Divestment not as simple as equitization


Equitization of several state-owned enterprises (SOEs) is expected to be carried out and completed in 2020, but divestment will be hard due to external risks in the securities markets.

To divest capital smoothly, we have to open the room for foreigners.

To divest capital smoothly, we have to open the room for foreigners.

Assets before and after divestment

According to statistics given by the Yuanta Securities Vietnam Company (YSVN), data collected from 896 SOEs that carried out equitization and divestment since 2005 shows that the average returns on equity (ROE) is 15.4% three years after divestment while it is 12.4% before divestment. Similarly, the average return on assets (ROA) is 1.5% before divestment and 1.6% after divestment. The total assets, equity and after-tax profits of the companies show a decline in growth after equitization. Before divestment, the total assets tend to increase, and then slow down, before getting better in the second year. Generally, it takes a company with divestment about two years to restructure its assets, and growth in after-tax profits improve in two years after divestment.

The statistics above indicate that business activities become more greatly effective after the State withdraws its capital from enterprises, whether by divestment or equitization, to pave the way for external investors to put investments in such enterprises. The growth of assets, equity and profits somewhat slow down after equitization; yet divestment helps enterprises improve financial quality with a significant rise in profits, especially two years after divestment of state equity.

Equitization and divestment do not only bring about greater business performance for enterprises, they promote growth for the securities market with increased liquidation. Take the 2007-2008 and 2015-2016 periods for example, the state did a lot to boost equitization and divestment. After that, liquidation in the securities market improved remarkably with VND 1,623 bn per session in 2009, and increasing by 28% by 2017.

Expectations from equitization

Though the business performance of enterprises has looked brighter after equitization and divestment, these activities have made very slow progress, especially throughout 2019. Pursuant to Official Document No.991/TTg-ĐMDN and Decision No. 26/2019/QĐ-TTg, the plan was that 127 SOEs would be equitized in the 2017-2020 period, but so far, only 37 SOEs have carried out equitization, making up only 29% of the plan. Under Decision No.1232/QĐ-TTg, the state would withdraw about VND 60,000 bn worth capital from 406 SOEs in the 2017-2020 period. However, the 2017-2019 period recorded equitization of only 44 SOEs, collecting VND 4,566 bn and completing just 7.5% of the plan.

From this actual situation, lots of activities of equitization and divestment are expected to take place in the near future. Acceleration of equitization in 2020 has also been mentioned by Prime Minister in Decision No.26/2019/QĐ-TTg, forcing 93 SOEs to get equitized in 2020. Among them are Vietnam Mobile Telecom Services LLC (MobiFone); Vietnam Bank for Agriculture and Rural Development (Agribank); Vietnam National Coal & Mineral Industries Holding Corporation Limited (Vinacomin); Vietnam Northern Food Corporation (Vinafood I); Power Generation Corporation 1 (EVNGENCO1) and Power Generation Corporation 2 (EVNGENCO2); with MobiFone and Agribank being the biggest.

Pursuant to Official Doc. 991/TTg-ĐMDN, MobiFone would get equitized in 2018. However, it has been delayed due to legal procedures and MobiFone leader’s involvement in the criminal case of AVG. Equitization of this SOE is likely to take place in the fourth quarter of this year. This business has attracted interest from not only domestic investors but also foreign telecommunications corporations such as Singtel (Singapore), Telenor (Norway), Comvik (Sweden) and Telstra (Australia).

Equitization also looks smooth for Agribank. For instance, a board of executives has been established to facilitate equitization at this bank. Last year, Agribank also strengthened its financial capacity and prepared grounds for equitization. Additionally, equitization will help Agribank avoid falling behind as commercial banks are in a race to increase capital.

Divestment unlikely to flow easily

Contrary to hope in equitization, divestment is very unlikely to flow as easily due to uncertainty in the securities market. Yet divestment could be successful if it takes place at an appropriate point in time. Very good examples are the successful divestment of the state equity at Saigon Alcohol Beer and Beverages Corporation (Sabeco) and Vietnam Dairy Products Joint Stock Company (Vinamilk) in 2017. In 2019, the securities market did not run smoothly, but Laocai Newspaper Printing Joint Stock Company was quite successful in its equitization with an average price of up to VND 16.5 mn per share, and VND 7,526 bn collected from the business.

The legal requirement is for businesses to register all transactions on UPCoM within 90 days from date of equitization. So far, only 64.2% of equitized businesses have listed on the securities market.
Therefore, satisfactory and well-prepared divestment can create many good products for the securities market and attract attention from investors. The securities market is a great place for buyers and sellers. The development of such a place can be promoted with active involvement from two groups of people. First, the bigger the number of sellers or size of participating businesses, the greater the scale of the market. Second, the investor as the buyer will have more choice in the securities market. But now, the market does not offer many shares of good quality assets and a significant scale of equitization.

Individual investors and organizations are cautious about making investments when the market is seriously affected by a few big equitization shares with low liquidation and few free-floating shares outside. There is the matter of not much room left for foreign investors as owners of current shares. This certainly limits the chances for flow of foreign cash to enter the Vietnamese securities market if there are not any attractive investment opportunities in the securities market.

According to an economic expert, it would be a wrong idea to restrict activities of divestment only because the securities market looks gloomy, but if boosted, divestment could help solve the two-way puzzle of increasing the scale of the market and paving the way for more foreign cash to flow into our market.

Translated by Nguyễn Gia

Thảo Nguyên

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