APEC’s influence

As thousands of CEOs from leading corporations in the Asia-Pacific region and leaders of the APEC economies gathered in Hanoi, the stock market had the strongest rally in months.

The market opened at 521.38 on November 1, then by the time President Bush visited the HCM exchange  on November 20, where he opened the day’s trading, shook hands with traders and met with a group of American and Vietnamese business leaders, the index soared and reached 636.95 on the November 23, the highest point ever.  The previous record was at 632.69 points set on April 25.

Between November 1 and November 23, the VN index gained 118 points, a 22.7% increase. Share prices of three of the four largest listed companies (REE, Vinamilk, VSH) enjoyed spectacular increases.  Sacombank’s shares however were flat, as its third-quarter profit slumped 30% compared to the same period last year.

The sense of excitement was also felt on the trading floor where the index passed the 200 points. On November 21, ACB, one of the biggest and the most profitable banks, made its debut on the Hanoi trading floor, becoming the second bank to have its share publicly traded. The timing could not have been better; ACB shares rose from VND 110,000 before listing, to VND 145,000 after just 2 days, and is expected to continue its upward trend capitalizing on the surging optimism. Everyone seems to be enjoying the current economic status, epitomized by the President of the United States when he was heard to be very bullish on VN economy and said that he would have come to this country if he was a young businessman seeking his fortune today.

However, the party may not last long. When the APEC euphoria subsides and Hanoi returns to its daily life, the market is likely to lose its momentum because the fundamentals have not changed yet, and foreign investors are still limited in their share holdings of listed companies, despite the introduction of the new Investment laws and agreement having been reached regarding the WTO accession deal.   Currently foreign investors are still limited to owning no more than 49% of a listed company – 30% in the case of banks.  After the weekend, investors might wonder “what’s next” as the VN index stands at the highest level ever since its establishment. Our guess is a correction back to 550 points next week is most probable when the hype is over and the market has its reality check.

So what’s been going on in the market in the shadow of APEC? As we reported in the October issue, a large number of companies are rushing to trade their shares on the exchange before the end of 2006 to benefit from the tax incentive, which will end in January 2007. By the end of November, the stack of applications to list on the HCM exchange has been higher with about 40 companies in the queue. However, it takes approximately 2 months for a new share to start trading after the complete application is submitted, and as time is running out, many companies are changing their tactics, and applying to the HN exchange instead, before moving to the HCM floor later.  The procedure here is quicker - approximately 20 days.  This is making the HN exchange a transit terminal for large corporations wanting to join before the end of the year. Already, ACB has started trading on 21 November, and SSI and Bao Minh corporation will soon make their debuts.

HN - a transit terminal

The management of the HN exchange, however, does not seem entirely pleased with the idea that their trading floor is becoming a transit terminal, as it is quickly becoming congested as December nears.  The flip side is that it will just as quickly empty again when all the ‘passengers’ find their way to their final destination on the HCM floor.  On November 1, there was a notice on their website regarding the move from HN to HCM exchange, which warned that for companies making the transition after December 31, 2006, all tax incentives will be terminated. The notice came as a surprise and caused a stir amongst the enterprises registering to trade their shares on the HN floor. However, the Ministry of Trade (MOT) quickly dismissed the statement on November 9, and confirmed that there will be no loss of privileges for firms who change their exchange, as long as they join before January next year.

By November 22, six more companies had submitted their applications to HN floor, which means the number of shares traded in Hanoi might exceed 30 by the end of this year, increasing from the current number of 18.

WTO accession commitments

On November 7, the WTO agreed on VN’s terms of accession and formally invited VN to join it’s organization as a fully fledged member. According to VN’s commitment, foreign owned securities companies can form joint ventures with the local enterprises with 49% ownership immediately after VN joins the global trade club. Then 5 years after accession, 100% foreign owned securities firms are allowed to set up and operate on an equal footing to local companies.

Although direct foreign competition in the financial business will not hit until 2012, the local firms are already feeling the heat of the challenges they face in the future as their weaknesses are fully acknowledged. The size of the local securities firms is very small and varied (between US$ 2.6 million and US$ 30 million).  They operate mainly as brokerages, helping clients to strike deals with limited consultancy roles. Some of the firms do not even have websites and their staff have limited foreign language skills and professional knowledge.  Most of them came from banking and accounting backgrounds with no proper training in stock analysis.

By 18 November, there were 54 companies listed in the HCM trading center, with total market capitalization of VND 58,562 billion (VND 8,902 billion at face value). There are also 372 bonds listed with total a value of VND 57,709 billion. 

The new Securities law has put tougher requirements on the securities firms, particularly the minimum requirements of capital for each service which will be much higher than at present. For instance, in order to provide a brokerage service, a firm will need minimum capital of VND10 billion instead of the VND 3 billion currently required. For underwriting, it will be VND 70 billion instead of VND 22 billion (see our October issue). And already, the State securities committee has started to consider applications from new firms with this new standard from 30 October 2006.