Category Archives: Vietnam – Securities Law

3 reasons smart investors are banking on Vietnam

Vietnam’s Gross Domestic Product (GDP) expanded by 6.81 per cent last year, marking its highest growth rate in a decade. The country continues to impress, with the economy growing by 7.38 percent in the first quarter of 2018 – one of the fastest rates in Asia – and total growth is expected to be in the region of 6.7-6.8 percent for the year. It could even hit 7.1 percent, according to the Asian Development Bank.

 

Looking ahead, the Vietnamese Government is seeking to maintain the country’s good growth until at least 2020, with the Prime Minister encouraging private companies – currently accounting for 43 per cent of GDP – to grow and increasing investment into rural areas.

 

There’s much to celebrate about Vietnam’s growth over the last few years, and many investors have already taken note and got in on the action. For those still on the fence, here’s just three reasons why a bet on the country’s economy may pay off handsomely.

 

Switched on to electronics

 

Other countries in the region tend to export raw materials or components to China, where they are assembled into other products. Vietnam exports mainly finished goods.

 

One such producer, the Samsung Electronics factory in Thai Nguyen, in northern Vietnam, employs more than 60,000 people and produces more mobile phones than any other facility in the world. Samsung Electronics’ combined factories in Vietnam produce almost a third of the firm’s global output. So far, the company has invested a cumulative US$17 billion in the country.

 

The relationship has been mutually beneficial, helping to make Vietnam the second-biggest exporter of smartphones in the world, after China. Samsung alone accounted for almost a quarter of Vietnam’s total exports of US$214 billion last year.

 

The company’s presence in Vietnam will not stop there, with co-CEO, Koh Dong-jin, recently informing the Prime Minister of plans to expand production and open further plants.

 

Samsung isn’t alone in Vietnam’s exciting electronics landscape. The export turnover of electronics and household electrical appliances accounted for 28.9 percent of total export turnover. Mobile phones & components, cameras and other machinery brought in revenue of US$61.8 billion, an increase of US$14.45 billion compared to the year before.

 

An international mindset

 

Vietnam received FDI worth 8 percent of GDP last year — more than double the rate of comparable economies in the region. Foreign-owned firms now account for nearly 20 percent of the country’s output. They have grown more than twice as fast as state-owned enterprises over the past decade, despite the country’s nominally communist government.

 

In contrast to China, a large rival in the cheap manufacturing stakes, Vietnam is liberalising its economy to welcome foreign industry. In 2015 the government opened 50 industries to foreign competition and cut regulations in hundreds more. It sold a majority stake in the biggest state-owned brewer, Sabeco, to a foreign firm last year. Similar sales are expected in the coming months.

 

Vietnam’s enthusiasm for free-trade deals has made it especially alluring to foreign investors. It is a founding member of the Trans Pacific Partnership, a multilateral trade agreement that includes Australia, Canada and Japan, among others. Although the agreement fell apart without US support, it was quickly repurposed and renamed. A significant trade pact with the European Union is also on the horizon. The deal signed with South Korea a few years ago has made it South Korea’s fourth-biggest trading partner.

 

Fertile ground for start-ups

 

The government has put forward a number of regulations and programmes to support start-ups, especially innovative ones, including Decree 38/2018/ND-CP (Decree 38) on innovative start-up investment. Decree 38 identifies and recognises innovative start-up investment activities as a business, and cements the legal status of innovative start-up companies and funds.

 

The decree is expected to provide a legal basis for private investors when jointly contributing capital to establish a creative start-up fund and streamline capital flows for creative start-up activities.

 

According to the Vietnam Chamber of Commerce and Industry (VCCI), the country boasts a strong entrepreneurial drive and ranks among the 20 economies with leading entrepreneurial spirit.

 

Up to US$291 million was poured into Vietnamese start-ups last year, a year-on-year increase of 42 percent. However, this figure lags behind the region as whole, which saw investment of US$7.86 billion. The number of M&A deals remains small and no startup has yet made an IPO. Clearly, there is still a lot of room for growth in this sector.

 

The great potential hasn’t gone unnoticed and the government has recognised the tremendous importance that the start-up movement has to the economy and accelerated its development.

