Vietnam scooter firm tests market
Vietnam's economic prospects will be the biggest selling point for the initial public offering of Vietnam Manufacturing and Export Processing (Holdings) (VMEP), the country's third-largest foreign-owned motorcycle maker, analysts say.
But the rapidly developing market poses liabilities. Since opening Vietnam's economy this year, government policy has been fickle, competition fierce and consumers developing an appetite for cheap cars rather than motorcycles. All could be hurdles for VMEP.
The company, owned by Taiwan's motorbike maker Sanyang Group, is trying to raise HK$1.05 billion to strengthen its sales network and research capabilities. It plans to sell 226.92 million new shares at HK$3.61 to HK$4.64 each or 25 per cent of its enlarged share capital.
Amid a chill in market sentiment towards new offerings, VMEP experienced a hiccup in the listing process. It delayed its trading date to December 20 from this Friday.
BNP Paribas is the bookrunner. The retail offering will run until today.
'Vietnam is taking a development path similar to that of China. The economy is strong, which is a positive factor,' said Yiu Chin, director at Altruist Financial Group. 'But like mainland consumers, local demand for personal transport will also change from the bicycle to the motorcycle and then to the car. And with China's access to the WTO, competition will become fiercer.'
Kenny Tang Sing-hing, an associate director at Tung Tai Securities, said the offering would test investor interest in Vietnamese 'concept stocks' - those closely linked to a country's economic outlook - since Hong Kong has no similar listings.
VMEP's indicative price was 10.8 to 13.9 times its forecast earnings for next year and 14 to 18 times this year's, market sources said. The company forecast less than US$30 million of earnings for this year.
Founded in 1992, VMEP's core products are scooters and light commercial motorcycles, called cubs, under two major brands - SYM and Sanda.
With custom-designed components and stylish looks, SYM motorcycles target young and affluent customers. Sanda motorbikes are positioned as practical and functional transport targeting budget-conscious consumers.
Sales of SYM products made up US$94.6 million or 82.3 per cent of VMEP's total revenue for the first six months of this year, the listing prospectus said. The company has factories in Ho Chi Minh City and Hanoi with annual capacity of 310,000 units that is expected to grow to 500,000 units in three years. It sold an average of 17,661 motorcycles per month in the first half.
VMEP's sales network consists of 230 authorised SYM stores owned by exclusive dealers, 262 service providers and 31 retail parts outlets.
The company has earmarked 61 per cent of the offer's net proceeds for opening 20 of its own new stores in prime locations, establishing another 20 new stores through joint ventures with dealers and upgrading or renovating 165 existing stores.
Some 18 per cent of the proceeds will go to building a research and development centre that should open in March 2009. It also plans to set aside 11 per cent of the funds for potential mergers and acquisitions. The remaining 10 per cent will be used for general working capital.
VMEP has 10 basic models, five of which were launched this year.
'Research and development ability is important in the industry,' said Eva Yip, an analyst at Sun Hung Kai Securities, 'I am impressed by the company's ability to roll out attractive models for young customers.'
Vietnam's public transport infrastructure is relatively poor.
According to the Vietnam Road Administration, Ho Chi Minh City had only 0.5 buses per 1,000 people last year compared with 1.3 in Bangkok in 2004.
With a growing economy and a comparatively poor public transport system, the motorcycle industry has recorded significant growth, expanding nearly 4.3 times between 1999 and 2002, with two million motorcycles sold annually.
But sales were severely hit between 2003 and 2005 when the government imposed a policy restricting the number of motorcycles each person can buy in big cities to one.
The number of units sold in 2003 dropped about 35 per cent. With the ban lifted at the end of 2005, sales rebounded to 2.2 million last year.
'As a wholly foreign-owned company in an emerging market such as Vietnam, the company is more vulnerable to policy changes than local ones or foreign joint ventures,' said Mr Yiu.
VMEP reported that net profit slumped 61.6 per cent to US$16.46 million in 2005 from US$42.89 million a year earlier.
That partly reflected the impact of government policy. But, more importantly, the earnings decline was the result of a quality control crisis in 2004 and early 2005.
During that period, some batches of the company's SYM cubs were made and sold with significant quality defects.
But as a result of its failure to identify defects in parts and components provided by third parties, the company's sales declined 29.6 per cent that year and its reputation suffered.
Turnover picked up slightly last year to US$184.31 million and net profit rebounded 41.6 per cent to US$23.3on.
For the first half of this year, the company reported a net profit of US$14 million, a decline of 7.6 per cent from US$15.15 million it recorded a year ago.
What the analysts say
Yiu Chin, director, Altruist Financial Group
Pros: Vietnam's economic outlook is robust.
Cons: As a foreign-owned company, it is vulnerable to changes in government policies.
Kenny Tang Sing-hing, associate director, Tung Tai Securities
Pros: It has the ability to develop, make and sell its own brands under one roof.
Cons: If it is regarded as an industrial stock, the valuation of 14 to 18 times this year earnings is not attractive.
Eva Yip, analyst, Sun Hung Kai Securities
Pros: VMEP can roll out new models to attract young customers in Vietnam
Cons: Competition will intensify as Vietnam opens up.