ASEAN Investment Flash Vietnam February 2013

Transcription

1 W ASEAN Investment Flash Vietnam February Reciprocus

2 Chairman s Message Dear Readers, Following our geographic expansion with new offices in the United States and Europe, we are seeing interest from SMEs who are seeking our assistance to execute expansion plans globally. We re pleased that this interest is not limited to a specific industry or a specific part of the value chain, but rather is across the board. In line with this, we have received mandates in several countries including Singapore, Germany, India and the United States and in industries such as chemical, manufacturing, direct marketing and real estate. We are finding our research efforts in these markets both highly educational for our firm as well as helpful in our scouting efforts. As Southeast Asia continues to be our home market, this Flash is keeping our firm up-to-date on recent developments in the region and we hope it has the same effect with our readers, keeping you informed and connected to the ASEAN pulse as well. Happy reading. David Emery Founder and Chairman Reciprocus International Pte Ltd Letter from the Editor Following a meteoric 20 year rise as one of Southeast Asia s fastest developing nations, recent economic turbulence in Vietnam has cast doubt over whether this nation s sharp growth trajectory of previous decades will resume going forward. Challenges continued to mount as Vietnam s economic growth rates declined to 13 year lows of 5.2% in 2012, a far cry from the annual 10%+ rates which Goldman Sachs and PriceWaterhouseCoopers predicted not long ago would likely last until The government struggles to curb inflation which has accelerated to 7% in recent months following a series of five central bank interest rate cuts last year. Toxic debts are swelling following a decade of bank liberalization efforts which has resulted in a fragile financial system mired with a bad debt ratio of 10 percent among commercial banks. World Economic Forum ranks Vietnam s competitiveness 65th out of 142 countries in Symptomatic of these weaknesses, foreign direct investment for 2012 dipped 4.9% y/y, however early indications of a strong 2013 rebound are emerging with FDI up 74% in January, 2013 from the same time last year. Moreover, Vietnam continues to serve as a favorable low cost manufacturing alternative to China, with government incentives such as preferential tax rates and foreigner-friendly investment policies attracting new productions of exported goods, agricultural farming and processing projects, and investments involving advanced technology. Nevertheless, the recent economic turbulence has deterred many investors who are now opting to pursue projects in neighboring countries, with Cambodia and Thailand proving themselves as serious contenders for the spot of the Indochina Peninsula s most attractive manufacturing hub. Among Sinaporean garment and textile manufactuers, we see increased interest in Cambodia, while other manfuacturers (e.g. furniture) remain interested in Vietnam. The significant decline of manufacturing activity in 2012 caused by weak Eurozone and China demand may now be reversing, with HSBC s Manufacturing PMI indicating marginal growth in January 2013 at 50.1, up from 49.3 in December While integration into the global economy and an incomplete transition into a market economy has brought a number of complex and challenging obstacles, we consider the country stable for the time being. We recommend investors remain cognizant of the fact that Vietnam s economy is highly dependent on foreign demand of exports and therefore highly vulnerable to global macroeconomic trends, while remaining cautious and vigiliant for indications as to whether Vietnam will resume its originally trajectory to ASEAN superstardom or if recent economic malaise will continue to drag on. Robert MacPherson Vice President and Editor Reciprocus International Pte Ltd 2013 Reciprocus

3 Table of Contents Introduction Country Profile 1 Highlights of the FY 2013 Budget 2 World Rankings 2 Investing in Vietnam FDI Inflows into Vietnam 3 Factors Driving Investment in Vietnam 4 Financial Markets in Vietnam Origin & Development 6 Institutional Framework and Supervisory Authorities 7 Banking Sector in Vietnam 7 Vietnam s Bank Credit Institutions 8 Private Equity in Vietnam Private Equity Market 10 Outlook 12 SWOT Analysis of the PE Industry 13 Appendix 14 Disclaimer: This report is an aggregation of available information gathered from extensive research done on the net. While Reciprocus endeavors to ensure accuracy of information, we do not accept any responsibility for the consequences of any actions taken on the basis of the information provided and any loss or damage to any person 2013 Reciprocus

