Between mid-January and mid-February, five IPOs of major SOEs raised a total of around US$800m for the government. The SOEs that have conducted IPOs so far this year include three subsidiaries of the state oil and gas firm, PetroVietnam (PV): a refinery operator, Binh Son; an oil distributor, PV Oil; and a power producer, PV Power. Vietnam Rubber Group (VRG) and a power producer, Genco 3, also held IPOs. Shares in Binh Son, PV Oil and PV Power were oversubscribed by investors, who remained undeterred by corruption investigations involving former senior officials at PV. However, VRG and Genco 3 did not fare so well in their IPOs, as investors bought only 21% and 2.8% respectively of the shares on offer.

Volatile market conditions since late January, which have wiped out many of the gains in Vietnam’s stock market since the start of the year, were partly responsible for Genco 3’s meagre IPO. However, there were issues with the IPO itself, as the power producer’s shares were viewed as overvalued. Meanwhile, there were lingering doubts over VRG’s balance sheet, owing to a sprawling corporate structure that included 123 subsidiaries and various non-core investments. The exclusion of foreign strategic investors further dampened appetite towards the rubber producer.

A stronger push from the government

The administration of the prime minister, Nguyen Xuan Phuc, has shown a resolve to accelerate the equitisation of SOEs, which is pressing given the need to improve the efficiency of the state and help fiscal consolidation efforts. Indeed, the government has embarked on two significant initiatives. Decree 126, which came into effect on January 1st, allows the use of book-building to price IPOs while tightening some rules on valuation and listing for SOEs holding such sales. The Committee for State Capital Management, slated to be operational in the second quarter of 2018, should help the central government to consolidate control over assets in firms managed by different ministries, where vested interests have often played a major role in delaying equitisation plans.

Politicised valuations remain a major hurdle

However, despite these initiatives, the fundamental mismatch between the government’s rhetoric on market-based valuations and its fixation on raising as much revenue as possible will not significantly reduce the problem of dubious valuations over the medium term. At the moment, executives at SOEs would rather risk overvaluing their firms and blame the market if sales disappoint than be held responsible for losing state assets by undervaluing them. SOEs with significant land holdings appear to be particularly prone to this tendency, owing in part to unreliable valuation frameworks for such assets. This was a major factor behind the recent unsuccessful stake sales by two state property developers, Becamex IDC and Vinaconex.

Plenty of opportunities for strategic investors

Tellingly, as evidenced by the purchase of a majority stake in a state-owned brewer, Sabeco, by Thai Beverage (a Thai conglomerate), foreign investors are willing to pay a premium for a foothold in the country’s more promising sectors. The government is aware of this and, through Decree 126, has eased restrictions on strategic investors, through measures such as lowering the required profitable track record of potential investors to two years (from three) and allowing these investors to cash in after three years (instead of five). The authorities have also enlarged the stakes offered to strategic investors, ranging between 29% and 49% for PV’s three subsidiaries and Genco 3, for example. Crucially, the government sanctioned Thai Beverage’s move to circumvent foreign ownership limits through the use of a local joint venture.

That said, the government is unlikely to give up its complete control over SOEs, even if it becomes a minority shareholder in a number of them. The state is likely to retain at least a 33% stake in the most profitable SOEs—those that provide a significant and reliable stream of revenue. A 33% stake would still give the government veto power over management decisions, which would probably be employed at firms in industries deemed “strategic” to the country’s interests.

A narrow window for a big push

We believe that the government’s plan to divest from 181 SOEs and to hold IPOs for 64 firms in 2018 is overly ambitious. The consolidation of control over SOEs by the Committee for State Capital Management will take time to bed in, partly owing to strong vested interests and the unprecedented scale of such a feat. Anti-corruption efforts, with no signs of abating, could render the SOEs that are under investigation prone to delays in their equitisation plans. In addition, the ebb and flow of global risk sentiment generated by the further normalisation of monetary policy settings in developed countries, especially in the US, could dampen appetite for emerging- and frontier-market assets and, by extension, threaten the success of equitisation efforts.

Nevertheless, 2018 will be a critical year in Vietnam’s equitisation drive. While the actual pace of IPOs and stake sales is likely to be slower than the official plans, the government will look to take advantage of the current strong investor sentiment towards Vietnam, underlined by a stock market at a decade high and a fundamentally robust economy.