Towards the end of June the Vietnamese government announced it had officially lifted its limit on foreign holdings in Vietnamese listed companies. The 26 June announcement significantly removes the investment restriction in stock exchange-listed public companies.
In practical terms, the new position means that instead of a limit of 49 percent for all foreign holdings in all stock exchange-listed firms, the levels will be determined on a sector by sector basis to determine the limit levels, although there is no cap in companies which are excluded from conditional business lines.
According to a press release issued by leading Vietnamese investment management and real estate development group Vinacapital.com, the change is ‘a game-changer, [bringing] Vietnam closer to fulfilling its WTO [World Trade Organisation] commitments, and may serve as a catalyst for ascension to MSCI’s Emerging Market Index.’[i]
According to VinaCapital the ‘foreign ownership limits on listed companies have been a major hurdle to capital markets, deterring many foreign investors. The limits have effectively capped the level of foreign participation and depressed valuations…’ [ii]
According to the press release from VinaCapital, Vietnam has ‘historically suffered from a liquidity discount compared to its regional peers. Measured on a simple PE basis, the market currently trades at 13 times trailing PE, with a liquidity discount in recent years of between 25 and 35 percent. With the market opened, a greater level of participation from both local and foreign investors is expected.’ [iii]
The Emerging Market Index attracts about US$1.4 trillion of investment and if Vietnam is to be included on it, as would appear likely once the new regulations are fully in place, VinaCapital suggests this could add a potential 15 to 20 percent bonus to investors.
Vietnam’s market capitalization is currently US$60 billion with daily trading volumes of around US$100 million. Due to the previous limits, foreign participation trailed below 15 percent with 26 companies currently at the foreign room limit. Those companies represent 17 percent of total market capitalization. ‘This lack of market depth…has featured as predominant reasons for market volatility. Greater foreign investment and the depth created by new listings will aid in reducing this volatility.’ [iv]
The Vietnamese Minister of Finance, Dinh Tien Dung, said that once the government decree takes effect, “it is hopeful that foreign investors will boost their activities in the Vietnamese securities market.”
Additionally, overseas investors can invest unlimited amounts in government bonds, securities investment fund certificates, non-voting shares in public companies, derivatives and depository receipts.
The sectors the Vietnam government considers strategic and will not permit any foreign domination centre around banking, airlines, defence industries and telecommunications.
Vietnam making great strides in the IT sector
The government announcement on foreign ownership limits comes at the perfect time for the country’s IT sector. Vietnam is aiming to become an attractive IT outsourcing destination and a conference will be held in Ho Chi Minh City from 14 to 16 October promoting this.
The Vietnam IT Outsourcing Conference (VNITO 2015) is expected to attract over 150 multinational companies from 20 nations as well as some 200 outsourcing companies and the 20 leading IT universities in Vietnam. They will be given their chance to present Vietnam as a major IT destination.
Vietnam already possesses a number of IT outsourcing advantages, among them the fact that there are a large number of high-tech companies with factories in the country already. These include Canon, Foxcon, Fujitsu, Intel, LG, Panasonic, Renesas, and Samsung.
Other major international companies, including Boeing, Cisco, CSC, HP, NEC, and Toshiba have also conducted software research and development activitiesin Vietnam. [v]
The government provides incentives for investment in hi-tech zones while software outsourcing costs are competitive.
Global real estate adviser Cushman & Wakefield presently rank Vietnam as the best in the world in their business process outsourcing location index while Tholons, a services globalisation and investment advisory firm, currently rates Ho Chi Minh City at 18th and Hanoi not far behind it at 20th in its list of the top 100 outsourcing destinations in the world.
Ho Chi Minh City launched its Quang Trung Software City (QTSC) project back in 2001 and has seen the government invest the equivalent of 250 billion dong. It is currently the most successful IT project in the country with 33 Vietnamese and overseas investors having stumped up some six trillion dong in capital.
According to Lam Nguyen Hai Long, the deputy director of QTSC, the centre hosts nearly 120 IT firms, and four of these are among the world’s leaders: Hewlett-Packard, IBM, Hitachi, and KDDI (from Japan).
In the first quarter of this year, the combined software sales of these IT firms hit 800 billion dong (around US$37 million), of which exports contributed more than two-thirds.
Now Hanoi aims to use IT as its own economic driver, with the local government planning a massive investment in the Long Bien district and submitting its plans for approval from the central government.
The project will cover 43 hectares and the Hanoi People’s Committee has selected the electronics and infomatic company Hanel as the lead investor.
According to a report issued recently by the local government, some 942 billion dong is expected to be allocated for the development of the infrastructure while an additional 9.5 trillion dong will be required to develop the functional areas nearby. The Long Bien project has a 2019 completion date.
Hanoi has previously invested around 30 billion dong in upgrading the Cau Giay Integrated IT Park while the Hoa Lac Hi-Tech Park, the largest in the nation, is also part of the Hanoi IT landscape. The latter hosts a number of leading Vietnamese telcos, including FPT Corporation, Viettel Group and Hanoi Telecom.
Vietnamese analysts believe the creation of hi-tech and software parks offer a great solution to attracting more foreign investment in the local IT sector.
Now, with the central government having opened its stock market to almost unfettered foreign capital, the stage is well and truly set for Vietnam to become the potential leader of the pack in the Southeast Asian region.
[i] www.vinacapital.com, press release 26 June 2015, page 1
[iv] www.vinacapital.com, press release 26 June 2015, page 2