4 Country Profile VIETNAM Administrative Divisions Map Located in South East Asia, bordering the Gulf of Thailand, Gulf of Tonkin and South China Sea, as well as China, Laos, and Cambodia 58 provinces (tinh, singular and plural) and 5 municipalities (thanh pho, singular and plural) provinces Flag About Vietnam Languages Figure: 1 Vietnamese (official), English (increasingly favoured as a second language), French, Chinese, and Khmer, mountain area languages (Mon-Khmer and Malayo- Polynesian) Figure: 2 Red field with a large yellow five-pointed star in the centre; red symbolizes revolution and blood while the fivepointed star represents the five elements of the populace - peasants, workers, intellectuals, traders, and soldiers - that unites to build socialism Capital City Hanoi (Ha Noi) Major Cities Population Ho Chi Minh City million; HANOI (capital) million; Haiphong million; Da Nang 807,000 (2009 census) Religions Buddhist 9.3%, Catholic 6.7%, Hoa Hao 1.5%, Cao Dai 1.1%, Protestant 0.5%, Muslim 0.1%, none 80.8% (1999 census) Currency Figure: 3 Vietnamese Dong (VND) 2013 Reciprocus 1

5 Population Age Structure 0-14 years: 24.9% (male 11,924,283/ female 10,824,773) years: 69.6% (male 31,824,777/ female 31,887,228) 65 years and over: 5.5% (male 1,940,755/ female 3,117,473) Economy The minimum wage will be adjusted up by VND 100,000 to VND 1.15 million by July 01 next year World Rankings ADB, APEC, ARF, ASEAN, CICA, CP, EAS, FAO, G-77, IAEA, IBRD, ICAO, ICRM, IDA, IFAD, IFC, IFRCS, ILO, IMF, IMO, IMSO, Interpol, IOC, IOM, IPU, ISO, ITSO, ITU, MIGA, NAM, OIF, OPCW, UN, UNCTAD, UNESCO, UNIDO, UNWTO, UPU, WCO, WFTU, WHO, WIPO, WMO, WTO Ease of Doing Business in 2012 (World Bank) 98 out of 183 countries Main Industries Figure: 4 Food Processing, Garments, Shoes, Machine-building, Mining, Coal, Steel; Cement, Chemical Fertilizer, Glass, Tyres, Oil, Mobile Phones FY 2013 Budget Estimates Competitiveness in (World Economic Forum) 65 out of 142 countries Enabling Trade Index 2012 (World Economic Forum) Rank 68 Government Effectiveness Indicator 2011 (World Bank) Budget revenues are projected at an estimated US$ 38.8 billion while spending would be approximately US$ 46.5 billion New construction and projects will be limited next year in order to save money to pay for completed projects or those slated to complete within 2013 Percentile rank Control of Corruption 2011 (World Bank) Percentile rank Transparency International s 2011 Corruption Perception Index 112 out of 182 countries 2013 Reciprocus 2

6 INVESTING IN VIETNAM FDI Inflows into Vietnam o Major infrastructure and production capacity projects Investment Policy/ Investment Incentives The 2005 Investment Law and 2005 Enterprise Law provides the legal and political framework for investment and business conditions in Vietnam Figure: 5 Vietnam has emerged as one of the most attractive destinations for foreign investments in the region The Government of Vietnam is seeking to attract increased investments across various sectors. However, a number of sectors which the Government especially encourages investments in are as follows: o The production of exported goods o Raising, farming and processing agricultural, forestry and aquatic products o Investments involving advanced technology o Environmental protection o Research and development o Labour intensive industries The efficient use of raw materials and natural resources The 2005 Investment Law encompasses investors regardless of foreign or domestic status in order to attract investment activities and mobilise capital Investors are entitled to preferential tax rates; the duration of entitlement to such rates and the duration of exemption from and reduction of tax is in accordance with the prevailing tax laws If an investor suffers losses after completion of tax finalization with the tax office, the party shall be permitted to carry losses forward to the following year Business projects with high economic efficiency and investment projects in incentivized sectors and geographical areas shall be subject to accelerated depreciation of fixed assets 2013 Reciprocus 3

7 Factors Driving Investment in Vietnam Strong Macroeconomic Fundamentals One of Asia s fastest growing economies GDP growth has been relatively stable while other ASEAN countries experienced negative growth during the Asian financial crisis The nation officially became the WTO's 150th member in 2007 Political stability Vietnam s growth has been relatively balanced, with the industrial and services sectors each accounting for most of the annual output Vietnam s growth has been driven by a young, expanding workforce Contained inflation while still encouraging economic growth Figure: 8 Figure: 7 Figure: 9 Figure: 6 Figure: Reciprocus 4