 

As well as a young, cheap and plentiful supply of workers, the Vietnamese economy possesses a dynamism unlike others in the region. Nurturing such domestic entrepreneurship is the key to sustainable growth. The Vietnamese government has already set out ambitions of creating a vibrant ‘start-up nation’, with a million new enterprises being born by 2020.

 

These are just a few of the reasons why smart investors should be seriously considering Vietnam as their next investment destination. In addition to the above, economic growth will be driven by manufacturing and export expansion, rising domestic consumption, strong investment fueled by foreign investors and domestic firms, and an improving agriculture sector. These is an abundance of optimism over the country’s future, and the signs are that this year Vietnam will be one of the strongest performers in the region.

 

For more information about investing in Vietnam, please contact Giles at GTCooper@duanemorris.com or any of the lawyers in our office listing. Giles is co-General Director of Duane Morris Vietnam LLC and branch director of Duane Morris’ HCMC office.

Vietnam steps up sale of SOEs

Hopes abound that a new Decree will drag the near-moribund process of privatising large State-owned enterprises (SOEs) into a new and more efficient phase.

 

Over the past 30 years, the restructuring of SOEs has been a key component of Vietnam’s economic reforms under Doi Moi (renovation). The process has been undertaken by successive governments and is a central pillar to creating the business-friendly climate desired by the current leadership.

 

Nevertheless, it remains largely a work in progress. According to a report by the Central Institute for Economic Management (CIEM), since 1992, Vietnam has ‘equitised’ over 4,500 enterprises (‘privatized’ being considered an unsuitable term for Vietnam and not always accurate anyway given the propensity for the State to maintain controlling stakes).  The fact is that many of these took place in a short period of time and were smaller production units of large conglomerate-type corporations.  The CIEM report concluded that progress is below expectations. SOEs have struggled to attract strategic investors and sale of shares has not reduced the level of State budget in SOEs’ charter capital, as was hoped.

 

There are multiple reasons for the disappointing progress including restrictions on foreign ownership, and the State’s desire to maintain ultimate management control.  Opaque valuations and concerns over transparency also deter strategic and other investors from getting involved in the process and ultimately slow it down.

 

To continue growing, Vietnam is under increasing pressure to reform the equitisation process for its SOEs, with new efforts being made to accelerate the government’s divestment. Under plans announced earlier this year, the government will equitise a further 137 SOEs in the 2016-2020 period.  Many of those slated are large and some can be considered the cream of the crop.

 

This renewed motivation is driven in large part by the government’s need to mobilise financial resources to deal with a rising fiscal deficit and public debt. The country’s obligations under a number of free trade agreements also provide impetus to break up the big entities.

 

Determining demand

 

Recently, a significant change was announced in a bid to speed up equitisation of SOEs: the law will change to allow book building as a means of determining interest and price for IPOs of SOEs.

 

Up until now, the equitisation of Vietnam’s SOEs has been handled through public auction, direct negotiation and underwriting. Most have adopted the public auction method, but this has proved unattractive to investors, with even big assets like Vinamilk failing to generate the expected interest.

 

Under new Decree 126/2017/ND-CP, the Prime Minister has instructed the Ministry of Finance to prepare detailed guidelines on implementation of book building to facilitate efficient IPOs as part of the equitisation process.

 

This method of price discovery, used widely internationally and now approved for the first time in Vietnam in connection with equitisation purposes, is expected to make the process more efficient and attractive to strategic investors.  Decree 126 also eases restrictions on the profitability of strategic partners (from three to two years), cuts the lock-in period (from five to three years) and provides more detailed guidance on valuations of SOEs generally (notably removing reference to DCF valuation and providing more clarity around valuation of land use rights and goodwill).

 

It is hoped that this move, to take effect from 1 January 2018, will enhance transparency in SOE equitisation and hasten the hitherto slow listing on the country’s stock exchanges. The Decree will have a particular impact on the next wave of SOE IPOs, slated for 2018-19.

 

Energy giants next?

 

An area in dire need of extensive equitisation is the energy sector. In order to ease electricity shortages, attract more investment and boost economic growth the country will need to tackle inefficient State-owned power actors.

 

The issue of power shortages could come to a head in the next four years, with forecasts predicting that annual growth in electricity consumption will start to match, and possibly outpace, the installed capacity growth. If consumption continues to expand at a similar rate to the last decade (an average of 12 percent a year) the country could soon be facing a power crisis.

