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Could CSX’s low liquidity soon be history?

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Source: Stock Exchange of Thailand (World Federation of Exchanges, Exchanges’ website, International Monetary Fund)

Could CSX’s low liquidity soon be history?

Years of low liquidity and trading rendered Cambodia’s stock exchange unattractive but hopes for an uptrend abound as it prepares for the entry of one of the Kingdom’s largest commercial banks – Acleda Bank Plc

By the end of April, the largest initial public offering (IPO) to list on the Cambodia Securities Exchange (CSX) would be complete.

It will also have put in motion the three-fold increase of the exchange’s market capitalisation to $2.1 billion, bringing the Kingdom’s early-stage market to another level and possibly earning a spot among its peers in the region. But all this is conjecture.

Dubbed the “People’s IPO”, Acleda Bank Plc (Acleda) is the first financial institution to list on the CSX’s Main Board, which until late 2018 performed sluggishly, with a slow but steady uptick last year.

Acleda will take its place among the five current listed entities, which recorded a collective market capitalisation of $701.5 million as of December 31, 2019. This is 58.7 per cent higher than the $442.9 million posted at the end of 2018.

The bank – with its servile history – is expected to issue two per cent of new shares, which is the minimum offering amount approved by its board of directors.

However, the final offering amount will be determined through book building and subscription after considering the actual market demand for the IPO.

The bank is not seeking institutional investors, choosing instead to share its earnings while encouraging inclusive growth. The listing is expected to help Acleda where funds raised through equity could provide it with leveraged room for additional debt funding.

The same logic can be applied for financial industry players who are involved in high-leveraged businesses. By going public, they can institute a feasible solution to lowering customer funds that can make interest rates competitive.

In Cambodia, financial institutions – including microfinance institutions (MFIs) and microfinance deposit-taking institutions (MDIs) – engage in price wars to offer competitive interest rates, which are still considered high.

The capital market can be mutually beneficial to financial institutions and investors where options such as corporate bonds create a healthy mix for investors while raising funds for the issuer.

Yuanta Securities (Cambodia) Plc managing director Han Kyung-tae said: “So far, banks offer collateralised loans but there should be secured bonds, unsecured bonds and corporate bonds to make it healthier, and diversify their assets.”

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Yuanta Securities (Cambodia) Plc managing director Han Kyung-tae.

Unlike foreign-owned financial institutions which seek funding from parent companies, local players constantly look for cheap funding. The more they borrow, the faster they expand.

Long-term equity funding frees up firms from being dragged by debt financing from financial institutions which would require collaterals. The cost of funds is relatively high compared to bond or equity issuance.

Despite Acleda’s unique disposition, its entry heralds more financial institutions in the CSX in the near term. It could perhaps be the much-needed shot in the arm to raise liquidity in the market.

CSX chief operating officer Ha Jong-weon said there are already rumblings in the sector.

“There are many MFIs here. To attract customers, they have to lower lending rates. So they are thinking and asking me about the procedure to list on our exchange. That is a signal that MFIs are considering coming on board,” he said.

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CSX chief operating officer Ha Jong-weon.

For now, CSX, co-owned by the Ministry of Economy and Finance and Korea Exchange on a 55:45 ratio, features three debt securities which raised a total of $71.2 million.

The corporate bonds were issued by commercial bank Advanced Bank of Asia Ltd (ABA Bank), and MFIs Hattha Kaksekar Ltd and LOLC (Cambodia) Plc which offer an average coupon rate of eight per cent.

South Korean-owned Phnom Penh Commercial Bank Plc (PPCBank), which announced its corporate bond listing, is expected to do so next month.

However, improved market capitalisation does not often translate into a bullish index. Coming from a low base, many assert that the bourse has ample room for growth.

For the first five years since its establishment in 2012, the index recorded negative growth before posting 39.6 per cent growth in 2017.

As of December 31, 2019, it closed 58.4 per cent higher at 761.73 points for a daily trading value of 199,148,890 riel ($48,685). The index rose to a six-year high of 869.69 points on October 9, last year.

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Source : Cambodia Securities Exchange

In addition, the average net profit margin of the companies has maintained an upward trend. For the fiscal year ended December 31, 2018, the margin was 20.9 per cent higher compared to 2017’s 14.6 per cent.

However, the dividend payout ratio fell to 23.6 per cent in financial year 2018 from 43.5 per cent in 2017.

The exchange has made every effort to attract investors, from extending its previous 8am-11:30am trading hours until 3pm, launching its mobile trading system and holding its annual My First Stock exhibition programme.

Some of these most likely drove the daily average trading value up to $157,045 last year – a 4.9-fold increase from 2018.

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But the argument for lack of liquidity persists with large local corporations staving off listing until the index turns bullish.

The lacklustre is exacerbated by a few “bad apples” on the Main Board.

Taiwanese stock, Grand Twins International (Cambodia) Plc, fell 13 per cent year-on-year to close at 4,000 riel on Thursday, and lost more than half its IPO price of 9,640 riel.

Its market capitalisation rose a marginal 1.9 per cent year-on-year as of December 31, 2019. The counter is involved in garment manufacturing, which critics opine should have stayed out.

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“This is a garment factory. It doesn’t have any valuable assets – it operates on borrowed land.

“Cambodia is a small market. CSX should look for quality companies. That is the only way we can compete with neighbouring countries. Quality is the only way we can survive like Singapore and Hong Kong, not through size and variety,” a source in the sector said.

