The launch of the Cambodia Stock Exchange (CSX) has been very successful but more companies need to list in order to create a lively stock market for Cambodia, according to SBI Royal Securities Director Morten Kvammen.

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The CSX opened last  Wednesday after the offering was more than 17 times oversubscribed on the book building, with a performance stronger than expected.

“We expected the stock to trade up on fairly healthy volumes.  All of last week they have hit the ceiling with the price movement the CSX allows, 50 per cent up the first day of the IPO and 5 per cent every subsequent trading day,” Kvammen said.

On opening day last week, nearly 900,000 shares were traded and just under 500,000 shares traded on the second day.

“These volumes are fairly healthy. Even on Friday which had the lowest volume last week with just under 400,000 shares traded; that’s still a million dollars of trades,” he said.

“We expect the volume to decline over time, the volumes seen last week are very healthy volumes when you consider the value of the free float of shares, which is $30 million at current prices.”

Phnom Penh Water Supply Authority’s IPO raised $20 million and the share price is still up by 46.8 per cent after end of trading on Wednesday.  The stock started trading at 6,300 Riel per share and is currently trading at 9,250 Riel after hitting 10,200 Riel or $2.55 on Friday.

Kvammen thinks PPWAS was a good choice for the CSX’s first IPO.

“Phonm Penh water is a solid company, capturing a number of growth factors n the Cambodian economy including the overall growth in per capita GDP, increasing urbanization and potential for expanding the company’s service reach,” he said.

Kvammen said PPWSA stock was expensive when it started trading and is even more expensive now when investors look at fundamentals such as price to earnings.

“Investors are not buying the stock on fundamentals, but more likely because they believe market demand for the stock will continue to drive the price up.”

Kvammen, who has been closely involved in the development of Cambodia’s stock market, gives credit to the government, the SECC and the CSX for not rushing to an early date, but “taking the time to prepare the regulations and making sure there was a good company to list when the exchange opened. They made the right business decisions and as a result, they are going to have a successful exchange.”

What’s critical now is to get more companies to list, either private companies or government entities and to make it easier for institutional overseas investors to come into the Cambodian market, Kvammen says.

“Investors need more stocks to buy, and we need more liquidity in the market.”

As far as attracting institutional investors from overseas, Kvammen said most of them are required to execute their trades through global custodian banks such as HSBC or Citibank, Standard Chartered for governance purposes.

“One of the biggest challenges for these institutional investors is lack of relationships between their global custodian banks and local cash settlement banks. Today, none of the cash settlement banks have global custodial relationships which prevents larger international investors to trade on the CSX. Having a global custodian involved in the buying of shares is a requirement for most large institutional investors,” he said.

Kvammen called for an effort on behalf of all the involved partners to establish relationships with global custodians to make it easier for overseas funds to invest in the CSX.

“There should be an effort amongst all of  the brokers, the settlement banks, exchange and regulators, to establish relationships with global custodians banks used by large international institutional investors.

“The biggest challenge in terms of establishing these global custodian relationships is to make them comfortable with the credit risk of their local counterparts.  They typically have very strict requirements dealing with partners in local markets.”

Kvammen said the Asian Development Bank and the International Finance Corporation could be asked to underwrite some of the credit risk to get the global custodian relationships in place.

“Longer term, the market will be very important for Cambodian companies to access capital, and for private equity investors to have an exit option.Therefore we hope that some of the multilateral finance institutions will be interested in supporting this effort.”

Kvammen takes the view that the more the CSX makes it easier for investors to participate, the more successful it will be.

“The whole point is, in order for this market to be successful, we need the broadest possible participation of local retail investors as well as institutional investors. Right now we don’t have local institutional investors.  We need to think of how we can build local investment funds and we need to try and enable as many global investors to invest in the market as possible. Therefore it is critical to work with their custodian banks to enable trading in the Cambodian market.”

Kvammen says the Cambodian stock market is off to a very good start.

“The interest and the active trading has exceeded our expectations.  We’re very excited.”

Kvammen said that now that the CSX is launched, it should be open for any company that wants to list.  

“If a company is ready to list, it should be allowed to list, whether it is a government entity or private entity.  We’ve got good momentum now and  we need to act on that. We don’t want to follow the path of Laos where they had two IPOs in rapid succession and then nothing happened.  We want to make sure there is a regular flow of IPOs coming out to keep interest in the markets high.”

Here in Cambodia, Kvammen was glad to see both institutional as well as retail buyers come into the market.