Risks and rewards for Kingdom’s exchange

[PHNOM PENH POST]

Singapore
INVESTING in the Kingdom’s planned stock exchange is a risky but potentially highly rewarding proposition, Cambodia experts told a group of regional investors.

Speaking at a conference hosted by DFDL Mekong Legal and Tax Advisers in Singapore on Friday, experts outlined the preparations of the Cambodia Securities Exchange to an audience of regional investors.

Investors could expect more volatility than in more mature markets, but at the same time they should see a bigger payoff in the end, said ANZ Royal Bank Chief Executive Officer Stephen Higgins.

“It’s high risk,” he said of the Kingdom’s investment opportunities, so “you would expect a high return”.

The Cambodia Securities Exchange (CSX) has been set to launch in July “at any cost”, according to government officials, after being twice-delayed.

Han Kyung Tae, Managing Director at Tong Yang Securities Cambodia, highlighted the growth potential of the Cambodian economy.

“Cambodia is in the infant-level of its development. The market is growing very fast,” he said.

The first offerings would come “near the end of this year”, most likely among the country’s stronger sectors: banking and telecommunications, and possibly agriculture, services and garments.

“They will continue to remain attractive targets for foreign investors,” he said.

But those investors tend to view even the Kingdom’s largest firms as small and medium-sized enterprises compared to other companies they deal with, he said.

Han said he expects five to 10 companies to hold public offerings in the first couple of years after the exchange’s launch, with the top companies in each sector being the first Cambodian firms to list.

During the conference, parallels were drawn between investors’ hopes for CSX and the one launched by Vietnam in 2000.

Vietnam’s Ho Chi Minh Stock Exchange started with just two listed, but now boasts more than 250 listed firms.

Beat Schuerch, Director at Vietnam’s Dragon Capital Management, who is looking at rubber, logistics and garments garments investments in Cambodia, said Vietnam “has come a long way since opening its stock market.”

He predicted similar success for Cambodia, saying that in four to five years the CSX would see “a lot more activity,” with possibly as many as 50 to 100 companies being traded.

With a young population and  annual gross domestic product growth of 7 percent to 8 percent, the Kingdom as an early-stage market was in a unique position to deliver gains other markets might not, he said.

“Countries like Cambodia can probably offer that outsized growth,” he said.

But while the Cambodian business community said they were excited about the potential for the country’s exchange, they were quick to point out the difference between the Kingdom and Vietnam.

L-Martin Desautels, Regional Managing Partner at DFDL Mekong, said a key contrast was the large number of state-owned enterprises in Vietnam that listed, which helped to buttress the launch of that country’s stock market.

However, Cambodia intends to list only three state-owned enterprises – Phnom Penh Water Authority, Telecom Cambodia and Sihanoukville Autonomous Port – at the start of trading in the country. In February, Telecom Cambodia Director General Lao Saroeun told The Post the firm may not be ready to list until later in 2011. Media reports on Friday claim that the Phnom Penh Water Authority may also not be ready until months after the CSX launches in July.

The CSX will have “probably the same trajectory [as Vietnam] but on the scale of Cambodia,” as the Kingdom’s population is between 14 million and 15 million while Vietnam’s is near 90 million, Desautels said. “It’s a different market.”

Still, potential investors remained bullish on the exchange.

“It certainly sounds promising, and the economic situation is perfect timing,” said Tim Flemming, Forest Acquisition Manager in Asia for The International Woodland Company, which holds a land concession in Kampong Speu province.

“The interest is building again. The foreign direct investment is roaring again,” he said.

Other potential investors saw limits to the CSX.

FCC Partners Managing Director Andrew Er, whose firm offers corporate finance services out of Asian centres, said the best opportunities in Cambodia were for smaller operators.

He cited the country’s still-developing regulatory framework and well-known corruption problems – a concern of many investors at the conference – as reasons larger, more established companies might wait before putting money into Cambodia.

“The medium-sized companies that can tolerate the extra flexibility requirements may find investing in Indochina markets interesting,” he said, adding lthe Kingdom was a “high-risk, high-return market.”

Edwin Vanderbruggen, Managing Partner of DFDL Mekong’s Tax and Customs Practice Group, said that while buying into the market may be easy, investors will also need a viable exit strategy. The Securities and Exchange Commission of Cambodia would work to ensure “stable, large and profitable” businesses are listed on the exchange, creating the demand necessary for proper liquidity in the early stages.

Significant trading volume and growth would be needed in the exchange’s early stages to make the launch successful. “The first year is crucial,” he said. “That will set the tone for the next 10 years.”