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Logo of Phnom Penh Post newspaper Phnom Penh Post - Much still to do as Cambodian enterprises prepare to go public

Much still to do as Cambodian enterprises prepare to go public

The first thing is due diligence, and with the result ... we’re going to have a meeting again with the government and ... companies.”

Dollar dilemma
A Poll on the SECC website highlights one of the key challenges still facing policy makers before the new bourse can start trading: In which currency should the Cambodian exchange list stocks, it asks, US dollars, riels or both? Analysts say that making the right decision is likely to mean the difference between a high level of interest among investors and a frontier market whose offerings are just too risky. “In order for the launch of the stock exchange to be successful, the investor base must include foreign investors,” said Kwan Tock Pong, a manager at Frontier Investment and Development Partners. “Listing in dollars will reduce currency risk and overall, it will have no impact on local investors, as the dollar already accounts for 90 percent of all transactions in the Kingdom, as well as over 90 percent of the deposits in major local banks.” The risk, analysts say, lies in a local currency that has shown a downwards trend over the longer term and weakness in the face of a strong dollar in the shorter term, as the exchange rate has remained around 4,250 riels to the greenback in recent weeks. “From a foreign investor standpoint, they would of course prefer to invest in US dollars,” said Douglas Clayton, CEO of the Leopard Fund, an investment vehicle operating in Cambodia and Sri Lanka. According to SECC regulations, up to 80 percent of shares listed by any one company on the CSX will be available to foreign investors, meaning that capital from overseas could make up a large part of investment. Whether shares are listed in riels or dollars will also likely determine the schedule for the launch of the exchange, said Kyung Tae Han, chief representative of Tong Yang Securities in Cambodia, as preparations for a riel-based bourse would take much longer to initiate. “If the Cambodian government has a time frame that they’re going to open the stock exchange … in the first half of next year, I don’t think … we have any time to discuss [riel listings],” he said. One option under consideration is to list in dollars first and then move to riel listings over time, but as Kyung admited: “I haven’t heard of any [such] case before.”
Which firms will list next? FOLLOWING a lengthy selection process by the government, Sihanoukville Autonomous Port, Telecom Cambodia and Phnom Penh Water Supply Authority were told they would list first on the forthcoming Cambodian exchange. But who will go public among the second wave of IPOs? The government on Sunday confirmed it had already earmarked another state-owned enterprise – the postal service – to move towards a stock listing, and Electricite du Cambodge, another utility, has also been mentioned previously by officials. “We would ... hope that quality private-sector companies would also list,” says the Leopard Fund’s Douglas Clayton. However, few have shown a desire to do so as yet, at least publically, with many thought to be taking a “wait-and-see” attitude. Only Cambodia Air Traffic Services, a local subsidiary of Thailand’s Bangkok-listed Samart Corporation, has stated in public its desire to float in Cambodia within the private sector. Analysts note that Cambodia’s banking sector would likely produce the most plausible candidates in the shorter term given that many – particularly ACLEDA Bank – already meet the necessary standards of transparency and corporate governance. Although ACLEDA has shown few liquidity problems in the past 12 months, it does already operate a share scheme for employees and was recently the subject of a 12.5 percent acquisition by Hong-Kong listed Jardine Matheson Holdings. Mobitel is another company that already operates to the standard required to go public. Until last year, Millicom International, a multinational listed on the Nasdaq, held a majority stake in the country’s leading mobile operator. Other mobile companies – including Beeline and Hello – are also listed outside of the Kingdom, but it remains to be seen whether they will look to the Cambodian exchange in the future to raise capital. Generating funds would usually be the main factor behind a decision to list, analysts say, in which case commercial operations with high start-up costs – particularly in the construction sector – would also make prime candidates for an IPO.

Photo by: Pha Lina
The state-owned electric utility’s main office in Phnom Penh.

THE stakeholders in Cambodia’s forthcoming stock exchange all agree on at least one point: the CSX should start trading as soon as possible.

However, just how prepared these different parties are remains a more complex issue, as is apparent in the case of the Phnom Penh Water Supply Authority (PPWSA), one of three state-owned enterprises due to list from the outset along with Telecom Cambodia (TC) and Sihanoukville Autonomous Port.

“We’re in the early stages of the process of preparation,” Ek Sonn Chan, the general director of PPWSA said last week.

His appraisal, however, could appear to totally contradict that of Chief Financial Officer Ros Kim Leang, who on Monday told the Post that PPWSA is “nearly 90 percent ready”.

In fact, both assessments are about right. Although the water authority has expanded significantly in recent years, improving its business practices, raising revenues and efficiency, and continuing independent auditing by the firm Pricewaterhouse Coopers, much remains to be done.

Analysts say the PPWSA has become a strong and well-prepared candidate to list but it certainly could not do so tomorrow, mostly because Cambodia has not finalised the necessary legislation, training, licensing and, indeed, physical location for the exchange to go public.

Yet, compared to Sihanoukville Port and TC, the water authority is considered much further along the process. Whereas PPWSA received its first independent audit in 1997, TC only did so in 2008 and Sihanoukville Port is yet to receive an audit from outside of the Ministry of Economy and Finance (MEF) meaning it is still to achieve compliance with listing regulations set by the Securities and Exchange Commission of Cambodia.

“Some [enterprises] ... already meet our requirements,” SECC Director General Ming Bankosal said Thursday.

