High priced stocks

During the first months of the year, steel consumption grew strongly compared to the same period last year due to high demand in export markets and also because of the recovery of the domestic construction industry. Finished steel products and consumption in the first quarter, including for construction steel, pipe steel, and galvanized steel sheet, reached 4.6 million tons, up by 18.2%, and 4.4 million tons, up by 21%, respectively. The biggest increase in export volume was in the galvanized steel sheet sector, while the domestic market promoted the consumption of hot-rolled coil (HRC), construction steel, and steel pipes.

According to Viet Dragon Securities Company (VDSC), recovering construction activity and rising steel prices supported construction steel demand from retailers. Specifically, the construction industry growth reached 5.2% in the first quarter, higher than the growth rate of 4.4% in the same period in 2020. The recovery of construction activities in many countries also helped increase steel export output by 12.3% over the same period in the first months of the year.

Steel enterprises also benefited from the recent high increase in steel prices. Specifically, steel prices surged in March and April with the highest increase up by 45%. According to the Vietnam Steel Association (VSA), the domestic steel supply is not scarce, as the price increases due to strong increase in dependence on production materials in the world. Specifically, the price of iron ore as of early March was over US$ 170 per ton, up by 55% compared to the end of 2020, and double than in the same period last year.

Steel prices are forecast to increase until the end of the third quarter due to scarcity of input materials from China and India. Analysts forecast that the price of standard iron ore could rise to US$ 200 per ton, breaking the record of US$ 194 per ton, set ten years ago. The reason is that steel mills in China are increasing production sharply, despite the government control measures to limit carbon emissions by the steel industry. China’s demand has further tightened the global iron ore market, as the market has not really recovered from the supply shock that occurred two years ago. There is an opinion that iron ore prices may go higher in the short term, even surpassing US$ 200 per ton.

Increase in profits

For steel enterprises, the first three months of the year were successful, especially for downstream flat steel manufacturers, due to strong growth in sales of galvanized steel and steel pipes. Consumption of galvanized steel increased by about 50%, of which export volume increased by 134%. Most of the major manufacturers are operating at full capacity in their galvanizing steel mills, including Hoa Sen Group JSC (HSG), Nam Kim Steel JSC (NKG), SMC Trading Investment JSC (SMC), Hoa Phat Group (HPG), and Tien Len Steel Joint Stock Company (TLH).

The increase in sales volume and selling price has helped steel enterprises to record a sudden increase in profits in the first quarter. For example, HPG became the leading enterprise in terms of profit on the stock market with more than VND 7,000 bn, up three times over the same period. After a long period of difficulties, HSG suddenly joined the group of trillion enterprises, with a profit of VND 1,035 bn, up five times over the same period. NKG and SMC also recorded profit growth, and even TLH increased by 30 times over the same period. Recently, TLH announced business results in April with consolidated profit after tax of VND 115.3 bn, equivalent to VND 116 bn profit in the first quarter.

On the stock market, steel stocks were also leading when many stocks reached historic peak. For example, HPG surpassed the mark of VND 63,000 per share and became the third largest market capitalization stock on the stock market, only after Vingroup (VIC) and Vietcombank (VCB). At this time last year, SMC and HSG were still trading below par, but now they have skyrocketed to around VND 40,000 per share. The most prominent is TLH from just over VND 2,000 per share to more than VND 20,000 per share. Huu Lien Asia Joint Stock Company (HLA), although not yet out of loss, still increased four times, at now VND 200 per share.

Hidden risks

Investors put high expectations on steel stocks because of excellent business results just announced by enterprises. However, this is only a short-term benefit, because if the price of raw material continues to increase, steel enterprises will be at a disadvantage when cheap inventory of raw materials is no longer available. According to a leader in a steel enterprise, the price of raw material increases a number of times, while the price of semi-finished products can only increase by about 50%. Normally, businesses buy raw material for each quarter, but now they have to buy raw material until the fourth quarter. Although the risk is high, businesses must accept buying to ensure continuous production. This shows that steel production is not really as per expectation of investors.

