ASIA FOCUS

Greener pastures and higher prices?

Investors cool on Thailand may find that rival markets, notably Vietnam, are overvalued

POST REPORTERS

As investment sentiment in Thailand continues to be affected by negative news, some investors are looking to regional countries to make quick profits, even though analysts warn that valuations may be stretched.

Among the countries attracting keen interest has been Vietnam, where there has been a surge in asset prices, from property to the equity markets.

Vietnam's small stock market, which is up nearly 35% so far this year alone, is being viewed as becoming highly overvalued although brokers continue to be optimistic about the growth prospects.

"We conclude by looking at the contrast between Vietnam and China, that Vietnam has enjoyed recent economic success in part due to its ability to spread its economic boom even to rural folks," said Patrick Yau, an analyst at Macquarie Securities, after a recent visit to the country.

"The rise in the production of Vietnamese rice, coffee, cashews and pepper has propelled Vietnam to rank among the top global producers for such produce and has also meant that its rural folks have been able to share the country's economic boom."

Macquarie, which hosted a roadshow to Vietnam in response to the market's stellar 147% return in 2006, says that despite the higher valuations, the country continues to offer a great potential for growth.

The Vietnamese stock market, with a capitalisation of $15 billion, continues to see high interest from institutional investors but retail participation is less than 1% of the market turnover.

According to Macquarie, the top five components of the market are FTP Corp (18% of total capitalisation), Vietnam Dairy Product Co (15%), Sacombank (9%), PetroVietnam Drilling & Well Services (8%) and Vinh Son Song Hinh Hydropower Joint St (5%).

Although Thai investors may not be allowed to invest in Vietnam or other regional markets, there are country-specific funds offered by companies such as Finansa Asset Management. Other than this, it's possible to use proxies by depositing a sum equivalent to five or 10 billion baht in a Vietnamese bank and then opening an equity trading account, according to some investors who have made the move.

But some fund managers are already warning that the roaring stock market in Vietnam is overvalued and due for a correction. They also say that securities laws in the one-party, communist-ruled country need more clarity.

Analysts told a two-day capital markets conference in Hanoi that intense speculation by foreign and domestic investors, or "hot money", had created an artificial shortage of stocks, Reuters reported.

"At this level, it is not sustainable," said Fiachra MacCana, head of research at Ho Chi Minh City-based Vina Capital investment fund. "This market is overvalued."

The price-to-earnings ratio for most stocks listed on the benchmark Ho Chi Minh City Securities Trading Centre is in the 25-30 times range, compared with the regional average of 18-20 times and about eight times for the Stock Exchange of Thailand.

Government officials and market regulators are concerned about speculators, and want to protect inexperienced local investors.

The Vietnam Index in Ho Chi Minh City is trading at its near all-time highs of 1016 points after hitting a all time high earlier this week of 1,040.7 points. The index breached the 1,000-point resistance level at the close Jan 19 for the first time since the market opened in July 2000.

Last year, the index was one of the fastest-growing in the world with much of the gains coming in the last two months of the year as companies rushed to qualify for tax breaks by listing before year-end.

"If the market were to correct in the next month or two, I would neither be surprised nor disappointed," Mr MacCana said.

But despite the hot flow of funds, the country's rules continues to remain lax and investors have been warned of possible pitfalls. Authorities continue to seek ways to make the system more transparent and have started to issue guidelines for companies to disclose more information to investors.

The head of the State Securities Commission, Vu Bang, has said that companies needed to publish more information to protect investors, and that amendments to the Securities Law passed last year would require businesses to do so.

Fund managers such as Lim Boh Soon, who is associated with the unlisted and state-run Vietcombank, urged the government to issue guidelines on carrying out the law.

"They should be making the structure more clear," he said.

Vietnam, which has a population of 84 million and has recorded annual GDP growth ranging from 7-8% in the past decade, is mostly an agriculture-driven economy, whereby the sector accounts for nearly a quarter of the country's gross domestic product.

Vietnam's GDP for 2005 stood at around $50 billion or about $600 per capita, led by exports such as rice, coffee, tea, rubber and fishery products.

But with the booming economy where banks expect their loan growth for the year to range anywhere between 50% to 80%, investors say the jury is out in the open.

Macquaire in its report said that from its talks with Asia Commercial Bank, one of Vietnam's largest private banks (Standard Chartered is a shareholder), they learned that loan growth of 50% year on year actually leans on the conservative side as there are other bank posting loan growth of 70-80% year on year.

These banks, it said, did not consider the 50% growth in their loan portfolios reckless, pointing to Asia Commercial's sub-1% non-performing loan ratio and its 50% loan-to deposit ratio.

Bangkok Post
Sunday January 28, 2007