There is a great deal of speculation as the annual general shareholders' meetings of renowned construction giants Coteccons and Ricons approaches. As the relationship between the two companies as main contractor and subcontractor is rather sensitive, it is necessary to take a close look at a potential conflict of interest resulting from overlapping management teams.

Both Coteccons and Ricons are the two leading players in Vietnam's construction scene

Since the unsuccessful merger proposed at Coteccons’ annual general shareholders' meeting (AGM) in 2019, Ricons has been growing steadily, even despite the impacts of COVID-19. In contrast, Coteccons has suffered continuous blows, enduring negative cash flow for the ninth consecutive quarter. Rumours are circulating that Coteccons is losing customers to Ricons, and some senior management members on the Board of Directors (BoD) and Board of Management (BoM) are concurrently holding the same executive positions at Ricons. As this has not yet been made clear to the public, there is definitely a lack of transparency in the management of the two companies.

Can Ricons develop without support from Coteccons?

The parent company Coteccons Construction JSC's (ticker code CTD) financial statements in the first quarter of 2020 showed the lowest profit in the last five years. This is the company’s ninth consecutive quarter of negative cash flow, with a bleak value of VND427 billion ($18.57 million) – four times lower than in the same period last year.

Along with this, Coteccons’s net revenue was VND3.554 trillion ($154.5 million), down 16.4 per cent since 2019. Its gross profit also shed 29 per cent to VND194.4 billion ($8.45 million), causing gross profit margins to decline from 6.4 to 5.5 per cent.

Contrary to the gloomy financial state at Coteccons, Ricons Construction Investment JSC has seen spectacular growth in recent years.

The company’s net revenue in the first quarter of 2020 was VND1.092 trillion ($47.48 million), a 21.2 per cent increase on-year. Ricons’s growth is attributed mainly to the growing number of construction deals, with revenue increasing from VND739.4 billion ($32.15 million) in 2019 to VND946 billion ($41.13 million).

These are not surprising figures. Since 2015, the first year after restructuring, Ricons’ revenue soared by 78 per cent to VND2.825 trillion ($122.83 million). After-tax profit rose to VND81 billion ($3.5 million), an increase of 97 per cent compared to 2014.

In the following years, Ricons entered a golden age with average revenue growth touching 50 per cent, and profit targets jumping 76 per cent from 2014 to 2018. Side-by-side, Coteccons’ after-tax profit increased by less than five times during the last five years, while Ricons’ net profit increased by over 10 times.

There arose questions of whether Ricons can maintain this steady growth amid market vulnerabilities, without support from its key management team who are also BoD members at Coteccons.

Rising above conflict of interest

According to trustworthy reports, the handful of BoD/BoM members shared by the two companies have much higher shares at Ricons than they do at Coteccons. It is important to note that Ricons was established in the backyard of Coteccons.

The significant difference in shareholder structure at both companies, however, must be taken into consideration. The merge may directly affect the benefits of shareholders in each respective party in very different ways.

Formerly known as Phu Hung Gia Co., Ltd., Ricons was established in 2004 as a member unit of Coteccons. The company went through management reconstruction from 2010 to 2014. Many key executives at Coteccons were appointed to manage Ricons during that time.

In fact, Nguyen Ba Duong (Coteccons BoD chairman and legal representative), Nguyen Sy Cong (Coteccons head of BoD, general director), and Tran Quang Quan (Cottecons deputy general director) are three of the five members on the Ricons BoD.

In addition, Quan is also the chairman and legal representative of Ricons. Ricons has five major shareholders, including Duong’s wife, Huynh Thi Tuyet Ngoc. She has a significant 7.38 per cent ownership rate in the company, although Duong is not officially reported to have any shares himself.

As the relationship between the two companies – main contractor and subcontractor – is deemed sensitive, having overlapping management teams seems to pose a potential conflict of interest between the two firms that looks difficult to overcome. There is much speculation on the threshold of the AGM of these two companies.

The main concern for Coteccons is whether they can overcome difficulties in merging with Ricons in order to recover from their losses over recent years. Is it possible that merging the companies will result in an entity that is stronger than its individual parts used to be?

The significant difference in shareholder structure at both companies, however, must be taken into consideration. The merger may directly affect the benefits of shareholders of the respective parties in very different ways. This may be the biggest obstacle for senior executives at both companies, who receive the largest benefits from Ricons.

With Ricons’s trending financial growth, could they be trying to avoid being inspected by major shareholders at both companies in order to remain separate? If so, Ricons may have to replace key members who are concurrently managing Coteccons and Ricons, removing the existing link in order to ensure its independent development.

Regardless of which possibility is closer to reality, the course of Ricons’s actions during the last year indicates intentional efforts to avoid investigation. In the case this merger occurs, the influence of chairman Nguyen Ba Duong may grow exponentially stronger. The opposite outcome would be that Ricons continues to prosper while its founding company, Coteccons, will flounder on.

Industry observers await the AGM to see if these established industry leaders can reach a compromise or if they will remain separate and enforce another period of reconstruction.
Source: VIR
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