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Cablegate: Vietnam's Stock Market: A View From the Floor Looking Up

This record is a partial extract of the original cable. The full text of the original cable is not available.



State for EAP/BCLTV; State Please Pass to USTR EBryan
USDOC for 6500 and 4431/MAC/AP/OPB/VLC/HPPHO
Treasury pass to IA/ASIA

E.O. 12958: N/A

REF: A) 02 HCMC 1213 B) Hanoi 0719

1. Vietnam's stock market has stirred recently. Since last fall,
the market index has more than doubled. This comes, however,
after a two-and-a-half year decline, during which the HCMC stock
market lost more than three-fourths of its value. Much of the
recent run up in prices is attributed to the loosening of
restrictions on foreign investors in the market, which may have
also stimulated local demand. Still the market is tiny - with an
overall capitalization of about US$240 million and only 23 listed
companies. There are only 106 registered foreign investors. With
liberalization of investment caps on foreigners, new investment
funds entering the market, and promises of a rash of new listings,
some government officials and local analysts have high hopes for
rising values and a developing market. The "smart money" from
wealthy private sector businesspeople is still sitting on the
sidelines, however. They prefer to invest in unlisted firms or
their own businesses where, they believe, potential profits are
much higher. They do not see the Stock Market as a viable
investment vehicle for a few more years. On the contrary: Beware
the local stock market, they say. End summary.

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Bull Market or Just Plain Bull?
2. With an overall market capitalization of only about US$240
million and 23 listed companies, the Ho Chi Minh City Stock Market
has been a huge disappointment. After an initial flurry of
speculative increases when the stock index peaked at 571 points in
early summer 2001, stock prices had been on a grim march to the
bottom. The index reached a low of 130 last autumn. Since
hitting bottom, however, the market index has more than doubled to
over 260 points.

3. The Ho Chi Minh City Stock Trading Center (HSTC) opened its
doors in July 2000 as Vietnam's first and only stock market. It
was a modest start with only two companies listed on the Vietnam
Index, worth a combined US$31.5 million (Ref A). In this rapidly
developing economy, the bourse has been something of a nonentity.
It has thus far failed to draw significant numbers of investors or
listed companies. Even today after the dramatic run up in values,
there are fewer than 16,000 Vietnamese investors, mostly inactive,
and only 106 registered foreign investors. The number of listed
companies has grown slowly to the current 23 companies with
overall capitalization of about US$240 million. The pace of new
listings has been glacial -- 4 new listings since November 2002.

4. Besides being the venue for trading listed equities, HSTC is
also the nation's official bond-trading center. The bond market
in Vietnam, now valued at about US$800 million, is currently
limited to government bonds. These bonds, however, are thinly
traded on the exchange, as banks, insurance companies, and other
long-term investors typically hold bonds from the initial auction
to maturity.

5. The lack of growth in the stock market contrasts dramatically
with what has happened with other investments here. Local
investors have been snapping up shares in companies in the largely
unregulated over-the-counter market. No one seems to know for
sure, but estimates range from one thousand to fifteen hundred
companies with a value of about US$1.5 billion. Buying and
selling in this market offers none of the relative transparency
and protection of trading listed companies on the stock market.
These stocks are typically sold by word of mouth, making it
difficult to know a true "market price." Nonetheless, local
investors apparently prefer the grey market where they have more
investment choices and where they can buy into firms that they
feel they understand, but which are not necessarily ready to make
all of the disclosures required for listed companies. Investors
in this market are not typically stock traders, but have followed
a "buy and hold" strategy. At the same time, many of Vietnam's
wealthy invest in their own businesses or the businesses of their
friends. And at least until recently, property was also seen as a
good, safe investment, and thus real estate prices, especially in
Vietnam's large cities, have risen to speculative levels.

No Irrational Exuberance, But Things are Looking Up
--------------------------------------------- ------
6. There are a variety of stimuli that may have triggered the
recent price rise. Foremost may be increased foreign buying.
Until last summer, by law foreigners were limited to an aggregate
20 percent ownership of any given stock and 7 percent ownership by
any single foreign owner. Last summer, however, the market
regulator State Securities Commission (SSC) raised the bar to 30
percent aggregate foreign ownership in any one stock and removed
the 7 percent limit. Foreigners once again began buying. Already
5 of the 23 listed companies have reached the 30 percent cap. One
expat working in the local securities industry stated his view
that a few actively trading foreigners triggered the run up, which
was relatively easy to do with such a small market. This
attracted other foreign investors and in turn even stimulated
local Vietnamese investors, who started buying when they saw the
market begin to rise and foreigners returning to the market. It
is not clear how much is left of the current market rally, but two
foreigners active in the securities industry here claim there is
still a strong upside potential in the market.