8 Strong Investment Climate Exports in Vietnam: A.T. Kearney 2011 Global Services Location Index (GSLI) Vietnam ranked #8 in the world in the 2011 index FDI Highlights 2012 Vietnam has 14,364 valid foreign FDI projects with a total registered capital of US$ billion so far Japan has become the biggest investor in Vietnam with 1,800 projects worth US$ billion followed by Taiwan with US$ billion, South Korea with US$ billion and Singapore with US$ billion The processing and manufacturing sector remains the most attractive to foreign investors with 8,061 projects capitalized at US$ billion, followed by real estate, hospitality and catering Figure: 11 Vietnam's Major Export Sectors Arts & Crafts, Cashew, Coffee, Electronics & Computer Components, Footwear & Leather Products, Fishery Products, Fruits & Vegetables, Pepper, Plastics & Plastic Products, Rice, Rubber, Software Processing Service, Textiles & Garments, Tourism, Wires, Cables & Conductors, Wooden Products FDI is one of the key sources of foreign exchange for Vietnam, apart from exports, remittances and Official Development Assistance (ODA) The country is actively working to minimize the number of unsuccessful projects across the board, while focussing more on industry, construction, high technology, and renewable energy. However, local experts have warned that this will not be without significant challenges Figure: 12 Manufactured goods dominate Vietnam s exports The country positions itself as a low-cost alternative to China s manufacturing dominance Oil exports continue to be an important source of foreign income 2013 Reciprocus 5

9 FINANCIAL MARKETS IN VIETNAM Origin and Development: First major transition towards the development of the equity markets in Vietnam is traced back to 1990 when the Law on Companies and Private Enterprises was passed Vietnam launched its privatization (equitization) program in Equitization is a process of transforming a State Owned Enterprise (SOE) into a joint-stock company. However, the Government also states that equitization is not always complete privatization as the Government holds control through investment management in some large SOEs, especially industries such as electricity and oil & gas. In the first four months of 2012, four SOEs were equitized. Refer Figure: 13 In 1996, State Securities Commission (SSC) was established as a regulatory authority of the securities market The capital markets became operational in July 2000 when Ho Chi Minh Centre (HoSTC) was established and started operations with only 7 securities companies licenced in December 2000 Hanoi Stock Trading Centre (HOSE) was established in 2005 Crucial step of setting up of a legal framework was marked in 2006 and the Law on Securities and Law on Enterprises came into force in 2006 In 2011, there were more than 500 companies on the two stock exchanges In terms of the bond market, the total value reached 15% of GDP These developments are a result of the systematic implementation of legal framework improvements However, only 16% of the total companies are listed companies (equitized) whereas 81% are unlisted companies (mainly SOEs) Refer Figure: 14 below Bond Markets: Source: SBV Vietnam s bond market can be classified as corporate bonds, treasury bonds and bills, municipal bonds, State Bank of Vietnam bills and Government guaranteed bonds Of the above listed categories, treasury bonds and bills, Government guaranteed bonds and municipal bonds are called Government bonds and are 2013 Reciprocus 6