Steel enterprises have to bear the risk of high raw material pricing, as well as face a lot of pressure from management agencies because their production activities cause serious environmental pollution. At the end of April, HPG new steel plant in Dung Quat in Quang Ngai province was put under strict environmental control. According to Mr. Nguyen Hung Thinh, Deputy Director-General of Vietnam Environment Administration, the investigation by authorities determined that the Hoa Phat Dung Quat Steel Factory was causing environmental pollution since the beginning of 2021. It is worth mentioning that this project is being promoted by HPG using advanced, modern, and green technology, producing coke coal by dry coke stamping technology, completely recovering heat and emissions, and making full use of by-products to generate electricity. The entire production water source is also used for circulation, and not discharged into the environment.

The high price of steel also has a negative impact on the economy. According to a construction contractor, the increase in steel prices affects signed contracts, causing the estimated budget to exceed, leading to loss. Although the investor knows the difficulties the contractor is facing, it is difficult to accept the extension of construction schedule, because they are also legally bound on the progress of the handover and the selling price according to the contract with the customer. This situation, if prolonged, will have negative consequences for the economy. The State needs to consider limiting export of raw materials to ensure supply for the market. In particular, it is necessary to have a regulatory policy on the ceiling price bracket for raw materials, to avoid the current unusual and unpredictable increase in steel prices.

SCIC will divest almost a hundred SOEs this year including some of the biggest names in the market, Photo: Le Toan

State Capital Investment Corporation (SCIC) has unveiled its divestment plan for 88 state-owned enterprises (SOEs) in 2021, including 31 listed companies. A big name topping the list is Saigon Beer-Alcohol-Beverage Corporation (SABECO) with a charter capital of just over $277 million, of which SCIC owns 36 per cent.

Meanwhile, FPT has a charter capital of $337.4 million, of which SCIC holds 6 per cent. Other companies include Song Da Corporation (SCIC owns 99.79 per cent) and Vietnam National Textile and Garment Group (SCIC owns 53.49 per cent), to name a few.

The lengthy divestment process has deterred investors’ appetite. SCIC has held auctions several times for 6 per cent ownership at FPT but there were no investors to participate due to complex and strict procedures. However, the shares increased to around VND95,000 ($4.10) apiece as of June 1 – a relatively high price for investors at the moment.

In another case, a sharp rise in MSB shares (nearly double the starting price that the Debt and Asset Trading Corporation applied at the end of last year) has also posed challenges for foreign financiers.

SCIC admitted not all of the sales could reap benefits, as only a few SOEs are proving lucrative to investors. As SCIC only holds a minority stake, it is impossible to have an influential impact in management if sales are executed successfully, which make such auctions less appealing to buyers.

However, the mechanism for non-voting depository receipts (NVDRs) – one of the most effective ways to entice foreign capital into Vietnam – is still stuck in the mud.

While waiting for NVDRs, foreign investors, particularly ones who wish to buy shares in listed SOEs, must purchase from another non-national at a price which will typically be 7-15 per cent above the prevailing listed price, according to VinaCapital’s calculation.

This dilemma also exacerbates roadblocks for international funds to expand their footprint in Vietnam, thus hampering state capital divestment pace. In a broader context, lack of foreign ownership easing conditions also thwarts Vietnam’s equity market to be upgraded to emerging status.

Sticking blocks

Le Song Lai, deputy general director of SCIC, said that long-awaiting guidance for Decree No.140/2020/ND-CP issued last November on changes to the legal framework covering the divestment of SOE capital in private enterprises have paralysed SCIC’s divestment activities since the beginning of this year.

Thus far, the regulatory obstacles have seriously hampered state divestment, making it lag behind stock market growth momentum.

