Covert Wave of M&As of Securities Companies

Two recently enacted circulars by the Finance Ministry have had a huge impact on the operation of securities companies in Vietnam. They present a multi-faceted picture of post-booming securities companies.

 

Circular 52/2012/TT-BTC defines the required information declaration in the stock market in order to increase the transparency of listed companies. Circular 226/2010/TT-BTC sets the prudent financial ratios of securities companies to be considered in the same way as Circular 13, which is applied to commercial banks. Accordingly, securities companies falling under the second and third group will subject themselves to regulation and special regulation, respectively, and correcting procedures such as increasing authorised capital, restructuring investment portfolio, loan contracts, reducing operating expenses and merger, according to the law. In addition, the financial standing, investment and debt of these companies will also be regulated, together with forgoing their broker services in order to safeguard customer’s interest. They will have to liquidate and declare bankruptcy according to the law if these weaknesses are not amended. Because of particular problems such as low capital safety ratio, accumulated loss being more than owners’ equity and the surface of bad debt in two or three consecutive years, seven securities companies including Rubber Securities, Vina Securities, Hanoi Securities, Truong Son Securities, Da Nang Securities, Me Kong Securities and Vietnam Industry and Commerce Securities (VIG) are now under special regulation.

 

Providing financial leverage for customers without proper credit risk management leads to serious loss suffered by VIG, or customer disputes in the case of Truong Son Securities. Total revenue of VIG for the first two quarters of 2012 is only VND4.54 billion, evidence that all company operations have come to a halt. However, Circular 226 has also failed to “catch” securities companies losing liquidity, such as SME Securities.

 

Lacking capital is a challenging issue for companies with consecutive quarter losses. We have to revive securities companies by looking for additional capital to supplement working capital. Issuing equities for strategic investors or convertible bonds is not an easy task without the backing of commercial banks as one of the major shareholders. For example, facing problems with accounts receivable amounting to trillions of VND, Military Bank Securities (MBS) immediately issued 1,000 5-year bonds to supplement working capital. Of course, the bond holder was none other than Military Commercial Bank, without which MBS would have to go through tough time. At the moment, MBS is gradually regaining its market position despite a still humble financial result. In the first six months, total revenue of MBS is VND165 billion with estimated profit of VND6 billion.

 

Likewise, in the case of Sacombank Securities (SBS), losses in 2011 have already “eaten up” two thirds of the VND1,266 billion owner equity. The main culprit was a large reserve pool of capital and interest expenses in the face of a sharp revenue plunge as the market went down. In 2012, SBS’ board of directors has ratified the issuance of a VND800-billion package of convertible bonds in order to supplement the working capital, helping companies to stay afloat. The bonds have a five-year maturity, convertible price being the book price of the latest financial statement, bond interest being set by the board of directors. Given the characteristics of this long-term capital injection, the saviour of SBS’ capital thirst is none other than its “mother” Sacombank. Despite being the subsidiaries of commercial banks, big securities companies such as SBS and MBS are struggling to find their own way after the boom period. However, can the serious losses suffered by SBS be averted without an appropriate and sustainable growth plan in this unfavourable market?

 

Founded with an authorized capital of merely VND 1 billion, Saigon Securities Incorporated (SSI) has rapidly boosted its capital to VND3.526 billion to claim the market’s top position. SSI is faster than medium-scale securities companies which are attempting to increase their authorized capital to gain market share and gain a place among the top 20 securities companies. Nevertheless, increasing capital is currently a hard nut to crack given the market conditions. This has led to some securities companies such as APS to employ the tactic of acquiring smaller-scale securities companies. 

 

At the same time, small securities companies are having a hard time increasing their capital. In fact these companies only exist on paper because they cannot compete and are currently waiting to be acquired by other companies. For instance, Da Nang Securities (which falls under special regulation) has just announced an increase of authorized capital from VND50 billion to VND60 billion. This amount is only enough for the company to be involved in broker and consulting services. Gone is the time when major shareholders and big corporations, one after another established their own securities companies to buy and sell their own shares or push companies’ services to these “backyard” companies. The liquidation or merger of these securities companies due to weakness in human resources and low capital is just a matter of time.

 

Moreover, revenue strategy is among the important strategies in the growth plan of securities companies. HCMC Securities Corporation (HSC) owes its success to its diversified “revenue pie”, which focuses on services and capital management. As of the second quarter of 2012, the pre-tax profit of HSC has exceeded that of the entire 2011. Out of the VND 330 billion in revenue, VND210 billion came from repo contracts, clear evident of an appropriate policy plan given the bear market and high interest. Likewise in MBS’ case, after a shuffle of executive positions, its main business has been directed towards services, especially M&A consulting. Successful deals of SBS mainly focus on Japanese partners who want to invest in Vietnam’s market. Among the deals are the sale of 19 per cent of Cholimex’s share to Japanese partners; Diageo’s tender offer of Halico’s share; and listing consultation for Fecon. Even Kim Long Securities (KLS) has now focused on capital and proprietary fund management. In the first six months, the total revenue of KLS is VND161 billion, the major portion of which comes from other revenues (VND137 billion). However, KLS still encounters numerous risks because it mainly invests in the Main Board and increases spending in the second quarter of 2012.

Now, 12 years after establishment, it is time for securities companies to restructure to avoid imbalance and potential bad debts.