10 regulated by Decree No. 141/2003/ND-CP These Government bonds constitute a majority of Vietnam s total outstanding bond market. These bonds are issued by the Vietnam Development Bank (VDB), the Vietnam Bank for Social Policies (VBSP) and few are assigned to SOEs to mobilize funds into other Government investment projects By the end of 2011, 50% of the bonds were either VDB, SOE or other Government bonds, 41% were Government treasury bonds while the remaining 9% were corporate bonds (Refer Figure: 15) Vietnamese corporate bond market has evinced an encouraging growth trend after 2007 (Refer Figure: 16) Institutional Framework and Supervisory Authorities: (Refer Figure: 17) 1. State Securities Commission (SSC): The SSC is the regulatory authority for the securities market, securities companies and the stock exchanges in Vietnam. The Law on Securities guides the legal framework for the security exchanges and companies 2. Insurance Market: The Insurance Supervision Department under the Ministry of Finance (MoF) is the supervising authority for the nation s insurance market. The insurance sector abides to MoF s Decision 288/ Bond Market: The Banks and Financial Institutions Department under the MoF is the supervisory authority for the bond market in Vietnam. The overall operations, guidelines, rules and regulations are governed by MoF s Decision 2456/ Banks and Other Credit Institutions: The State Bank of Vietnam (SBV) is the supervisory authority for banks and other credit institutions 5. Overall, the National Financial Supervisory Commission supervises the financial markets The State Securities Commission (SSC) Under the MoF, SSC is in charge with functions of exercising the state regulatory functions of the securities markets which include direct supervision of securities market activities, management of public services in securities markets in compliance with the applicable laws. The SSC has an independent legal status, its seal is imprinted with the national badge and its account is at the State Treasury as stipulated by applicable laws. Various duties and powers are vested with the SSC. Banking Sector in Vietnam: State Bank of Vietnam (SBV) The Vietnam National Bank was founded as the nation s central bank and was performing various roles assigned by the Communist Party of Vietnam and the Government during 1951 to During 1975 to 1985 (the post war period), 2013 Reciprocus 7

11 Vietnam built the new banking system under the new Government. Through a series of reforms, the entire banking system experienced several transformations. The real development and reforms post 1986 are: From : - Separation of the state management function from the monetary and other commercial credit functions - Setting up new and improved banking mechanisms - In May 1990, the Ordinance on the State Bank of Vietnam and ordinance on banking, credit cooperatives and finance companies, were enacted, thereby officially changing the operational mechanism of the banking system of Vietnam from one-tier to two 1993: Normalizing credit relations with international monetary organizations (IMF, WB, ADB) 1995: Resolution on removing sales tax on banking activities was passed by the National Assembly; the bank for the Poor was founded 1997: The Law on the State Bank of Vietnam and the Law on Credit Institutions were passed by the 10th National Assembly of the Socialist Republic of Vietnam and became effective in : The Deposit Insurance of Vietnam was established 2000: Financial and organizational restructuring of state-owned commercial banks and joint-stock commercial banks 2002: The VND denominated lending rate of credit institutions was liberalized, marking the last step to complete liberalization of the credit market's interest rates 2003: Comprehensive operational restructuring of commercial banks in line with international standards 2010: The 12th National Assembly passed the Law on the State Bank of Vietnam (SBV) and the Law on Credit Institutions at its seventh session in Hanoi on June 16, The two laws became effective from January 1, 2011 Vietnam's Bank Credit Institutions: The State Bank of Vietnam is the regulatory authority overlooking Vietnam s bank credit institutions. These institutions can be broadly classified as follows: State-Owned Credit Institutions: The banking sector in Vietnam is largely dominated by state owned credit institutions or banks. According to official data available for 2008, the banking sector in Vietnam was dominated by state-owned banks, accounting for 70% of total assets in the banking system and 70% of total bank loans Joint-Stock Commercial Banks: According to official data available for 2008, these banks serve mainly small and medium enterprises, accounting for about 15% of total credit and 20% of the total chartered capital in the banking system 2013 Reciprocus 8

12 Foreign Banks (FB) Branches and Representative Offices: According to the latest data available, there are about 50 foreign banks branches in Vietnam and 49 representative offices of foreign banks Joint-Venture Banks in Vietnam: The Vietnam-Russia Joint Venture Bank is the largest joint venture bank with a chartered capital of US$ million, closely followed by INDOVINA Bank Ltd. with a chartered capital of US$ 165 million Wholly Owned Foreign Banks: HSBC, Standard Chartered and ANZ are the most popular foreign banks in Vietnam Finance & Leasing Companies: Vietnam has a network of 18 finance companies and 12 leasing companies A brief synopsis of Vietnam s Bank Credit Institutions is described in Figure: 18 Capital Mobilization and Credit Growth in 2010: During 2010, capital mobilization by joint stock commercial banks, finance and leasing companies experienced a strong growth while foreign banks, state owned commercial banks and joint venture banks witnessed modest growth Statistics suggest an increase of credit growth during the first 4 months of 2011 from that period a year ago At the end of 2010, total credit of the banking system increased over 31% y- o-y, lower than the near 38% y-o-y growth in 2009 All credit institution groups witnessed high credit growth. Joint stock commercial banks reached the highest level with 44.12% followed by stateowned commercial banks with 27.85%, joint-venture banks and foreign banks' branches at 24.47% and finance & leasing companies at over 20% growth With respect to economic industries, credit structure saw a big change in 2010 compared to the previous year. There was an increase in the proportions of industry and services and reduction in the share of agriculture in the nation's GDP Credit to agriculture development, which includes farming, forestry and fisheries accounted for 9% of total credit while, industry-construction took over 39% Banking sector scenario in Vietnam is dominated by 5 large State Owned Commercial Banks (SOCBs). Largesized joint-stock banks: assets over VND 60 trillion; Medium-sized: assets over VND 50 trillion; Small-sized: assets over VND 20 trillion (Refer Figure: 19) SBV carries out all its functions through various departments. Detailed organization structure (departments under SBV) and their specified roles are described in Figure: Reciprocus 9