Seck Yee Chung, partner at Baker McKenzie Vietnam, told VIR that it is interesting and encouraging to see SCIC announce its plan to divest from the 88 companies. It continues the government’s long-standing agenda to reduce state holdings in a whole raft of originally state-owned and presently equitised companies.

In this regard, peak excitement was last reached in 2017 with ThaiBev’s majority stake acquisition in SABECO. Since then, no divestment has generated the same amount of attention and eye-catching deal size, simply because no similarly-sized companies have been put up for investors since. In the meantime the government, various stakeholders, and investors at large continue to monitor the outcomes and developments of the landmark deal.

With the onset of the pandemic in early 2020 came new uncertainty in the market but SCIC maintained its divestment plans for the year. In parallel, various equitised companies also had their state holding transferred to SCIC – including SABECO, where the state holding was originally by way of ownership of the Ministry of Industry and Trade.

“Again, these are indications that the government is staying the course on state divestments, even while recognising and addressing the challenges,” Chung added. “The companies in the new 2021 list are diverse in terms of size and sector. It has some very well-known names, like SABECO, FPT, and Bao Viet Group. However, there are also many companies that have considerably smaller book sizes. At this point, whilst this news will generate interest, it is too early to tell to what extent there will be landmarks deals created.”

According to the latest report by the Finance and Budget Committee sent to the National Assembly Standing Committee, only 27.3 per cent of the divestment plan in 2020 was fulfilled with 89 SOEs yet to be equitised as of last December. The coordination between the owner’s representative agency and local authorities on disposition of public property remained sluggish.

The committee proposed the government to accelerate the process of divestment, equitisation of state capital, and rearrangement of SOEs in production and business fields where non-state economic sectors operate more efficiently.

Feasible solutions

On May 26, the prime minister issued Circular No.36/2021/TT-BTC on guiding a number of contents on state capital investment, management and use of capital and assets at SOEs as prescribed in various decrees over the past five years.

Circular 36 guides many provisions, of which the most important one is the guidance on determining enterprise value based on their cultural and historical values.

Circular 36 is expected to take effect from July 10 this year. Thus, SCIC can start execute some divestment deals, the corporation said.

Thus, investors can lay their hopes on an accelerating divestment pace in the second half of this year, which is a main catalyst to boosting the domestic stock market’s synergy.

In the same vein, analysts at Mirae Asset Securities said that following the successful earnings season, the domestic stock market is expected to extend its further rise within the range of 1,130-1,480 points, with the base-case target of 1,300 points.

“Among them, one of the market’s main drivers is SOE privatisation and a wave of bank initial public offerings or transfers to the main bourse. Other factors include the government’s commitment to controlling the pandemic, the rollout of vaccinations, buoyant market liquidity, accelerated credit growth combined with low interest rates, and others,” Mirae Asset Securities highlighted.

In order to create significant investor interest and larger-sized deals, Chung from Baker McKenzie believed that the company would need to be a market leader and a sizable business to begin with. Meanwhile, the state would also need to be prepared to divest a majority stake so as to essentially give the new investor at least simple majority control. This also means that investors will be looking out to see if there any foreign ownership caps for these companies.

In terms of legal framework, Vietnam has new investment, enterprise, and securities laws that took effect in January, as well as a more robust merger control regime that took effect from around mid-2020. This means that state divestments in 2021 will put to test these new laws, regulations, and procedures, according to Chung.

On the upside, he said that there is more leeway under the new laws under which foreign ownership may go above the 49 per cent cap that was imposed on all public companies under previous laws. In addition, there is no longer a legal requirement for a shareholder to hold shares for at least six months before being allowed to nominate a board of management member.

“However, the merger control rules are much more encompassing and it is likely that any majority acquisition, and the parties and company involved, will meet the notification thresholds and will trigger merger filing. The preparation, application, and review process can be time-consuming – especially if the target is a market leader,” he added.

