VZCZCXRO8666
RR RUEHCHI RUEHDT RUEHHM
DE RUEHHI #0595/01 0871018
ZNR UUUUU ZZH
R 281018Z MAR 07
FM AMEMBASSY HANOI
TO RUEHC/SECSTATE WASHDC 5004
INFO RUEHBK/AMEMBASSY BANGKOK 5563
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEHHM/AMCONSUL HO CHI MINH 2815
RUEHGP/AMEMBASSY SINGAPORE 2330
RUEHZS/ASEAN REGIONAL FORUM COLLECTIVE
UNCLAS SECTION 01 OF 03 HANOI 000595
SIPDIS
STATE FOR EAP/MLS AND EB/OMA
STATE PASS USTR DAVID BISBEE
STATE PASS USAID FOR ANE/AA KUNDER/KENNEDY/WARD
AMEMBASSY BANGKOK FOR RDM/A
USDOC FOR 4431/MAC/AP/OPB/VLC/HPPHO
TREASURY FOR ABAUKOL AND SCHUN
SINGAPORE FOR SBAKER
SENSITIVE
SIPDIS
E.O. 12958: N/A
TAGS: EFIN EAID EINV ETRD ECON VM
SUBJECT: STOCK MARKET PREDICTIONS
HANOI 00000595 001.2 OF 003
(U) THIS CABLE IS SENSITIVE BUT UNCLASSIFIED. NOT FOR INTERNET.
REF: HANOI 584
1. (U) Summary: At the second annual Euromoney Institutional
Investor Investment Forum held March 19-20 in Hanoi, a panel of
investment experts in Vietnam offered their opinions on and
predictions for VietnamQ volatile stock market. While all
panelists agreed a market correction will occur within the next two
years, they varied in their predictions on how large a correction it
will be. Citing the massive overvaluation of 10-15 major companies
as the source of the problem, analysts predicted that the market
correction that does occur will be a healthy and necessary part of
Vietnam's development. The panelists concluded that Vietnam's stock
market fundamentals are sound enough to ensure that it will survive
even a large correction and that foreign firms will continue to
invest in the market for the foreseeable future as a result. All
expressed strong optimism in Vietnam as an investment destination
and confidence in the GVN's understanding of market fundamentals.
End Summary.
2. (U) Vietnam's stock market has received much international and
domestic attention in recent months, due mainly to its extraordinary
levels of growth, as well as some very high price-to-earnings
ratios. In the past four years, said Equity Markets Panel chairman
Chris Leahy of Asiamoney, Vietnam's stock market has grown from a
total listed value of USD 500 million to more than USD 16.5 billion.
Daily trading volumes four years ago were about USD 500,000 a day.
Last week, they reached an average of USD 60 million a day. This
growth, coupled with the increased participation of Vietnam's
growing middle class in both the listed market and the
over-the-counter market, has attracted the attention of foreign
investment firms, GVN regulators, foreign governments and
international media.
THE BUBBLE'S BURST - WHEN AND HOW MUCH?
---------------------------------------
3. (U) While all panelists agreed that a market correction will
happen in the next year or two, they were strongly divided on the
question of how much the market will correct. On one hand, Kevin
Snowball, Director of PXP Vietnam Asset Management, suggested that
the market will correct anywhere from 30 to 50 percent within the
next two years, and possibly earlier if triggered by an unforeseen
domestic event or regional market issues. Snowball stressed,
however, that the GVN is already laying the foundation for a good
recovery for what they too see as an inevitable event, and that its
plans to move ahead quickly in the equitization of state-owned
enterprises (SOEs) is the most prudent means of planning for a
correction which Snowball characterized as "natural for an emerging
market."
4. (U) Dean Van Drasek, Executive Director for Lim Advisors,
disagreed slightly with Snowball, claiming that people "who talk the
market down are not really invested here." He said there is no
chance the correction will be as large as 30 to 50 percent, but more
like 10 to 15 percent. Van Drasek emphasized that while there is a
lot of interest in the top 10 to 15 stocks, making this a top-heavy
market, the rest of the market is healthy and the correction will be
shallow and quick.
5. (U) Finally, Fiachra Mac Cana, Director of Research at
VinaCapital, concluded the discussion on market correction by
observing that the "truth lies somewhere in between" the two
predictions. He asserted that he does not see a correction
happening in 2007 unless there is a problem with global liquidity
levels or some outside event that prompts psychological reactions to
trading and saving. The market will crash at some point in the
near-term, however, and large international firms that have the cash
will be waiting to buy in when it does.
OVERVALUATION
-------------
6. (U) Mac Cana then turned to a discussion of the Vietnamese
market's overvaluation. He acknowledged that from a
price-to-earnings (PE) ratio standpoint, the top 75 to 80 stocks
trading are extremely overvalued, but in a market where few
HANOI 00000595 002.2 OF 003
investors outside the major international firms are looking at PE
ratios, this doesn't really matter. The key is liquidity, and as
long as Vietnam's liquidity boom continues, it will sustain the
overvalued PEs.
