IPO at any cost might risk market manipulation

Throughout the SOE equitisation process, the valuation of enterprises pre-equitisation is a key step as a premise to approve the equitisation plan. However, the appraisal process of determining an enterprise’s value has shown that there are still many shortcomings and gaps in practice, possibly leading to the loss of state resources.

IPO at any cost might risk market manipulation
Nguyen Van Phung, director of the Tax Management Department for Large Enterprises

The 2016 audit report of the State Audit of Vietnam on the valuation of some state-owned enterprises before equitisation has shown that state capital worth trillions of dong might be lost since the methods used to value enterprises are still inadequate.

It points at the need to renovate the mechanisms and policies related to the valuation of state-owned enterprises in order to measure the enterprise value accurately, and at the same time, speed up the SOE equitisation process that is still too slow.

Commenting on the typical deviation between the values of equitised firms, which have been announced recently, and their actual selling prices, Nguyen Van Phung, director of the Tax Management Department for Large Enterprises under the General Department of Taxation, said: “Basically, prices are determined by the market. The enterprise values suggested by valuation agencies are only used as one of the grounds for authorities to set the offering prices when launching SOEs’ initial public offerings.” Phung also warned that if the IPO is meant to be performed at any cost or tends to pursue a particular target, it might face major risks of “market manipulation.”

The par value of shares is fixed at VND10,000 (roughly $0.44). However, through IPOs, some businesses could sell their stocks at VND15,000-20,000 per share to the primary market (about $0.66-0.88 per share), for example Petrolimex (averagely VND15,032 or $0.66 per share), while some could only sell at VND6,000-8,000 per share ($0.26-0.35), such as Cai Lan Port Investment JSC. (averagely VND5,900 or $0.26 per share). Could you explain this disparity?

First, limitations in expertise inevitably constrain appraisers in effectively evaluating the profitability of a business in the future or to predict the potentials of the market.

Second, when conducting appraisals, valuation agencies hired to determine the values of the firms do not receive sufficient records, documents, and information on assets and inventory, receivables and liabilities, leased and borrowed assets, joint-venture capital contributions as well as other financial investments of the equitised enterprises.

Third, it takes quite a while from the valuation of a business to public disclosure (usually more than six months) and even longer until the IPO is officially launched. During this time, the market might undergo a host of fluctuations, even some major volatility, not to mention that government policies always have a tendency to evolve through times. This also exerts considerable influence on the value of the enterprise from the time of appraisal until public disclosure and the event of the IPO.

For this reason, current regulations are set to allow equitised enterprises to adjust their proclaimed values when uncontrolled incidents occur or 12 months after the completion of appraisal when the IPO has not been executed.

Is it possible to attribute the inadequacies in firm valuation to the lack of experience of valuation agencies?

At present, only those accounting firms, securities companies, and valuation agencies are permitted to provide appraisal services for SOEs pursuing equitisation which have at least five years of experience in the areas of appraisal, auditing, accounting, financial consultancy, and consulting services for business ownership restructuring.

Additionally, during the last three years, appraisers must have conducted at least 30 contracts to provide services in the abovementioned domains each year. Also, appraisers need to employ at least three appraisers holding the appraiser practitioner certificate of the Ministry of Finance.

Foreign appraisal agencies must be highly reputable, well-qualified, and well-known organisations and must have at least five years of experience in the areas of appraisal, auditing, accounting, financial consultancy or consulting services for business ownership restructuring to be allowed to provide valuation and consultancy services to SOEs during the course of equitisation.

Given our strict conditions on the provision of valuation services for SOEs over the equitisation process, I believe that the quality of valuation agencies in general and their appraisers in particular are not posing serious problems.

However, the cost of equitisation, in which the cost to determine the current value of an enterprise is usually limited, has so far restricted enterprises from hiring more competent appraisal agencies. The Decree replacing Decree No.59/2011/ND-CP will remove the control of equitisation expenses, hoping that the value of each enterprise will be more accurately weighed as “you usually get what you pay for.”

Valuation agencies often choose the asset-based approach to measure the value of a business, which often causes a major gap between the appraised and the actual value of the business. Do you think agencies should use a variety of different valuation methods?

Appraisers have the right to freely choose any method to value an enterprise, so it is true that they often employ the asset-based method, as this approach is the most easily implemented.

Although there were many advantages, this method also carries many limitations as it is conducted based on a “static state.” Therefore, the calculations do not reflect the actual situation in many cases and ignore the intangible value that is not accounted for in the financial statement. Also, it led to a decrease in the appraised asset value, “distorting” the value of the enterprises and to some extent affecting the interests of the state.

Hence, in addition to the asset approach and the discounted cash flow analysis, which are common ways to determine the value of a business, additional options such as the market approach, the “comparable transactions” method, and the “capitalisation of earnings” method should also be adopted.

Current regulations do not prohibit valuation agencies from using different valuation methods, but in practice they are difficult to apply, even the comparable worth method which is considered the easiest one. For example, as the comparison between Habeco and Sabeco—two similar firms in the beverage industry—is very complex, it is nearly impossible to appraise the value of Sabeco by of comparing it with Habeco and vice versa.

Are you saying that the value of an enterprise provided by a valuation agency only acts as a basis to help authorities determine the scale of its charter capital and the offering price for its IPO, while the actual value of the business will be determined by the market?

Yes! In fact, the shares of Vinamilk are extremely popular, while the shares of other dairy firms might not be so attractive. Nobody can imagine that in Vietnam, while the stocks of companies providing cheap installation services keeps sagging, the stocks of film companies are on fire. The market has its own reasons that are difficult to explain. The matter is that it is critical to ensure transparency and unambiguity at all stages of the equitisation process to minimise the loss of state capital and assets.

I think if we are paying too much attention on a particular target, such as finding a strategic investor, launching an IPO at any cost or trying to list shares on the stock market, we might fall into the trap of “market manipulation” where state capital and assets will be lost through purchasing undervalued state-owned shares.

So far, evidence suggests that the difference between the appraised value of SOEs and their actual value was due to the “distortion aspect” of professional weaknesses in valuation agencies, not to mention other factors influencing share prices and keeping them undervalued.

In fact, the poor valuation of enterprises has delayed the equitisation process of SOEs. Therefore, ensuring the soundness of SOE valuation should be seen as a mandatory requirement to improve the efficiency of the equitisation process. 

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