In 2021, the divestment of SOEs is expected to generate around $1.73 billion. Dang Quyet Tien, director of the Corporate Finance Department under the Ministry of Finance, said that the implementation of state divestment and equitisation this year depends on the control of the pandemic. If it continues to cause major disruption, it will be difficult to organise the bidding auction for divestment. On the other hand, the result of divestment depends on movements in the stock market.

“Hopefully in the second half of this year, the progress of state divestment and equitisation will pick up thanks to a more open valuation of enterprises, attaching responsibility to the valuation organisation. Besides that, the auction regulation is more in line with the market mechanism, making auction activities more attractive to investors,” he added.

Plans of construction costs fall through

In flood-hit regions in the Central of Vietnam, local people have been building tens of thousands of permanent houses to withstand storms and floods. However, the price of construction materials, such as iron and steel, bricks, and cement, and labor prices soared too high, causing a wide gap in the estimates of the housing construction costs.

While clearing the pile of building materials next to her unfinished house, Mrs. Hoang Thi Tinh, 42, a resident in Ky Nam Commune in Ky Anh Town of Ha Tinh Province, said that she planned to spend VND1 billion on building a two-story house with three bedrooms and a roof, not including interior furniture. However, the price of construction materials and labor costs jumped by 40-45 percent, making everything more expensive. After recalculating, now she can only afford to finish the house with plastering instead of painting it. The roof must also be left until she has money to complete it. The investment costs of her house have increased by VND300 million, but it has not finished yet.

After many years of working and accumulating, in early 2021, Mr. Nguyen Van Hoa, a resident in Cat Tai Commune in Phu Cat District of Binh Dinh Province, started building his house with an estimated cost of VND500 million. However, the price of building materials escalated rapidly, causing all of his plans to fail. “Steel prices rose too fast, so our plans failed. Now the costs have surged to nearly VND100 million, it is very difficult for people who do not have much money,” said Mr. Hoa.

In Binh Dinh province, many enterprises are crying because the price of construction materials, especially steel, has simultaneously increased. According to research, steel prices have galloped by 40-50 percent. From VND12,00 per kg in 2020, up to now, steel coil has risen to VND18,000-VND20,000 per kg. According to the Department of Construction of Binh Dinh Province, the high steel prices have had a great impact on local projects and works. This department acknowledged that steel prices in the second quarter of this year surged suddenly, nearing the peak of the steel crisis that occurred in 2008.

A representative of KingHome Architecture and Construction Co., Ltd in Quy Nhon City of Binh Dinh Province said that from the middle of the end of 2020, the company had signed over ten turnkey contracts for customers with the unit prices of 2020, applicable in 2021. However, everything unexpectedly hiked, making the company unable to handle and face many difficulties, especially during the pandemic.

Finding ways to remove difficulties

According to Mr. Le Anh Son, Deputy Director of the Department of Construction of Binh Dinh Province, the unit has sent a document to the Ministry of Construction, reporting the impact of steel price fluctuations on local construction activities. The strongest impact is on projects using public investment capital, as when steel prices climb, the construction value and total investment of these works increase correspondingly. The costs for agricultural projects, technical infrastructure, and transportation edged up by 2-4 percent, making the total investment cost 2-3 percent higher. Especially, the construction costs of roads and bridges rose by over 10 percent, so the total investment costs increased by nearly 7 percent; those of civil works went up by nearly 11 percent, so total investment added up by nearly 9 percent. These two types of construction works exceed the provisioning costs for the maximum slippage factor of 5 percent.

The Department of Construction of Binh Dinh Province proposed the Ministry of Construction to soon issue the guide on the organization of construction works, contributing to ensuring construction progress and limiting the impact of rising building material prices. In addition, the ministry should provide specific guidance on the adjustment of contract prices for projects signed in the form of package contracts and fixed unit price contracts. In the coming time, the State needs to issue a policy to guide price compensation for construction materials with a sudden price increase in the second quarter of this year and have a macro regulatory policy to stabilize the price of construction materials in the coming time.