 

This gloomy scenario is looking increasingly likely, considering that foreign direct investment (FDI) into the manufacturing sector, which accounts for 50 percent of total electricity consumption, has doubled over the past four years to reach US$63.1 billion. Luckily for businesses, the government is keen on keeping this development trend going, and having the electricity to power it.

 

Recent reports in the media state that the government has lined up a series of sizable IPOs of major power corporations, including PV Power, EVN Generation Corporation Number 3 (Genco 3) and Binh Son Refining and Petrochemical Company Limited (BSR). If the above projections on power demand growth are anything to go by, Vietnam’s power sector holds significant potential, and may prove an irresistible offer to foreign firms. This offer, however, is contingent on the government breaking up the energy giants and levelling the playing field for investors. Official approval of the book building method for pricing IPOs is a start.

 

PV Power, the country’s second-largest electricity producer, plans to auction a 20 percent stake through its IPO scheduled for the end of this year, and 28.8 percent of shares will be sold to strategic investors. Meanwhile, the equitisation of Genco 3 is awaiting the government’s go-ahead.

 

The changes above demonstrate a willingness to step up the equitisation of SOEs, with looming budget considerations providing a timely incentive. Beginning next year, the slow process may finally gather some much needed pace and see involvement of foreign players previously put off by the state of play.

 

For more information about Vietnam’s equitisation and IPO processes, please contact Giles at GTCooper@duanemorris.com or any of the lawyers in our office listing. Giles is co-General Director of Duane Morris Vietnam LLC and branch director of Duane Morris’ HCMC office.

Plenty of life in Vietnam’s M&A market despite bumps

Globally, 2017 has been an unpredictable year for the mergers and acquisitions (M&A) market, with the hangover of political and economic instability from 2016 inspiring caution among investors.

 

Foreign investment has been put on the back foot due to rising protectionism and the failure of promising free trade deals like the TPP (Trans-Pacific Partnership). Vietnam in particular has suffered and will need some big breakthroughs to regain lost momentum.

 

Although the TPP would have brought some big benefits to Vietnam, it is expected that other trade deals on the horizon will make up most of the shortfall. The nation has joined six regional FTAs as an ASEAN member, including the ASEAN Free Trade Area (AFTA) and the five FTAs between ASEAN and China, Japan, South Korea, India, Australia and New Zealand, as well as four bilateral FTAs with Chile, Japan, South Korea and the Eurasia Economic Union (EAEU). Negotiations over an FTA with the European Union (EU) have also been concluded.

 Sluggish start

 

Whereas 2016 was an exciting year for M&A in Vietnam, 2017 has gotten off to a slower start. According to a report released in advance of the M&A Forum (August 10, HCMC), deals in Vietnam hit an all-time record of US$5.8 billion in 2016, a growth of 11.92 percent compared to 2015. However, the market has slumped since the latter half of last year with fewer headline signings. The total value of M&A activity reached just US$1.1 billion in the first quarter, a drop of 24.4 percent year-on-year.

Continue reading Plenty of life in Vietnam’s M&A market despite bumps

3 Things About Overseas Securities Investment by Vietnamese Residents

Buying foreign securities has been for years a vague promise for most Vietnamese residents having an appetite to invest in shares and bonds issued abroad. Although legally permitted since 2006 at the legislative level, such promise remained on paper in practice due to the absence of a detailed regulatory framework. All investments in foreign securities were subject to ad hoc approvals by various governmental authorities, including the Ministry of Planning and Investment and the State Bank of Vietnam (“SBV“). This situation seems set to change when on the last day of 2015 the Government adopted Decree no. 135/2015/ND-CP on Indirect Overseas Investment (“Decree 135“) (the term used in Decree 135 is “overseas indirect investment” (“đu tu gián tiếp ra nuớc ngoài“); curiously, this term is no longer used in the new Law on Investment no. 67/2014/QH13 dated 26 November 2014) which became effective on 15 February 2016. Certain Vietnamese residents (i.e. economic organisations established and operating in Vietnam (companies, cooperatives, cooperative unions and other entities having an investment/business activity) and individuals) are now permitted to make investments in foreign securities. Here are the three most important things you should know: Continue reading 3 Things About Overseas Securities Investment by Vietnamese Residents