13 PRIVATE EQUITY IN VIETNAM Introduction Vietnam s economy has grown rapidly since the 1980s with the country opening up its economy. Today foreign investors consistently rank it as one of the most attractive investment destinations in Asia. Rapid economic growth, attractive capital markets and evolving political and regulatory frameworks are some of the factors which have contributed immensely in attracting global institutional investors to this promising frontier market. To maximize investments by developing a stable investment environment, Vietnam has been developing different measures for investment guarantees through simple and transparent procedures and processes to ensure fairness among investors. Private Equity (PE) Market: Capital has been scarce in Vietnam in the recent past. Debt markets have been largely inaccessible or unaffordable, and an illiquid stock market has rendered public equity markets as an unreliable source of funding for Vietnamese corporations. This has resulted in stronger deal flow for alternatives, including private equity. The strong economic and market fundamentals in Vietnam has led to an increase in the number of private equity firms with international capital to invest. In Vietnam, there are a number of firms applying the term "private equity", but it sometimes includes investment activities in e.g. real estate and the OTC market. There are few fund managers in Vietnam who focus on classical private equity, i.e. a comprehensive plan for adding value, legal agreements with investor protection/rights and board representation. The country s attractiveness among investors emerged for private equity players due to the privatization of state owned enterprises (SOE). With a view to encourage investments especially in SOEs, in July 2011 the Government announced a more flexible regime for SOEs targeting strategic investors. However, progress is slow and many SOEs are resistant to changing behaviour to drive efficiency. Prominent PE players in the country: Dragon Capital VinaCapital Mekong Capital Horizon Capital VI Group IDG Blackhorse Vietnam Asset Management Aureos Fullerton Fund Private equity investments have slowed sharply since 2007, when 63 deals worth US$ 840 million were completed compared to 18 deals worth US$ 220 million completed in (Refer Figure: 21) 2013 Reciprocus 10

14 In 2010, PE activity was more focused on the sell-side than on the buy-side as older Vietnam-focused funds approached its maturity stage and fund managers were accordingly looking for exits. Amid this, concerns increased over the Vietnamese economy towards the end of 2010 as inflation rose, the balance of trade gap continued to widen which in turn pressured the local currency. Notable PE activity announced during 2010 includes: Mekong Capital Ltd divested its minority stake in Masan Food Corporation, a Ho Chi Minh based producer, wholesaler and retailer of food products and a majority-owned unit of Masan Group Corporation, to an undisclosed acquirer for VND billion (US$ 18.8 million) Aureos South East Asian Fund of United Kingdom, a unit of Aureos Capital Ltd, agreed to acquire a 18.5% stake in Tran Anh Digital World JSC, a Hanoi-based wholesaler of computer devices for VND 80.8 billion (US$ 4.2 million) in cash, in a privately negotiated transaction Mekong Capital Ltd divested its undisclosed minority stake in Maison JSC, a Ho Chi Minh based fashion retailer, to an undisclosed acquirer Masan Group Corporation acquired a 70% interest in Nui Phao Mining Joint Venture Co Ltd, a mining company, from Tiberon Minerals Pte Ltd (Tiberon) a majority-owned unit of Dragon Capital Corporation. Terms of the deal were not disclosed The year 2011 proved to be fruitful for the country with: KKR s spending of US$ 159 million on a 10% stake in Masan Consumer Corporation which brought Vietnam back on the private equity stage. KKR s acquisition in April 2011 is the country s largest-ever private equity transaction and stands out as a major achievement in the consumer sector. With interests in food, banking and mining, Masan raised more than US$ 500 million. The investment deal had stimulated the interests of international PE firms looking out for US$ 50 million-plus deals making entrepreneurs aware of the PE proposition In the same year, eight Vietnamtargeted funds were launched. The largest was Saigon Asset Management s growth capital fund targeting US$ 300 million Sectors in focus: PE firms are targeting sectors which will benefit from the increasing levels of urban wealth, including consumer goods, media, education, healthcare and pharmaceuticals. Successful growth investments in the US$ 5 15 million made over the last few years are likely to generate deal flow for larger PE firms as exits are sought. However, 2013 Reciprocus 11

