The vietnamese stock market the the privatisation and market listing process of state - owned enterprises

STUDENT NAME (S) (PLEASE UNDERLINE YOUR FAMILY NAME) FOR GROUP ASSIGNMENTS, WRITE THE GROUP LEADER’S NAME FIRST. KHANH NGUYEN STUDENT NO. N 04226097 (MASTER OF APPLIED FINANCE - BS98) FACULTY OF BUSINESS Assignment Cover Sheet Assignment should be stapled in the top left hand corner. DO NOT USE plastic sleeves or bindings. Assignments will be returned in class or consultation times, unless students are advised otherwise by their tutors/lecturers. Assignments will only be handed out at the school office during specified times as notified on the OLT site for your unit. Photographic identification will be required. DATE RECEIVED (Office use only) Campus: GARDENT POINT Faculty of Business School of Economics and Finance Unit Name: PROJECT 1 Unit Code: BSN 404 Due Date: 18 February 2005 Lecturer/Tutor’s Name: MR. MARK CHRISTENSEN Tutorial Day/Time N/A Description/Topic: The Vietnamese Stock Market - The Privatisation & Market Listing Process of State-owned Enterprises DECLARATION: I declare that: • This work is entirely my own, and no part of it has been copied from any other person’s words or ideas, except as specifically acknowledged through the use of inverted commas and in-text references; • No part of this assignment has been written for me by any other person except where such collaboration has been authorised by the Unit Coordinator concerned; I understand my assignment may be scanned as part of the assessment process, and that plagiarism detection software may be utlilised; • This assignment has not been submitted for any other unit at QUT or any other institution, unless authorised by the relevant Unit Coordinator; • I have read and abided by all of the requirements set down for this assignment. SIGNATURE*……………….…Khanh Nguyen…….……………..…….… DATE…18 Feb 2005……..………… * If this is a group assignment, only one signature is required • The Unit Coordinator may exercise a right not to mark this assignment if the above declaration has not been signed. • If the above declaration is found to be false, you may receive reduced or zero marks for this assignment, and you will be dealt with under QUT’s Student Rule No. 29 - Academic Dishonesty, and the associated procedures for Academic Dishonesty which are available at: and BSN401- PROJECT1: The Vietnamese Stock Market Student Name: Khanh Nguyen (N4226097) Page - 2 - Queensland University of Technology Faculty of Business School of Economics and Finance - BSN404 PROJECT 1 STUDENT NAME: KHANH NGUYEN MASTER OF APPLIED FINANCE STUDENT No: N04226097 THE VIETNAMESE STOCK MARKET THE PR I VAT I S AT ION AND MARKET L I S T ING P ROCES S OF S TATE -OWNED ENTERPR I SE S A BLUE SKY ’S BEST OPPORTUNITY IN MERGING MARKETS BSN401- PROJECT1: The Vietnamese Stock Market Student Name: Khanh Nguyen (N4226097) Page - 3 - TABLE OF CONTENT Acknowledgments------------------------------------------------------------------------------------------------4 Glossary------------------------------------------------------------------------------------------------------------4 INTRODUCTION -----------------------------------------------------------------------------------------------5 CHAPTER (1) ----------------------------------------------------------------------------------------------------6 THE VIETNAMESE STOCK MARKET-------------------------------------------------------------------6 1.1 The Development Process of the Stock Market ------------------------------------------------6 1.2 The Rise, The Fall and The Recovery of the Vietnamese Stock Market-------------------7 1.3 The Current Stage of the Vietnamese Stock Market ------------------------------------------7 1.4 The Stock Market Operations ---------------------------------------------------------------------8 1.4.1 The Market Regulator, Facilitator and Owner: ------------------------------------------------------9 1.5 Current Issues Concerning The Development of Stock Markets ------------------------- 10 1.5.1 Issues That Hinder The Expansion of The Vietnamese Stock Market --------------------- 10 1.6 Future Development and Opportunities of the Stock Markets---------------------------- 12 1.6.1 Vietnam Outlines Solutions to Boost Stock Market in 2005 ----------------------------------- 12 1.6.2 Vietnam Launched the Second Stock Market in Hanoi and the OTC Market ------------ 13 1.6.3 Vietnam is Linking and Listing Large Companies on Overseas Stock Markets --------- 14 1.6.4 Vietnam Proposed Changes to IPO Rules to boost Market Investors:--------------------- 14 1.6.5 Vietnam Proposed Equisation and Market Listing of Large State-owned Corporations to boost the Stock Markets: ------------------------------------------------------------------------------------------ 15 CHAPTER (2) -------------------------------------------------------------------------------------------------- 16 THE PRIVATISATION AND IPO PROCESS OF STATE-OWNED ENTERPRISES --------- 16 2.1 What is Privatisation ?