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Portfolio Review, April 2012

28 Apr

Currently, the Vietnamese market is trading at the following levels:

HOSE: 473.77
HASTC: 79.86
UPCOM: 35.07

Our current open positions consists of the following:

Habubank (HBB) and Saigon Hanoi Bank (SHB)

This week, Habubank presented a merger plan to its shareholders for voting and the plan had been ratified, with more than 85% of shareholders approving the plan. After this, the plan will be submitted to the State Bank of Vietnam. Once approval is given, the merger with Saigon Hanoi Bank can proceed. As reported by the local newspaper:

28 Apr 2012 – Hanoi Building Commercial Joint Stock Bank (Habubank) will merge with Saigon-Hanoi Commercial Joint Stock Bank (SHB) with the nods given by most Habubank’s shareholders at a recent meeting.

With over 85.2 percent of Habubank’s voting shares approving the plan, the merger ratio between Habubank share, coded HBB, and SHB, coded SHB, will be 1:0.75.

The new bank, the result of the merger, will taken the name of SHB with chartered capital of VND8.865 trillion ($425.6 million). It will not raise capital and pay dividends in the next 2-3 years. After the merger, the new bank’s total assets will be VND123.724 trillion with capital adequacy ratio of 13.22 percent, total outstanding loans at over VND 51 trillion, the return on equity and asset rate (ROE, ROA) at 14.9 percent and 1.16 percent respectively.

As of early March, the capital of HBB was at VND195 billion. As of February 29, the total rate of bad debts under the Vietnam auditing standards of HBB was above 16 percent. HBB’s total assets was VND36.855 trillion, while its total liabilities were at VND33.112 trillion and chartered capital was at VND3.741 trillion. Its pre-tax profit was negative VND649 billion.

But the rate doubled if it is based on special assessment in accordance with greatest potential risk. In this case, HBB’s total assets decreased to VND33.3 trillion, while total liabilities were at VND33.112 trillion and pre-tax profit slumped to a negative VND4.197 trillion. Among HBB’s bad debts, debt-stricken shipbuilder Vinashin accounted for some VND4 trillion.

As we have expected, the price of HBB has converged with that of SHB. Once the merger was announced, we established a position of 6,290 VND per share for HBB and 11,200 VND per share for SHB. While SHB shares had remained about the same at 11,300 VND, HBB has moved up to 7,200 VND per share.

Still, at the reported exchange ratio of 1 HBB share for 0.75 SHB share, HBB shares are still at a discount.  Hence, we are still keen to accumulate HBB shares if it ever drops.

The news on the merger sounds rather bad as is highlighted that the new bank “will not pay dividends or raise capital for the next 2 to 3 years”. The price of both HBB and SHB may well drop after this merger announcement and give me a chance to add to my holdings.

As for the debts of Vinashin, I am not too concerned. The Vinashin debt default had become such a big and international issue (after the involvement of international hedge funds like Elliot advisors and global banks like Credit Suisse) that the issue had to be resolved in an amicable manner to the creditors, both international and local.

Elliot advisors, which initially sued Vinashin in the UK courts, recently dropped the suit, suggesting that a mutually agreeable solution had been reached. This “solution” probably meant that Elliot made a killing on the debt that they owned. In addition, local creditor Petrovietnam Finance Corporation (PVFC) recently recovered close to 60% of the amount it lent to Vinashin. Interestingly, this was done without having liquidating Vinashin’s pledged assets yet. With additional recovery from liquidating the collaterals pledged for the loans, PVFC will likely recover almost its entire investment in Vinashin.

At the press conference on April 26 to prepare for the coming annual general meeting (AGM) (scheduled on April 28) of PetroVietnam Finance Joint Stock Corp (PVFC-coded PVF), Nguyen Thien Bao, PVFC’s general director, said that so far PVFC has reclaimed 1.025 trillion dong (including 800 billion dong and 225 billion dong in two times) of the total 1.8 trillion dong debt from Vietnam Shipbuilding Industry Group (Vinashin). However, according to Bao, Vinashin’s collaterals such as ship or boat are untouched.

Therefore, PVFC will recover an estimated additional 20% to 30% of the remaining debts. In addition, PVFC has a contract with Vinashin worth about 200 billion dong.

This bodes well for HBB (or its acquirer Saigon Hanoi Bank). I am confident that like PVFC, HBB/SHB will likely recover its bad debts due to Vinashin almost in its entirety eventually. However, for now, the debt would have to be written down.

Petrovietnam Transportation (PVT)

There is no news coming out from PVT and I am waiting for the company to come up with its first quarter results for this year.

PVT shares has performed a little better than the market, moving up to 5,700 VND compared with our cost of 4,500 VND per share.

Mong Duong Coal (MDC)

MDC had done a little better than even PVT. Again for this company I am also waiting for the company to release its first quarter earnings but I am not too worried. For MDC, its earnings are almost guaranteed by the government monopoly Vinacomin. The company shares are like an inflation protected bond.

Shares are currently trading at 15,700 VND per share compared to our cost of 11,700 VND per share.

Still, its valuation is quite reasonable, at 3x price to earnings so I am keen to keep the shares. Liquidity is picking up for MDC shares. Last month, number of shares traded per day is usually less than 10,000 shares per day. However, now you can see that for most days, shares transacted is well above 10,000 shares per day.

This shows that more attention s being paid to the company by investors. With increased liquidity, shares will usually perform better. This is in line with all the shares of coal mines in Vietnam. I believe that MDC also outperformed many other shares of coal mines as well.

Interestingly, there is still absolutely no interest from foreign investors for this company even though one of its largest investors is a Swiss based company, Raw and Refined Commodities AG.

Ha Lam-TKV Coal JSC

What I did not mention in my analysis of MDC was that it was one of the few coal miners that have underground coal mines which have better quality coal.

Most of the other coal mines are open pit mines. In this respect, it is similar to that of Ha Lam – TKV Coal JSC (HLC : HNX), shares of which also performed very well.

Ha Lam Coal’s mines are also underground and the coal is of a better quality than most of the open pit coal mines. Ha Lam Coal is also minority owned by Raw and Refined Commodities AG, though not as much as for MDC.

Raw and Refined Commodities AG owns more than 16% of MDC but in the case of HLC, only 7%.

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Posted by on April 28, 2012 in Portfolio

 

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