Seeking and Seizing Opportunities

The inflation growth of over 18 percent in 2011 was too high, near that of the surge in 2008. Dr Vo Tri Thanh, Deputy Director of the Central Institute for Economic Management (CIEM), said: In the past four years, Vietnam had changed macroeconomic objectives four times. The objective in 2007 was public investment and credit-driven growth but it shifted to macroeconomic stability in 2008. In 2009, it launched economic stimulus package and inconsistencies in macroeconomic stability policies were seen in 2010. However, no matter what policies are adopted, the economy faced the most frustrating problem: inflation

 

This is time to look back on the steps which might have worked well in a certain period of time but have tremendous consequences later. The extended application of the stimulus package launched in 2009 with the purpose of promoting growth raised the amount of money in the economy. High inflation caused a negative impact on businesses and people's lives. And, the easing of credit growth in 2007 allowed banks to lend much more, particularly for real estate and securities markets, which led to the overheated expansion of these two markets. One banker estimated that more than 90 percent of companies got directly or indirectly involved in real estate.

 

Therefore, the ‘death’ of the real estate market is unavoidable when banks suddenly reduce realty loans. Immediately, many property and securities companies lost capital structure balance due to unfocused operations, poor risk management and weak liquidity. They are forced to scale down operations and drop investments which used to bring them a lot of profits. Not only falling short of money for their projects, Vietnamese enterprises are exposing weaknesses in capital capacity and corporate governance more clearly than ever. Without being sufficiently supported by loans due to tightened credit policy and high interest rates, the biggest problem of companies - fragile capital structure – is being exposed. Owner’s equity on total working capital in private companies is 15-20 percent, while the rate in State-owned enterprises is just 10 percent. Mr Nguyen Duc Vinh, General Director of Vietnam Technological Commercial Joint Stock Bank (Techcombank), said: "More than 60 percent of companies lose capital balance because they have brought too much short-term capital for medium and long-term investments and most of them invested in non-core businesses. In this rough time, it is essential for enterprises to restructure capital and build long-term business strategies.”

 

However, the crisis has also its positive effects. Bad elements are destroyed and good seeds are sown for stronger future growth. Dr Le Xuan Nghia, Vice Chairman of the National Financial Oversight Committee, said hundreds of producers and exporters report a great volume of backlogged products. According to a recent survey conducted by the National Financial Oversight Committee, 130 listed companies now have very bad balance sheets.

 

A high interest rate over a long time inhibited companies from accessing credit sources. And, if banks lower deposit rates to pave the way for lending rate cuts, they will confront liquidity risks because of shrinking deposits. In addition, the banking sector is being restructured and the process will last through next year.

 

And, SOEs are also the centre of restructuring plans. Big M&A deals will be a major trend for this year and subsequent ones. Weak companies will be reduced in number, while more large-scale enterprises will be formed. This is an opportunity in the tough time.

 

The saying “cash is king” is always true. If you have cash now, you can buy valuable assets like factories or projects at a much lower value than one or two years ago. You can also invest in companies by buying shares with a price reportedly equal to a third or a quarter of book value. Your investments will bring in high margins when the economy recovers, if your picks are good enough.

 

This is also said to be a golden time for foreign investors to seek opportunities in Vietnam. Domestic property developers are facing certain financial difficulties and foreign investors can take advantage of this to buy projects at good prices. Mr Su Ngoc Khuong, Manager of Investment Division, Savills Vietnam Company, said he expects to see "new faces" from Asia and the Middle East on the real estate market in 2012.

 

The appeal of Vietnam remains unchanged. It is an emerging market with a young population, with age 20 to 35 accounting for more than 55 percent. Young people prefer living independently and they take special care of housing. In addition, this is also the time to replace degraded housing stock.

 

Excessive pessimism is undermining the stock market. According to the State Securities Commission of Vietnam (SSC), Vietnam now has some 1.1 million accounts, of which 80-90 percent are held by individual investors. A report released by a securities company said only about 5 percent of accounts had regular trading. Confidence and interest of individual investors are also weakening. Even big investors are trading less because stock brokerage houses are more prudent in providing financial leverage.

 

Vietnamese equities are rated relatively low in the group of emerging countries. The overall price to earnings (P/E) ratio of the market is 8. Many shares are traded at 2 - 4 times below book value. This means that investors purchase shares at very low prices while most companies cannot raise capital through the stock market.

 

Any downturn spiral reaches its bottom and it is followed by a rebound. Many policies have been enacted to support the stock market, but it needs foreign funding to sustain the upward trend. The currently very low confidence index needs to be revived and sustained if we want the market to develop sustainably. And, the first thing to be done is to attain macroeconomic stability.

 

However, the pessimistic context always contains optimistic elements. Companies will have the opportunity to restructure their capital sources and focus more on core operations. When listed shares are undervalued, many silent acquisitions that aim at takeovers are going on. This is also the time for the market to filter its strong products. In this period, undervalued companies are the target of M&As.