---------------------------------------------------------------------------- 16 2.2 The Need for Privatisation of State-owned Enterprises ------------------------------------ 16 2.3 What Types of Privatisation Techniques can be Adopted ? ------------------------------- 17 2.3.1 Small Business Auctions -------------------------------------------------------------------------------- 17 2.3.2 Trade Sale of Larger Enterprises --------------------------------------------------------------------- 18 2.3.3 Initial Public Offerings (IPOs) -------------------------------------------------------------------------- 18 2.3.4 Joint Venture ------------------------------------------------------------------------------------------------ 18 2.3.5 Mass Privatisation Programs--------------------------------------------------------------------------- 19 2.3.6 Build-Own-Operate/Build-Own-Transfer Programs---------------------------------------------- 19 2.3.7 Liquidation of State-owned Enterprises ------------------------------------------------------------- 19 2.3.8 The General Process of Privatisation ---------------------------------------------------------------- 20 2.3.9 Critical important factors need to consider --------------------------------------------------------- 20 2.3.10 General Problems Encountered during the Privatisation Process in the Former Socialist Countries ------------------------------------------------------------------------------------------------------ 20 2.4 The Vietnamese Privatisation Program ------------------------------------------------------- 21 2.4.1 Government Solutions in Speeding up the Equitisation Process ---------------------------- 24 2.4.2 Privatisation Results and Lesson Learned from the Process --------------------------------- 25 CONCLUSSION----------------------------------------------------------------------------------------------- 28 REFERENCES------------------------------------------------------------------------------------------------- 30 APPENDIX (A)------------------------------------------------------------------------------------------------- 32 BSN401- PROJECT1: The Vietnamese Stock Market Student Name: Khanh Nguyen (N4226097) Page - 4 - ACKNOWLEDGMENTS The author wishes to thanks the course coordinator Mr. Mark Christensen for his valuable time, guidance and support during the busy time of the year, the festive season 2005. GLOSSARY ASIC Australian Security Investment Commission ASX Australian Stock Exchange AMP Australian Fund Management & Life Insurance Institution AUD Australian Dollar Circular 126/2004/TT-BTC MoF’s Circulation of Guidelines on Government’s Decree 187/2004/QD-CP. Decree 187/2004/ND-CP Government’s Decree on Transforming State-owned Enterprise into an Equitised Enterprise. Decree 161/2004/ND-CP Government’s Decree on Penalties of Administrative Violations in The Field of Securities and Securities Markets. Decision 161/2004/QD-TTg Prime Ministerial Decision on The Approval of The Strategy for The Development of Vietnam’s Securities Market up to 2010. Decision 63/2003/QD-TTg Prime Ministerial Decision on The Functions, Duties, Powers and Organisational Structure of the SSC. Decree 144/2003/ND-CP The Government’s Decree on Securities and Securities Market. Decree 103/1997/CP Decree on Regulation on Entrusting, Selling, Business Contracting or Leasing State Enterprises. Doi Moi Vietnamese term for economic revolution in the 1980s. Equitisation A term for partly Privatisation . GDP Gross Domestic Product HOSTC Ho Chi Minh Security Trading Centre HASTC Ha Noi Security Trading Centre IPO Initial Public Offering MoF Ministry of Finance NRMA NSW Royal Automobile Club & Insurance company OTC Over The Counter market SSC State Security Commission SOEs State-Owned Enterprises US$ American Dollar VND Vietnamese Dong VAT Vietnamese Good and Services Tax (GST equivalent) BSN401- PROJECT1: The Vietnamese Stock Market Student Name: Khanh Nguyen (N4226097) Page - 5 - INTRODUCTION The Vietnamese stock market is one of the merging markets in Asia, which comprises of the Ho Chi Minh City Security Trading Centre (HOSTC), the Hanoi Security Trading Centre (HASTC) and the OTC market. The HOSTC has been in operation since July 2000, the HASTC is to become operational in March 2005, while an OTC market, also managed by HOSTC will kick off in mid 2005, according to Nguyen Doan Hung, Deputy Chairman of the State Securities Commission (Vietnam Investment Review News, January 2005). The HOSTC is currently the only official shares trading centre in Vietnam with 26 listed partly state-owned joint stock companies, and one recently listed privately joint stock company amongst more than 6,000 private and state-owned joined stock enterprises. The potential of the Vietnamese stock market is great, which can offer investors plenty of blue sky’s best opportunities and also pains and headaches. The main fundamental step taken towards the development of a stock market in Vietnam is to diversify ownership of national assets through the privatisation process. The basic legal infrastructure Law on Companies, Law on Private Enterprises has been passed. Enterprise valuation has proved to be the most difficult issue in implementing the conversion of state owned enterprises. Accounting standards have also been recently implemented. The pace of implementation has been pain taking slowed but the progress and number of reforms initiated are quite remarkable in such a short time. The country economy emerged from a post-war centrally planned system with an impressive average annual GDP growth rate of 8%, from a merely 10 billion USD economy during the late 90s into a striving 45 billion USD economy in 2004 (Reuters, January 12, 2005). As the economy expand which requires capital investment to grow, the government is accelerating the current equitisation (privatisation) process of State-owned enterprises, and at the same time pushing on with the development and expanding of the financial markets as future sources of capital investment for Vietnam’s economic expansion. The development and expansion of the Vietnamese stock market is fuelling by the rate and the pace of the equitisation (privatisation) program in Vietnam. Hence, this project will attempt to cover both processes at the introductory level, and identify issues for future researches. The project’s aims are to: • Examine the development process and the current stage of the Vietnamese stock market; • Identify future stock market development potentials and opportunities; • Investigate the privatisation (equitisation) and market listing processes of State- owned enterprises; • Lessons learn and suggestions for future researches on the Vietnamese privatisation and listing programs of state-owned enterprises. BSN401- PROJECT1: The Vietnamese Stock Market Student Name: Khanh Nguyen (N4226097) Page - 6 - CHAPTER (1) THE VIETNAMESE STOCK MARKET 1.1 The Development Process of the Stock Market Follow the successful implementation of the economic reform ”Doi Moi” in the early 1980s that lifted Vietnam out of the socio-economic crisis and moved the country onto the stage of intensified industrialisation and modernisation. Vietnam transformed from a net imported foodstuffs country into a second largest rice exporter country in the regions within the short pace of time. Vietnam is seeking for capital development with a great need to transform the country economy from the centrally planned and subsidised mechanism into the free market economy. The need for a new channel of fund raising for development investment together with the privatisation of state-owned enterprises in the early 1990s were the driving force for an establishment of the securities market. As one of the preparatory steps towards kick-starting the stock market in Vietnam, the Capital Market Development Board under the State Bank of Vietnam (SBV) was then set up by its Governor’s Decision 207/QD-TCCB dated November 6, 1993. The Prime Minister approved of the establishment of the Board for drafting the Decree-Law of Securities in preparation of the establishment of a Securities Market as by the Prime Ministerial Decision No. 361/QD-TTg (June 29, 1995). This Board is assigned with responsibilities as follows:
Drafting legal documents of securities and securities market;
Drafting the Government’s Decree on the establishment of the State Security Commission;
Preparing infrastructure facilities and training market regulatory staff and practitioners;
Carrying out cooperation projects with other countries and international organizations in the field of setting up the securities market development in Vietnam. Established under the Government’s Decree 75/CP (November 28, 1996), the State Security Commission (SSC) is a securities market regulatory agency (that take on the roles similar to ASIC in Australia, including some of the ASX’s roles) in charged with the mission of establishment, organizing and regulating securities and securities market operations. The establishment of the securities regulator prior to the actual functioning of the securities market itself proves to be an approach in consistence with the general direction of building and developing the securities market in Vietnam, and this determines the birth of the securities market over 3 years later. The development of Vietnam’s financial markets can often be frustratingly slow. But regulators are conscious that by deregulating before the necessary infrastructure is in place is not constructive (infrastructure refers to staff skill, technology of market information, communications and management). In financial markets, a policy of crawling before BSN401- PROJECT1: The Vietnamese Stock Market Student Name: Khanh Nguyen (N4226097) Page - 7 - walking, and walking before running may not be such a bad thing. Nevertheless, Vietnam launched its first post-war stock exchange in Ho Chi Minh City in July 2000. 1.2 The Rise, The Fall and The Recovery of the Vietnamese Stock Market Trading on communist Vietnam's 5 years old stock market “The Ho Chi Minh City's Securities Trading Centre” (HOSTC) is rapidly recovering from the slump of 2002/2003, but still a far cry from the heady days of the first year, when speculators desperate for anticipated profits made it the world's best-performing market for the first six months listing during 2000. Fortunately, the current recovery is based on fundamental and healthy earning which far different from the steep rise that followed with a spectacular crash during 2002. The falling prices so enraged speculators in 2002 that they threatened to kill the exchange's director, Tran Dac Sinh. “There were some death threats. But now I think investors can understand the stock market better”, Sinh said. At that time investors thought I was manipulating the prices. We had to have police assistance. “Regulators say the recent stability of the stock market, in southern Ho Chi Minh City, is a sign it has already begun to mature, as investors who once believed the exchange would only climb higher are no longer view it as a source of risk-free quick gains” (The Associated Press - July 25, 2002). According to the Securities Commission, Vietnam's five-year-old stock market saw positive developments in 2004, with the total market capitalization of listed securities increasing 93.4% on-year, equivalent to nearly VND12.5 trillion (US$796.2 million). The market has attracted more investors (20,300 accounts opened at securities firms as at the end of 2004) and its prices of stocks are gradually recovering after a period of declination in 2002 and 2003. The Vn-Index rose by 72.35 points, or over 43% to close at 239.29 on December 31, 2004 from 166.94 at the end of 2003 (Vietnam Investment Review News, January 2005). 1.3 The Current Stage of the Vietnamese Stock Market The Ho Chi Minh City's Securities Trading Centre (HOSTC) is the only stock market currently in operation in Vietnam. By the end of 2004 there were 27 listed enterprises and one fund management company with a combined market capitalization of about US$260 million, together with an US$1.60 billion worth of 207 government and banks bonds. The current weekly trading values are on average of US$35 million for bonds, and just above US$1 million for shares. The market liquidity problem has so far deterred foreign investors and financial institutions to participate in the stock market. The stock market listed enterprises are predominant by industries that comprise of Confectionary & Foodstuff, Manufacturing, Engineering & Construction, Tourism, Transportation, Import & Export, Petroleum and Telecommunication. There is no banking or financial companies currently listed on the stock market, with an exceptional a Fund Management Unit listed since 2003 (Viet Fund Management, a 70:30 venture between the BSN401- PROJECT1: The Vietnamese Stock Market Student Name: Khanh Nguyen (N4226097) Page - 8 - Saigon Thuong Tin Commercial Bank and the UK-based fund management Dragon Capital). The table of currently listed companies in the HOSTC is included in Appendix A. Among the 27 listed enterprises, 26 are privatised SOEs with one exception of North Kinh Do a maker of biscuits, cakes and confectionery, the very first Vietnamese private enterprise listed on the stock market. “Vietnam's fast expanding private sector got a boost by the recent listing of North Kinh Do, became the first company founded by a private entrepreneur to list on the country's tiny stock exchange. The three year-old confectionery company is a de facto subsidiary of Kinh Do, a construction and food-company founded by Tran Le Nguyen, one of a new breed of Vietnamese entrepreneurs profiting from the relaxation of state control over the economy over the past decade. North Kinh Do reported a revenues of 210 billion VND (US$13m) and profits of 15 billion VND (US$1 million) in 2003, was hailed as a big step forward for Vietnam's official stock market, and an inspiration for the country's 150,000 registered private businesses” (Bankok Financial Times, December 16, 2004). The Vietnamese stock market has so far attracted hundred of foreign individual investors and 25 foreign institutional investors, who now hold a large percentage of shares in all the 27 listed companies, according to the Ho Chi Minh City Securities Trading Centre (HOSTC). They sometimes hold up to the 30% limit of many listed companies, including the shipping line Transimex Sai