Clearly though, some still do not. Luu Kim Chhum told the Post last week that the port adapted its accounting system to meet government requirements this year and would receive an external audit from a third party “very soon” and almost certainly during 2010, but at that time the exchange had been scheduled to start trading by December.

“In terms of auditing, there are really not many companies being audited, being properly audited” in Cambodia, said Kyung Tae Han, chief representative of Tong Yang Securities in Cambodia, a South Korean financial firm assisting the government in CSX preparations.

And although the likes of Tong Yang Securities say the PPWSA is the most advanced of the three CSX frontrunners, it has not yet appointed an internal auditor or an independent board of directors, both requirements under newly passed regulations by the SECC designed to govern the exchange.

Lao Sarouen, director general of TC, said Wednesday that his enterprise needs to implement “corporate governance and a standard accounting system” following an internal appraisal of what steps are still required ahead of a public offering.

Further necessary measures cannot be undertaken by the listing companies without the necessary legislation in place. For example, the SECC has not yet issued a prakas required to transform these state enterprises into public companies, a process that would come closer to IPO time.

Still, Kyung said that progress has been made since he first met with TC more than three years ago – the first encounter he had with a Cambodian firm about a possible listing on a future exchange in Phnom Penh.

Starting with what he terms an exchange listing “101 workshop”, the likes of TC have examined case studies on international floated firms in the same sectors such as China Telecom and Telecom Korea so that Cambodian businesspeople – who until recently knew very little about the workings of a bourse – could get a feel for a successful IPO.

Part of that success will depend on the business practices and profitability of the companies involved, and in that respect they are mostly moving in the right direction, according to recently issued financial results.

PPWSA announced Monday that revenues had risen 11 percent this year up to the end of May compared to the same period in 2009, an average US$200,000 per month increase. The authority is expected to post strong 2009 results next week once audited figures are signed off by Pricewaterhouse Coopers.

Although TC profits fell 10 percent last year to $27 million, the company brings in millions of dollars above the SECC financial requirement that asks for 1.5 billion riels ($370,000) in net profit in the previous financial year and an aggregate of 3 billion riels over the previous three years.

Like TC, Sihanoukville Port saw less business last year mostly due to a fall in trade on the back of the economic crisis.

But Luu Kim Chhum said cost-cutting measures meant the port’s fundamentals had improved since 2008, and that traffic has risen in each month of this year so far compared to 2009.

“According to the information I got on these three SOEs – financial information – they all meet the requirements [to issue IPOs],” said Tong Yang’s Kyung, who added, however, that he has in some cases seen only unaudited results.

But financials are of least concern at this stage because balance sheets are expected to be in order – all three companies were chosen by the MEF for the very reason that they represent the cream of Cambodia’s companies and face little commercial competition.

“The three companies ... are near-monopolies and hence [have] strong fundamentals,” Kwan Tock Pong, a manager at Frontier Investment and Development Partners, an investment fund operating in Cambodia, Laos and Mongolia, said Wednesday by email.

Other key areas remain much greater priorities in preparation for the opening bell on the first day of trading on the CSX.

The SECC still needs to pass more legislation – despite signing regular edicts so far this year – including a prakas on corporate bond issuance and another on fund management, said Ming Bankosal.

The commission also needs to issue licences to auditors, brokers and underwriters, he added, a process expected to be completed in the next few weeks.

Kyung said he will shortly establish an IPO team that will comprise key elements of the government and the three listing companies, along with an as yet unnamed accounting agency and a law firm, so that the various parties can work through the issues that still may need to be ironed out.

“The first thing is due diligence, and with the result of the due diligence we’re going to have a meeting again with the government and issuing companies,” he said.

That could take up to 12 months he added, which combined with the lack of a physical stock exchange means the CSX is unlikely to start trading before the second quarter of 2011.

South Korea’s World City Co Ltd has still not started building the proposed four-storey structure at Camko City outside Phnom Penh.

Law firm DFDL and Cambodia Capital are due to hold their first “IPO breakfast” this morning, outlining steps firms must take in order to list. The presentation is to point out that the listing process usually takes around six months for a compliant company in a developed market.

In Cambodia, the same process can be expected to take much longer. At the end of this process comes the marketing of an IPO, according to this typical schedule.

Still, none of the three listing companies has started to court potential investors, a process that involves distributing a slick prospectus to create interest ahead of a launch.

And Ming Bankosal noted that the SECC will likely not even finalise the template for disclosure documents – the all-important information designed to entice investors – until next month.

In terms of the other preparations for the exchange, Inpyo Lee, project director at exchange joint-venture partner Korea Exchange, said that in the past three years more than 700 people have been trained to use the electronic trading platform that will run the CSX.

“Our system is pretty much ready,” even if training in the clearing system is still needed, he said.

Except Lee doesn’t yet know where the CSX will be housed when trading starts, a problem that presents added logistical challenges.

Because of delays in the construction of the exchange building at Camko City, other temporary options are understood to be under consideration. This would mean an expensive removal of the trading system to Camko City once the permanent exchange building is completed.

Ultimately, however, the physical location of the exchange is just one of a number of issues that still need to be addressed. Other questions remain.

Which currency will stocks be listed in? To what auditing standard will listing firms have to adhere? In most markets compliance is more specific than simply enlisting an “outside auditor”.

Exactly when Cambodia will finally launch the stock exchange is therefore a moot point. Of more importance, particularly to investors, remains how exactly the SECC intends to get the CSX operating to the required standards. On that front all sides involved still have a great deal of work left to do.

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