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Brown Coffee
Employees at work at Brown Coffee yesterday. The co-founder of the successful chain, Chang Bunleang, has expressed interest in joining an SME board on the CSX. Hong Menea

Hopes small businesses can help jump-start local bourse

Plans afoot to create an SME board on Cambodia’s fledgling stock exchange – with generous reductions in red tape and tax subsidies – to encourage smaller companies to go public

The Cambodia Securities Exchange trading floor doesn’t see much activity during its two-hour trading session. Most traders prefer to make the small number of daily transactions from their offices. The room is used solely as a simulation centre for training in anticipation of one day becoming a full-fledged trading floor.

It’s been a rough couple of years since the opening of the CSX. After getting the Phnom Penh Water Supply Authority to list in 2012, it took more than two years to list its second business, Taiwanese-owned garment manufacturer Grand Twins International (Cambodia). Trading volumes are still sluggish, and the process of listing new companies has been pain-staking and arduous. Local businesses have struggled to meet the stringent rules of transparency and accounting practices needed to go public.

But the CSX is hoping to turn all this around, with a proposal to set up a “small board”, or a market for trading the shares of Cambodia’s small- and medium-sized enterprises.

Hong Sok Hour, chief executive officer at the CSX, is cautiously optimistic an SME board will encourage smaller companies to go public, increasing trade volumes and boosting investor sentiment. For Cambodia’s SMEs, it provides an opportunity to raise much needed capital and boost their profile among rising regional competition.

“The government has been thinking of setting additional framework for smaller companies to go public,” Sok Hour said.

“And all those small companies that do not comply or cannot afford to go public in the present conditions, maybe a small board will suit them best.”

The current listing process is expensive. CSX potentials have to raise more than $10 million in capital for a public offering to be worthwhile, according to Sok Hour, and when compliance issues, underwriting fees and accounting firm costs are all taken in account, the listing process costs about $1 million to $2 million.

“We are trying to set up a legal framework for companies that want to raise $1 million to $2 million, without having to pay $1 million to $2 million in total costs,” Sok Hour added.

Exchanges for SMEs are normal on other major international exchanges, as they tend to host a lot more companies than the main board. The Hanoi Stock Exchange has a Small and Mid Cap Index, with 317 listings, while Thailand too, has shown interest in setting up an SME index.

In Cambodia alone, there are close to 560,000 SMEs, which employ 70 per cent of the working population.

Sok Hour is banking on smaller companies owned by young entrepreneurs, who he says have greater enthusiasm and are more open to disclosure to go public. CSX has set itself an ambitious target of launching the board by the end of 2015, calling it a “priority”.

The CSX SME board will also benefit from a recently announced 50 per cent tax incentive for all listed companies.

Hong Sok Hour
Hong Sok Hour, chief executive officer at the CSX. Daniel Quinlan

One likely candidate for the SME board is Brown Coffee and Bakery. The coffee chain’s co-founder, Chang Bunleang, said the move would be welcomed by SMEs who can raise funds and enjoy a tax holiday.

“Even myself, I believe if we were to go for an IPO, it would be good to have an SME board,” said Bunleang.

Bunleang was quick to clarify that his company would need a few years before it could go public, but the opportunity to raise capital in a formal environment would be a natural progression for a business like his.

Kuy Vat, president of VTRUST-owned Park Café, shares Bunleang’s optimism but says he will wait to see if the board comes to fruition and could consider listing sometime in the future.

“I think when it starts with four or five companies, then we will see the situation change,” Kuy said.

But there is still much to overcome.

Douglas Clayton, chief executive of Leopard Capital, attributes the exchange’s lowly performance to the small number of listed companies and uncertainty of growth prospects for those who may be eyeing an IPO.

An SME exchange may not be the panacea CSX is looking for, Clayton said.

“While adding a SME exchange may help the CSX attract additional small listings, to really become relevant, it still needs to persuade Cambodia’s most profitable corporations, like banks and telecoms companies, to list,” Clayton said.

Clayton added that the board makes sense in-principle but will depend on the listing costs, because many small companies have “limited budgets for non-operational expenses.”

Significantly reducing the costs of listing and having the regulations in place to make an IPO easier for smaller companies are the challenges that lie ahead for the CSX. They are quick to point out that the small board is still in its inception stage, but at the same time, chief executive Sok Hour knows that Cambodia’s fledging securities exchange needs to evolve quickly.

“Some people say if we continue our present conditions, we may die in a few years,” said Sok Hour. “So that’s why we are working to amend what can be amended in the years to come. I cannot give you a perspective beyond that yet.”

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