The Phnom Penh Special Economic Zone Plc (PPSP)’s share price shed 19.4 per cent year-on-year at 2,450 riel at Thursday’s close.

As of December 31, 2019, its market capitalisation stood at $46.4 million, shaving off 11.03 per cent from the corresponding period in 2018.

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Source : Stock Exchange of Thailand (World Federation of Exchanges, December 2019 data estimated based on November 2019)

The industrial landowner possesses 357ha of land which houses some 100 companies. It recently opened the 70ha Poipet Special Economic Zone in Banteay Meanchey province on the border with Thailand.

“PPSP has good assets and they can grow, but this is not an IPO product. This is a private placement product for investors who know the business and have knowledge. It is not for public investors,” a market player said.

The lack of guidance on the company’s growth plans for investors makes stocks like PPSP and GTI less attractive, despite their high price-to-earnings (PE) ratio, which mars the CSX ensemble.

Barring that, observers are prophetic over Acleda’s ability to turn things around.

Citing the Ho Chi Minh Stock Exchange (HoSE) which started slow and trended upwards from 2005 – five years after its inception – Yuanta Securities’ Han said he expects the same from the CSX.

“People were initially not keen on the Vietnamese market. There was hardly any positive review of the market for many reasons, such as Vietnam being a communist country, restrictions in money flow, no liquidity, and poor quality of companies.

“But very quickly – in a year – everything changed. This could happen in Cambodia and Acleda will propel it,” he said.

A subsidiary of Taiwan-based Yuanta Securities Holding Ltd, the Cambodian unit is the underwriter for state-owned Phnom Penh Autonomous Port (PPAP), Phnom Penh Water Supply Authority (PWSA) and Acleda, and bond issuers – LOLC and PPCBank.

“You cannot find Main Board-listed companies with monopolistic abilities here. These companies have steady growth, predictable revenues, simple business and a strong market position,” said Han, who has more than 20 years experience in the field.

However, he finds that PPAP is undervalued despite being one of the strongest performing stocks on the index.

Its share price has grown 128.5 per cent to 11,700 riel ($2.85) since its IPO in 2015 but its PE ratio was 3.61 in 2018 compared to Sihanoukville Autonomous Port (PAS)’s 10.83.

PPAP shares similar attributes with PAS, whose stock price has gained 29.3 per cent in a year to close at 17,200 riel ($4.19) on Thursday.

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Source : Cambodia Securities Exchange

The port – identified by its French acronym Port Autonome de Sihanoukville – has seen its share price up nearly 3.5-fold since its listing on June 8, 2017.

Both companies’ earnings in the first nine months of 2019 grew nearly 50 per cent year-on-year due to more container throughputs. This makes these stocks an attractive investment and the bourse enticing, Han said.

CSX chief operations officer Ha’s first impression of the exchange when he arrived to the Kingdom three years ago was that the stock market was undervalued.

“Maybe three years ago there was no strategy to attract investors.

“Two stocks were undervalued. PPAP and PAS post strong revenue yearly, which is underpinned by a steady economy.

“GTI is affected by the partial withdrawal of the EU’s Everything But Arms scheme. Some companies will lose out,” he said.

But he ruminates over PWSA’s performance. “In my opinion, the company should grow because they are operating in Phnom Penh which has seen robust development. Buildings need water, meaning that revenue should rise accordingly.”

Ha believes that the index will not rise rapidly this year, perhaps ending the year at around 870 points.

“I also don’t want it to [climb quickly]. Market capitalisation would be higher though because of Acleda,” he said.

Forty years on in the industry, Ha still has new tricks in his bag of strategies. He is reminded of the time the index rose 40 per cent a year after assuming his post at the CSX.

“It then grew 60 per cent in the following year. This is what I do best. The stock market was largely undervalued, so it was good time to buy,” he says.

Like Nasdaq-styled Korean Securities Dealers Automated Quotations (Kosdaq), where he was instrumental in growing the index, he is expending new methods such as full disclosure of market performance to high-rollers, media and institutional investors, inviting foreign investors, organising talks on business plans, collaborating with regional exchanges and introducing the idea of derivatives trading.

“We don’t have adequate qualified investors. This is the demand side so we have been to Shenzhen Exchange to get Chinese investors,” he says, adding that Japan and Korea are target investment pools.

The rise in trading by foreign investors was evident last year when 91 per cent of trading value comprised foreigners, mostly Chinese.

More trading is expected as at least seven entities, both for equity and debt, list on the exchange by the end of this year.

These include an engineering firm for the Main Board, two start-up tech firms for the Growth Board, catered to small caps, and three corporate bonds including PPCBank.

There are future plans to make CSX a global exchange, as well as introduce stock options but not until company revenues and financials are strong.

In the meantime, the exchange hopes to see government policies in place to spur the market.

South Korea’s information disclosure law makes it compulsory for companies to announce financial support of a significant amount.

In Vietnam, big corporations and state-owned commercial banks are required to go public, which explains the increased number of listings on the HoSE, whose index gained 7.7 per cent year-on-year as of December 31, 2019, closing at 960.99 points.

Looking ahead, the CSX, which largely operates in a vortex that’s continuously bucking external headwinds, is poised for a turnaround on the back of new listings and investment opportunities.

This, coupled by an annual average economic growth of seven per cent, a dollarised economy and a plethora of government incentives, could very well turn the complaints of low liquidity into a thing of the past.


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