VZCZCXRO8666
RR RUEHCHI RUEHDT RUEHHM
DE RUEHHI #0595/01 0871018
ZNR UUUUU ZZH
R 281018Z MAR 07
FM AMEMBASSY HANOI
TO RUEHC/SECSTATE WASHDC 5004
INFO RUEHBK/AMEMBASSY BANGKOK 5563
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEHHM/AMCONSUL HO CHI MINH 2815
RUEHGP/AMEMBASSY SINGAPORE 2330
RUEHZS/ASEAN REGIONAL FORUM COLLECTIVE

UNCLAS SECTION 01 OF 03 HANOI 000595 
 
SIPDIS 
 
STATE FOR EAP/MLS AND EB/OMA 
STATE PASS USTR DAVID BISBEE 
STATE PASS USAID FOR ANE/AA KUNDER/KENNEDY/WARD 
AMEMBASSY BANGKOK FOR RDM/A 
USDOC FOR 4431/MAC/AP/OPB/VLC/HPPHO 
TREASURY FOR ABAUKOL AND SCHUN 
SINGAPORE FOR SBAKER 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958:  N/A 
TAGS: EFIN EAID EINV ETRD ECON VM
SUBJECT: STOCK MARKET PREDICTIONS 
 
HANOI 00000595  001.2 OF 003 
 
 
(U) THIS CABLE IS SENSITIVE BUT UNCLASSIFIED. NOT FOR INTERNET. 
 
REF:  HANOI 584 
 
¶1.  (U) Summary:  At the second annual Euromoney Institutional 
Investor Investment Forum held March 19-20 in Hanoi, a panel of 
investment experts in Vietnam offered their opinions on and 
predictions for VietnamQ volatile stock market.  While all 
panelists agreed a market correction will occur within the next two 
years, they varied in their predictions on how large a correction it 
will be.  Citing the massive overvaluation of 10-15 major companies 
as the source of the problem, analysts predicted that the market 
correction that does occur will be a healthy and necessary part of 
Vietnam's development.  The panelists concluded that Vietnam's stock 
market fundamentals are sound enough to ensure that it will survive 
even a large correction and that foreign firms will continue to 
invest in the market for the foreseeable future as a result.  All 
expressed strong optimism in Vietnam as an investment destination 
and confidence in the GVN's understanding of market fundamentals. 
End Summary. 
 
¶2.  (U) Vietnam's stock market has received much international and 
domestic attention in recent months, due mainly to its extraordinary 
levels of growth, as well as some very high price-to-earnings 
ratios.  In the past four years, said Equity Markets Panel chairman 
Chris Leahy of Asiamoney, Vietnam's stock market has grown from a 
total listed value of USD 500 million to more than USD 16.5 billion. 
 Daily trading volumes four years ago were about USD 500,000 a day. 
Last week, they reached an average of USD 60 million a day.  This 
growth, coupled with the increased participation of Vietnam's 
growing middle class in both the listed market and the 
over-the-counter market, has attracted the attention of foreign 
investment firms, GVN regulators, foreign governments and 
international media. 
 
THE BUBBLE'S BURST - WHEN AND HOW MUCH? 
--------------------------------------- 
 
¶3.  (U) While all panelists agreed that a market correction will 
happen in the next year or two, they were strongly divided on the 
question of how much the market will correct.  On one hand, Kevin 
Snowball, Director of PXP Vietnam Asset Management, suggested that 
the market will correct anywhere from 30 to 50 percent within the 
next two years, and possibly earlier if triggered by an unforeseen 
domestic event or regional market issues.  Snowball stressed, 
however, that the GVN is already laying the foundation for a good 
recovery for what they too see as an inevitable event, and that its 
plans to move ahead quickly in the equitization of state-owned 
enterprises (SOEs) is the most prudent means of planning for a 
correction which Snowball characterized as "natural for an emerging 
market." 
 
¶4. (U) Dean Van Drasek, Executive Director for Lim Advisors, 
disagreed slightly with Snowball, claiming that people "who talk the 
market down are not really invested here."  He said there is no 
chance the correction will be as large as 30 to 50 percent, but more 
like 10 to 15 percent.  Van Drasek emphasized that while there is a 
lot of interest in the top 10 to 15 stocks, making this a top-heavy 
market, the rest of the market is healthy and the correction will be 
shallow and quick. 
 
¶5.  (U) Finally, Fiachra Mac Cana, Director of Research at 
VinaCapital, concluded the discussion on market correction by 
observing that the "truth lies somewhere in between" the two 
predictions.  He asserted that he does not see a correction 
happening in 2007 unless there is a problem with global liquidity 
levels or some outside event that prompts psychological reactions to 
trading and saving.  The market will crash at some point in the 
near-term, however, and large international firms that have the cash 
will be waiting to buy in when it does. 
 
OVERVALUATION 
------------- 
 
¶6. (U) Mac Cana then turned to a discussion of the Vietnamese 
market's overvaluation.  He acknowledged that from a 
price-to-earnings (PE) ratio standpoint, the top 75 to 80 stocks 
trading are extremely overvalued, but in a market where few 
 
HANOI 00000595  002.2 OF 003 
 
 
investors outside the major international firms are looking at PE 
ratios, this doesn't really matter.  The key is liquidity, and as 
long as Vietnam's liquidity boom continues, it will sustain the 
overvalued PEs. 
 
