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Market understanding the key to success
Hai Ly
Thursday,  Jul 13, 2017,13:02 (GMT+7)

Market understanding the key to success

Hai Ly

Despite the cut-throat competition among the leading brokerage firms, Viet Capital Securities Joint Stock Company (VCI) has become the top broker for foreign investors with a market share of over 30% in 2016, as per the data of the Ho Chi Minh City Stock Exchange (HOSE). What is the secret behind such achievement of VCI, even though brokerage for foreign investors for years had been dominated by other units? Richard Fitton, Senior Manager of Investment Banking at VCI, says the key is “market understanding.”

Mr. Richard Fitton, Senior Manager of Investment Banking at VCI
"Market understanding is the key to the success of investment banking in particular and the company as a whole. We not only offer businesses advice on M&A and IPOs, but also recommend the appropriate timing for the deal to achieve the optimal results.
Richard Fitton, Senior Manager of Investment Banking at VCI 

Q: You are talking about timing, which is considered a difficult problem in investment. Quite a few brokers have recommended the right stocks, but just because of bad timing, many cases of IPO, listing, issuing shares or choosing a strategic partner have been unsuccessful.

A: Exactly. Getting to know the market is simple, but diagnosing it is a very sophisticated job. In-depth understanding of the market comprises comprehension of the appetite of investors. For example, in our early years when the consumer class was first really emerging in Vietnam, VCI helped major consumer goods companies—such as Vinamilk and Masan—distributors and retailers—like The gioi Di dong—build a consumer base via consultation on strategy, placements and listings. When global crude oil price started going up, we gave PVD (PetroVietnam Drilling and Well Services Corporation) and Vietnam Oil and Gas Group (PVOil) advice to catch this upward trend.

From 2013, when the real estate market displayed early signs of recovery, VCI assisted a number of industry players in tapping the capital markets. Over the last couple of years, Vietnam’s tourism industry has been booming, with a great number of both domestic and foreign tourists, so we helped VietJetAir take advantage of the positive effects from this sector. Currently, VCI is focused on deals in financial services, an area that is receiving a lot of attention from investors with the attractiveness of healthier balance sheets and fast-growing consumer lending.

Do you mean healthier balance sheets of banks?

- I mean not just banks, but other businesses as well. Some realty firms have reduced their debt. Many enterprises are recording higher sales and cash inflows.

This may be called the agility in “reading” the market. You need to figure out in which direction the market is moving, which path it is taking, and offer your clients advice so that they adopt the right strategy.

VCI is now a major partner connecting domestic companies and foreign investors who want to access the market. Global consultants like Nomura, JP Morgan, Deutsche Bank, BNP Paribas, and HSBC have chosen VCI to co-advise on large mandates to utilize our local expertise and knowledge.

For consultancy to become a developed service, the consultants must be competent. How does VCI deal with the human resources problem?

- When giving advice on IPO, share issuance or M&A, we work very closely with both buyers and sellers. The investment banking team is run by Vinh Tuan, a French national born in Vietnam, who speaks Vietnamese and has over 20 years of experience working at international financial institutions including Goldman Sachs and Credit Suisse, in Paris, London and New York.

At VCI, foreign experts take charge of the main departments and also fill some managerial positions. Also, we are actively developing domestic human resources through training and design of appropriate compensation policies.

One of the methods of capital utilization by a securities company is proprietary trading. However, this operation is quite risky. Furthermore, it may conflict with other services such as market research, analysis and customer orientation. How does VCI settle such conflict?

- VCI’s revenue comes from three main sources: investment banking, brokerage and proprietary trading. Looking at the total assets of about VND3 trillion on the company’s balance sheet, investors and shareholders will see one-third of this amount relates to proprietary trading, which are fast-growing local companies, both private and listed, held at cost. If we market to market the holdings that have listed since our investment, we are looking at unrealized gains of around 40% generated from those stocks alone. Our leading investment banking practice has brought us opportunities over the years to invest in the most promising companies in the country at a very early stage.

How strong is the balance sheet and can you describe the recent private placement?

- The company’s capital adequacy ratios are good. Three weeks prior to the listing on July 7, 2017, we placed 11 million shares to institutional investors and three million shares to individuals via a private offering, with a total value of over VND720 billion. Some of the new capital mobilized will be used to pay down bank debt, so VCI’s leverage ratio is expected to fall from 86% last year to less than 50%—a safe level.

Of the three main revenue streams, which is the most significant?

Each of the three aforementioned business divisions has its own strengths, and strength in one supports the success in the others. For example, investment banking achieves efficiency in the process of book building for IPOs and issuance thanks in part to the extensive global and domestic client database of our brokerage division. These clients know us very well, know we provide reasonable advice and high quality information and as a result they trust us. Similarly, investment banking gives proprietary trading an opportunity to invest in private equity often long before a placement or listing.

Many investors maintain that VCI’s analysis and research reports on certain enterprises, the industry and the macro-economy have been “upgraded” over the past two or three years. What is the reason behind such “upgrade,” sir?

- Our research department is managed by Barry Weisblatt, a U.S. specialist, and he has 24 employees in his team, both local and foreign. They closely follow the movements of businesses as well as the macro-economy. Our analyses cover about 60 listed companies and around 80% of market capitalization. The research department has a recommended list for customers that is adjusted according to market developments.
An effective report is not just about providing information, but it must also realize the full potential of businesses and of course realistically communicate and value the risks they face.

Recently, your research department has expressed optimism about the market with a forecast that the VN-Index will probably rise to 800-820 points. Do you hold the same view?

- Vietnam’s growth story is highly attractive to foreign investors who love the fast-growing middle class story with the young population who are spending more. Flotations are being considered by more and more companies witnessing the successful listings of dynamic companies, most of whom we are advising. This wave of private placement and public offering on the bourse by both State-owned and private units will both enlarge the exchanges and hopefully continue to bring in more foreign investors hoping to share in the upside, which combined could drive the market up to those heights and beyond if the macroeconomic environment remains benign. 

My last question—what is the difference between VCI and other brokers in the market?

Our market capitalization and revenue are equivalent to some of our peers, but the size of our human resources is much more modest. VCI has under 200 employees whereas some others have upwards of 700. Many of our peers employ a large personnel together with their balance sheets to promote brokerage for individuals via margin lending services to expand their market share, while we focus more on higher margin activities of brokerage for foreigners and investment banking, thus have a far higher revenue and profit per employee. We are also much more international in our outlook, not just in terms of personnel but also in transparency, corporate governance and the service provided to our clients across the firm.

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