There have been many observations that Vietnamese stocks are overvalued based on a single indicator, the price/earning ratio.
Analysts at the Saigon Securities Inc., a leading local securities company, argue that people should look at a larger picture, not only the P/E, as macro-economic performances are impressive and the growth of listed stocks is healthy.
It may be unnecessary to re-tell the successful story of Vietnam’s stock market in marking its name in the world of investment community. In 2006 only, VN Index grew 146 per cent, while in the first three months this year, the index made another 43 per cent growth. The upward trend is observed more clearly once we graph VN Index movements in the last nine months on Figure 1.
We divide the trend into a period of three phases that we name: period to WTO accession; market expansion; and market correction. For the first two phases to happen, we could think of no other reasons than fundamental changes as the underlying course of the sharp rise.
The first and most important reason is the strength of the country’s political and economic environment. Secondly, the stock market also went through major changes after a strategy paper was devised and the Securities Law came into effect, showing a commitment of the government to develop the market. And finally, for the correction period, we present major drivers that caused the correction.
After its boom from December last year to this March, the market was poised to invite a correction. Investment professionals, both local and foreign, and local authorities had aggressively raised the view that stock prices were overvalued. They got their point.
A simple average P/E for 20 largest cap stocks in both centres, Hanoi and Ho Chi Minh City, results in 54.98 on March 12, 2007; the day when VN Index peaked. More than two weeks later, a close look at other Asian markets reveals a P/E of each market all under 20.
Another factor that has driven the market down further is the expansion of supply side from the IPOs in 2007. The number of shares offered within the first four months was almost equal those offered throughout 2006. In terms of value, from our records of all big IPOs in 2006 and 2007, by ‘big’, we mean any company that offers more than one million shares of face value VND10,000 through a single public offering, we have seen many investors willing to pay VND21 trillion ($1.3 billion), four times larger than they paid for IPOs stock in 2006.
The $1.3 billion, in return, was almost worth two months of trading on the Ho Chi Minh City Trading Centre, given an average daily trading value of $45 million by March 2007. The demand for listed stocks, therefore, was inevitably weakened especially when year-end impressive results, as much as the stock split decision and divident payment policies were all announced.
Apart from the two most direct reasons driving the correction, we also believe that government decisions have helped stir the market in the short term. Never before has the stock market received so much government attention. Scores of decisions have been issued, notably on controlling money flows from banks to their securities arms to finance stock trading and on increasing and empowering the capacity of the State Securities Commission and the two stock trading centres.
However in conclusion, we find no reason to believe the market will see a long-term correction as the valuation by April 24 (Table 2, when VN Index felt to its recent low), looked somehow more reasonable. The main reason for the market to behold is its story of growth as we will present in the following session. We believe that if you invest in the Vietnamese stock market, you are betting on the company’s growth and living in the hope that the market will reward the most patient and faithful investors.
The story of growth
Apart from positive elements in terms of political environment, economic performance and legal framework, the growth of listed firms is a significant factor to influence the Vietnamese stock market’s future.
While tracking the 2007 performance of 20 largest cap stocks, our research team came out with an interesting finding. The years of 2006 and 2007 have been the most favourable years to date to attract capital through the stock market. Never before could companies raise equity that easily. As a result, most companies, particularly our 20 selected companies, have gone through a massive equity issuance. The raise, mathematically, dilutes EPS, even bringing about a negative growth rate of EPS in several cases.
However, looking at the operation sides of sales, net profit margin, net earnings growth, we find out a much healthier picture. The simple average of both sales and net earnings growth comes out at above 56 per cent against those of 2006 while that of net margin in 2007 remains significantly strong at 26.02 per cent.
The two seemingly conflicting points lead us to one possible explanation. The 20 largest cap companies have never been real large caps by any international standard. Starting from a small base and going forward to the current phase, the companies require a lot of growth capital to expand their operations. As a result, considerable potential for raising the valuation of these companies remains, while their share prices do not necessarily reflect their potential value. Therefore, our research team strongly believes that it should be fairer to look at the company growth in terms of sales and net earnings and somehow the net profit margin rather than the current popular method of PE and EPS growth (Table 4).
We observe from Table 4 a decent growing picture from three factors: sales and net earnings growth; and somehow net profit margin. In average, sales in 2007 are to increase by 58.32 per cent. Banking (STB and ACB) and securities (SSI and BVS) sectors boost strongest figures with sales growth of 96.3 per cent, 118.24 per cent, 202.1 per cent and 247 per cent respectively. This year’s earning growth rate in both cases, with or without the two securities firms, accelerates closely with the rate of sales, respectively at 56.56 per cent and 40.2 per cent. For profit margins, we see a slight reduction of nearly 1 per cent which we think mainly from impacts of a higher input cost in 2007.
Our conclusion for the healthy growth of the 20 companies, then, mostly comes from the following points:
*A slower growth rate in 2007 does not mean major changes in the fundamental and the spread between 2006 and 2007 is not as significant as before.
*The growth rate in 2007 itself is still impressive enough. By that, we have to benchmark with S&P 500. In a report from the Business Week magazine in early 2007 on top 50 companies of S&P 500, we find that their normalised three year sales growth reaches 24.82 per cent; and that the pre-tax profit margin stays at 43.6 per cent. To some extent, it could be not so appropriate to compare the growth rate of Vietnam’s 20 largest market cap companies to that of Top 50 S&P 500. However, the benchmarkillustrates that the 20 companies of Vietnam beat the top 50 of S&P 500 in terms of sale growth and not far behind in term of profit margin given adjustment for effective tax rate;
*The year of 2007 still shows huge potential to grow beyond companies’ expectation. Recent trends of listed companies reveal a move toward diversifying into property development and finance, two of the most profitable and booming sectors in the economy. While experts could argue on the wisdom of the diversification over thelong-term, large corporations in the countries still could not afford to miss the currently easy profit in the two sectors.