7. Much of the recent growth generated by foreign investors has
come by way of investment funds taking larger stakes in the local
market. Dragon Capital, a U.K. based investment bank, which has
been working in Vietnam for the past decade, continues to buy
listed and unlisted stocks for its VEIL (Vietnam Enterprise
Investments Limited) Fund on the Irish stock exchange. Dragon
Capital is currently the largest single investor in the market
outside of the GVN. Phan Xi Pan Investment Fund, named after the
Vietnam's highest mountain peak, also listed on the Irish
exchange, has recently invested US$5 million and is planning to
invest another US$5 million soon. The German fund DEG is actively
buying shares on the exchange and the Swiss fund FMO has expressed
an interest in entering the market. The foreign funds are joined
by the locally based VietFund, a partnership of Dragon Capital and
Sacom Bank, which is preparing to raise and invest 250 billion VND
(about US$16 million) of registered capital in the exchange. This
fund, which will list itself on the exchange and trade as a closed-
end fund, will be open to both foreign and Vietnamese investors.

8. Another factor in this run up may have been that stock prices
fell so low that bottom feeders also began to bite. The average
P/E ratio for listed firms, which reached 40 at its peak, was well
in the single digits when the run up started, and average
dividends were in the double digits. At the same time, other
places to put away money were looking increasingly less
attractive. Bank deposit rates were near historic lows, while
property, a traditional investment in this part of the world, had
reached all-time highs in Vietnam's major cities. Gold prices had
also risen considerably.

9. Credit may also go to the Vietnamese Government, which has
renewed its commitment to creating new listings on the market.
This was reinforced by the recent decision to move the SSC, which
had been under the Office of the Prime Minister, to the Ministry
of Finance (ref B). The stock index rose after this decision
became public. Local press reports as well as our contacts in the
securities industry believe that with the backing of the ministry,
the SSC will draw more state-owned enterprises (SOEs) undergoing
`equitization' to list shares on the exchange. One such company
listed just this week. The government may also be closer to
allowing foreign-invested enterprises (FIEs) to list on the
market. According to an SSC official speaking at an HCMC seminar
on the stock market, 20 FIEs would be allowed to list on the
market as part of a pilot program.

10. The banking sector also offers potential fuel for the
market's continued rise. At least three leading joint stock banks
(Sacom Bank, Asia Commercial Bank, and East Asia Bank) have begun
the application process to list their shares, currently traded
over the counter, on the exchange. Entry of even one of these
banks would significantly increase the market's capitalization.
ACB hopes that it will be able to list this year or next. The
bank estimates that their market capitalization alone would be in
the range of US$90 million.

But Will the Momentum Continue?
11. The local securities industry and even the government is
actively touting the stock market and there does seem to be some
interest. Earlier this month, the HCMC government and the SSC
hosted a seminar on "Opportunities for Foreign Investors:
Securities and the Stock Market." The seminar drew about 240
participants. About half the attendees were foreigners, the
majority from Asia, while the remainder were representatives from
listed companies and a few local investors. Foreign buyers will
probably continue to provide support to the market as investment
funds expand and new funds are established, especially if good
companies get listed. Five of the 23 listed companies, however,
have already reached their maximum foreign holding level of 30

12. At the seminar, a theme hit on repeatedly was the low profile
of the listed companies. They are not big name companies, even by
Vietnamese standards. A Western financial reporter quoting
conversations he has had with overseas investors said, "We've
never heard of these companies," and went on to ask when investors
would see flagship companies on the exchange -- like Vietnam
Airlines and Vinamilk. Officials waffled on the big names and
merely said that many SOEs were slated for equitization and each
would be considered for listing. But the First Vice Chairman of
the HCMC People's Committee quipped that although the city was
working to equitize SOEs, he thought some would still be around in
his granddaughter's day. It may also take some time before the
market grows large enough to be able to absorb a company the size
of Vietnam Airlines. Investors may have to wait for the market to
grow a bit before they get a shot at the big names.