15 price expectations remain a barrier to deals, with vendors holding on to higher valuations seen in the boom. According to reports, Vietnam s investment scenario is about to get a boost in its private equity industry, as fund management companies seek to establish open ended funds that will allow domestic investors to participate in trading, increasing liquidity across all asset classes. This type of setup which is often seen in developed countries, will allow local, typically retail investors, to purchase shares in the fund directly. At present, many Vietnam-based funds targeting private equity deals are closedended. For example PE firm VinaCapital, has a private equity fund of about US$ 780 million launched in 2003, but as the vehicle s shares are traded on London s Alternative Investment Market, local Vietnamese are restricted from trading in it. Outlook Successful PE investments in the country require long-term commitments to building relationships with entrepreneurs, government and regulators to get into potential deals early. Regulatory reforms, combined with economic growth and political stability, underpins Vietnam s development potential. Vietnam is well positioned to become the upcoming investment destination amid increasing purchasing power coupled with a budding population. Increasingly deregulated financial markets will create significant opportunities for private equity firms. The domestic retail sector in Vietnam has seen an increase in private equity investments in recent years. With limited infrastructure and a fragmented retail business space, this sector will continue to offer an attractive mid to long term growth potential for private equity investments. In spite of these growth factors, Vietnam continues to tackle a number of key issues to ensure its competitiveness as an investment destination in the region. These issues include poor infrastructure, corruption, unrealistic pricing expectations, currency instability, a highly regulated labor market, high taxation and conservative home-ownership laws. According to surveys, higher prices for companies in North America and political and regulatory risks in China are leading private equity investors to consider this emerging market of Southeast Asia. Moreover, deal flow in the country will come mainly from the emerging entrepreneurial businesses needing capital Reciprocus 12

16 SWOT Analysis: Strengths: The Vietnamese economy performed comparatively better in the first half of 2012 compared to the rest of Asia Vietnam leads in the region with its diversified economy, spearheaded by consumer and industrial sectors Standard & Poor s has raised Vietnam s rating from negative to stable on the back of Government measures to tighten its finances, and get inflation down to its lowest level in three years at about 3% Opportunities Sectors that investors should consider when looking at Vietnam includes FMCG, tourism and the construction sectors Threats As with any emerging market, investors exercise caution with regards to investing in Vietnam, particularly considering the ever evolving political, social and economic landscapes Favourable investment policies through the country s new Law on Investment and Law on Enterprises Weaknesses Lack of information available to investors in Vietnam. This shortage of information continues to hold back investments in the country Vietnam s economy offers challenges due to macroeconomic problems including a depreciating currency, inflation and fluctuations in property prices 2013 Reciprocus 13

17 APPENDIX Origin and Development of Securities Market Source: Spearhead Business Research/Reciprocus Figure: 13 Source: Spearhead Business Research/Reciprocus Figure: 15 Source: Asian Bond Online Figure: Reciprocus 14

18 Supervising Authorities of the Financial Markets in Vietnam Source: Spearhead Business Research/Reciprocus Figure: 17 Source: Spearhead Business Research/Reciprocus Figure: 18 Source: SBV Figure: Reciprocus 15

19 Functions of State Bank of Vietnam (SBV) Source: Spearhead Business Research/Reciprocus Figure: 20 Figure: Reciprocus 16

20 For More Information Contact: Robert MacPherson Vice President Reciprocus International Pte Ltd 10 Anson Road, #10-22, International Plaza, Singapore Mobile: Tel: Fax: Website: Follow us on Facebook and LinkedIn: