Will ‘scandals’ in property firms draw investors back to value investing?

An FLC real estate project in Quy Nhơn City, Bình Định Province. VNA/VnExpress News Photo

Compiled by Mai Hương

Recent property firm scandals have shaken the stock market, blowing tens of trillions of Vietnamese đồng and making investors feel the pain of loss when the market was in free fall.

The question now is whether investors turn to value investing after the shock?

On January 18, the State Securities Commission (SSC) issued a decision to fine FLC chairman Trịnh Văn Quyết VNĐ1.5 billion (US$65,200) for his ‘underground’ trading. The fine is the biggest applicable to an individual who is a major shareholder of a company for not informing the stock authority three working days before making a sale.

Quyết sold nearly 75 million FLC shares on January 10 but the SSC only received the disclosure on the evening of the same day. The watchdog made a quick response with a decision of blocking his accounts the next day and cancelled the transaction, the first time such a large volume was treated so on Việt Nam’s stock market, and gave penalties later, including suspending him from trading for five months.

Quyết paid the fine but the story raises many issues for regulators, companies and investors.

Responsibility and credibility

On the same day as FLC leader’s unreported trading, property developer Tân Hoàng Minh Group’s chairman pulled out of the purchase of a 10,060sq.m land lot in Thủ Thiêm new urban area in HCM City which it bid at a record price of VNĐ24.5 trillion (US$1.07 billion) in December.

Though the group said it is ready to accept all penalties, including surrendering its deposit of more than VNĐ588 billion, the action of pushing the price and then putting down the stake has caused a ripple effect on the market, creating the risk of a price bubble in the land areas that have been assigned to investors and freezing new projects.

According to analysts, besides the legal sanctions, the biggest damage to business owners is the loss of reputation and trust in customers, partners and investors. Such behaviour from leaders of big companies in the market is deemed irresponsible to investors.

After the withdrawal decision, the Police Agency for Investigation of Crimes on Corruption, Economy and Smuggling (C03) has investigated 11 Hà Nội-based projects of Tân Hoàng Minh Group.

These incidents have also created a domino effect on the stock market.

The benchmark VN-Index has plunged from over 1,500 points on January 10 to 1,438 points on January 18.

Realty and construction firms were the biggest victims. Most of them were locked on the floor for many sessions without buyers such as CII, NBB, DIG, DLG, HQC, QCG, HAR and CEO.

Hồ Chí Minh City Infrastructure Investment JSC (CII) and Năm Bảy Bảy Investment Corp (NBB) – the two land ‘bosses’ in Thủ Thiêm area – hit the floor prices for six consecutive sessions.

FLC Group (FLC) and its affiliate stocks such as FLC Faros Construction (ROS), FLC Stone Mining and Investment (AMD), HAI Agrochem (HAI) and CFS Investment and Import Export Trading (KLF) have lost more than 40 per cent each.

Lessons for investors

FLC shares had lost 43 per cent during January 10-20 which meant FLC’s value evaporated by more than VNĐ6.4 trillion ($278 million). Many investors suffered heavy losses when buying the shares at the ceiling price before witnessing it had been knocked down without buyers.

However, according to Nguyễn Sơn, chairman of the Vietnam Securities Depository Centre (VSD), after this downturn, investors will likely return to the enterprises with good intrinsic value after a period of running after speculative stocks regardless of risks.

In recent times, a big number of new investors joined the rising wave of property stocks which pushed share prices of many companies on speculation of land information.

Many securities experts have warned investors about the bubble price of realty stocks abd the slump of this group in the last two weeks have erased most profits of many investors.

Việt Nam’s stock market has increased rapidly recently but according to many market insiders, this development is not sustainable.

“In Việt Nam, the stock market is considered a highly profitable market, so investors often prefer hot stocks, speculating instead of paying attention to really good businesses. In addition, with the dream of getting rich quickly, investors are easily caught up in information recommended by online investing groups,” economist Đinh Thế Hiển was quoted as saying on the Người Lao Động (Labourers) newspaper.

Hiển suggested developing open-ended funds with low management fees for individual investors to participate. He cited open-ended funds are currently accounting for about 60 per cent of the US stock market. Together with mutual funds, pension funds, capital funds from insurance companies, they have strict standards and sufficient information to carry out responsible investments on behalf of investors.

Legal rules need updating

SSC’s unprecedented measures on FLC chairman’s unreported trading are said to have a great deterrent effect, making big shareholders of enterprises hesitate to take risks of conducting underground trading.

However, this story also points to the weaknesses of the existing law.

Only 19,600 accounts involving Quyết sale of 74.8 million shares returned money, just half of a record 135 million FLC shares that changed hands that day. This has created an unfair feeling among investors who suffered huge losses from this incident.

In the future, investors will have to pay attention to another risk that the transaction may be cancelled and the stock price will be affected later as in the case of FLC. This can also make foreign investors anxious about trading in Việt Nam’s stock market because it exposes legal risks. Smooth transactions and legal protection are important factors for this group.

Besides, although the law has provisions to sanction illegal selling by insiders and major shareholders, the fine is not big enough to deter such actions. The ceiling fine of VNĐ1.5 billion is considered a trivial value compared to the profit of trillions of đồng.

To avoid similar cases, heavier and stricter punishments are recommended.

In the US, for example, persons who violate insider trading law may become subject to a fine of up to three times the profit gained or loss avoided as a result of the insider trading. The violator can also face criminal penalties with a maximum prison sentence of 20 years and a criminal fine for individuals of $5 million.

With current technology, many investors and market members have proposed to “technically freeze” the securities accounts of internal shareholders and related people. When they need to buy/sell shares and comply with information disclosure regulations, their accounts will be released to perform transactions.

Besides, the regulator also needs to consider the settlement time which is now T+3 (stock trade settles in three business days). On T+3, the money will be transferred to the investor’s account but, in the case of the securities already advanced to the investor and the transaction is then cancelled, how will the advance money be handled?

For Việt Nam’s stock market to develop sustainably and attractively, becoming a long-term investment channel as well as a capital mobilisation channel for enterprises, this needs the involvement of four stakeholders including the State, securities companies, listed companies and investors. — VnExpress News