Mr. Hoang Minh Thai, Deputy Director of the Department of Construction of Quang Binh Province, said that the price of construction materials has been fairly high, with the sudden rise in steel prices affecting public investment in particular and construction investment in general. The rising construction material price might cause the investment level to increase or some contractors to fail to perform their contracts. Currently, the department is updating construction material prices in the province to promptly announce once a month for organizations and individuals to reference and apply.

According to Mr. Thai, the Department of Construction of Quang Binh Province will continue to monitor, survey, and announce the original price of construction materials in the province in accordance with market price movements as prescribed. The department will carefully check the price announcements to avoid the situation that some organizations and individuals take advantage of the price increase of some construction materials to raise their prices while there is not enough basis for the price increase. The department will refuse to announce the original construction material prices of organizations and individuals if the notices of price increase are not appropriate.

The NovaWorld Phan Thiet entertainment and tourism complex covering 1,000ha in Binh Thuan

According to experienced investors, property stocks of companies mainly in the South have fared well since the beginning of this year. The companies, which have available land bank as well as high inventory of completed and unfinished projects, are benefiting from the rising demand and growing supply scarcity. The companies enjoy very favourable conditions in the midst of low interest rate and more cash flows going into securities.

More property companies in the South are developing self-contained urban complexes with clear segment targets. In particular, the companies with clean land fund, good price, and extensive experience are starting to make profits in this period. As a result, many property stocks like NVL (Novaland), NLG (Nam Long Group), KDH (Khang Dien House), AGG (An Gia Group), and IJC (Becamex IJC) are attracting investors.

Take NVL for example – for several years, little attention was paid to the ticker as the developer was in the beginning phase of developing large-scale projects. However, the company recently has announced its plan to accelerate the development process, which will increase its profits in the next three years. This has led to NVL’s rising share prices.

Closing the session on May 7, NVL share price was trading at VND135,800 ($5.90), a strong increase since the beginning of the year. It brings the market capitalisation of NVL to VND145.68 trillion ($6.33 billion), maintaining its position as the second-largest listed real estate company in Vietnam. Over the past years, the price of NVL shares fluctuated above the level of VND60,000 ($2.61).

NVL is one of the large-cap stocks with strong momentum in April. It became the stock that accounted for the ninth-largest proportion in the portfolio of Vietnam Enterprise Investment Limited (VEIL), with an investment value of about $82 million. Also, foreign investors net bought nearly VND1.4 trillion ($60.87 million) of NVL shares in 49 out of nearly 70 trading sessions during the first four months of the year.

On May 12, the Board of Directors also announced a plan to distribute bonus shares to shareholders at the ratio of 555:198. It is expected to issue nearly 386 million shares this time. This bonus share issuance plan has been planned and submitted by Novaland to shareholders for the past two years. With this bonus plan, it is expected that NVL’s liquidity will increase sharply when its share has an “attractive” price range in the market. This is also the reason that many institutional and individual investors are weighing the opportunity to increase ownership of NVL because the room for price increase is very large.

In the first quarter of 2021, NVL’s sales grew by 152 per cent compared with last year’s period, bringing the total value of its delivered products to $5.3 billion. The group will accelerate the process of three key projects, including NovaWorld Ho Tram (Ba Ria-Vung Tau), NovaWorld Phan Thiet (Binh Thuan), and Aqua City (Dong Nai) to record its revenue in 2021-2023 to achieve its revenue targets, five years earlier than the original plan of 2028. It is projected that the total profit from three projects can reach $2 billion based on the charter capital of VND10.7 trillion ($465.22 million). The figure is much higher than the estimates in previous reports.

As of the first quarter of 2021, NVL’s land bank has risen to 5,400 hectares from 4,894ha at the end of 2020. The funds are located along the key national infrastructure projects with gross development value of $45 billion. NVL maintains its position as Vietnam’s second-largest land bank among listed property developers in the country.

