UBS AG Singapore and Saigon Securities have been selected to advise on the sale of a 3.33% stake in state-owned Vietnam Dairy Products (Vinamilk), the country's most valuable company, according to Vietnam's State Capital Investment Corporation (SCIC). This will be a repeat auction of Vinamilk shares that were left unsold after an attempt in 2016; SCIC intends to offer the shares again this month and realize 6.5-7 trillion dong (around $300 million).

The new advisers replace Morgan Stanley Asia (Singapore), which along with Saigon Securities and VinaCapital Corporate Finance Vietnam advised on the last divestment.

If the sale goes through this time, some 36% of Vinamilk shares will remain in government hands, enabling it to retain its veto.

The Vietnamese government plans to sell a 3.33% stake in Vinamilk, a state-owned company. (Photo by Yumi Kotani)

The plan was to divest 9% of Vinamilk's shares at the last auction. Fraser and Neave in Singapore acquired 5.4% through two subsidiaries that hit the 2.7% individual bidder limit. The deals were worth 144,000 dong apiece ($500 million) -- 7.7% above market price. Fraser and Neave is Vinamilk's largest foreign shareholder with a combined interest now of 18.74%.

Ho Chi Minh City Securities Corp., an equity research company, expects Vinamilk's profit in the first nine months of the year to reach 8.6 trillion dong, up 15% year on year.

"This is a high value asset and we expect to gain experience from each auction," SCIC Chairman Nguyen Duc Chi told the Nikkei Asian Review. He said the divestment needed to be carried out carefully for the state to do well without distorting the stock market. Vinamilk shares closed at 148,500 dong apiece on Monday, down 0.47% on the previous session.

Critical catalyst

Vinamilk's sale is vital to SCIC's overall scheme initiated in 2015 to divest 10 leading state-owned enterprises (SOEs), including Vinamilk, FPT, FPT Telecom, Bao Minh Insurance, Binh Minh Plastic. Another five SOEs were added to the list this year.

The lack of progress and major losses have been variously attributed to regulatory hurdles, mismanagement, wrongdoing and the time needed for the new cabinet to settle in.

The government is looking to speed up and expand privatization this year to ease its tight fiscal situation. Prime Minister Nguyen Xuan Phuc's government inherited an empty treasury in April 2016 with heavy debts and payments in arrears. Official figures released last month indicate Vietnam's national debt has increased to $118 billion, or 61% of gross domestic product in 2015 -- approaching its ceiling of 65%. Some economists argue that the actual figure is much higher once SOE debts guaranteed by the government are factored in.

Vietnam is in urgent need of funds for infrastructure upgrades and improvements to public services if it is to remain on track for its 6.7% growth target this year. There are also external pressures. The overall business structure will require reform to make a free trade agreement with the EU work that is due to be implemented next year.

Authorities have named and shamed SOE executives who missed deadlines and targets. There have been warnings, demotions, salary cuts, fines and criminal charges for infractions that delayed listings.

Last month, the ministry of finance mooted transferring two state breweries Sabeco and Habeco from the industry and trade ministry to SCIC if the ministry failed to put out their sales prospectuses before October. Nothing has been revealed as to what transpired.

Both breweries are listed on the Ho Chi Minh City bourse with market caps of $7.2 billion and $1.3 billion, respectively. The prime minister wants to see complete divestments on the grounds that the government should "not trade beer and milk." He believes these businesses will be run better by the private sector.

Vietnam hopes to restructure and list 137 SOEs by 2020, and to raise around $11 billion for state coffers in the process -- more than 10% of national public debt.

A report by Eurasia Group in September suggests these targets will be hard to achieve. Barriers include a lack of transparency, poor audits, weak management, and ongoing corruption investigations.

Vietnam approved 34 of the 137 SOEs for privatization in the first three quarters of the year, and 44 state companies for the year as a whole. Only 11 have gone through so far, placing considerable pressure on the final quarter. The stock market has meanwhile done well, gaining 20% this year already.

On Saturday, the prime minister chaired a consultative meeting with 14 top private corporations to discuss strengthening the legal system and business environment. The private sector only contributes about 43% to gross national product at present.

In July, the prime minister formed an economic advisory group that includes economists based in France, Japan, Singapore, and the U.S. to propose strategies and assess domestic and global developments.

There has also been a crackdown on corruption. A court in Hanoi last Friday sentenced a former chairman of PetroVietnam to death, and his counterpart at Ocean Bank to life imprisonment, in a major graft case. Other PetroVietnam and bank executives have received heavy sentences in the scandal that has shaken the nation and sunk a rising political star, Dinh La Thang, a former chairman of PetroVietnam. Investigations and prosecutions continue.

Nikkei Asian Review - October 4, 2017