7. (U) Snowball agreed with Mac Cana's assessment, and added that
in similar markets such as Bangladesh and Sri Lanka where PE ratios
were as high as 70 and 80, the market sustained these rates for some
time, but not forever. Eventually, any emerging market with such
high PE ratios experiences a correction in valuation.
8. (U) Van Drasek expounded on this overvaluation issue, noting
that there is essentially a two-tier market in Vietnam. Any stock
with a PE ratio of more than 30 is essentially unsustainable given
Vietnam's economic prospects and realities. However, many of the
[Vietnamese] people participating in the market and buying these
stocks have "no idea what a PE ratio is", and many of the foreign
investment firms that are buying into the market in order to get
themselves in the door and established "do not care what the PE
ratio is." The result is that a portion of the market - about 10-15
stocks - functions without regard to standard trading practice. At
the next level, there are 50 to 60 stocks trading normally whose
average valuation is only about 14. This is normal for Southeast
Asian markets, he added.
9. (U) On the point about the general public's awareness of PE
ratios and other basics of trading, Mac Cana urged the GVN to
improve the education process about the market. When middle class
investors start losing huge sums of money, he added, they will come
looking to the GVN for answers. On top of that, he added, there are
a lot of international investors waiting on the sidelines to see
what happens and to buy in when the crash does come, which will not
help the politics of the situation. (Note: USAID has been a
leading provider of technical assistance to the State Securities
Commission (SSC) in (1) developing the new progressive Securities
Law and related implementing regulations, (2) focusing on strategic
factors in developing the equities market, and (3) understanding the
risks and issues arising with explosive market growth. End note.)
THE OTC MARKET
--------------
10. (U) Van Drasek then cited the over-the-counter (OTC) market as
another example of the need for greater education and public
awareness. He commended the GVN for its efforts to bring several of
the more legitimate companies which previously traded OTC onto the
listed exchanges by removing the disincentives to listed trade. The
GVN issued a series of rulings last fall which imposed the same
regulations on OTC trades as on listed trades, prompting 59
companies in November and December 2006 alone to move to the listed
market. In Van Drasek's opinion, this likely drained the OTC market
of its real players, leaving only smaller, less profitable
companies. "Most of what one hears about the OTC market in Vietnam
is simply untrue", said Van Drasek. What is true, he added, is the
fact that the estimated 2800 companies traded OTC produce no
earnings statements and no publications on pricing, and thus no PE
ratios or any reliable means other than word-of-mouth for evaluating
these businesses. He concluded that the next wave of SOE
equitization will probably kill off the last of any rational OTC
trading that is taking place, as anything worth investing in will be
listed formally on the exchanges.
SOE EQUITIZATIONS
-----------------
11. (U) Despite the fact that all panelists acknowledged that SOEs
and state-owned commercial banks (SOCBs) tend to list at far greater
values than the companies are actually worth, these analysts
remained optimistic about the SOEs expected to debut this year.
Vietcombank, several food and beverage companies, and a large
telecom firm were all mentioned as equitizations (although they will
all be only partial equitizations) which the investment community is
watching carefully. Van Drasek noted that Vietnam is the only
market in the world where SOEs are listing at two to four times the
value of similar companies on the exchange (i.e., where a food and
beverage SOE will list for four times the value of a privately held
food and beverage company already trading on the exchange) and
getting away with it. The market is simply hot enough to absorb
HANOI 00000595 003.2 OF 003
this overvaluation. Snowball agreed, and added that the GVN has
studied emerging markets for years and it knows it is not stressing
the market to list its SOEs in this way. However, as an industry
develops around watching Vietnam's markets (journals, company review
products, reporting, public analysis), there will be some correction
in SOE valuation if the companies do not start producing better
post-equitization. That is, apparently, a risk the GVN is willing
to take.
GVN OVERSIGHT GETS A+
---------------------
12. (U) In the end, all panelists agreed that the Vietnamese market
is structurally very sound and well set up. One panelist did
mention capital controls very briefly as a measure which the GVN had
"recently considered, but now dismissed" as a means to cooling the
market. Instead, he said, the GVN will continue to list parts of
SOEs and keep the foreign ownership limitations in place
indefinitely in order to keep the market growing at a more
sustainable rate. Note: Foreign investors are currently allowed to
own no more than 49 percent of a listed company and no more than 30
percent of a listed bank, of which a single investor may own no more
than 10 percent. In 2006, there were rumors that these amounts would
be lifted in 2007. However, the GVN has decided to postpone these
increases indefinitely. End note.
13. (U) When asked to give a long-term prediction on the market's
performance, all panelists agreed it would continue to do well even
after the inevitable correction. They foresaw no real long term
risks or fundamental problems, and all rated the future outlook as
extremely optimistic, "setting aside the issue of valuation."
14. (SBU) Embassy comment: One private sector attendee told us a
senior Ministry of Finance official said to him in a private
conversation that the Minister of Finance and central bank governor
had had their "fingers on the trigger" to impose capital controls.
This remark is in contrast to the general public image conveyed that
Vietnamese government officials were simply considering the idea.
End comment.
ALOISI