The company aims to increase its land funds by another 10,000ha by 2030 in the south-central region such as Dong Nai, Binh Thuan, Ninh Thuan, Khanh Hoa, Phu Yen, and Binh Dinh. Rather than develop separate projects, NVL will develop complexes in the funds with infrastructure facilities and in line with local and regional economies.

Strong cash flows into NLG, KDH, and AGG

Along with NVL, other stocks like NLG, KDH, and AGG are offered at a good price and attracting cash flows in the market. KDH rallied 19 per cent in the past month with high liquidity over 6.4 million shares per trading session. NLG increased by 8 per cent in the past week with a volume of 4.1 million shares per trading session. Some securities firms predict it is possible to upsize about 24 per cent from the current price range. Meanwhile, AGG posted a slow but steady price increase, more than 29 per cent in the first quarter, and the rise is continuing to go to new heights.

There are strong grounds for the price increase among property firms based on their professional business activities and the potential of the land banks.

Specifically, in 2021, KDH continues its site clearance efforts and gradually complete legal procedures for existing projects in Thu Duc City (formerly districts 2 and 9), Binh Chanh and Binh Tan to prepare for development in the coming years.

In addition, the company plans to implement three projects, including a 4.3ha villa townhouse complex in Phu Huu ward and a 5.7ha villa townhouse project in Binh Trung Dong ward, Thu Duc city. Another development is an apartment project at 158 An Duong Vuong in Binh Tan district.

Regarding the business plan, KDH expects to generate VND4.8 trillion ($208.7 million) in revenue and VND1.2 trillion ($52.17 million) in after-tax profits, up 6 and 4 per cent, respectively, compared to 2020. The dividend is expected to be around 10 per cent.

NLG also make a breakthrough in the market this week thanks to its impressive business results in the first quarter of the year. In particular, the company’s first-quarter profit mainly came from the revaluation from the increase in the ownership ratio at Dong Nai Waterfront City LLC at VND429 billion ($18.65 million). NLG acquired 30 per cent of the project from Keppel Land. In general, its after-tax profit reached VND365 billion ($15.87 million) in the first quarter, three times over the same period and fulfilling 32 per cent of the year’s target.

NLG also recorded nearly VND3.2 trillion ($139.13 million) including short-term prepayment of VND2.41 trillion ($104.78 million) and long-term unrealised revenue of VND767 billion ($33.35 million).

With the ownership increase to 65 per cent at Dong Nai Waterfront City LLC, NLG added to an additional 170ha to its land bank, which can accommodate approximately 7,000 products. Thanks to the advantage of prime location and urban area development trends in recent years, the securities company expects this will be a key project bringing large cash flow for NLG in 2021-2025.

Meanwhile, AGG currently owns more than 32.4ha of undeveloped land in the south of ​​Ho Chi Minh City, corresponding to about 15,000 products. In 2021, AGG plans to spend large capital to acquire a land bank of about 30-50ha in Binh Duong, corresponding to about 6,000 high-rise and low-rise products. Binh Duong is also one of the key markets of AGG, when the company is deploying The Standard Binh Duong with low-rise housing products. This project also marks AGG’s vision to become a developer of complete urban areas in the next 3-5 years.

With a cautious development strategy, AGG is always looking for land funds that have completed legal procedures, thereby making it easy for AGG to find investment capital as well as quickly deploying project construction.

In 2021, AGG set a net revenue target of VND3.6 trillion ($156.5 million), double the previous year. Meanwhile, its after-tax profit will reach VND500 billion ($21.74 million), up 21 per cent. During the year, AGG will complete the sale, construction and handover of products of current trading projects Sky89 (Ho Chi Minh City) and The Wave (Vung Tau city). The company is launching new projects such as Westgate in Ho Chi Minh City, The Standard Binh Duong as wells another 3,500-unit project in Binh Duong.