed 1.25 times (BusinessWeek.com, 12/21/07). However, in January, when investors were supposed to pay the remainder for their shares (only a 10% deposit is required to participate in auctions), they only took up 90% of the shares, with the company stuck with the rest.

Not only does overpricing new issues put a damper on the market, it also undermines the government's efforts to attract strategic investors into companies that need them. Vietcombank, for example, has been in discussions with potential investors such as GE Money (GE) and Japan's Nomura Holdings, but because the price they would have to pay for a stake must not be less than the December auction price, no deals have emerged.