¶7.  (U) Snowball agreed with Mac Cana's assessment, and added that 
in similar markets such as Bangladesh and Sri Lanka where PE ratios 
were as high as 70 and 80, the market sustained these rates for some 
time, but not forever.  Eventually, any emerging market with such 
high PE ratios experiences a correction in valuation. 
 
¶8.  (U) Van Drasek expounded on this overvaluation issue, noting 
that there is essentially a two-tier market in Vietnam.  Any stock 
with a PE ratio of more than 30 is essentially unsustainable given 
Vietnam's economic prospects and realities.  However, many of the 
[Vietnamese] people participating in the market and buying these 
stocks have "no idea what a PE ratio is", and many of the foreign 
investment firms that are buying into the market in order to get 
themselves in the door and established "do not care what the PE 
ratio is."  The result is that a portion of the market - about 10-15 
stocks - functions without regard to standard trading practice.  At 
the next level, there are 50 to 60 stocks trading normally whose 
average valuation is only about 14.  This is normal for Southeast 
Asian markets, he added. 
 
¶9.  (U) On the point about the general public's awareness of PE 
ratios and other basics of trading, Mac Cana urged the GVN to 
improve the education process about the market.  When middle class 
investors start losing huge sums of money, he added, they will come 
looking to the GVN for answers.  On top of that, he added, there are 
a lot of international investors waiting on the sidelines to see 
what happens and to buy in when the crash does come, which will not 
help the politics of the situation.  (Note:  USAID has been a 
leading provider of technical assistance to the State Securities 
Commission (SSC) in (1) developing the new progressive Securities 
Law and related implementing regulations, (2) focusing on strategic 
factors in developing the equities market, and (3) understanding the 
risks and issues arising with explosive market growth.  End note.) 
 
THE OTC MARKET 
-------------- 
 
¶10.  (U) Van Drasek then cited the over-the-counter (OTC) market as 
another example of the need for greater education and public 
awareness.  He commended the GVN for its efforts to bring several of 
the more legitimate companies which previously traded OTC onto the 
listed exchanges by removing the disincentives to listed trade.  The 
GVN issued a series of rulings last fall which imposed the same 
regulations on OTC trades as on listed trades, prompting 59 
companies in November and December 2006 alone to move to the listed 
market.  In Van Drasek's opinion, this likely drained the OTC market 
of its real players, leaving only smaller, less profitable 
companies.  "Most of what one hears about the OTC market in Vietnam 
is simply untrue", said Van Drasek.  What is true, he added, is the 
fact that the estimated 2800 companies traded OTC produce no 
earnings statements and no publications on pricing, and thus no PE 
ratios or any reliable means other than word-of-mouth for evaluating 
these businesses.  He concluded that the next wave of SOE 
equitization will probably kill off the last of any rational OTC 
trading that is taking place, as anything worth investing in will be 
listed formally on the exchanges. 
 
SOE EQUITIZATIONS 
----------------- 
 
¶11.  (U) Despite the fact that all panelists acknowledged that SOEs 
and state-owned commercial banks (SOCBs) tend to list at far greater 
values than the companies are actually worth, these analysts 
remained optimistic about the SOEs expected to debut this year. 
Vietcombank, several food and beverage companies, and a large 
telecom firm were all mentioned as equitizations (although they will 
all be only partial equitizations) which the investment community is 
watching carefully.  Van Drasek noted that Vietnam is the only 
market in the world where SOEs are listing at two to four times the 
value of similar companies on the exchange (i.e., where a food and 
beverage SOE will list for four times the value of a privately held 
food and beverage company already trading on the exchange) and 
getting away with it.  The market is simply hot enough to absorb 
 
HANOI 00000595  003.2 OF 003 
 
 
this overvaluation.  Snowball agreed, and added that the GVN has 
studied emerging markets for years and it knows it is not stressing 
the market to list its SOEs in this way.  However, as an industry 
develops around watching Vietnam's markets (journals, company review 
products, reporting, public analysis), there will be some correction 
in SOE valuation if the companies do not start producing better 
post-equitization.  That is, apparently, a risk the GVN is willing 
to take. 
 
GVN OVERSIGHT GETS A+ 
--------------------- 
 
¶12.  (U) In the end, all panelists agreed that the Vietnamese market 
is structurally very sound and well set up.  One panelist did 
mention capital controls very briefly as a measure which the GVN had 
"recently considered, but now dismissed" as a means to cooling the 
market.  Instead, he said, the GVN will continue to list parts of 
SOEs and keep the foreign ownership limitations in place 
indefinitely in order to keep the market growing at a more 
sustainable rate.  Note: Foreign investors are currently allowed to 
own no more than 49 percent of a listed company and no more than 30 
percent of a listed bank, of which a single investor may own no more 
than 10 percent. In 2006, there were rumors that these amounts would 
be lifted in 2007.  However, the GVN has decided to postpone these 
increases indefinitely.  End note. 
 
¶13.  (U) When asked to give a long-term prediction on the market's 
performance, all panelists agreed it would continue to do well even 
after the inevitable correction.  They foresaw no real long term 
risks or fundamental problems, and all rated the future outlook as 
extremely optimistic, "setting aside the issue of valuation." 
 
¶14.  (SBU) Embassy comment:  One private sector attendee told us a 
senior Ministry of Finance official said to him in a private 
conversation that the Minister of Finance and central bank governor 
had had their "fingers on the trigger" to impose capital controls. 
This remark is in contrast to the general public image conveyed that 
Vietnamese government officials were simply considering the idea. 
End comment. 
 
ALOISI