Smart Money Not Buying
13. While analysts and government officials are touting the stock
market, the "smart money" remains wary. ConGenoffs asked several
local business contacts, each owning one or more companies and
wealthy by any international standard, if they had or were
planning to invest in the stock market. Their across-the-board
response, besides grim chuckles, was "No way." Each pointed out
the lack of dynamic companies on the exchange. Listed enterprises
are not business powerhouses and savvy investors know it. All but
one of the listed companies are former SOEs, and the government
still retains a large stake in most. Vietnam's most profitable
and efficient firms are not on the exchange. One contact said,
"The day I see ACB (Asia Commercial Bank) go to the stock exchange
I will go." (Note: ACB is trying to list and believes it will be
able to do so this year or the next. End note)

14. Some businessmen were also cautious about companies that
might be listing in the future. "Be careful, because many of the
companies which are seeking to list in the near future are doing
so not to raise capital to invest in the company, but to be able
to sell out at an attractive price." These business people were
particularly concerned about some of the banks and FIEs that were
interested in listing.

15. ConGen contacts bemoaned the lack of credible and independent
information on listed companies and their industries. There is no
Wall Street Journal or Financial Times here, one pointed out.
Without an unbiased third party to report on and analyze these
companies, it is difficult to get the true picture of the listed
firms, even with the stock market's disclosure requirements.
These businessmen operate in a world where personal contacts and
inside knowledge are key to success. The bottom line - when it
comes to companies they don't know, there is no source of
information they can trust.

16. So, if they aren't investing in the market, who is? These
contacts described current Vietnamese stock market investors as
small players -- people without enough money or access to
participate in other arenas. In their view, the stock market is
for people who cannot afford HCMC's speculative real estate game,
people who do not have the network of contacts to enable them to
sufficiently vet grey market offerings, or individuals whose
assets are not enough to buy into unlisted companies. Basically,
they do not see the HSTC as a place for serious investors.

17. In these businessmen's view, there is limited room for quick
growth as the SSC caps the daily price movement and limits trading
hours. Two ConGen contacts likened the market to gambling, but
without the possibility of a big win. One also complained that he
would be required to pay full market value of the shares up front
as no margin trading is permitted -- in essence tying up his money
and keeping it from better uses.

18. One businessman did admit that when the HSTC opened he
enthusiastically dove right in. He bought listed stocks and even
set up a division in his company to track and analyze the market.
But by the HSTC's second anniversary he "hated it." He described
the frustrations of investing in what he called "not a real stock
market," unlike the Singapore market where he also invested.
After just over two years in the market he sold out with a small
loss. He has no intention to return.

19. These businessmen are the movers and shakers in the local
economy. They have a proven ability to make money and a
comprehensive understanding of how things work here. Up to now,
they remain unconvinced. Their estimates of when the stock market
would be a viable investment vehicle worthy of their consideration
ranged from 3-10 years,

Smart Money Not Listing
20. Our contacts clearly do not trade on the exchange, but would
they ever consider listing their companies to raise capital? From
their responses, that is even less likely. As well-connected
businesspeople, if they need to raise money for a business project
they simply pass the word through their network of contacts and
associates. One contact had just launched a new company and
claimed he had no shortage of people willing to buy stakes worth 1
or 2 billion VND (about US$63-127,000). They are also actively
courted by a variety of local banks.

21. Each of these local tycoons also said they were unwilling or
unable to meet the disclosure requirements mandated by the SSC.
It was too much of a hassle and would open them to scrutiny,
perhaps government scrutiny, which they would prefer to avoid.
One contact also expressed the worry that, if listed, his company
was open to slander in the press that could damage the share
value. He seemed more worried about the inability of the firm to
defend itself against false allegations in the press. Even if the
allegations were untrue, he said, he had no real recourse under
current Vietnamese law.

22. Increased foreign involvement seems to be driving the recent
stock market growth. The advocates touting the market, with
investment firms and brokerages leading the charge, point to
Vietnam's overall economic growth and future potential and then
try to draw a connection from that to the stock market. They
skate around the fact that the listed companies are not leading
this economic charge. Vietnam is growing and the stock market is
one of few vehicles for foreigners to take a stake in that growth.
Foreign investors lack the all-important network of contacts and
do not have access to most stocks traded off the exchange. So,
unless they want to open a factory or take a large stake in a
joint venture, the HSTC is the only game in town. The current
caps on foreign ownership coupled with the dearth of listings
means room for foreign investment is limited.

23. The GVN needs to speed up the pace of new listings and
implement the plan for listing joint venture firms -- a plan that
has been under review for over 18 months. These moves will
continue to make room for additional foreign investment.
Meanwhile, the lack of flagship companies, including banks, and
the perceived opportunity cost of stock market investments will
continue to drive away top tier Vietnamese investors who, unlike
their foreign counterparts, have a wide range of other investment
options in Vietnam. They still advise avoiding Vietnam's stock


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