Development of derivatives market to further spur economic growth

Stock Market in Vietnam

For better or worse, stock exchanges tend to provide a good lightning-rod example of the overall health and expected future vibrancy of a country’s business strength. As Vietnam continues to move in the free market direction, the Ministry of Finance has added a further ‘plank’ to the economic floorboards by announcing its intention to have a derivatives market up and running by the end of 2016.

For the past 15 years of its economic development, Vietnam has only operated a standard stocks and bond market, although in recent times it has begun restructuring the whole securities market to make it more transparent as well as attractive to local and overseas investors. [1]

The Hanoi Stock Exchange (HNX) will be tasked with implementing transactions on this new derivatives market with the Vietnam Securities Depository (VSD) controlling clearing and settlement activities.

As well as the two benchmark indices (VN-Index and HNX-Index) both the HNX and the Ho Chi Minh Stock Exchange have created several indices based on the market capitalization of stocks and across diverse industries. These will provide the fundamental underlying assets for derivatives with expansion coming once the market has been in operation for several years.

The State Securities Commission (SSC) will be overseeing the move into the derivatives marketplace. The first part of the move to create this is to set the ground rules for derivatives instrument providers, including determining which securities firms, fund management companies and commercial banks are capable of operating in the field and what parameters they need to stay within.

The SSC also wants to make sure that a derivatives market does not interfere with the continued efficient management of the state. So, the start of the market will see just two fundamental products launched: future contracts derived from stock indices and futures contracts derived from bonds.

As the market gains maturity and strength, so the paradigm can be altered and improved. The expectation is that only around 20 security companies and 20 banks will be in a position to begin trading derivatives but as the overall stock market is restructured this number will almost certainly increase.

Of course, another limiting factor, at least in the early stages, is that derivatives are a new concept to a lot of investors in Vietnam, so customers will need to be educated about the products, looking at both the potential benefits as well risks associated with derivatives.

The SSC believes derivatives will help not only the stock market but also the entire economy, especially when the exchange deploys derivatives products based on other underlying assets. “A number of areas, from mining, import and export, to interest rate and exchange rate operation, will be hedged using derivatives,” said the SSC. [2] 

Successful IPO shows faith in the hotels and tourist market

While the derivatives market is still in the nascent planning phase, the overall stock exchange model is clearly viewed in a positive light, as evidenced by the early August initial public offer (IPO) auction of the 33.9 million shares in the state-run company Thang Long GTC, a unit of the hospitality firm Hanoi Tourist.

The IPO was completely sold, to a value of 363 billion dong. In fact, in an incredible vote of confidence, the shares were oversubscribed by a factor of three, as 18 investors had earlier submitted requests to purchase more than 102.5 million shares in the IPO, while institutional investors were looking to buy almost 68 million units.

While the reference price was set at just 10,600 dong, the highest bidding price reached 31,000 dong. Overall, the average price per share of the auction was 10,724 dong. [3]

Following the IPO, management of Thang Long GTC announced it will sell a 27 percent stake (or the equivalent of 33.2 million shares) to its strategic investor Thung Lung Vua Co Ltd.

Thung Lung Vua owns the Kings Island Golf Resort in Hanoi while its parent company, BRG Group is the operator of the Do Son Seaside Golf Resort, Legend Hill Golf Resort and Hilton Opera Hanoi, among other property projects.

Thang Long GTC itself holds equity in a raft hotels based in Hanoi. These include 30 percent stakes in the Hilton Hanoi Opera and Pan Horizon Hotel and 25 percent of the InterContinental Westlake along with a number of smaller hotels dotted around the capital. The company also has up to 35 percent equity in the Big C Thang Long supermarket and has invested in the office building on No 115 Le Duan Street.

This diversified range of interests and assets helps explain the keenness exhibited by both institutional and general investors in the IPO. Thang Long GTC’s assets as at the end of 2014 were reported at almost 896 billion. However, corporation evaluation under the equitisation plan rated the company’s value at nearly 1.4 trillion dong, with state capital accounting for 1.23 trillion dong.

The company has steadily increased its revenues over the past three years, reaching 266.8 billion dong in 2014, which resulted in a profit of 50.7 billion dong, more than double that of 2013.

The company aims to achieve 79.3 billion dong in profit by 2017 and intends to pay dividends at a rate of 50 percent.

In March this year, the Hanoi Tourist Service Company (Hanoi Toserco), another unit of Hanoi Tourist, also sold out its IPO shares. In that auction, proceeds were 45 percent higher than the reference price.

The state retains a 45 percent holding in both Thang Long GTC and Hanoi Toserco after their IPOs.

[1] http://www.dealstreetasia.com/stories/derivatives-market-lauch-in-2016-will-help-cos-hedge-interest-rate-exchange-rate-ops-in-vietnam-ssc ,accessed 18/8/15

[2] ibid.

[3] www.dealstreetasia.com/stories/vietnam-based-hospitality-firm-thang-long-gtc-launches-ipo-collects-16-7m , accessed 18/8/15