MM has long been suspicious of the Ho Chi Minh City Infrastructure Investment Joint Stock Company (CII VN), Vietnam`s leading infrastructure stock, for its too-close-for-comfort relationship with Ho Chi Minh City`s political power structure and its consistent long term record of negative free cash flow. Vietnam will have need for loads of road building and other infrastructure over the coming decades, and these guys will sign on for plenty of the projects, but being so closely related to the politicos gives one a queasy feeling about how this company can truly be run in the interests of ordinary minority shareholders. This opinion has held up pretty well over the last five years: the stock has been an up-and-down dog, with an overall five year share price loss of 20% (in VND), versus a VN-Index rise of 6% over this time.
Today`s reading of broker HSC`s Vietnam Daily has brought this case to mind once again. There is a choice development here, which (no discredit to them, they`re just delivering the facts, ma`am) HSC dutifully reports on without a trace of irony: “CII will issue just under USD 50m worth of local currency bonds to another company called Metro Pacific Tollways Corporation at a premium…and book an immediate gain of c. USD 10m from this”. This, of course, is pure phantom profit. Normal humans do not make a profit immediately as a result of borrowing money from someone. If they do, they are playing games, obfuscating, and/or behaving like slippery weasels. One hopes the sell side analysts quickly start showing an underlying profit number for CII that excludes such items. The reason CII are able to report the profit is by officially borrowing USD 50m but actually receiving USD 60m – presumably by giving away something equivalent elsewhere in the deal: perhaps – for example – paying an above-market interest rate, or selling a plum asset to the lender on the cheap. Even if we assume tax on this gain at a full 22%, it contributes 27% of this year`s projected attributable net profit – which means that over two thirds of the net profit growth for 2015 being projected by CII management actually comes from this cheap ruse. How many other ruses are going on here?
This HSC summary of the recent AGM goes on to describe oodles of projects costing lots and lots. It all sounds very exciting – but more so for the eventual users of the highways, bridges and piped water, and not, we suspect, for the outside minority shareholders.