Liquidity, cash flows and the story of the forgotten stocks

23-Oct-2018 Intellasia | Dau tu Chung khoan | 6:00 AM Print This Post

In the first nine months of 2018, the trading volume on the three bourses reached over 7.1 trillion dong per session, up by 42 percent compared to the average of 2017. Trading was exciting and capital continued to flow into the market but over 50 percent of shares saw almost no liquidity, while many of which have good business results with regular dividend payment.

Efficient business but cash flows are not interested

West Coach Station (WCS) has a specific operation which is to exploit one of the two largest coach stations in HCM City with connection to the western provinces. In the past 10 years, WCS has maintained steady growth in revenue and profit.

In the first half of 2018, WCS recorded 67.7 billion dong of revenue, up by 6.8 percent; and 33.1 billion dong of after-tax profit, up by 4.1 percent over the same period of 2017. WCS’s Earnings per Share (EPS) was 13,226 dong, while the Return on Asset (ROA) was 11.1 percent and Return on Equity (ROE) was 12.4 percent.

Contrary to its position as one of the most efficient firms on the bourse having positive financial structure with regular dividend payment and almost no debts, etc. the liquidity of WCS was limited at only several hundreds of units traded in each session and many sessions did not record any trading.

Since being unable to attract cash flows, the market price of WCS fell by over 27 percent in the past two years, although the VN Index continuously increased.

WCS is not a rare case. Statistics on the two stock exchanges (HCM City Stock Exchange (HoSE) and Hanoi Stock Exchange (HNX)) in the session on October 16th 2018 showed that 178 stocks were not traded and 238 stocks had trading volume from a few dozen units to less than 10,000 units. These two groups accounted for nearly 60 percent of the total listed shares. In particular, many efficient firms with growing business results and good dividend payment could not attract capital flows.

The most notable cases were the stocks in electricity and water sectors. Despite being the essential sectors with highly stable business activities and good profitability, their stocks were in a state of neglect, although the valuation was fairly attractive.

Being listed since 2009, Thac Ba Hydropower Joint Stock Company (TBC) has paid cash dividends from 18-25 percent, very attractive compared to the market price of over 25,000 dong per share. However, the trading of TBC often saw no liquidity. The most exciting sessions rarely exceeded 10,000 units, too small compared to the number of 63.5 million listed units.

This is also the situation of the shares of Southern Hydropower Joint Stock Company (SHP), Thac Mo Hydropower Joint Stock Company (TMP), Gia Dinh Water Supply Joint Stock Company (GDW), Cholon Water Supply Joint Stock Company (CLW), Bao Loc Supply Sewerage and Construction Joint Stock Company (BWA), Nhon Trach Water Supply Joint Stock Company (NTW), Nha Be Water Supply Joint Stock Company (NBW), Ben Thanh Water Supply Joint Stock Company (BTW), etc.

On the Unlisted Public Company Market (UPCoM), the lack of liquidity was even more popular. Only 198 stocks, equivalent to a quarter of the number of registered shares, recorded trading on October 16th 2018. In which, the number of shares with trading volume from 10,000 units or more was only 59 codes.

The BDP shares of Oriental Sea Villas and Hotel Joint Stock Company owner of Sheraton Da Nang, registered for trading on the UPCoM since April 2017, but no share has been transferred until now.

The DCI shares of Da Nang Chemical Industries Joint Stock Company, MEF shares of MEINFA Joint Stock Company, PTG shares of Phan Thiet Garment Import-Export Joint Stock Company, etc. have not seen any trading for a long time, making their reference pricesafter some adjustments of dividendslower than the annual dividend payment.

Reasonable or unreasonable?

Normally, the cash flows often seek efficient and transparent businesses and gradually eliminates weak investments. This makes the story of good stocks lacking liquidity for a long time while the stocks of loss-making businesses and those which were suspected of transparency still recording trading volume from hundreds of thousands to millions of shares each session becomes a paradox.

Some long-term investors said that the cause of the “white liquidity” situation despite good business performance and attractive profitability is due to the overly concentrated shareholder structure with less “floating” shares where existing shareholders want to hold the shares for longer and thus limit the sale. However, it may due to the limited information disclosure of the businesses and the inactive in approaching investors.

Meanwhile, as for the Vietnam’s stock market, individual investors account for a large proportion, the investment taste is more in favour of stocks with strong price fluctuations and major information changes with the expectation of searching for high profitable opportunities in the short term instead of holding stocks with stable movements.

On the other hand, individual investors have limited access to corporate information and they must depend on the information announced by businesses. If the business is too closed, it will be difficult to attract investors.

The lack of trading for listed stocks has led to many consequences. In terms of the business, the poor liquidity will cause the mobilisation of capital (when needed) to be very difficult.

In addition, the failure to attract investors and to have a diversified shareholder structure have significantly lowered the transparency of shareholders’ supervision and negatively affected the real meaning of listing.

Notably, the low liquidity of stocks has affected the interests of small shareholders those who, under the law, are prioritised for protection in public companies. When they want to transfer shares, they encountered many difficulties and even could not do that because under the current regulations, the stock must have trading in the last 25 sessions in order to be traded under put through method. Meanwhile, the prices are too low if selling shares under order matching method, and it will not reflect the true value, such as the cases of MEF, PTG and DCI.

In the perspective of a management agency, the capitalisation increased with the number of shares and listed companies, but transactions only focused on certain stocks, causing the use of stock indexes as a measure to be distorted and not truly reflect the overall market. The attractiveness to big investors and financial organisations therefore also declined, although the businesses have been operating efficiently.

In practice, the management agency has only controlled and supervised the violations in cases of fraudulent reporting, fraudulent trading, or information disclosure did not comply with the law.

The liquidity factor, despite being important, is still completely determined by the market. No stocks with low liquidity have had to cancel the listing or registration for trading.

In order to support liquidity status, on May 29th 2017, the HNX has issued the Regulations on operation of market makers for shares that have been listed, registered for trading and listed exchange-traded fund (ETF). The Regulation took effect from July 1st 2017.

This is considered one of the important steps to bring the Vietnam’s stock market towards international practices. It has not only helped promote the liquidity of shares of businesses, increased the market transparency and also contributed to create revenue, expand market share, and enhance the competitiveness of securities firms. However, after more than a year in force, this policy has not been actively deployed.

In order to have liquidity, stocks must attract capital of investors. In reverse, stocks only attract investors when their liquidity reaches a certain level.

Despite the objective factors such as shareholder structure, market conditions or the wait for policies of management agencies, businesses expect to improve the liquidity for their stocks need to actively have good connection with investors, interact, update operating activities, perform communication and brand promotion, and help shareholders and investors understand their potential and strengths.


Category: Stocks, Vietnam

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